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In 2024, annuity sales hit a record $432.4 billion as high interest rates spurred demand for products offering guaranteed income streams.
With private pensions in decline, more investors are turning to annuities to help fund retirement. But these insurance products often come with high fees, limited flexibility, and complex structures.
The good news? You don’t necessarily need to buy an annuity to get similar benefits. With the right combination of income-generating investments, you can create a do-it-yourself (DIY) annuity that may offer higher returns and lower costs.
Key Takeaways
- Annuities are products created by insurers that offer guaranteed income streams which are influenced by interest rates, your life expectancy, and the length of the payment period.
- Generally speaking, there are three main types of annuities including fixed, indexed, and variable.
- DIY annuities can mimic these income streams using U.S. Treasuries, corporate bonds, and dividend-paying stocks.
- Avoiding annuity fees can help maximize retirement income over time.
What Are the Types of Annuities?
To start, it’s important to know the basic types of annuities that are available to investors and how they work. Broadly speaking, they differ based on their risk-return characteristics and when payouts begin.
- Fixed annuities: Offer guaranteed payouts with a minimum interest rate.
- Indexed annuities: Returns are based on an index, such as the S&P 500, typically over a period of 12 months, but payouts will be a portion of the indexes performance and dividends are excluded.
- Variable annuities: Lets you invest in mutual funds or Exchange-Traded Funds (EFTs). The payout is impacted by factors including contract expenses, investment returns, and your payment amount.
Beyond the main types of annuities, there are hybrid products. These include multi-year guaranteed annuities, fixed-indexed annuities, and registered indexed-linked annuities.
While these complex products have grown in popularity, it’s important to be aware of the costs that come with owning them. “Most variable annuities are absolutely loaded with fees,” says Devin Carroll, owner of the Carroll Advisory Group. “You’ve got mortality charges, administrative fees, rider expenses, and underlying investment expenses. Over time, those layers of fees start to take big bites out of your returns.”
Indexed annuities are often so complex due to a host of factors such as participation rates, cap rates, and the composition of the underlying index, which can make it challenging to understand what you’re truly investing in.
How to Create a DIY Annuity
Typically, annuities return between 4% and 8% annually depending on the type, but come with a host of fees like surrender charges, commission fees, and annual fees that meaningfully cut into your net retirement savings over time.
Instead, you can take a do-it-yourself approach to replicating an annuity to help generate predictable lifetime income. “With a mix of high-quality bonds, dividend-paying stocks, and a well-structured withdrawal strategy, you can replicate the benefits of an annuity while keeping full control of your money,” says Carroll.
To build your own annuity, consider the following income-generating investments to choose from:
| 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 |
Matching Investments to Annuity Types
If you’re looking to build something similar to a fixed annuity, you can construct a portfolio of high-quality bonds that generate predictable income that typically pay distributions semiannually.
In addition, you could theoretically invest in dividend-paying funds that hold companies with strong dividend track records, such as Ford Motor and Verizon. To make the most out of your investment, consider funds with low management fees that limit the impact on your net return. The iShares Select Dividend ETF, for example, has fairly low management fees of 0.38%.
If you’re comfortable with more risk in exchange for higher returns, U.S. corporate bonds pay out an interest rate of about 5.3%. In contrast, certificates of deposit have the lowest risk, but pay an interest rate of under 2%, with the interest typically paid at the end of the term.
Fast Fact
With an effective interest rate of 5.30% (as of June 2025), U.S. corporate bond yields have jumped by more than double since 2020.
Pros and Cons of a DIY Annuity
Of course, a homegrown annuity has its own set of pros and cons.
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
It takes time to build a portfolio of investments that fit with your goals and risk tolerance. But with the right discipline, you can conceivably save yourself thousands of dollars that would otherwise be lost to the high fees that come with handing your money to an insurance company.
The Bottom Line
If you’re looking to build your own annuity with higher returns, you can choose from a number of income-generating investments that offer competitive yields. Thanks to today’s high interest rate climate, corporate bonds, investment-grade bonds, or even longer-dated Treasuries are all yielding above 4%.
By putting together a carefully constructed portfolio, a do-it-yourself approach allows you to be in full control of your own retirement savings that can leave you with more money in your pocket over the long-term.
