Why it matters
- Diversifying your investments across different asset classes like stocks and bonds — and even annuities — can help protect your money against risks such as market downturns, inflation, and the possibility of outliving your savings.
- Each asset type serves a different purpose in your investment portfolio, creating balance that matches your personal goals and comfort with risk.
- Annuities can provide reliable income that continues throughout your lifetime, helping add stability to your retirement plan when other investments fluctuate.
What is asset allocation?
You may have heard the term “asset allocation” in the context of building an investment portfolio that jibes with your goals and appetite for risk. But what is it, and why does asset allocation matter? Most types of assets – including equities (stocks/mutual funds), bonds, and even cash, which can lose its purchasing power due to inflation – aren’t without some sort of risk. Asset allocation is spreading some of that risk around. Essentially, it’s the adage of not putting all your eggs in one basket. Some asset classes, like stocks, can help guard against inflation. Others, such as bonds, may offer stability. And then there’s annuities, which can provide consistency as other assets fluctuate, and can provide the option for a lifetime of steady income.
Unfortunately, there’s no one-size-fits-all formula (wouldn’t that be great). Every investor is different with individual goals. That’s where discussing available strategies with a qualified financial professional can help you develop a strategy that’s right for you.
Your investment portfolio and risk
When building a strategy, investors and savers may consider the potential risks challenging their financial portfolio.
Market risk
This one sort of explains itself. Stocks can go up. But they can also go down. That’s “market risk.” Nonetheless, over the long run, a diversified basket of stocks — such as a broad mutual fund with many holdings — tends to increase in value. For instance, the S&P 500 — an index of 500 companies —gained 24% in 2023 and rose 23% in 2024, after falling 20% in 2022.1 That’s why, if you have the time and fortitude, it often pays to stay the course and stay invested for the long haul — despite market risk — so you don’t miss out when stocks bounce back.
Inflation risk
This one might not look obvious at first glance; it’s the “money in the mattress” conundrum. At first, it may look fine. The amount in the account hasn’t decreased. But with inflation risk, if prices rise, that money buys less. So even “being safe” isn’t always “safe.” You’ve likely experienced the impact of inflation firsthand in recent years as prices have soared, meaning you’ve paid more for everyday goods from groceries to gas. The silver lining is that inflation rates have come down since their 2022 peak of 9.1%. In December 2024, year-over-year inflation stood at 2.9%.2
Liquidity risk
This is the old “house rich, cash poor” situation. In other words, it’s when an investor has something worth something, but nobody wants it at the moment. When the investor needs cash (say, to pay a debt, an emergency expense, or just to live on) an asset may need to be sold at a discount because there’s little demand. This can hurt someone who invested in real estate and then the housing market tanks, or it can be an investment in any asset — like a bond — if there’s no demand.
Longevity risk
It might be hard to think of living longer as a “risk,” but for those who haven’t prepared for a long, long life in retirement, running out of money before running out of morning wakeups could mean lean years in old age. Lifelong employer pensions are being phased out, future Social Security payments could be reduced, and given increasing life spans, longevity is one of the biggest risks retirees face today. A 65-year-old woman can expect to live to age 86 (excluding factors such as family history and lifestyle).3
How different asset classes contribute to a balanced portfolio?
When it comes to deciding where to save, grow, and preserve assets, investors have lots to consider. A balanced investment portfolio consists of several asset classes that together can help to address investment risks. Understanding the different types of asset classes and their potential role in an investment portfolio can help you get started.
Equities (stocks)
Owning a stock is owning part of a company, or in the case of mutual funds and ETFs, owning parts of lots of companies. Stocks can go up in value and be sold at higher prices, or a company may return some of the profits to investors in the form of dividends. Stocks provide the greatest potential for growth. They also provide the greatest potential for losses and for market risk.
Bonds
These are loans investors make to companies or governments in exchange for interest payments (nothing’s free, right?). Bond returns often move in the opposite direction of stock returns, so they can help bring balance to a portfolio. But they come with their own risks, including interest rate risk, for example. That means the value of most bonds may fluctuate with changes in interest rates.
Cash
Maybe not always “king,” but nice to have. An emergency fund kept in cash may help alleviate liquidity risk while increasing inflation risk. An emergency fund can cover unexpected events: a health crisis, damage to a home or car, stuff like that. An emergency fund can help avoid selling an asset at an inopportune time or taking on debt. However, 27% of Americans have no emergency savings at all.4
Annuities
Annuities are investments with insurance components. They offer the potential for growth with a level of protection against losses and can be a strong hedge against longevity risk. Annuities can provide a guaranteed income for a time period you choose — even a lifetime. Of course, any guarantees are based on the claims-paying ability of the issuing insurance company.
