Annuities as Investments

To begin with, while many annuities such as variable annuities have investment components, it might be useful to think of an annuity as an insurance product rather than an investment.

Annuities are generally intended to convert a sum of money into a guaranteed stream of income. This is the process common to all annuities. The feature that makes them unique in the financial world is the "guaranteed" part of the guaranteed stream of income. The guaranteed income part is super important and that's where you get the bang for your buck. It provides real protection against the risk of outliving your assets, and that is why you pay the insurance premium.

There are investment products that include insurance features which provide guarantees, and there are annuity products that include investment features, but there is no investment product that provides long-term income that can be guaranteed for as long as one lives. As a result, comparing annuities and investments can be like comparing apples and oranges.

With investments, people often think about gains, losses and terminal wealth (i.e. the amount of money that has been accumulated at the end of the chosen time horizon). It would be helpful if people did not think about annuities in this same manner.

For example, do most people think about homeowners insurance as an investment, or do they simply think of it as reasonably priced protection against the possibility of significant loss from a fire, earthquake, etc?

Good to think about annuities more along the lines of homeowners insurance. Instead of fire protection, think about the guaranteed income part.

Last, people are often critical of the costs associated with annuities and conclude that "high costs" are one of the reasons annuities make such poor "investments." This is a large issue and separate topic, but suffice it to say that: a) there are costs associated with any financial services product or service; b) all consumers should be informed and aware of the costs associated with their financial decisions because costs are absolutely critical to one's financial well-being, and; c) it is laughable that many of these same commentors often do not think twice about a hedge fund (or even worse fund of funds) that charges "2 and 20" or an actively managed mutual fund that charges 1.2% year in and year out--an astronomical amount to pay for vehicles that provide absolutely no assurances or guarantees.