The number one fear of many retirees is running out of money before they run out of life. For clients who share this concern, new research suggests that they use annuities to replace certain portions (or all) of a client’s portfolio that would normally be allocated to bonds and other fixed income investments. Doing so, studies show, may significantly extend the life of a client’s assets.

While this strategy has advantages, such as reducing portfolio risks associated with market downturns or longevity, the benefits come at the expense of liquidity and upside potential.

Related: Annuities for retirement income

One reason this approach may make more sense in today’s environment is the heightened level of interest rate risk advisors believe now exists. With interest rates still hovering near all-time lows, they see only one direction in which the rates can move — up.

(Note: Some still believe that interest rates will continue to fall, especially in the event of another economic slowdown or recession, to such an extent that negative interest rates will exist.)

If interest rates move higher, client’s bond and bond fund prices will likely decline. And if clients need to sell those assets to support lifestyle needs, they may be forced to “lock in” those losses.

Using a single premium immediate annuity (SPIA) to replace the bond portion of a client’s portfolio can effectively eliminate or substantially reduce a client’s interest rate risk (on this portion of their assets). This is especially true if the SPIA incorporates inflation protection in the form of a cost-of-living adjustment (COLA).

The use of SPIAs offers one additional benefit beyond bonds: mortality credits. If clients live long enough, a portion of their annuity income will be attributable to others who have purchased an annuity but were not as fortunate in the longevity department.

Sure, it’s possible that your client could end up being the “too-soon-to-make-it-worth-it” death, but there’s generally no way to know that in advance. And if running out of money is the client’s primary concern, an early death is actually a mitigating factor.

What about those who are not concerned about running out of money, but rather, are primarily motivated by legacy goals and wish to leave as much as possible to future beneficiaries? Would the use of a SPIA to replace bonds still make sense? Quite possibly.

It all depends on a couple’s longevity. Much like the decision of when to claim Social Security benefits, there is a break-even point for this strategy to make sense from a net liquid assets point of view.

Related: Do’s and don’ts of indexed annuities

Redirecting to a SPIA the 50 percent portion of retirement portfolio assets normally allocated to bonds can result in a great legacy heirs, writes Jeffrey Levine.

For a couple 65 years of age with a 50/50 portfolio, in which the 50 percent portion allocated to bonds is redirected to a SPIA payable equally over both lives and with a 2 percent COLA adjustment and no death benefit thereafter, the breakeven point — at today’s rates — is roughly 22 years.

Related: What’s behind the surge in fixed indexed annuity sales?

Actuarially speaking, there is a greater than 50 percent chance that at least one of the two members of the couple will be alive at that point. Thus, for most clients, this strategy — which requires irrevocably “forking over” a chunk of assets to an insurer — will result in leaving a greater legacy amount to heirs.

Of course, what works in the classroom doesn’t always work as effectively in the real world. And there are serious roadblocks to this approach.

For one, many clients don’t like the idea of annuities, especially those that offer no death benefit should they die earlier than expected. In addition, while in theory the annuity replaces the bond allocation of a client’s portfolio, leaving the balance to be invested in equities (in real life there are additional asset classes), it is unlikely that a retiree will be comfortable having their entire liquid portfolio invested in equities.

So what does all of this mean for you, your practice and your clients? Consider using SPIA allocations as a part of your retirement planning for clients. As always, such a recommendation should be made on a case-by-case basis, but research has shown this strategy can add value to both clients looking to make sure they don’t outlive their portfolio and those who are looking to pass on as big a legacy as possible.

For more information on this topic, check out Wade Pfau’s research. He’s done yeoman work and, in my humble opinion, is one of the true thought leaders on this topic.

Further consider that using annuities to replace bonds doesn’t have to be an all-or-nothing decision. Portions of bond allocations can be replaced with such investments, offering at least some of the benefits. Alternatively, SPIAs can be replaced with deferred income annuities (DIAs), such as qualifying longevity annuity contracts (QLACs), to maximize the value of mortality credits.

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Annuity sales trending slightly up year over year: IRI