Why Would Anyone Buy a Fixed Annuity?
It is shocking how few people actually understand the true value of fixed annuities. Most have their investor hats on when trying to evaluate annuities, when in reality, annuities are simply a form of insurance in which you are transferring the financial risk of outliving your retirement savings to the insurance industry. Fixed annuities do provide guaranteed growth rates, but that should not be the primary reason for your purchase.
Another way to phrase the title above is – why would anyone buy insurance? Well, we buy it for our cars, our homes, our jobs, our spouses, pets, and ourselves…. we buy for the “just in case stuff happens” moments. Car accidents, job lost, disabilities, and medical issues. We pay these monthly insurance premiums without even considering their annual growth rates.
What about when you retire? Why don’t more people insure their retirement? This is where buying a fixed annuity comes in. No risk, no loss, and a guaranteed income stream you that will last as long as you do.
According to the Society of Actuaries 2000 Annuity Table, there is a 17% chance a male age 65 will live to age 95. Females who are 65 have a 23% chance of living to age 95. For married couples, there’s a 36% chance that either member of the joint couple will live to age 95.
Given these statistics and the fact that so few companies offer pension plans, more and more retirees are going to face financial hardships from what would otherwise be a great thing… living too long. My personal favorite thing about fixed annuities is that they give us a financial incentive to stay active and healthy since they can provide guaranteed income for life… I for one can’t help but to feel richer every time I leave the gym, sink a put on the 18th hole, and shake my opponent’s hand on the tennis court.
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Great post. Especially the part about having their Investor Hats on when evaluating annuities.