Tennessee Annuity Rates and Risk Tolerance: What Every Retiree Should Know

Tennessee Annuity Rates and Risk Tolerance: What Every Retiree Should Know

Understanding your risk tolerance helps you choose the right annuity contract. Learn how Tennessee annuity rates fit into a balanced retirement income plan.

Full written article: Tennessee Annuity Rates and Risk Tolerance: What Every Retiree Should Know

Tennessee Annuity Rates

Transcript

SPEAKER_01 0:03

Welcome to the Tennessee Annuity Show. I'm Jessica.

SPEAKER_00 0:06

And I'm Caleb. We break down complex annuity products in plain English, fixed annuities, indexed annuities, income annuities, all of it.

SPEAKER_01 0:13

We cover the products, the fine print, and the questions you should ask before you sign anything.

SPEAKER_00 0:18

Quick note before we start. This show is for general information only and is not financial, tax, or legal advice. Annuity guarantees depend on the issuing insurance company's ability to pay claims. Talk with a licensed professional before making decisions about your retirement income.

SPEAKER_01 0:33

Alright, let's get into today's episode. So I had a conversation with my aunt a few weeks ago. She's 68, just retired, and she called me because she'd seen some ad about annuity rates in Tennessee, and wanted to know if she should just go get the highest one she could find.

SPEAKER_00 0:53

Oh, that's such a common starting point. And honestly, it's not a bad instinct. Rates matter, but it's kind of like walking into a car dealership and asking for the fastest car without mentioning that you drive on mountain roads in winter.

SPEAKER_01 1:05

Right. The rate is almost the last thing you should be looking at, or at least not the first.

SPEAKER_00 1:09

Exactly. Because before you even pull up a rate comparison, there's a more personal question sitting underneath all of it. How much financial uncertainty can you actually live with? And I don't mean in theory. I mean when your account is down and you're watching the news.

SPEAKER_01 1:22

And that's different for everybody, which is what makes this hard to talk about in general terms.

SPEAKER_00 1:27

It really is. The industry uses words like a conservative and aggressive and moderate, but those labels don't actually tell you much. A more useful question is if your retirement account dropped 20% in a single year, what would you do?

SPEAKER_01 1:40

Would you stay the course or would you panic and move everything?

SPEAKER_00 1:44

And most people, when they answer that honestly, realize their actual comfort level is lower than they thought. We saw that in 2008. We saw it again in 2022. People who thought they were fine with volatility were suddenly selling at the worst possible moment.

SPEAKER_01 1:59

Which locks in the losses. That's the thing. It's not just uncomfortable, it can permanently damage a retirement income plan.

SPEAKER_00 2:06

Permanently, you sell low, you miss the recovery, and you never get that back. So knowing your actual tolerance before you structure your retirement income, that's not a soft, feelings-based exercise. It has real financial consequences.

SPEAKER_01 2:20

Okay, so let's say someone has done that self-reflection and they're thinking about annuities as part of the picture. How does risk tolerance actually connect to which type of annuity contract makes sense?

SPEAKER_00 2:33

Great question. And I want to back up for a second before we get there, because um I think there's a piece most people miss entirely. When we say risk, most people picture a stock market crash. Market risk. But that's only one type of risk in retirement.

SPEAKER_01 2:49

Oh, there are several.

SPEAKER_00 2:51

Several. And they pull in different directions, which is what makes this genuinely complicated. You've got market risk, sure, but you've also got inflation risk, the slow erosion of your purchasing power over time. If your income stays flat for 20 or 30 years, you're going to feel that.

SPEAKER_01 3:06

I think that one sneaks up on people. Like a retirement plan that feels totally stable at 65 can feel very different at 80.

SPEAKER_00 3:15

Exactly. And then there's liquidity risk, the chance that your money is tied up in a contract when you actually need it. That's a real thing with annuities because most of them have surrender periods.

SPEAKER_01 3:24

Right. And I want to come back to that because I think people sign contracts without fully understanding what a surrender period means for them.

