Traditional annuities are popular for guaranteed retirement income, but their high fees and restrictions can erode your returns. Learn how to build a DIY annuity using income-generating investments for higher returns and complete control over your money.
An Overview of Annuity Types
To understand how to construct a DIY annuity, it's crucial to know the basic types of annuities available and how they function. These products differ primarily in their risk-return frameworks and when payouts initiate.
Primary Annuity Types
- Fixed Annuities: Offer guaranteed payouts with a minimum interest rate.
- Indexed Annuities: Payouts are linked to an index like the S&P 500. Your returns will be a fraction of the index's performance, excluding dividends.
- Variable Annuities: Allow investments in mutual funds or ETFs. The payout is influenced by factors such as contract expenses, investment returns, and your payment options.
There are also hybrid products like multi-year guaranteed annuities, fixed-indexed annuities, and registered index-linked annuities. Although these complex products have grown in popularity, potential owners should be wary of the substantial costs associated with them. According to Devin Carroll from the Carroll Advisory Group, “Most variable annuities are burdened with multiple fees, including mortality charges, administrative fees, rider expenses, and underlying investment costs, which collectively erode returns over time.”
Constructing a DIY Annuity
Traditionally, annuities can return between 4% and 8% annually, depending on the type, but they come with various fees such as surrender charges, commission fees, and annual fees that erode net retirement savings over time.
To mimic an annuity while retaining control over your investments, consider using a mix of high-quality bonds, dividend-paying stocks, and a structured withdrawal strategy. Devin Carroll suggests, "With a selection of high-quality bonds, dividend-paying stocks, and a well-planned withdrawal strategy, you can replicate the benefits of an annuity while maintaining full control of your money."
Income-Generating Investments for DIY Annuities
| Type | Interest Rate / Yield | Interest Paid |
|---|---|---|
| 12-Month Certificates of Deposit (CD) | 1.62% | Typically at maturity |
| 10-Year U.S. Treasuries | 4.25% | Biannually |
| Investment-grade bonds | 3.55% | Biannually |
| U.S. corporate bonds | 5.30% | Biannually |
| 5-Year Treasury Inflation Protected Securities (TIPS) | 1.63% | Biannually |
| Dividend-paying funds | 3.69% | Quarterly |
(As of June 2025)
Matching Investments to Annuity Types
If you aim to build a portfolio comparable to a fixed annuity, you can assemble a selection of high-quality bonds that generate predictable income paid semiannually. Alternatively, investing in dividend-paying funds that include reputable companies like Ford Motor and Verizon could be beneficial. To optimize your returns, consider funds with low management fees, such as the iShares Select Dividend ETF, which has relatively modest management fees of 0.38%.
For those willing to accept more risk for potentially greater returns, U.S. corporate bonds offer an interest rate of about 5.3%. Conversely, certificates of deposit provide the least risk, though their interest rate is typically under 2%, with interest paid at the end of the term.
Pros and Cons of a DIY Annuity
Creating a homegrown annuity comes with its unique advantages and challenges:
Pros:
- Lower fees
- Full control over your money
- Greater flexibility in asset allocation
Cons:
- Requires time, planning, and investment knowledge
- Portfolio performance may vary with interest rates
- Lacks the guaranteed income floor of an annuity
Building a well-aligned portfolio according to your goals and risk tolerance takes time and discipline, but it may save thousands of dollars in fees typically associated with annuities offered by insurance companies.
Conclusion
If you want to construct a DIY annuity for higher returns, several income-generating investments offer competitive yields in today's high-interest-rate environment. Incorporating corporate bonds, investment-grade bonds, or long-dated Treasuries into a carefully constructed portfolio enables you to maintain full control of your retirement savings, potentially leaving more money in your pocket in the long run.
