Immediate Annuity vs TIPS Ladder: $750K Income Floor

The decision in one worked example

Margaret is 65, single, and lives in Georgia. She has $750,000 earmarked for one job: a guaranteed income floor that covers her essential spending no matter how long she lives or what markets do. Social Security covers $30,000/year of her $62,000/year baseline; she needs the $750,000 to reliably produce the remaining $32,000/year, ideally with some inflation protection. She has two clean ways to build that floor, and they produce very different answers.

Option A — single-premium immediate annuity (SPIA). She hands $750,000 to a highly rated insurer and receives roughly $52,000/year for life (about 6.9% of premium at 2026 rates for a single 65-year-old, life-only). That overshoots her $32,000 target by $20,000/year — but the payments stop the day she dies, and they are nominal: fixed in dollars, eroded by inflation.

Option B — 30-rung TIPS ladder. She buys 30 Treasury Inflation-Protected Securities, one maturing each year from age 65 to 95. At a 2.0% real yield, a self-liquidating ladder that returns principal and yield over 30 years supports roughly $33,800/year in today’s dollars, and every payment rises with CPI. That just clears her $32,000 target, the income is U.S.-Treasury-backed, and if she dies at 78, the unspent rungs — roughly $375,000 of remaining maturities — pass to her heirs.

The SPIA pays about $18,000/year more. The TIPS ladder protects her $750,000 and indexes to inflation. Neither is “better” in the abstract. Which one wins for Margaret depends on whether she values maximum guaranteed spending or principal-plus-inflation certainty — and the rest of this article is the math that decides it.

Why the SPIA pays more: mortality credits

A SPIA can pay 6.9% of premium while a 30-year TIPS ladder at a 2.0% real yield supports only about 4.5% — even though both are “safe.” The entire gap is one thing bonds cannot manufacture: mortality credits.

When you join an annuity pool, the insurer pools your premium with thousands of other annuitants. Some die early; the principal they did not live to spend is redistributed to the survivors. The longer you live, the more of those forfeited dollars flow to you. That subsidy is the mortality credit, and it grows with age — which is why a 70-year-old single-life SPIA pays closer to $58,000/year on the same $750,000, and an 80-year-old far more. A bond ladder gives you only your own money plus market yield; an annuity gives you your money, market yield, and a share of everyone who died before you.

This is also why the SPIA is the better pure-longevity hedge. If Margaret lives to 99, the SPIA keeps paying $52,000/year for 34 years — total payout near $1.77M on a $750,000 premium — while a 30-year TIPS ladder runs out of rungs at 95 and pays nothing for her last four years. The annuity transfers longevity risk to the insurer; the ladder leaves it with you.

The head-to-head at $750,000

Read that table as a values test, not a scoreboard. The SPIA dominates the income and longevity rows; the TIPS ladder dominates the inflation, legacy, liquidity, and credit rows. Margaret’s answer lives in which rows she weights most.

The inflation trap that sinks the fixed SPIA

The $52,000 SPIA looks like a blowout win — $18,000/year more income. But that number is frozen the day Margaret signs. At 3% inflation, here is what that fixed $52,000 actually buys over a long retirement:

• Age 65: $52,000 buys $52,000 of goods.
• Age 75 (10 yrs): still $52,000 nominal, but the buying power of about $38,700.
• Age 85 (20 yrs): buying power of roughly $28,800 — below her $32,000 essential floor.
• Age 95 (30 yrs): buying power of about $21,400 — the fixed SPIA has quietly failed the one job she bought it for.

The TIPS ladder does not have this problem. Its $33,800 starting payment is indexed to CPI-U, so at 3% inflation the nominal payment at 85 is around $61,000 — preserving the same $33,800 of real spending. This is the heart of the comparison: the SPIA wins the first decade decisively, the lines cross somewhere in the late 70s to mid-80s depending on inflation, and the TIPS ladder wins the back half. If Margaret’s family routinely lives into their 90s, the inflation-adjusted floor matters far more than the headline payout.

Insurers do sell CPI-indexed SPIAs, but they start roughly 25-30% lower — around $39,000/year on $750,000. That narrows the income gap with the TIPS ladder to about $5,000/year while keeping the longevity guarantee. For a longevity-worried retiree who still wants inflation protection, the inflation-adjusted SPIA, not the fixed one, is the real competitor to the ladder.

How to actually build the 30-rung TIPS ladder

A TIPS ladder is not exotic. It is 30 individual Treasury securities, one maturing each year, sized so that each maturity (plus that year’s coupons) funds one year of spending in real dollars.

