The excess of our youth are checks written against our age and they are payable with interest thirty years later.
You’re born broke and die broke. The rest is variance.
The oldest people in the world aren’t getting any younger. Over time, the age of the oldest living person has increased. You can see in the chart here that the age of the oldest verified living person has crept up over time. Also, the largest growing population segments in the United States skew to the older generations.
Yet, we tend to shy away from annuities, decrying them as poor investments and stating that we can keep the money invested in markets and make more money. We show risk aversion – reasonably, I believe – in a concern that we’re trading in money which has a chance for a higher return to get a steady, or slowly growing return. We also fear making the wrong decision because after purchasing the annuity, we could face a major and expensive illness or, worse yet, we die before we can recoup the cost of the annuity through payments. The biggest concern, though, is a loss of control over that money. We can’t do with it what we want. We gave it to someone else, and now we just get a monthly check that comes in.
But, really, who actually jumps on someone’s grave because the inheritance went down due to that ill-timed annuity?
If we can make so much more money in the market, then why would anyone rationally purchase an annuity? The biggest reason is that the annuity hedges against the risk that we’ll outlive our assets. We generally can make money in the market over the long run, but there are ups and downs and a big negative swing in your assets right after you stop earning an income can be devastating for your post-retirement lifestyle. Put a different way, an annuity provides you with an income no matter what happens, be it a major stock dive or you breaking the Guinness Book of World Records for being the oldest person in the world.
How can you know when and if an annuity is right for you? I recommend looking at a Monte Carlo simulation of your life and what could potentially happen to your assets and income stream over your lifetime. You don’t want to run out of money while you still have a need for an income, and a thorough Monte Carlo simulation can tell you what the risks are for different investment strategies, including the purchase of annuities. You may find that annuities represent a reasonable tradeoff for income requirements and risk; although you might be one of the well-placed few who will build up enough assets to never need an annuity.
For the rest of us, they’re worth not dismissing out of hand. Annuities might even make you happier!