Annuities and Investment Portfolios

A Balanced Approach to Retirement Income Planning

Clients often ask why an annuity may be considered when a conservative investment portfolio can also provide income and growth potential. When annuity income begins, the contract transitions from an accumulation phase to an income phase. Rather than focusing on account value growth, the funds are used to provide a predictable stream of income over time. A conservative investment portfolio, by contrast, may continue to grow while providing income and liquidity. However, portfolio income is subject to market performance and investment risk.

The two strategies serve different purposes within a retirement plan.

The Role of Annuities

Annuities are insurance products designed to provide income over a specified period or for life, depending on the contract selected. They are commonly used to establish a foundation of predictable income, similar to a personal pension. Annuities may help address the following retirement risks:

Market risk – exposure to volatility and downturns
Longevity risk – the possibility of outliving available assets
Sequence-of-returns risk – the impact of poor market performance early in retirement

How Annuities Provide Income?

When income begins, an annuity contract is structured to provide:

Guaranteed income for life or for a specified period (as per Contract)
Predictable payment schedules
Protection from direct market losses (depending on product type)

Income payments may be supported by:

Contract value
Interest credited
Mortality credits through risk pooling among policyholders

These features allow annuities to provide income certainty that is not dependent on ongoing market performance.

Case Study: Single Premium Immediate Annuity (SPIA)

At age 60, John purchases a Single Premium Immediate Annuity (SPIA) with a one-time premium of $100,000. In exchange, the insurance company agrees to pay him $7,210 annually for as long as he lives.

These payments are contractually guaranteed and continue for John’s lifetime, even if the total payments received exceed his original premium. By doing so, John transfers longevity risk — the risk of outliving his assets — to the issuing insurance company.

It is important to note that once purchased, a SPIA is generally irrevocable. Access to the premium is limited, and payments are based on the claims-paying ability of the issuing insurer. Income payments may be fully or partially taxable depending on whether the annuity is funded with qualified or non-qualified assets.

This example is hypothetical and provided for illustrative purposes only. Actual income amounts depend on age, payout option selected, carrier pricing, and prevailing interest rates at the time of purchase.

Considerations of Investment Portfolios

A conservative investment portfolio may generate income while maintaining liquidity and growth potential. However, results depend on several factors, including:

Market performance
Withdrawal strategy
Time horizon
Investor behavior during periods of volatility

Portfolio income is not guaranteed and may fluctuate over time. Principal is subject to market risk, including the possible loss of value.

A Combined Strategy

Many retirement income strategies use both annuities and investment portfolios to balance stability and flexibility.

Bucket 1 – Guaranteed Income

Typically used to help cover essential living expenses such as:

Housing
Utilities
Food
Healthcare

Potential benefits:

Predictable income stream
Reduced exposure to market volatility
Income that may last for life, depending on contract terms

Bucket 2 – Investment Portfolio

Typically used to support:

Discretionary spending
Liquidity needs
Long-term growth objectives

Legacy and estate planning goals

Potential benefits:

Market participation
Access to funds
Flexibility in withdrawals

Why a Blended Approach is Better

Using both strategies may help clients to:

Establish a base level of predictable income
Maintain access to invested assets
Reduce the need to sell investments during market downturns
Align income planning with individual goals and risk tolerance

Annuities and investment portfolios serve different functions within a retirement income strategy and may be used together to address multiple financial objectives.

Key Considerations

Annuities are not designed to maximize investment returns. Their primary purpose is to provide income predictability and protection against longevity and market risks.

Investment portfolios offer growth potential and liquidity but involve market risk and variability of returns.

The appropriate mix of annuities and investments depends on individual circumstances, objectives, risk tolerance, and time horizon.

Annuities trade upside for certainty. Portfolios trade certainty for upside.

Page updated

Google Sites

Report abuse