How to Combine Annuities and Investments for Lifetime Income in 2025

 Lifetime Income Strategy (2025)

In 2025, one of the most pressing challenges for retirees is creating an income stream that lasts a lifetime without running out of money or being whipsawed by market volatility. While traditional investment portfolios offer growth, they come with risk. Annuities provide guaranteed income but often lack flexibility or inflation protection. So, how do you combine annuities and investments into a single strategy that delivers both income and control? The answer lies in an integrated approach known as “income flooring”, and it's quickly becoming a best practice for retirement planning in the post-pandemic, high-rate era.

The Problem: Sequence Risk and Longevity

Let’s first set the context. Retirees in 2025 face a trifecta of risks:

  1. Longevity Risk – You might outlive your savings

  2. Sequence of Returns Risk – Early market downturns can cripple long-term income

  3. Inflation Risk – Gradual erosion of purchasing power over decades

While the 4% rule worked in past decades, many experts now suggest it's too rigid and outdated, especially in a world of volatile returns and longer life expectancies. That’s why more advisors are shifting toward guaranteed income tools like annuities, alongside traditional portfolios, to reduce stress and increase reliability.

What Is the Income Flooring Strategy?

The income flooring model involves setting aside a guaranteed income “floor” that covers essential expenses housing, food, insurance, and healthcare typically using Social Security, pensions, and annuities. The remaining discretionary spending is funded by investments in stocks, bonds, and other growth assets.

Expense TypeIncome Source
Essentials (floor)Social Security + Annuity/Pension
Lifestyle (flexible)Investment portfolio

This hybrid approach allows retirees to sleep well at night knowing essentials are covered, while also maintaining upside potential through their portfolio.

Types of Annuities That Work in 2025

Not all annuities are created equal. In 2025, the most practical and popular options include:

1. Single Premium Immediate Annuities (SPIAs)

  • Provide guaranteed monthly income for life

  • Purchased with a lump sum

  • Start paying income immediately

  • Best for those who want simplicity and predictability

2. Deferred Income Annuities (DIAs)

  • Purchased today, begin paying income in the future (e.g., age 80)

  • Excellent for longevity insurance

  • Smaller premium = larger future income

3. Qualified Longevity Annuity Contracts (QLACs)

  • Can be purchased within an IRA

  • Defer RMDs on up to $200,000 (2025 limit)

  • Income starts as late as age 85

  • Tax-efficient and RMD-smoothing tool

4. Fixed Index Annuities (FIAs)

  • Track a market index (e.g., S&P 500)

  • Offer principal protection + limited upside

  • Can include lifetime income riders for guaranteed payouts

In 2025, many insurers are offering inflation-adjusted payout options, addressing one of the biggest historical weaknesses of annuities.

How to Combine Annuities and Investments

Let’s walk through a practical allocation model for a 65-year-old retiree with $1 million:

  1. $300,000 to SPIA or FIA with income rider

    • Provides $18,000–$22,000/year guaranteed income

    • Complements Social Security to fund core needs

  2. $50,000 in QLAC

    • Begins at age 80 or 85

    • Covers long-term care, late-life costs

  3. $650,000 in diversified portfolio

    • 40% bonds (laddered or funds)

    • 40% dividend-paying equities (e.g., SCHD, DIVO)

    • 20% cash equivalents and T-Bills for liquidity

This hybrid model allows you to cover basic income now, hedge against future risks, and keep your portfolio growing.

Tax Considerations

  • Annuity income from non-qualified sources is partly return of principal and partly interest (taxable)

  • QLACs help defer RMDs, reducing taxable income in your 70s

  • Roth accounts should generally be left untouched for tax-free growth

Be aware that adding annuity income may impact:

  • Social Security taxation

  • Medicare IRMAA brackets

  • Capital gains stacking

Pro tip: Coordinate annuity purchases with a CPA or advisor to avoid unwanted MAGI spikes in early retirement.

Behavioral and Emotional Benefits

One often overlooked advantage of annuities is psychological. Studies show that retirees with guaranteed income sources:

  • Report lower stress about money

  • Spend more comfortably

  • Delay portfolio withdrawals

  • Have higher retirement satisfaction

This is sometimes called the "annuity income illusion" the ability to spend more freely when your base income is locked in, even if the math is the same.

What to Avoid

  • Variable annuities with high fees

  • Annuities purchased without understanding riders

  • Using 100% of assets for annuities (no liquidity!)

  • Buying from insurance reps without fiduciary duty

Final Thoughts

In 2025, building a retirement income stream is about blending safety and flexibility. Annuities provide the floor. Investments provide the upside. Together, they create a resilient system that adapts to inflation, market swings, and the unpredictability of long life.

By combining annuities and investments wisely, retirees can reduce risk, optimize taxes, and increase confidence all while keeping control over their financial future. The key is intentionality: plan ahead, model scenarios, and structure a retirement that pays you every month, for as long as you live.

Comments

Post a Comment