How to Add Annuities to Your Retirement Asset Allocation

Why choose between annuities vs. stocks and bonds? Here's how to invest in both.

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Before deciding how much of your retirement dollars to direct into stocks and bonds, consider adding another type of investment to the mix: annuities.

Learn about how your retirement income can benefit from annuities. And find out how to put them to work in your asset allocation approach.

Key Takeaways

  • One common rule of thumb is to divide your retirement contributions among stocks and bonds in a way that suits your timeline and risk tolerance.
  • Annuities can be added to your portfolio to guarantee income in the form of either a lump sum or installments.
  • They can help hedge against running out of money during a market downturn.
  • Immediate annuities pay income immediately; those that are deferred will pay out at a later time.

How Do You Build a Portfolio With Annuities?

Here's how a traditional asset allocation approach works: You divide your retirement contributions among stocks and bonds in percentages that suit your tolerance for risk, your investing goals, and your retirement timeline. Based on that, you'll set a sustainable withdrawal rate. In other words, that's the amount you can expect to withdraw each year in retirement without running out of money.

As an alternative, some experts recommend that you use money that otherwise would have gone to stocks and bonds to buy an annuity, a type of investment that offers you guaranteed income in retirement. It comes in the form of a lump sum or installment payments.

A third asset allocation model gives you the best of both worlds. Instead of choosing between annuities vs. stocks and bonds, you can incorporate annuities alongside stocks and bonds. Or, you can replace one asset class in your portfolio with annuities. For instance, you might replace bonds.

What Are the Benefits of Annuities?

Your goals should be to reduce the risk of depleting your nest egg during retirement and boost your income potential. Having annuities as a portion of your portfolio can help you deliver on these goals. Here are a few of the ways:

Reduces risk of income decrease: Annuities can minimize the risk of an income decrease during a market downturn. Inside a variable annuity, you will often allocate a higher percentage of stocks than you would if you weren't using the annuity. But if the annuity contract has a guaranteed minimum withdrawal benefit (GMWB) rider clause, you can feel comfortable doing so. That's because the amount of income you can withdraw is guaranteed by the GMWB rider, regardless of market performance.

Reduces the odds that you will run out of money: Variable annuities with a GMWB with a guaranteed minimum lifetime benefit let you annually withdraw a certain percentage of the amount you invested for life. What remains will most often be extended to a beneficiary upon your death. Investors with low pension amounts or conservative withdrawal rates or equity allocations can achieve a sustainable lifetime income. All you have to do is replace a portion of your portfolio with a variable annuity with a GMWB.

It can maximize your lifetime income: Research by Wade Pfau found that an integrated portfolio including immediate or deferred annuities can result in a higher income level. It can also result in a greater amount of legacy assets available to beneficiaries than an investment-only asset allocation approach. That is largely because a pool of annuitants share risk, such that those who don't live as long subsidize the payouts of those who live longer.

More aggressive investing: Annuities allow for more aggressive investing in other areas of your portfolio. Deferred or immediate annuities also help give you a better idea of what your future income will be regardless of the performance of the markets. Calculators like the AARP annuity calculator allow you to assess your expected income from an annuity. You can invest in other funds more aggressively, knowing a portion of your income is secure.


An investor who buys a variable annuity with a guaranteed lifetime withdrawal would get a guaranteed payout every year for the rest of their life. This is true even if the value of the underlying assets of an annuity declines.

How to Work Annuities Into Your Portfolio

Adding annuities into the mix starts with the traditional asset allocation approach of deciding what percentage of your money you want to allocate to stocks vs. bonds. Then, follow these steps to adjust your asset allocation to fit in annuities.

Decide On the Type of Annuity

You can allocate a portion of your portfolio to one of the three common types of annuities:

  • Variable annuities: These go up and down with market performance. They let you choose the mix of underlying assets. This makes them suitable for investors who want greater control over their future investment gains. For instance, you can achieve aggressive, moderate-risk, or conservative annuities. It depends on the assets in the annuity.
  • Immediate annuities: These begin to pay income immediately, making them suitable if you are retiring now.
  • Deferred annuities: These offer defined payouts that begin at a later time. They may be more suitable for younger investors with a longer time horizon.

Allocate the Annuity Portion of Your Portfolio

Determine what percentage of your portfolio to allocate to annuities. Here are a few sample asset allocations using a blend of traditional assets with an annuity:

  • Conservative: Instead of having a portfolio that is 20% stocks and 80% bonds, you can create a portfolio that is 20% stocks, 60% bonds, and 20% guaranteed income from an annuity.
  • Moderate: Instead of having a portfolio that is 40% stocks and 60% bonds, you can build a portfolio that is 40% stocks, 45% bonds, and 15% annuity. To create additional guaranteed income from moderate-risk annuity portfolios, you can allocate 40% stocks, 25% bonds, and 35% annuity.
  • Aggressive: Instead of having a portfolio that is 60% stocks and 40% bonds, assemble a portfolio that is 60% stocks, 30% bonds, and 10% annuity.

Allocate the Stock and Bond Portion of Your Portfolio

Once you've figured out what type of annuity to invest in and how much to allocate to it, allocate the stock and bond portion of your portfolio according to the percentages you earlier identified. Here are a few allocation strategies, in order of increasing risk:

  • Use bonds with staggered maturity dates and buy dividend-paying stocks, or use a dividend income fund for the stock allocation.
  • Invest in a retirement income fund that automatically allocates and rotates across stocks and bonds for you.
  • Layer in some high-yield investments with your traditional stock/bond portfolio to maximize current income.

Other Asset Allocation Guidelines

You only retire once. Asset allocation decisions are best made after putting together a comprehensive income plan on your own or with the help of an advisor who takes into account these factors:

  • Current income: The shorter your life expectancy is, the more you will want to choose investments and strategies that maximize current income.
  • Lifetime income: The longer your life expectancy is, the more you will want to choose strategies that maximize lifetime income. That may mean they produce less income now, but the income would be expected to keep pace with inflation.
  • Lifestyle: You can change strategies to meet lifestyle needs. For instance, you may want to maximize current income for the first decade of retirement while you are healthy. Then, you may have the intent to withdraw less income later on when you slow down.

The Bottom Line

Annuities can be a valuable part of a retirement investing strategy. Instead of choosing annuities vs. stocks and bonds, you can incorporate annuities alongside or in place of other asset classes in a portfolio. This can help you achieve long-term income for yourself and your beneficiaries without fear of future market fluctuations.

There are many types of annuities and allocation approaches you can use to diversify your portfolio. You should factor in your unique investing goals, tolerance for risk, and retirement horizon. Then, settle on the approach that best supports your vision for your retirement.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. OneAmerica. "Optimizing Retirement Income by Combining Actuarial Science and Investments," Pages 2, 12.

  2. National Association of Insurance Commissioners. "Annuities."

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