A financial advisor has recommended that a client allocate more than 50% of their investment portfolio to annuities. The client, identified as Georgia, sought further opinion on the suggestion.
Fifty percent would likely be considered high for most individuals, but it could be suitable depending on specific personal details. Some investors may require or prefer a larger annuity allocation.
Annuities provide guaranteed income, similar to pensions or Social Security. A lifetime immediate annuity involves exchanging a lump sum for regular monthly payments that continue for life, addressing concerns about outliving savings.
Fixed annuities offer stability by paying a guaranteed interest rate unaffected by stock market volatility, which can appeal to those with low risk tolerance.
However, potential drawbacks exist. Annuities typically reduce liquidity, as funds become inaccessible once annuitized to purchase payment streams. This requires ensuring remaining portfolio portions can cover unexpected expenses.
Allocating to annuities may also limit growth potential compared to investments left in accounts like IRAs or 401(k)s, which can grow based on market performance. Additionally, annuities generally do not leave account balances to heirs, though reduced payment options for beneficiaries are available.
The appropriateness of a 50% allocation depends on individual needs for guaranteed income, risk tolerance, liquidity requirements, growth expectations, and estate planning goals. Clients are encouraged to discuss their advisor's rationale for such recommendations.