Maximum Guaranteed Income vs. No-Fee Income From Annuities
Guaranteed income is a foundational part of every retirement. Everyone has social security and a lucky few have pensions with both sources essentially considered guaranteed. If additional income is needed those with sufficient assets can live off of dividends and interest alone but there is an advantage to using an annuity to fill the income gap no matter whether you have saved enough or not. I’ve demonstrated the power of this in the past and will continue to do so. Many of you don’t know that we are continually working on calculators that take the subjective element out of this. It’s all about the numbers…
Many people recognize that they need an annuity for one of these advantages and just as many simply want an annuity because it’s so safe and makes retirement much more enjoyable. Everyone has to overcome hurdles to make the decision. Contradicting advice and confirmation bias toward other options are common but the tide is turning more rapidly than I expected. Fees are most likely the biggest hangup people have and understandably so. Fees should be minimized if you want to optimize your retirement portfolio.
The vast majority of people I talk to you will bring this up when asking about guaranteed income. “I’d rather not pay fees.” That’s perfectly fine but you need to understand what the fee provides and what you equally forfeit by not paying it. Yes, you can have guaranteed income with or without fees and I’ve covered that before. Now I’m going to show you the complete difference and in what situations each option is the best. I’ll use this as a reference going forward for the next person who asks this question. You can also put the pieces together by going back to several podcasts that hit some of these points in more detail.
Paying a fee gives you maximum Guaranteed income. An insurance company is on the hook to make monthly payments for the rest of your life at a set amount now or in the future. I capitalize the word guarantee because annuities are the only financial asset in existence that can claim it. If you don’t want to pay the fee then your guaranteed income won’t be as high. The insurance company takes the fee and pads their reserve account to insure the actuarial possibility of you living too long. It’s about more than just you because your money is pooled with thousands of other people to make the liability much more manageable. And insurance companies are better at this than any other financial institution is at anything.
Now there are two types of no-fee guaranteed income available. First is that several contracts have two optional income riders, one with a fee for maximum income and one without a fee for less income. The second type of no-fee guaranteed income is what I call a performance-based guaranteed income contract. This is what most people see and it essentially means that the growth in the contract contributes in large part to the income you will receive in the future. For comparison purposes I will focus on these contracts that are performance-based.
Guaranteed income is again the highest when paying a fee. This doesn’t mean that a performance-based contract won’t catch up in the future. It just means that you are risking the highest available payout because you don’t want to pay the fee. If the growth of the contract isn’t sufficient to match the fee-based payout then you might be without necessary income. Crazy projections in the beginning have let down a lot of people so if you need the money then take a full guarantee and pay a fee for it.
Account value growth is an added benefit of having an income rider. You get to maintain an asset on your balance sheet which has solved a major objection to income annuities of the past. Sadly, maximum guaranteed income contracts with a fee are not built to grow substantially so your options are more limited in the future. Performance-based income without a fee will usually have much more growth potential because you are taking the risk for the level of future income. More money means more options.
Residual value of the contract is important for legacy and future planning changes. Without a fee you have much more growth potential and you are also keeping the cost of the fee in your pocket. Also, if the guaranteed income is not as high then the payments are not extracting as much value from the contract. Performance based contracts will have a higher residual value in the future for a lot of reasons.
Generally speaking, fee-based maximum income is the best way to go for most people. You can achieve the most efficient stream of income leaving additional funds for future investment and planning changes. The bottom line is guaranteed income so I like to tell people that their goal after buying the highest guaranteed payment should be to live a long time and stick it to the insurance company. There are times, however, when each type of contract has its definite place.
Who Should Pay a Fee for Maximum Guaranteed Income?
- The person who wants to make purely objective decisions about the optimal retirement plan is perfect for this. These people will pay the least for income, knowing the additional investments they have will grow more because of it. Fees do not bother them because they see the long term benefits to their overall portfolio and understand the value of shifting this burden to the insurance company
- Those who are barely funded for or even underfunded for retirement cannot afford to take the risk. Market investments or even performance-based income that doesn’t pan out will leave them in a compromised position. The value of paying a small fee for the guarantee is incredibly high for those who don’t have a lot of wiggle room.
Who Should Avoid the Fee and Go With Performance-Based Income?
- People ten or more years from retirement have the time to continually alter the plan depending on performance. This has been useful for younger people who want the combination of safe assets, partial market participation, and eventual guaranteed income if growth is sufficient. Otherwise they retain plenty of options if they want to take the money to another investment in the future. This is why Nate did the podcast with me last month to explain why he bought one of these at the age of 46.
- When income isn’t the main goal of an annuity purchase but nice to have just in case. Others who have bought one of these from me have some assets they want to protect, don’t want to pay fees, and enjoy partial market participation with no risk of loss. Income needs have been covered elsewhere and this may be just a little bit extra to help with something like RMDs in the future.
I met with a lady earlier this week who is 10 years away from retirement. She has good retirement savings in addition to some cash in the bank that she wants to set aside and start building an income foundation in retirement. We started by looking at the maximum payout that comes with a fee for $100,000. A good company would offer in excess of $15,000 annually for life but the income rider would cost 1.25% annually. She specifically asked for one without fees so I compared it to a performance-based contract. In that contract, she had better growth potential and no cost but the guaranteed income was lower at $7500 annually over the same time period. The growth in the contract needs to make up the difference and it is possible but not guaranteed. We ran a conservative illustration and it projected to nearly match the guaranteed payout she could get with a fee. Because she is ten years from retirement and has ample retirement funds, I recommend the no-fee option for her because she has the time and means to make changes if needed.
Aside from one specific story, the above are general scenarios so you only have to mostly align with one of these scenarios to match with either product. Just understand what you’re giving up if you want to avoid the fee. Unfortunately most salesmen are only going to show you one of the two. I like to show both so you can at least see the difference. Fees are there for a reason and you get to decide if the value works for you. Don’t forget that a performance-based illustration with no fee might not work out so be careful what you wish for. Get on my calendar if you want a fair explanation of what might be best for you.
Have a great weekend…
Bryan
Watch Episode 197: Maximum Guaranteed Income vs. No-Fee Income From Annuities
Download Episode 197: Maximum Guaranteed Income vs. No-Fee Income From Annuities on Apple Podcast
Last Updated on October 3, 2025 by Bryan Anderson
Hi Bryan,
Our granddaughter moved to Stevensville for a while but my wife and I couldn’t get up there before she decided to move to a warmer climate. We have always loved the Bitterroot. My father was born in Missoula so I have fond memories of summers there as a kid. But I digress.
We’re 74 and 75 and have our money , approximately 600k in CD’s at about 4%. SS pays us about $4500/mo., Cd’s about $2-2200/mo. I keep seeing CD rate gradually dropping, so I was wondering what you might suggest for a better return at our age. We’re both in good health and maintain healthy weight. We take no meds and are very careful about what we eat. We ask God to keep us healthy and so we try to cooperate in that endeavor. This may be TMI but just wanted to give you a proper picture. I would say we are very risk averse.
Bob
Hi Bob – a MYGA would be a perfect alternative that can get you more than 5% right now and the rate will be guaranteed for a longer term. It’s an increase in income that you won’t have to worry about for quite some time.