How to Create Your Own Annuity

Marc Lichtenfeld

Earlier this summer, I wrote a column explaining why I believe annuities are terrible investments.

My colleague Alexander Green shares my disdain for these investments. And he’s been even more vocal than I have been about why investors should avoid these products.

But it seems, in lieu of the Great Recession, annuities are back in fashion. Last week, The New York Times published an article explaining how one type of annuity, the advanced life deferred annuity, can generate more income later in life if you put off receiving a payment right away.

Here’s the good news…

Annuities are sold on the notion of safety, and they guarantee your income. If the market goes down, you can’t lose money. It sounds nice.

But what the article did not cover is how expensive annuities are. Currently, the average annual fee is around 2.28%. That’s astronomical. And a lot of it has to do with the fact that annuity salespeople receive high commissions.

On top of this, your money is locked up and your gains are capped. (Many people don’t understand this last feature.)

For instance, even though the stock market is up 18% this year, with an annuity, your gains could be capped at 5%.

If you had taken out a variable annuity with 5% caps in 2009, you’d have missed out on over 129% gains during the past four years. Not to mention, if you haven’t noticed, Wall Street’s good years have always made up for its down years, and then some, to date.

Instead, I suggest you create your own annuity. It couldn’t be simpler, and it’s cheaper.

The D-I-Y Annuity

All you need to do is buy a basket of Perpetual Dividend Raisers. These are stocks that raise the dividend every single year. That way, the dividends you receive will increase each year. And it can be by a meaningful amount.

For example, the average dividend growth expectation of The Oxford Income Letter‘s Instant Income and Compound Income portfolios is 12%.

If my assumptions are correct, that means an investor who collects $10,000 in dividend income this year should collect $11,200 next year, $12,544 the following year and so on.

It should be calming to know there are hundreds of companies that have been raising the dividend for years. Some, such as Procter & Gamble (NYSE: PG), have done so since Eisenhower was president. Others, like Texas Instruments (Nasdaq: TXN), have a 10-year track record.

Additionally, you’ll get to participate in the considerable upside that stocks offer. Is there some risk? Of course, but over 10-year periods, stocks have gone up 91% of the time.

In fact, the only time stocks did not rise over 10 years was if an investor sold during the heart of the Great Depression or Great Recession. The average increase over those 10 years (including the losing years) was 128%. Does an annuity do that?

Furthermore, stocks that raise the dividend every year have never been down over 10-year periods, not including the Great Depression, for which the data was not available. But that does include the Great Recession. In fact, if you sold at the end of 2008, right near the bottom of the market, you still made 40%.

Stocks, particularly Perpetual Dividend Raisers, are not as risky as people think when you’re talking about the long term. If you have a 10-year or longer horizon, it’s riskier not to be in stocks as your money won’t grow and keep up with rising prices.

Four Advantages

Here are four reasons why you’re better off creating your own “annuity”:

  1. It’s cheaper. When you create your own annuity with Perpetual Dividend Raisers, your costs are a few hundred bucks at the most, rather than thousands. All you do is buy stocks online with a $10 (or less) commission. That’s your only cost.
  1. You participate in the long-term gains of the stock market.
  1. You control your money. Your funds are not locked up. You are free to take it out without penalties (as long as you’re not younger than 59 1/2 years old if the money is in an IRA).
  1. And most importantly, your income should increase every year.

With some annuities, your income could increase if the market cooperates. With a portfolio of Perpetual Dividend Raisers, it doesn’t matter what the stock market is doing as long as the companies are raising the dividend. And remember, the dividend is not tied to the stock price.

Many companies raised the dividend in 2008 and 2009 despite sell-offs in their shares. If the companies are generating enough cash flow and have a track record of raising dividends, there’s a very good chance they’ll do so again.

When you create your own annuity, you maintain control of the money, receive an increase in income every year and more of the money gets invested rather than going to pay for the lease of the annuity salesman’s new Mercedes.

33 Responses to “How to Create Your Own Annuity”

  1. Mark Paul says:

    Excellent article! Is there a source that shows the dividend increase record for companies?


  2. alex trevino says:

    I always enjoy these articles and have already started putting together my DIY annuity. I know I’ve seen this list, but can you re-print a list of these dividend paying companies that have a great record of raising their dividends every year? Your help would be sincerely appreciated.

