The Tradeoff Nobody Talks About With Annuities
Annuities are usually sold as protection.
Guaranteed income.
No market risk.
Peace of mind.
For some retirees, they serve a purpose.
But there is a tradeoff that is rarely discussed clearly.
An annuity does not eliminate risk.
It converts one type of risk into another.
Understanding that conversion is what matters.
What You’re Actually Buying
When you purchase a fixed or income annuity, you are typically exchanging:
A lump sum of capital
For
A lifetime stream of payments
You have traded:
Liquidity for certainty.
That’s not inherently bad.
But it is permanent.
Once the contract is in place, flexibility narrows.
The Liquidity Tradeoff
In higher net worth households, liquidity matters.
A portfolio allows you to:
Adjust withdrawals
Reallocate capital
Fund large one-time expenses
Gift to children
Adapt to tax changes
An annuity limits that flexibility.
If $2M of an $8M portfolio is annuitized, that $2M no longer participates in market recovery, tax planning flexibility, or estate planning in the same way.
You gain income certainty.
You lose optionality.
The Inflation Question
Many annuities pay fixed income.
If inflation averages 3 percent over 20–25 years, purchasing power erodes meaningfully.
Some contracts offer inflation adjustments.
Those come at a cost.
The guarantee becomes smaller upfront in exchange for future indexing.
Again, it’s a tradeoff.
Certainty now versus flexibility later.
The Estate Impact
For affluent families, this is significant.
Most lifetime annuities:
End at death
Or end at second death if joint
There may be limited guarantees for a period.
But once payments stop, the underlying capital is gone.
A portfolio, by contrast:
Can fund income
Can adjust
Can be transferred
Can be structured in trusts
If legacy is a priority, annuitization reduces transferable capital.
That may be acceptable.
It should be intentional.
The Psychological Benefit
This is where annuities shine.
Some retirees value:
Predictable income
Reduced anxiety during downturns
Simplicity
For them, converting part of the portfolio into a guaranteed stream may reduce behavioral mistakes.
That benefit is real.
But it should be weighed against structural cost.
The Hidden Cost
The hidden cost of annuities is not the fee.
It is the surrender of control.
You give up:
Rebalancing flexibility
Tax coordination options
Liquidity
Estate adaptability
In exchange for guaranteed income.
For households with limited assets and no pensions, that exchange may be rational.
For households with $5M–$10M portfolios, multiple properties, and existing Social Security income, the need for additional guarantees is often lower.
The better question becomes:
Are we solving a real structural risk?
Or are we outsourcing volatility because it feels uncomfortable?
The Alternative: Structured Income Without Full Annuitization
Some retirees achieve similar stability by:
Staging multiple years of income in stable assets
Using guardrails to adjust spending
Maintaining growth exposure for inflation
Preserving liquidity
This does not eliminate volatility.
It contains it.
The tradeoff here is opposite:
You retain flexibility.
You accept market exposure.
The Real Question
Annuities are not good or bad.
They are an exchange.
Capital for certainty.
Flexibility for guarantees.
In Grosse Pointe, many affluent retirees already have:
Social Security
Pensions
Significant portfolio income
Before adding more guarantees, it’s worth asking:
Are we improving structure?
Or reducing discomfort?
The answer depends on the household.
But the tradeoff should be explicit.
Because once the exchange is made, it is difficult to reverse.
