I recently heard a Wade Pfau interview discussion that focused on how/when to consider using SPIAs as another investment in your RE planning. I have to admit, my knee jerk reaction to the word "annuity" is negative. That said, I sense that Pfau is really a big proponent of their use. Putting legacy desires aside, one of the arguments is looking at our assets once we RE as how they create the most dependable income for life. I am hearing more people warming up to the idea of buying a SPIA to cover their base expense needs, but also some funding their wants/wishes budget with a SPIA. Assuming you are well funded, one argument is to fund your whole budget with a SPIA and then have everything else in stocks. While I have a hard time making peace with the fact that once i write the check my $$ are gone/locked into the SPIA for life, I can see somewhat of an argument here if the focus is on solely maximizing your cash flow needs in RE. So, should SPIAs be considered as at least part of your/in lieu of your bond allocation??
Here is my take, from a 30,000' view.
You want to live out your life without going broke, and continuing to enjoy the fruits of your labors. You face many risks and uncertainties in doing so. One obvious uncertainty is that you don't know how long you will live. You also don't know exactly what your expenses/needs will be in the future, and you don't know the market performance going forward.
If you think about it, it is kind of crazy that we are largely expected to manage all these uncertainties and bear all those risks as individuals. Everyone pretty much has to plan for the worst-case scenario of a long life in the face of poor market returns. So everyone needs to save a lot, spend cautiously, and, consequently, die rich.
Risk-pooling, in the form of an SPIA, for example, is a way to transfer some of that longevity risk and market risk. People who die early subsidize people who live a long time. You therefore have a guaranteed income as long as you live. Therefore, everyone does not need to plan to retain a nest egg late in life that can meet all of their expenses. In exchange, of course, you give up all the upside.
Another risk you have is prematurely depleting your portfolio. You can play with this risk via your withdrawal plan. At the extremes, you could guarantee that you never deplete your portfolio by taking, say, a fixed percentage of your nest egg each year. But now you have a volatile income. Instead, you could keep your withdrawal amount rock steady (i.e., 4% rule), but now you have a risk of depleting your portfolio. (I think almost everyone does something in between these extremes.) But another way to play those factors off one another is to use a SPIA with some of your nest egg. Again, you get a guaranteed base income, moderating your income volatility, but you gave up the hope of having high market returns.
As pointed out by Midpack, conventional wisdom (Otar, Zwecher, Pfau, Kotlikoff...) is that if you are very well-funded, you are able to bear these risks yourself, and don't need to annuitize anything. If you are underfunded, your best hope of not going broke may be to annuitize nearly everything you have. In between, you get to consider using SPIAs to decide how much of these risks you wish to retain yourself (in hopes of realizing the upside) vs. how much of these risks you wish to transfer to an insurance company.
So, yes, in answer to your question, I think annuities deserve to be considered in your AA. In fact, right now I am struggling to decide on this tradeoff myself! (For me, I have the option of buying more credits in my pension plan, which I equate to a particularly favorable annuity.) And I have not yet determined where the right point on the curve is!