What is an Annuity, Anyway?
Besides being part of a retirement plan that we recommend, and an exciting topic for your next Zoom cocktail party, annuities are an important lever for mitigating the three main risks to retirement – Market Risk, Tax Risk and Longevity Risk.
According to Investopedia, “An annuity is a financial product that pays out a fixed stream of payments to an individual, and these financial products are primarily used as an income stream for retirees. Annuities are contracts issued and distributed (or sold) by financial institutions, which invest funds from individuals.”
Because everything we do is based on research, statistics and the science of economics, we spend a lot of time keeping up with the leading research in our industry. Our goal is for clients to have plenty of money when they retire. One of the key facts – not opinions – we rely on is that retirement plans that DO NOT contain a lifetime income annuity significantly under-performed those that DO.
We love the article at right, “Income Annuities Improve Portfolio
Outcomes in Retirement” because it proves the math around annuities. We’ve read it so you don’t have to.
The study highlights the following features of income annuities that other products
currently are not able to offer: High cash flow, uncorrelated to market returns;
retirement alpha in the form of mortality credits, which only life insurance companies
can manufacture; longevity hedging; and liquidity features that guarantee that
the investor, or his heirs, will receive the full amount of the investment back.