SPEAKER_00 3:31

We will. And then there's interest rate risk. Changes in rates affect what you can get on new contracts, and they affect bond values too. And then the big one that annuities are specifically designed to address longevity risk.

SPEAKER_01 3:44

Outliving your money.

SPEAKER_00 3:46

Outliving your money, which is not a small risk. People are living longer than ever, and a retirement that starts at 65 could last 30 years.

SPEAKER_01 3:53

And here's the thing that I find kind of counterintuitive. If you try to eliminate market risk entirely by moving everything to something super conservative, you haven't actually eliminated risk. You've just traded one type for another.

SPEAKER_00 4:06

That's such an important point. A portfolio with zero market exposure might feel safe, but over a long retirement, inflation can erode that purchasing power significantly. You've solved for one risk and created another.

SPEAKER_01 4:17

So the goal isn't to eliminate all risk, it's to understand which risks you're most exposed to and structure things accordingly.

SPEAKER_00 4:26

That's it, and that's where different annuity structures come in because they're not all solving the same problem.

SPEAKER_01 4:31

Okay, walk me through them because I know there are several types and people get confused.

SPEAKER_00 4:36

So let's start with the most straightforward fixed annuities and immure AIs, which stands for multi-year guaranteed annuities. A MEGA credits a contractually stated interest rate for a set period. It could be three years, five years, seven years. The rate is defined in the contract.

SPEAKER_01 4:54

So you know exactly what you're getting for that term.

SPEAKER_00 4:57

For that term, yes. And Tennessee annuity rates on myGAs right now vary depending on the carrier, the term length, and how much you're depositing. But the appeal is predictability, no exposure to what the market's doing on any given day.

SPEAKER_01 5:10

Which is genuinely valuable for certain people. My neighbor, 62, just retired last year. He put a chunk into a five-year MIGA specifically because he said he couldn't stomach watching a number go up and down anymore. He just wanted to know what he had.

SPEAKER_00 5:27

And that's a completely legitimate reason to choose that product. The thing to watch, though, is that over a longer time horizon, say 10 or 15 years, you want to think about whether that rate is keeping pace with inflation.

SPEAKER_01 5:39

Right, because a five-year MIGA solves for the next five years. It doesn't solve for what happens at year 12.

SPEAKER_00 5:46

Exactly. So then you move to fixed indexed annuities, which are a step up in complexity. These link the interest credited to the performance of a market index. The SP 500 is a common one, but there's a floor that protects against negative index returns in a given period.

SPEAKER_01 6:01

So if the index goes down, you don't lose.

SPEAKER_00 6:03

Right. The floor is typically zero. You just don't get credited anything for that period, but you don't lose principal. The trade-off is that your upside is capped or subject to a participation rate, so you're not getting the full index gain either.

SPEAKER_01 6:16

And I want to be really clear for anyone listening. These are not market investments. They're insurance contracts with a specific crediting formula.

SPEAKER_00 6:25

That's an important distinction. You're not in the market. The index is just the measuring stick for how interest gets credited. The insurance company is managing the actual risk.

SPEAKER_01 6:33

Okay. And then there's another type. Reals. I feel like those are newer and people don't always know what they are.

SPEAKER_00 6:40

Registered index-linked annuities. And yes, they're they're relatively newer and they're a different trade-off than a traditional fixed indexed annuity. With a RELA, you can get more participation in index gains, so the upside potential is higher, but you're absorbing some downside rather than eliminating it entirely.

SPEAKER_01 6:59

Wait, so you can actually lose money in a RELA?

SPEAKER_00 7:02

You can lose a portion, yes. The way it typically works is through what's called a buffer. So if a Rela has a 10% buffer, the insurance company absorbs the first 10% of index losses in a contract term. If the index drops 15%, you're down five.

SPEAKER_01 7:18

Aaron Powell So it's not full downside protection, it's partial.

SPEAKER_00 7:22

Partial. And in exchange for accepting that partial downside, you get more growth potential on the upside. So these make sense for someone who's comfortable with some exposure. Maybe they don't need every dollar protected, but they want more participation than a traditional fixed indexed annuity offers.

