Let me start with complete transparency: I don’t sell annuities, I don’t receive commissions from them, and frankly, I dislike most annuity products on the market. They’re often complicated, expensive, and in many cases, they’re sold rather than planned.

My skepticism runs deep. Nearly 18 years ago, in my first financial role out of college, there was a veteran in my office who had one solution for everything: annuities. Client had an IRA rollover? Annuity. Extra money beyond their 401 (k)? Annuity. Worried about market volatility? You guessed it – annuity. This approach made me sick and shaped my career trajectory as a fee-only planner.

But this isn’t about bashing annuities like Ken Fisher does. When used correctly – specifically when used the way they were designed to be used – annuities can create outcomes that surprise even sophisticated investors and retirees. After 17-18 years of retirement planning, I’ve learned that bringing bias to the table and simply saying “annuities are bad” isn’t helpful.

Today, I want to walk you through four surprising benefits of annuitizing a portion of your fixed income and how this fits into well-designed retirement income planning.

The big takeaway? Retirement planning isn’t just about growing assets anymore – it’s about turning those assets into reliable, efficient, and sustainable income.

1. Lower Stress During Market Volatility: The Emotional Game-Changer

Here’s something most people don’t understand until they experience it firsthand: having an annuitized portion of your portfolio dramatically reduces stress during market downturns in retirement.

Consider this reality: if you retire at 60 and plan to live until 90, that’s a 30-year time horizon. Historically, there’s a 20% market downturn or bear market approximately once every five years. This means you could experience five or even six major bear markets during your retirement.

Bear markets hit differently when you’re retired.

When you’re accumulating wealth, you might even feel somewhat positive about a bear market – subconsciously, you know you’re buying shares at discounted prices. It’s uncomfortable, but manageable. When you’re withdrawing money for living expenses, volatility can feel nauseating.

I’ve been working with retirees for 18 years. In that time, I’ve witnessed very sophisticated retirees panic during downturns by bailing out of well-thought-out, diversified strategies right in the middle of a bear market. I’ve watched vacations get ruined, and couples argue over whether they should cut spending during market downturns.

But here’s what I’ve never seen:

I’ve never had a client with guaranteed lifetime income layered on top of other income sources – whether Social Security or a pension – say they regret securing that income stream. It’s always the opposite.

During COVID in 2020, during the 2022 downturn, and going back to 2008, when markets dropped 20% or more, clients with annuitized income consistently told me: “I’m so glad I have that guaranteed income check showing up every month.”

That predictability changes behavior, and in retirement, behavior matters infinitely more than spreadsheets.

Yes, you can hold bonds or cash for safety, but 2022 reminded us that bonds can fall double digits, and cash loses purchasing power over time. Your safe money isn’t about maximizing returns – it’s about minimizing emotional risk. And emotional risk in retirement is incredibly expensive.

2. Reduced Withdrawal Pressure: The Mathematical Advantage

This is where the math really shines, and it’s one of my favorite impacts of annuitization.

Most retirees follow traditional withdrawal frameworks. Let’s use the 4% rule as an example. Say you have $2 million invested and need $80,000 annually – that’s exactly 4%, which should theoretically work fine.

Now let’s see what happens with partial annuitization:

Instead of relying solely on systematic withdrawals, let’s say you annuitize $500,000 of your fixed income allocation. Using a conservative 7% payout rate (and I’ll explain why this is conservative in a moment), that $500,000 generates $35,000 annually in guaranteed income.

Your remaining portfolio balance is now $1.5 million, but it only needs to produce $45,000 because you’re receiving $35,000 from the lifetime income stream. Divide $45,000 by $1.5 million, and you get an effective 3% withdrawal rate on the remaining portfolio.  That reduced withdrawal rate on the invested balance could allow for better long-term growth, all because you maximized the cash flows from your ‘safe bucket.’ 

That difference matters enormously over the long term.

Why can annuities offer higher payout rates than bonds? Two reasons: mortality credits and longevity pooling. You’re not just earning bond-like returns – you’re benefiting from pooled longevity risk. Some people in the pool won’t live very long; others will live much longer. This pooling effect creates higher payout rates than you could achieve with individual bonds or CDs.

I broke down Marilyn’s real case study on YouTube: She was earning approximately 8.6% on her TIAA traditional annuity – well above the conservative 7% I used in the example above.

Surprisingly, partial annuitization increased the ending ‘legacy’ to her two adult children!  Despite dropping her liquidity after annuitizing that portion of her assets.

This higher payout rate reduces strain on your equity portfolio, which means:

• Lower sequence of returns risk
• Fewer forced sales during market downturns
• More compounding potential for long-term growth

Annuities don’t just create income – they reduce selling pressure on everything else. This structural shift is often misunderstood but incredibly powerful.

The timing of this strategy matters significantly. We’ve had three consecutive years of bull market returns – double digits in the 20% range for two years, then 16% last year. But who knows how much longer this will continue?

We had about 11-12 years between 2008 and 2020 with minimal bear markets, but then just a two-year gap before the 2022 downturn. Markets are cyclical, and short-term, they’re driven by emotion and irrationality.

The question is:

1. What’s your plan for the next bear market?
2. Can partial annuitization help you navigate it emotionally while avoiding the need to sell riskier assets with better long-term growth potential?

3. Higher Legacy Potential: The Counterintuitive Truth

This surprises people more than anything else, and honestly, it shocked me initially, too. I spent considerable time manipulating financial planning software because I didn’t believe the results. But the math is sound and makes perfect sense once you understand it.

