Annuity Investing

In the wake of an economic crisis, annuities are more appealing than ever and can provide some much needed stability in a world of uncertainty.

With more and more people living past the age of 100 and running the risk of outliving their retirement income, it is important to think of managing the risk of “outliving your assets”. Annuities offer an answer. An annuity is a mirror image of life insurance; it is an agreement for one person or organization to pay another a stream or series of payments. While insurance addresses the risk associated with dying too soon, annuities tackle the threat of living too long.

Annuities are looking all the more appealing these days after one of the worst economic recessions on record. Annuities provide guaranteed returns, and while some may say they want a more speculative investment…annuities are GUARANTEED.

Criticisms of annuities are that they are high in cost and complex, we respond to those criticisms “Compared to what?”  They can be rather complex and expensive but only because of the hedge’s they contain (longevity, interest-rate, and market). “If a mutual fund contained all those hedged positions it would be equally complex and equally expensive. And so it would be an annuity. You really can’t compare it to a product that doesn’t contain those instruments.”*

Annuities are complex in nature, and it is understandable that there is a fear in putting money to work in such a complex product. Although when most people think about annuities it seems that they think of the traditional “old-school” annuities and have not realized the evolution of the product. A recent Allianz survey found that 25% of the respondents had formed their opinion about annuities 20 years ago.* What most people do not grasp is that these products have changed and they really do have some protection from downside risk and they provide a steady stream of income that you can’t get from other products. One such change over the years is the implementation of income riders, such as living and death benefits that allow people to maintain control over the principal they would normally lose with an annuity.

The bottom line is that annuities help lower risk in ones portfolio and are a building block to a sound retirement. Take a look at the Financial Pyramid to the right to see where annuities fit in with your other allocations.