Friday, October 28, 2011
First of all, what is an annuity? It is a financial product with many variations, but the basic idea is that you pay some large lump sum at the beginning and receive regular payments until you die (or for a fixed number of years). From the definition, you can probably see that it might be a very good investment if you live longer than you expect. If you have $X and plan on living another 10 years, it may be better to spend those $X to get an annuity which will pay you enough money to live on for the rest of your life. This way, you are insured against living another 15 years without having to worry about finding new sources of income for consumption in those extra five years.
It seems like a good idea if you are retired to buy annuities, but only about 8% of people aged 70+ have annuities while 78% of the same group have life insurance (I got these numbers from my insurance class last year). Why is this the case? Social security provides one reason. Because you can collect on social security (which is a form of annuity), people would naturally buy fewer annuities than otherwise. However, it does not explain why so few people 70+ buy annuities.
It is probably a very long ways off until any of us have to consider looking at annuities, so I won't spend too much time talking about the specifics. I may eventually return to the topic if I find that it is important enough. Just remember that they exist and for those of us who lead healthy lifestyles and run the risk of living longer than we expect, annuities may be the insurance we need to ensure our comfort in those late years.