It's tough to save for retirement effectively. Finding savings at all is a tough job, and once you've accumulated some investment capital, putting it to the best possible use is always a challenge. With many different investment options available, it's easy for ordinary Americans to get lost among them all, and that can lead to procrastination. Even if you do pick something, you might not use it effectively if you don't understand it completely.

Annuities are a controversial topic in retirement planning, with some advisors promoting them heavily while others seem opposed to their use in all cases. Yet most people agree that in their simplest form, annuities can be extremely helpful as part of a smart retirement plan. The problem is that most people who buy annuities don't end up using them the way they were intended: by annuitizing them and taking a stream of payments lasting for the rest of your life. Choosing never to start taking annuitized payments can take away much of the benefit while leaving you with many of the disadvantages of annuities. Below, we'll look at the three reasons behind why so many people don't use annuities that way.

Glass jar holding cash with a note saying Retirement on the side, next to a calculator.

Image source: Getty Images.

1. Annuities aren't marketed with annuitizing in mind

One reason so few people end up annuitizing their annuities is that they don't buy them for that particular purpose. Marketing of annuities comes in several different forms that vary by the type of annuity. For fixed annuities, the focus is often on the interest rate, making it easy to compare levels of income with what you'd get from a bank certificate of deposit. Meanwhile, for variable annuities, sales often focus on some of the unique protective elements that annuities can provide, including guaranteed lifetime income or other benefits that can effectively put a cap on potential loss of principal.

Moreover, most annuities offer multiple methods for taking withdrawals. If you have the right to take a portion of your principal out of an annuity without penalties or surrender charges, then that can seem a whole lot simpler than committing to a lifetime stream of income.

2. People don't want to make a losing bet

The biggest risk of annuitizing an annuity is that if you die prematurely relative to your life expectancy, then you can end up having made a poor financial choice. For example, if you buy an immediate annuity and then pass away after just a single year, then the odds are good that you'll end up getting back only a tiny fraction of the up-front premium you paid for the annuity contract. The pain of that potential loss exceeds the possible benefit you get from outliving your life expectancy with an annuitized stream of lifetime payments.

Annuity providers understand this aversion, and so they typically make it possible for you to choose alternative payout methods. These can include joint and survivor plans to pay both you and a spouse or other loved one for as long as you live, as well as plans with a guaranteed term of years that lets your selected heirs receive payments for a set minimum amount of time even after your death. Yet again, once you make a specific selection, you're generally locked into it, and the possibility of leaving your heirs with the short end of the stick stops many people from looking into annuities more deeply.

3. Annuitizing requires budgeting

Committing all of your money to an annuity also takes away the ability to handle unexpected large one-time costs. If you pay $500,000 for an annuity that pays you $2,000 monthly, and then a $50,000 expense arises, then you're basically out of luck. If you'd hung on to the $500,000, however, then you could withdraw $50,000 of it and then make different choices with the remaining $450,000 to make it last longer.

Yet there's no requirement to put all your retirement savings into an annuity. Immediately annuitizing a portion of your retirement assets can boost other fixed-income sources like Social Security while still leaving the remainder of your retirement nest egg to handle financial emergencies. Yet even with that balanced approach, it's rare to see people use annuities that way.

Be smart with annuities

Annuities can be good or bad depending on how you use them and what your needs are. But it's important to consider the most important element of an annuity: the right to receive a lifetime stream of income. Annuitizing your annuity holdings can make them a lot more valuable of a tool in your retirement planning.