    Alex Trevino

  3. Yvonne Duncan says:

    This was a great article, This may be of great help to me. How and where do I get stocks recommendations.

    I have learned so much from both you and Mr. Green.
    Please continue the good work.

    Yvonne Duncan

  4. Antonio Doria says:

    … and most important: you keep your principal and leave it to your beneficiaries when you pass away! With most annuities the capital is gone!

  5. Ronald Ferrill says:

    Good call, Marc. I am one of those people who did roll some of my 401(k) monies into an annuity. Without a lot of detail, it was a market beater the last 3 years, partially because I was allowed to transact with the portfolio and did so sparingly. That said, I also bought it with an eye toward deferring, which I have done. The other strategy I have in mind is to cash it out prior to having to take any withdrawals.
    As a relatively newcomer to Wealthy REtirement, and your income letter, I now understand how better to prepare for building my own low cost, high value annuity that will provide not only income, but a legacy for my family.

  6. Great article, since I just mailed in for annuity quotes from NY Life (the AARP Lifetime Income Program)for 50K, 100K, &150K. Do you have any recommendations (10-15), if I set up my own annuity. Any insight would be appreciated. I am 75, good health, & a 16 handicap. Hope to hear from you soon. Thanks.

  7. compton plummer says:

    Verizion has a good dividend but has shown very litle capital apprecation. Question would you stick with a stock like that or would you prefer a little less dividend but with more apprecation

    • As you’re probably aware, I can’t give personal advice. The main things I look for, assuming I’m starting with a quality company is a decent yield, track record of strong dividend growth and the ability to continue to raise the dividend.

    • Newton Louverture says:

      I have owned VZ over 2 years and am sticking with it. Buying out Vodaphone frees VZ to be an even larger player in the telecom space.


  8. Saunders Moore says:

    Dividend raisers for my income, sounds like a good idea to me.
    I have owned both PG and TXN for several years.

  9. Roland Trivett says:

    You obviously are not familiar with many annuities or just don’t want to make a fair comparison to stocks. Can stocks provide life time income and a death benefit? NO. Do stocks guarantee dividends? NO. Purchasing enough stocks to build your own annuity can be expensive too. Most annuities do not charge a fee after 7 or 8 years if you need to make a withdrawal. What would you recommend annuty providers to charge in order to guarantee lifetime income and a death benefit (which can go to zero). I don’t think I need to recieve your “Wealthy Retirement” letter if you can’t make a complete comparison of different products.

    • Can stocks provide life time income and a death benefit?

      They can if the portfolio is large enough that you never have to touch your capital. And if you need a death benefit, term life insurance is cheaper.

      Do stocks guarantee dividends?

      They’re not guaranteed, but if you own a portfolio of 15-20 stocks that have track records of annual dividend raises, your dividend and increase should be pretty secure.

      Purchasing enough stocks to build your own annuity can be expensive too.

      If you buy 20 stocks online it will cost you $200. That’s it.

      Most annuities do not charge a fee after 7 or 8 years if you need to make a withdrawal.

      Terrific, so I have to wait 7 or 8 years for access to my money without a penalty? No thanks.

      What would you recommend annuty providers to charge in order to guarantee lifetime income and a death benefit (which can go to zero).

      They should charge whatever they want to guarantee lifetime income and death benefit and make a handsome profit. I just don’t recommend investors buy their products

  10. John Wermuth says:

    Always enjoy your comments, but must comment where you have mixed “variable” deferred annuities (2%/yr +) which are high costs, with “fixed index” deferred annuities which these days come with annual caps of about 5 – 7%.
    The latter have principal and a minimum interest guaranteed.

    Variable annuities have both downside and upsides, like a mutual fund. And both are “deferred”, not with monthly income as you imply by discussing bond income.

  11. Rick says:

    I rolled over some of my 401k to an annuity after I was laid off. It prevented me paying a 20% early withdrawal penalty. With the PDR what I don’t understand is, if stock XYZ is $50 and I have 2000 shares which equals to 100K with dividends and it drops to $25 now its worth 50K. How is the dividends helping me out here? Am I missing the point?

