When most people think about annuities, they often envision a product designed to preserve principal and provide a reliable, long-term income stream. However, lifetime income annuities that deplete principal internally—meaning the annuity pays out income until the initial investment is gone—are sometimes misunderstood.

Many retirees worry that these annuities, which don’t preserve principal within the product itself, are a poor choice. However, when viewed from the right perspective, these annuities can be a powerful tool in a well-balanced retirement strategy.
 

The key to understanding why depleting principal annuities aren’t a bad thing lies in understanding the broader context of a retirement portfolio and the role annuities play in it. In fact, these annuities offer unique advantages in producing higher income and preserving the overall health of your portfolio.
 

1. Higher Proportionate Income than Other Traditional Options
 

One of the greatest advantages of lifetime income annuities that deplete principal is the higher income they provide compared to other traditional retirement income options like CDs, bonds, or dividend-paying stocks.
 

• CDs and bonds offer low yields, particularly in a low-interest-rate environment, and often don’t keep pace with inflation. While they can provide a reliable income stream, their returns are limited.
   

• Dividend stocks can offer higher yields, but they are subject to market volatility. The dividends may fluctuate or even be cut during market downturns, leaving you with less income when you need it most.
   

Lifetime income annuities, on the other hand, are structured to guarantee a fixed income for life. The insurer calculates how much you can withdraw each month based on your life expectancy, often offering payouts that are significantly higher than those you would get from more traditional sources.
 

Because annuities provide a higher level of guaranteed income than CDs, bonds, or most dividend approaches, they can free up more of your overall portfolio for growth. This allows you to take a portion of your funds and lock in stable, predictable income, while leaving the rest to be invested for long-term growth.

 

2. Freeing Up More Principal for Growth
 

When you allocate some of your retirement savings into a lifetime income annuity, you essentially shift the risk of outliving your money to the insurance company. This allows you to use less of your overall portfolio to generate income, which in turn frees up more principal for growth.
 

• For example, if you invest in a lifetime income annuity that pays a predictable income over your life, you don’t need to set aside as much capital in income-generating investments like bonds or dividend stocks.
   

• This freed-up capital can then be allocated into more growth-oriented investments, such as equities, mutual funds, or real estate, which have the potential to appreciate over time.
   

By keeping a larger portion of your portfolio invested for growth, you’re able to outpace inflation, build wealth, and preserve principal at the portfolio level, rather than within the annuity itself.

 

3. Preservation of Principal at the Portfolio Level, Not the Product Level
 

Here’s where the distinction becomes important: Preservation of principal is not necessary at the product level of the annuity itself. What matters is the overall preservation of principal at the portfolio level.
 

Think of it this way: lifetime income annuities, even those that deplete principal internally, are income tools, not growth tools. They are designed to provide guaranteed income for life. By contrast, your growth assets (stocks, mutual funds, real estate) are the tools that will preserve and grow principal over the long term.
 

Just like a screwdriver is excellent at driving screws but not at sawing wood, annuities are excellent at generating income but not at long-term capital growth. You don’t need your annuity to preserve principal because that job is taken care of by your broader investment strategy.

 

4. Lower Risk with Higher Income and Growth Potential
 

One of the biggest advantages of using lifetime income annuities that deplete principal is that they reduce overall portfolio risk while still providing long-term growth opportunities.
 

• Risk Reduction: Since the annuity guarantees income for life, it significantly reduces the sequence of returns risk(the risk of running out of money due to poor market performance early in retirement). The fixed income from the annuity ensures that you don’t need to sell assets in a down market to meet your living expenses.
   

• Growth Potential: Meanwhile, by freeing up principal for growth, the remaining portion of your portfolio is still positioned to compound over time. You can take on slightly more risk with the growth portion of your portfolio, knowing that your income needs are already covered by the annuity.
   

This approach offers the best of both worlds: predictable income and the opportunity for your portfolio to grow and outpace inflation, all while reducing the risk that can come with relying solely on income-producing assets.

 

5. The Right Tool for the Job
 

Ultimately, it all comes down to using the right tool for the job.

Annuities are excellent tools for generating reliable, guaranteed income. They excel at providing financial security in retirement, particularly for individuals who want to know they’ll have a steady income stream no matter what happens in the markets.
 

But they’re not designed for long-term capital growth. That’s where your growth-oriented investments come in. By combining income annuities that deplete principal with a diversified portfolio of growth assets, you’re putting together a well-rounded financial plan that ensures both income security and capital appreciation.

 

Conclusion
 

Lifetime income annuities that deplete principal internally are not a bad thing—they are simply a strategic choice within a comprehensive retirement plan. They offer higher income than other traditional options like CDs, bonds, and dividend stocks, and by freeing up more of your portfolio for growth, they allow you to preserve and grow principal at the portfolio level, not at the annuity product level.
 

Just as you wouldn’t use a hammer to paint a wall, you don’t need an annuity to provide long-term growth. Annuities are powerful income tools, and when used alongside growth investments, they allow you to achieve both income security and long-term wealth preservation. By understanding their role and placing them appropriately within your overall strategy, you can enjoy the benefits of a more balanced, lower-risk retirement plan.