For those who’ve never thought about a financial solution to longevity risk, the way an annuity works may sound strange. You pay into something and later receive income for life. Modern annuities are also able to provide risk control beyond longevity to address volatility, interest rate risk, and inflation risk.
Types of annuities
There are several types of annuities to consider, each with its own features and benefits. Here are some of the most common ones:
Fixed annuities
As their name implies, fixed annuities provide a guaranteed interest rate and regular, fixed payments for a specific period. For this reason, they typically offer more stability and predictability than other types of annuities, making them a potentially attractive option for risk-averse investors.5
Variable annuities
With variable annuities, payments can fluctuate based on the performance of the investment options you choose. So while they offer the potential for higher returns, they also come with greater risk.5
Indexed annuities
These annuities are tied to a specific market index, such as the S&P 500. They offer a balance between risk and return, providing some potential for growth while offering a level of protection against market downturns.5
RILAs, another type of annuity
And then there’s the Registered Index-Linked Annuity (RILA), a deferred annuity crafted with the intent to limit exposure to downside risk while generating returns based on the performance of a stock index or indexes without investing directly in stocks or securities. They’ve been called “buffered” or “hybrid” annuities based on their structure and can allow investors to tailor choices to meet individual risk tolerance. This could be an option for someone nearing retirement, seeking comparable market performance (with a level of downside protection), and interested in tax-deferred growth. Keep in mind, annuity guarantees are based on the claims-paying ability of the insurance company you buy them from.
How annuities may fit into your investment portfolio
Wondering how annuities could work alongside your other retirement savings? Let’s look at how they can help you create financial confidence, particularly when it comes to creating reliable retirement income.
Reliable monthly income
Social Security may provide regular, monthly income, but many retirees find they may need additional, reliable income to help cover basic expenses such as housing, groceries, and utilities. Annuities can potentially provide these regular payments to help supplement Social Security benefits. They can even help bridge the gap between when you retire, providing steady income until you begin collecting Social Security benefits.6
Tax-deferred growth
Many annuities offer an opportunity for your investments to grow tax-deferred, which means you won’t pay taxes on the earnings until you begin receiving payments.5 This benefit can be especially valuable if you’ve already maximized your contributions to a 401(k) or IRA but still want to take advantage of the ability to save tax-deferred money for retirement.
Protection against outliving your savings
As people live longer, there’s a real possibility you could outlast your retirement savings. Unlike traditional retirement accounts that have the potential to be depleted during your lifetime, certain types of annuities can provide income for as long as you live. This guaranteed lifetime income can help you maintain your standard of living throughout your retirement.
Diversification
Including an annuity in your investment portfolio can help reduce risk and improve your chances of meeting your financial goals by spreading your investments across different asset classes, known as diversification. While stocks offer growth potential and bonds provide income, for example, annuities have the potential to offer elements of both while providing some level of protection against negative market performance.7
As you think about your retirement planning options, consider how an annuity might fit your financial needs. While annuities can offer benefits like guaranteed income and tax-deferred growth, they also come with important considerations, such as fees, surrender charges, and varying levels of complexity. Take time to understand the different types of annuities and review their related costs so you can make an informed decision about whether they could help support your retirement goals. Working with a financial professional can help you make an informed decision about where annuities fit into your investment portfolio, if at all.
Things to consider
- Take inventory of your existing investments to see if you’re over- or under-invested in any asset classes, leaving you vulnerable to specific financial risks.
- Determine if your current portfolio reflects your appetite for risk and when you may need to access your money, especially as you approach or enter retirement.
- Schedule a portfolio review with a financial professional to see if an annuity may be right for you and discuss how different annuity options might complement your existing investments and address your income needs.
1 “Stocks just did something they haven’t done in nearly three decades,” CNN Business, December 2024
2 “Historical U.S. Inflation Rate by Year: 1929 to 2025,” Investopedia, February 2025
3 “Period Life Expectancy – 2024 OASDI Trustees Report,” Social Security Administration, accessed March 2025
4 “Bankrate’s 2025 Annual Emergency Savings Report,” Bankrate, February 2025
5 “Guide to Annuities: What They Are, Types, and How They Work,” Investopedia, September 2024
6 “How Annuities Impact Your Social Security Retirement Benefits,” Annuity.org, accessed February 2025
7 “Help Clients Diversify a Portfolio with Annuities,” ThinkAdvisor, September 2024
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.
