How do you ensure clients amass enough wealth they can leave something to heirs while still maintaining a comfortable income stream to support themselves as long as they are alive?

That’s the holy grail of financial planning, of course. And it’s not simply a matter of investing in a proper mix of assets and then crafting a savvy withdrawal strategy, though that is crucial. It turns out annuities – those oft-maligned insurance products – can play a vital role as well, according to a recent academic study.

Peng Zhou, Ph.D., is an actuary with Sun Life in Wellesley, Mass., so his academic work, while objective, will naturally be taken with a grain of salt.

But in a paper recently presented to the Society of Actuaries Practice Forum, based on a 2003 study he did at the University of Connecticut, Zhou says that financial advisors should consider aggressively using several types of insurance products as part of a retirement plan. That plan should include investments in stock funds, immediate annuities and deferred income annuities, which allow the policyholder to pay regular premiums and receive income later in life. In addition, he recommends long-term care insurance and a declining one-year term insurance policy to cover any gap in the estate value in the event the individual dies early.

“A well-crafted investment and immediate annuity strategy can create both longevity risk protection and greater estate value than a pure investment strategy,” he says. “Estate value preservation and longevity risk protection can both be accomplished using immediate annuities.”

His study, “Stochastic Modeling of Post-Retirement Financial Planning,” shows how mutual funds and insurance can work together to limit investment risk and preserve an estate’s value.

Zhou assumed a fixed immediate annuity payout of 4%. Variable immediate annuities, as well as mutual funds earned a 5% annual rate. Taxes were factored in. He assumes the risk of ruin occurs when the mutual fund investments drop below the required estate value at death.

 The results of his research, based on Monte Carlo simulations, show the best mix of assets includes 25 to 45 percent in immediate annuities, deferred income annuities and/or a ladder of immediate annuity contracts. Today, only about 2% to 4% of retirees’ assets are in immediate annuities.

If you wanted to minimize the probability of ruin, more money would be invested in a fixed immediate annuity.

Take a 65 year-old male, with a life expectancy of 19 years, assets of $1 million and annual expenses of $50,000. The subject wants a minimum estate value of $100,000. To achieve a 0% probability of ruin, he would invest 75% in a fixed immediate annuity and 25% in mutual funds. This, Zhou says, is essentially a risk-free investment. The ending estate worth is $928,000.

But as annual expenses rise, so does the risk of ruin, and the ending estate value declines. If the subject had $63,000 in annual expenses, the probability of ruin is just over 7%. He would invest 85% in a fixed annuity, 3% in a deferred immediate annuity and 12% in mutual funds. The estate would be worth $250,000 after 19 years.

The same 65 year-old male who wanted to maximize the ending estate would need to take a more aggressive stance.  A 90% investment in a variable income annuity, 3% in a deferred income annuity and 7% in mutual funds would result in a 5% probability of ruin and an ending estate value of $1,779,000.

Rising annual expenses, however, would force the subject into a more conservative stance to keep the probability of ruin at just 5%. If the individual had $62,000 in annual expenses, he would invest 70% in a fixed immediate annuity, 5% in a variable immediate annuity, 4% in a deferred immediate annuity and 21% in mutual funds. The ending estate value would be $413,000.