An annuity comes in many forms, but a simple definition is that an annuity is a contract that converts a sum of money into a series of periodic payments for an agreed upon period of time. An annuity can be thought of as a financial vehicle that converts a pool of money into a stream of income. Annuities are most useful in addressing the financial planning needs of people in or approaching retirement. Annuities are unique in the financial world because they can provide protection against the risk or outliving one’s assets (longevity risk) by guaranteeing income payments in perpetuity or any other selected amount of time. Annuities can be viewed as a type of personal pension plan. Social Security is similar to an annuity in that money contributed over the course of one’s working years is converted into a series of periodic payments that provide income during retirement.
Conventional financial wisdom says that bonds should comprise an increasing percentage of a portfolio as the owner ages and heads into retirement.
In theory, a retiree’s need for income and a reduced tolerance for risk are the main drivers of the larger allocation to bonds.
A key consideration, though, is...
Inflation protection for fixed annuities would seem to be a sensible consideration given the fact that central banks around the world are doing everything they can to reflate in the wake of an historic deleveraging.
After all, the worst possible place to be if and when inflation does kick-in is on the receiving end of nominal (not adjusted for inflation) fixed payments, and most fixed annuities fit this description perfectly.
While the inflation protection makes sense in theory, it turns-out that inflation-protected annuities may not be so sensible in practice....
The U.S. longevity insurance market has been developing for almost a decade, and yet there are still...