1. Decide the term. Margaret picks ages 65 to 95 (30 rungs). The U.S. Treasury issues TIPS at 5-, 10-, and 30-year maturities and reopens them, so a continuous 30-year ladder is buildable on the secondary market through any major brokerage.
2. Size each rung for level real spending. Because TIPS principal grows with CPI, you solve for the par amount in each maturity year that delivers the same inflation-adjusted dollar — roughly $33,800 in today’s terms — at a 2.0% real yield across the curve.
3. Hold the TIPS in an IRA. TIPS generate “phantom income”: the annual inflation adjustment to principal is taxed each year even though you do not receive it until maturity. Holding the ladder inside a traditional IRA or Roth IRA defers or eliminates that drag entirely.
4. Let each rung mature — do not trade it. The ladder’s guarantee comes from holding to maturity. Interim TIPS prices swing with real-rate moves, but a held rung pays exactly its inflation-adjusted par on schedule, regardless of market price.

The 2.0% real yield assumed here is conservative and defensible — long-dated TIPS real yields have traded in a 1.5%-2.5% band in recent years. Lock in a higher real yield and the ladder supports more income; if real yields are near zero when you build it, the ladder underperforms this example and the SPIA’s relative advantage grows.

Taxation: the exclusion ratio vs phantom income

For money outside an IRA, the two options are taxed in nearly opposite ways, and it changes the after-tax math.

Non-qualified SPIA — the exclusion ratio (IRC §72). Each annuity payment is split into a tax-free return of your own principal and a taxable interest portion. The IRS sets an exclusion ratio using your premium and life expectancy, so a large slice of Margaret’s $52,000 is tax-free until she has recovered her $750,000 basis — typically into her 80s. After basis is fully recovered, the entire payment becomes taxable. This front-loads the tax efficiency into exactly the years she most needs spendable cash.

TIPS — coupon plus phantom inflation income. Outside an IRA, TIPS are tax-inefficient: you owe federal tax annually on both the coupon and the inflation adjustment to principal — income you will not touch until the rung matures. That is why TIPS ladders belong in tax-advantaged accounts. TIPS interest is exempt from state and local income tax (like all Treasuries); the SPIA’s taxable interest portion is not. In Georgia, both the SPIA interest and any taxable TIPS income are taxed at the flat 5.39% state rate (stats.md §13), while the SPIA’s excluded principal portion escapes both federal and state tax.

What most people miss: the insurer-credit and legacy mechanics

Two myths drive bad decisions at this dollar level.

Myth 1: “An annuity is FDIC-safe.” It is not. A SPIA is backed by the insurer’s claims-paying ability and, behind that, your state’s guaranty association — which typically covers only $250,000 to $500,000 of present value per insurer. A single $750,000 SPIA can sit above that limit. The fix is mechanical: split the $750,000 across two or three insurers rated A.M. Best A or better, so each contract stays inside guaranty coverage. A TIPS ladder carries only U.S. Treasury credit risk, which is the benchmark against which all other “safe” assets are measured — effectively zero, no diversification needed.

Myth 2: “The annuity is gone, so heirs get nothing — that settles it.” Not quite. A life-only SPIA pays heirs nothing, true. But if Margaret wants a floor and a legacy, she does not have to abandon the annuity — she can add a cash-refund or period-certain rider that guarantees heirs receive at least the unrecovered premium. The rider lowers her monthly income (often by 5-15%), but it keeps the longevity guarantee while protecting against the “die at 67, lose $600K” scenario. The TIPS ladder solves the legacy problem natively: unspent rungs pass to heirs and receive a step-up in basis to date-of-death value under IRC §1014, wiping out the accrued inflation gains.

The deeper point most retirees miss: this is rarely all-or-nothing. Splitting the $750,000 — say $400,000 into a SPIA to lock the essential floor with mortality credits, and $350,000 into a TIPS ladder for inflation-protected, liquid, heritable income — captures most of the annuity’s longevity protection while keeping real principal in the estate.

Which one builds your floor

Run your decision through these levers in order:

• If your top fear is outliving your money and you have no strong legacy goal, the life-only SPIA wins outright — its $52,000/year and lifetime guarantee are unbeatable for pure longevity insurance.
• If you must preserve the $750,000 for heirs or keep it liquid for medical or housing shocks, the TIPS ladder wins — it returns your principal, indexes to inflation, and is sellable anytime.
• If you want longevity protection AND inflation protection, compare the CPI-indexed SPIA (~$39,000/year) against the TIPS ladder (~$33,800/year) — not the fixed SPIA, which quietly fails on inflation by your mid-80s.
• If you want most of both, split the premium: SPIA for the essential floor, TIPS ladder for the heritable, inflation-protected layer.

The lever is not “which product is safer.” Both are. The lever is whether you are buying maximum guaranteed lifetime spending (mortality credits, SPIA) or guaranteed real principal you can pass on (Treasury credit, TIPS ladder). Price both at your exact age and premium, decide which guarantee you actually need, and build the floor around that single answer.