Annuitizing a portion of your assets can actually result in higher legacy amounts, not lower ones.

This shocks people because the common assumption is: “If I annuitize, my kids lose out because that money isn’t liquid anymore.” While liquidity does disappear with annuitization, if longevity plays out in your favor – which is the entire purpose of annuitization – the results can be dramatically different.

Here’s why: If you plan to live into your 80s or 90s, the annuity keeps paying throughout that entire period. Meanwhile, because you’ve reduced withdrawal pressure on your equity portfolio, those riskier assets with higher long-term growth potential can compound more efficiently.

In stress tests I’ve run with real case studies, including Marilyn’s situation, the numbers consistently support this outcome. For Marilyn, the breakeven point was approximately 81 years old. Beyond that point, the legacy outcome was significantly higher with partial annuitization than without it.

Legacy’s biggest threat

The biggest threat to legacy isn’t annuitization – it’s poor returns early in retirement. Poor sequence of returns risk combined with higher withdrawals damages portfolios far more than partial annuitization ever could.

If you retire into a bear market, the value of reduced withdrawal strain becomes even more powerful. I’ve seen this play out with clients who annuitized portions of their portfolios 10-15 years ago. They’ve been able to take full advantage of the bull run we’ve enjoyed since 2008, with their remaining investments growing much more efficiently because they weren’t forced to sell during downturns.

4. True Longevity Insurance: Beyond Social Security and Bonds

Most retirees over-allocate to bonds because they fear volatility. But bonds don’t solve longevity risk – they just reduce volatility temporarily.

If you live 25 or 30 years in retirement, how long will that safe bond allocation actually last?

Longevity risk is particularly real for people who take care of themselves, have good genetics, and access to excellent healthcare. As modern medicine continues to evolve and AI advances rapidly, life expectancies may increase significantly. Even if the most optimistic predictions don’t materialize, many people will still live well into their 90s or beyond.

Social Security provides powerful longevity insurance, but for many high-income retirees, it won’t cover enough expenses. This is where partial annuitization becomes valuable – it can convert part of that underutilized fixed income allocation into maximized income streams that protect against longevity risk.

The annuity will pay whether you live to 85 or 105.

I see the bond or fixed income bucket consistently underutilized by retirees. People are often afraid to commit large lump sums to annuities because liquidity disappears. This is exactly why having a comprehensive plan and strategy is crucial – this isn’t an all-or-nothing decision.

Liquidity matters. Health matters. Legacy goals matter. Interest rates, payout rates, specific annuity contracts, and terms all matter significantly.

This isn’t about annuitizing everything – it’s about intelligently designing the fixed income sleeve of your portfolio, building an income floor, creating emotional stability, and giving growth assets room to compound. That’s true retirement income planning.

Four Critical Questions to Ask Yourself

If you’re approaching retirement or recently retired and wondering whether partial annuitization makes sense, consider these four questions:

1. What is my true risk tolerance in retirement?

Really internalize this. How do you actually feel about risk – not today while you’re still working, but when you’re actually retired and watching your portfolio fluctuate? If you are retired, how do you feel when the market drops 10%, 20%, or even 30%?

2. Do I expect longevity in my family?

Consider both yourself and your spouse. Do you have good genetics, take care of your health, and have access to quality healthcare? Are you planning for the possibility of living 25, 30, or more years in retirement?

3. What percentage of my expenses are covered by guaranteed income sources?

If Social Security only covers 25% of your total expenses, that’s not substantial coverage. You could be much more subject to the sequence of returns risk than someone with higher guaranteed income coverage.

4. Am I reacting emotionally to the word “annuity,” or am I evaluating strategically?

Are you considering annuities as part of an overall retirement income plan, or are you dismissing them based on preconceived notions?

If your income stability ratio is low – meaning most expenses must come from portfolio withdrawals – you’re much more exposed to sequence risk. This doesn’t automatically mean you need annuities, but it absolutely means you should evaluate them objectively.

This is especially true if you have access to quality annuities, such as TIAA traditional products, where older vintages can offer very attractive payout rates. Before surrendering or transferring these products, understand the crediting rates, liquidity restrictions, income options, and payout rates.

The Bottom Line: Building Resilient Retirement Income

Retirement income planning isn’t about collecting the highest returns – it’s about building a resilient retirement income plan that can weather various economic storms while providing the lifestyle you want.

People who succeed in retirement aren’t those chasing performance; they’re the ones who design their plans intelligently, balancing growth potential with income security.

The mathematical advantages of partial annuitization – reduced withdrawal pressure, higher effective payout rates through mortality credits, potential legacy benefits, and true longevity protection – can create outcomes that surprise even sophisticated investors.

But remember: this strategy requires careful planning, appropriate product selection, and integration with your overall financial plan. The goal isn’t to annuitize everything, but to strategically design your fixed-income allocation to deliver maximum benefit across all your retirement objectives.

As we face potential market volatility ahead – with tariff uncertainties and the conflict in Iran – having a portion of your income guaranteed can provide the emotional stability needed to let your growth investments do what they do best: grow over time.

The question isn’t whether annuities are good or bad in isolation. The question is whether partial annuitization can help you build a more resilient, less stressful, and ultimately more successful retirement income plan.

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions. If you are looking to

• Maximize your retirement spending
• Minimize your lifetime tax bill
• Worry less about money

You can start by taking our Retirement Readiness Questionnaire on our website at www.imaginefinancialsecurity.com, so we can learn more about how we can help you on your journey to and through retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal, or investment advice.