SPEAKER_01 7:37

Aaron Powell That's a meaningful distinction. Someone with a higher risk tolerance might actually prefer a RELA over a fixed indexed annuity, even though both are technically annuity contracts.

SPEAKER_00 7:49

Right. And neither is better in the abstract. It depends entirely on what you're trying to solve for.

SPEAKER_01 7:54

And then there's the income-focused option, the immediate annuity.

SPEAKER_00 7:58

The single premium immediate annuity or SPIA. You hand over a lump sum and it converts almost immediately into a stream of income payments, monthly, usually, and those payments can be structured to last for a set period or for your lifetime.

SPEAKER_01 8:15

Aaron Powell So that's really the longevity risk solution. You can't outlive the income if it's structured for life.

SPEAKER_00 8:21

That's the core appeal. You're essentially transferring the longevity risk to the insurance company. Current immediate annuity rates in Tennessee are worth looking at with a licensed agent who can run illustrations from multiple carriers because the payout varies quite a bit depending on your age, the amount, and how the income is structured.

SPEAKER_01 8:39

Okay, I want to go back to something you mentioned earlier. Surrender periods, because I think this is where people get burned.

SPEAKER_00 8:47

Yeah, this is a big one. Most annuity contracts have a surrender charge period, which is a window of time, could be five years, could be ten, during which, if you pull money out beyond a certain free withdrawal amount, you pay a fee.

SPEAKER_01 9:00

And that fee can be significant in the early years.

SPEAKER_00 9:02

It can be. It typically declines over the surrender period. So year one might be seven or eight percent, year five might be three percent, and by the end of the period it's zero. But if you need that money in year two and you didn't plan for it, you're paying a penalty.

SPEAKER_01 9:17

Which is why matching the contract term to your actual cash flow needs is so important. Like don't put money in a seven-year annuity if you know you're going to need it in three years.

SPEAKER_00 9:27

Exactly. And this is where mapping your income timeline matters. Which expenses are coming in the next one to three years, which ones are five or ten years away. You want to match the contract structure to when you actually need the money.

SPEAKER_01 9:38

I think people sometimes treat annuities like a savings account, which they're really not.

SPEAKER_00 9:43

They're not. They're insurance contracts with specific terms, and those terms exist for a reason. The insurance company is making long-term commitments based on what you put in. So there are rules around how and when you can access it.

SPEAKER_01 9:55

Okay, let's talk about something practical. If someone is sitting down and thinking, I want to look at Tennessee annuity rates and figure out what makes sense for me, what should they actually do before they call anyone?

SPEAKER_00 10:08

First thing, take a risk assessment. And I'd say take it more than once, because the first time you do it, you might answer based on how you think you should feel. The second time, you might answer more honestly.

SPEAKER_01 10:20

That's a good point. There's a difference between your theoretical risk tolerance and your actual one.

SPEAKER_00 10:26

And uh, if those two answers differ significantly, that gap is actually really useful information. It tells you something about where you might make reactive decisions under pressure.

SPEAKER_01 10:34

Second thing, map your income needs, like we talked about. What do you need covered in the near term versus what can sit for a while?

SPEAKER_00 10:42

Right. And then, and this one I cannot stress enough, understand the surrender period before you sign anything. Rate that section of the contract, ask your agent to walk you through it with specific numbers.

SPEAKER_01 10:53

And compare carriers, not just rates.

SPEAKER_00 10:55

This is huge. The financial strength of the insurance company matters. A slightly lower rate from a highly rated carrier can be a better long-term choice than a higher rate from a company that's less established.

SPEAKER_01 11:06

Because the insurance company is the one making good on those contractual promises for potentially decades.

SPEAKER_00 11:13

Exactly.

SPEAKER_01 11:16

And then revisit the plan, because I think people said it and forget it, and life changes.

SPEAKER_00 11:22

Life changes a lot. A health event, a major expense, losing a spouse, all of those can shift your risk tolerance and your income needs. What made sense at 62 might need to look different at 72.

