Annuities are another one of those financial products that aren’t very well understood, and peoples’ aversion to them might actually be hurting their retirements. What are annuities, exactly? They’re essentially just an insurance product that people usually come into one of two ways. The first way is simple buying annuities. Those who do actually buy annuities usually do it for the purpose of preparing for retirement. The other way people usually come to own an annuity is as the result of a personal injury settlement. Structured settlement money is funneled through annuities for the tax shelter.
So put very simply, an annuity is just something that is purchased that will later pay out to the owner or the recipient incremental payments of money. Annuities get complicated when it comes to the different types of them, how they work, and how they will eventually pay out. What makes things even more complicated is that there are a number of different factors that a person needs to consider when thinking about buying an annuity.
The problem is that people don’t often think about buying annuities, and many people (financial professionals and owners alike) have a pretty bad impression of them — with the notable exception of fixed annuities.
What also comes into play here is what is referred to as the annuity puzzle. At face value, annuities really aren’t that bad an investment. One in four Americans believe that they will have to work well into retirement to be able to live comfortably, and many Americans have no retirement savings or preparation at all. Annuities can generate a steady stream of income in retirement, which can obviously make living more comfortable and money management much easier.
The puzzle part is that when people are faced with either receiving a large lump sum or smaller incremental payments over time, people choose the lump sum. Additionally, people don’t buy annuities because they think that they’re losing control over their money or they will be a burden to heirs in the event of their deaths.
Would you rather receive incremental payments or a large lump sum in retirement? Feel free to let us know in the comments. Ger more information on this topic here.
