What is the primary purpose of annuities in retirement planning?

Annuities play a key role in retirement planning primarily because they provide a means to convert investments into a predictable income stream. This feature is essential for individuals who seek financial security during retirement. When someone retires, they often want to ensure they have a steady flow of income that can cover their living expenses, and this is where annuities excel. By allowing the accumulation of capital that can later be paid out on a scheduled basis, typically monthly, they help retirees manage their finances more effectively throughout their retirement years.

Moreover, this income can be tailored, as annuities can come in various forms, such as immediate annuities, which start payouts right away, or deferred annuities, which accumulate value over time before making payouts. This predictability offers retirees peace of mind knowing they have a reliable source of income, similar to a pension, which is particularly valuable given the uncertainties of investment returns and other forms of income.

While the notion of accumulating wealth for future investments might seem appealing, in the context of retirement, the focus shifts from growth to ensuring financial stability. Similarly, avoiding taxation on capital gains is more associated with other investment vehicles rather than being the primary purpose of annuities. Lastly, annuities do not eliminate