SPEAKER_01 11:33

Okay, I want to touch on taxes because Tennessee has a specific situation that I think surprises people.

SPEAKER_00 11:39

Yeah, this is worth knowing. Tennessee doesn't have a state income tax on wages or salaries. And there used to be something called the Hall income tax, which applied to interest and dividend income, but that was fully repealed as of 2021.

SPEAKER_01 11:54

So from a state tax standpoint, Tennessee is actually pretty favorable for retirees with annuity income.

SPEAKER_00 12:03

It can be. But and this is important, federal income tax still applies to the growth portion of annuity distributions. So when you start taking money out, the earnings are taxed at the federal level.

SPEAKER_01 12:15

And there's the early withdrawal penalty, too.

SPEAKER_00 12:17

Right. If you take money out before age 59 and a half, you're potentially looking at a 10% federal penalty on top of the income tax. So that's another reason why the timeline piece matters so much.

SPEAKER_01 12:28

And the qualified versus non-qualified question, that affects how distributions are taxed too, right?

SPEAKER_00 12:34

It does. A qualified annuity. Meaning it's funded with pre-taxed dollars, like from an IRA rollover. The entire distribution is taxable because you haven't paid tax on any of it yet. A non-qualified annuity is funded with after tax dollars, so only the growth portion is taxable.

SPEAKER_01 12:49

Aaron Powell Which is why talking to a licensed agent or a tax professional about the specifics of your situation is so important because the tax treatment isn't one size fits all.

SPEAKER_00 13:02

Not even close. And we're definitely not giving tax advice here, but knowing that those distinctions exist means you should be asking those questions before you fund a contract.

SPEAKER_01 13:10

So let me try to bring this back to where we started. Uh my aunt, who just wanted to know the best rate, what would you actually tell her?

SPEAKER_00 13:18

I'd tell her the rate matters, but it's not the first question. The first question is what problem are you trying to solve? Is it predictable accumulation? Is it income you can't outlive? Is it some growth potential without full market exposure?

SPEAKER_01 13:31

Because the answer to that shapes which type of contract even makes sense to look at.

SPEAKER_00 13:36

Right. And then within that type, yes, compare Tennessee annuity rates across carriers. Look at the surrender schedules, look at the carriers' financial strength ratings. But the rate is the last filter, not the first.

SPEAKER_01 13:48

I think there's also something to be said for just being honest with yourself about how you actually behave when things get stressful. Because a contract that looks great on paper but causes you to lose sleep every time there's market news, that's not a good fit, regardless of the rate.

SPEAKER_00 14:07

And uh that's not a weakness. That's just self-knowledge. The whole point of these contracts is to reduce the emotional pressure of retirement income planning. If a contract isn't doing that for you, it's the wrong contract.

SPEAKER_01 14:21

And the flip side, if someone is comfortable with some exposure and they go with a super conservative product because they think they should, they might be leaving meaningful growth potential on the table over a 30-year retirement.

SPEAKER_00 14:34

That's a real cost, too. Being more conservative than you need to be has a price. It's just a slower, quieter one than watching a portfolio drop.

SPEAKER_01 14:42

Which is why this isn't a one-size-fits-all conversation. And honestly, it's why talking to a licensed annuity agent who can actually run illustrations from multiple carriers and who knows the current Tennessee annuity rates across different product types is so valuable.

SPEAKER_00 15:00

Because they can show you side by side what different structures actually look like for your specific numbers, not hypothetically, with actual contract illustrations.

SPEAKER_01 15:09

And then you make the call. But at least you're making it with the full picture.

SPEAKER_00 15:13

That's really all any of this is about, making sure the picture is complete before you commit.

SPEAKER_01 15:21

That's it for today's Tennessee Annuity Show.

SPEAKER_00 15:23

If you have questions about your specific situation, talk to a licensed advisor.

SPEAKER_01 15:27

Visit Tennessee AnnuityRates.com for show notes or to get matched to an advisor.

SPEAKER_00 15:32

We'll see you next time.