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The Role of Annuities in Retirement Planning

Retirement planning is similar to forecasting the weather. While we can map out broad trends that will influence the future, we are unaware of the weather on a specific forthcoming date.

On average, stocks carry higher risk but generate greater returns. Concurrently, cash devalues with time, but its certainty is worth its weight in gold. Thus, creating a retirement portfolio requires constructing a tiered model that allocates monies to various instruments so that investors do not run out of money.

Each investor will tolerate risk differently, and the accepted "average investor" retirement portfolio has remained split between stocks and bonds at a 60/40 ratio. But, for those who cannot stomach the ups and downs of more volatile times, annuities can stabilize one's future while providing modest returns.


Unlike traditional investments that trade on exchanges, annuities are insurance contracts between individuals and companies. When an individual purchases an annuity, they deposit money upfront or over time with an insurer. In return, the insurance company guarantees the individual a future payment or income stream.

The benefit of annuities is that they are guarantees that retirees can count on when working with a reputable firm, which is different from stocks and certain bonds. On any given day, the stock or bond market may drop in value for reasons that are only sometimes clear.

Types of annuities

Annuities come in two primary styles with two types of durations.

Fixed annuities have static and unchangeable payments for the duration of their term, while variable annuities have dynamic payments that change based on many factors, such as investments they mimic.

Regarding annuity durations, these insurance products can either be immediate or deferred.

With immediate annuities, individuals deposit a lump sum amount in return for an immediate stream of income that can last for a specific duration or the remainder of their life. With deferred annuities, an individual makes either a lump sum or a stream of reoccurring payments in return for a future payout date.

Important considerations

Finding a reputable insurance agent or broker to put your interests first is essential. These products quickly become complex when adding riders and features, making them more challenging to understand.

We generally prefer fixed annuities at Lundeen Abrams Advisors since they cost less and are more transparent. Still, most investors should only consider annuities as a planning tool if they have mandatory income needs or are unwilling to accept modest levels of risk.

Notably, annuity rates vary based on prevailing market interest rates, which have increased as the Federal Reserve tries to stymie inflation.

Are you risk averse?

If you consider yourself risk-averse or have a financial goal that requires tampered risk-taking, an annuity could be worth considering. Additionally, annuities can have tax benefits for high-income earners, which are worth comparing to the traditional benefits of long-term equity investments.

At Lundeen Abrams Advisors, we work as fiduciaries and consider the benefits and drawbacks of each investment type when helping our clients build a retirement portfolio. If you are wondering what investment strategy will meet your income needs, we welcome you to schedule an appointment today to discuss your situation. We look forward to talking with you soon!

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