Income annuities (whether an immediate annuity or the annuitization of a deferred annuity) are an incredibly powerful tool for managing income needs and are almost surely the most underutilized financial asset in the market today.
As reported by The Wall Street Journal, "income annuities can assure retirees of an income stream for life at a cost as much as 40% less than a traditional stock, bond and cash mix." What that efficiency means is that retirees who need a nest egg of, say, $1 million, can live the same lifestyle with as little as $600,000 in an income annuity.
From Prof. David Babbel of Wharton:
"I have reviewed over 70 academic studies that have appeared since 1999, analyzing lifetime income annuities vs. other alternatives, and coauthored another major study. (Most of these are included in the reference section to this paper, as well as a handful of earlier academic studies, each marked with an asterisk.) The consensus of the literature from professional economists is that lifetime income annuities should definitely play a substantial role in the retirement arrangements of most people. How great a role depends on a number of factors, but it is fair to say that for most people, lifetime income annuities should comprise from 40% to 80% of their retirement assets under current pricing. Generally speaking, if a person has no bequest motive, or is averse to high risk, the portion of wealth allocated to annuities should be at the higher end of this range.
"Lifetime income annuities may not be the perfect financial instrument for retirement, but when compared under the rigorous analytical apparatus of economic science to other available choices for retirement income, where risks and returns are carefully balanced, they dominate anything else for most situations. When supplemented with fixed income investments and equities, it is the best way we have now to provide for retirement. There is no other way to do this without spending much more money, or incurring a whole lot more risk coupled with some very good luck."
Here are some great academic resources on the value of income annuities:
Annuities and Individual Welfare
Investing your Lump Sum at Retirement
Lifetime Income for Women: A Financial Economist’s Perspective
Rational Decumulation
Optimal Gradual Annuitization: Quantifying the Costs of Switching to Annuities
Optimizing the Retirement Portfolio: Asset Allocation, Annuitization, and Risk Aversion