    • Remember that stock price/value of the portfolio has no bearing on the dividends you will receive. If you’re making $4,000 a year in dividend income on a $100K portfolio and the value drops to $50,000, you should still receive $4,000 a year in dividend income.

      And if you’re reinvesting the dividends, you’ll now get to buy more shares for your $4,000, which will spin off more dividends, which will buy more shares….

      The only time you should care about the stock price is when you’re getting ready to sell. If your time horizon is 10 years and the stock falls in price, it doesn’t really matter as long as the company is still operating at a high level and you continue to receive the dividends.

  12. Peter Barrett says:

    As I am English my understanding of American annuities is very limited, however, if they are like the typical UK annuity they have been a very bad investments for several years and that is likely to continue for several more years least. Annuities, like our typical British pension are set up for the greedy incompetent insurance companies and are one massive con; in my opinion they are the biggest financial scandal of the last twenty years.
    The best way to save for a retirement fund is by purchasing solid dividend paying stocks from worldwide stock markets, I currently have exposure to the US Dollar, Swiss Franc, Euro, Danish, Swedish and Norwegian Krone as well as £ Sterling. I tend to hold stocks for a long time and for retirement investments only purchase stocks that have a long record of increasing dividends coupled with little or no debt.
    As turkeys don’t vote for Christmas no broker or financial advisor will tell you about this.


    Peter Barrett

  13. Newton Louverture says:

    Excellent article on Creating Your Own Annuity. Two years ago I used Fischer’s Dividend Champions list (
    ) to build my own portfolio of long tem dividend paying companies. At the time I chose this as an alternative to bond funds not knowing I was creating my own annuity! Thanks for opening my eyes further.


  14. George says:

    One of my closest friends is a financial advisor. He puts a portion of many of his clients’ portfolios in a variety of annuity products particularly Ohio National. Why? Partially, but certainly not exclusively, because of the fee it generates for his firm. He himself, owns no annuity products. What does that tell you…

  15. Mary says:

    HI Marc,

    Thanks for the annuity analysis, it was timely in my case, as someone was trying to sell me whole life insurance and annuities. All I needed was professional advice of how to continue investing my hard earned dollars. After being burned in the 2008 crisis with a hedge fund investor I am wary of letting others invest for me.

  16. Ed Guillotte says:

    Good article on annuities , however there is a way to beat the given return : get a life insurance license as issued by state , then purchase an annuity ($200-300k) & receive a 6 to 8% commission on top of small fix & cap on the sp500(indexed annuity ) you get immediate cash . It only cost acouple of hundred bucks & the course is for 4 days . You put $18,000. In your pocket on top of the safety if that’s what your looking for .

  17. irving laub says:

    What is your feeling about BBN and GBAB

  18. Robert Moeller says:

    There is one Fund Family that I would recommend for Annuities. They are quality and their rates are the lowest. I’m 72 and put $5,000 in a Vanguard Variable Annuity in 1991. It is 35% Stocks/60% bonds/5% money market. Stock portion is 20% Income/15% Diversified Value. Bond portion is 44% High Yield/16% Quality Corporate. I employed one of its features that would be impossible for me to do. I set it up to be automatically rebalanced monthly at no cost to me. It is also an Insurance policy that will pass to my beneficiaries tax free, as I will never withdraw from it. It is now worth $27,089 and I never had to do any research, investing or stock picking. I value my time, lived life while letting the Vanguard expert managers crunched the numbers.

  19. Betty Wong says:

    I like your article very much

    thank you,
    Betty Wong

  20. Thomas Crosh says:

    I have been trying to save one of my tennis buddies from purchasing an Allianz flexible premium indexed annuity. He plans to invest 250K and so does his lady friend. I read the “preliminary contract summary” which is written to confuse. I am a registered representative and in good conscious could never recommend such a product to my clients. I forwarded Marc Lichtenfeld’s article “How to create your own annuity” and hope my friend sees the light! Thanks Marc!

  21. where can I put $100,000 safely so I can get regular income stream or have it available as I need it. I am 70 and soon to retire

  22. Alfonso says:

    Excellent content you got here! You can earn some extra $$$ from
    your blog, don’t miss this opportunity, for more details just search in google – omgerido monetize website

Leave a Reply

Your email address will not be published. Required fields are marked *