Without even realizing it, many people actually stand in line for annuities on a daily or weekly basis. We learned a few weeks ago with the soaring popularity of the lottery just how many people are searching for a lifetime free of financial worry. Annuities can provide just that and actually already do for some people who don’t even know they have one. Social Security is an inflation-adjusted lifetime annuity that most everyone takes advantage of. Annuity payouts from the lottery are another form of guaranteed income that everyone loves to dream about. Stan Haithcock told us “Why the country stands in line for annuities every week” in a recent Marketwatch article.
When you stand in line to buy a lottery ticket, you are often looking for guaranteed income that will last for as long as you live. Some people are just looking for easy money and some might take the lump sum payout and blow most of the money immediately, but most people seek financial stability and income that will pay their bills forever. No one wants to run out of money; in fact it is one of the biggest retirement fears. Now if you lived in a perfect world, you would probably be better off taking the lump sum from an annuity, or your personal retirement savings, and investing that money in the markets. But there are two things that can negatively effect this perfect world scenario. First, you have no control over what happens in the markets and while you have the potential to make great gains, there is also the potential for great losses of your money. Secondly, even if you think you have self control and won’t overspend, it’s easy to see a large sum of money and think it will last forever and simply spend too much too quickly.
Annuities help to ensure that your money will last for as long as you live. Whether you purchase an annuity with your retirement savings or use lottery winnings for a lifetime income stream, annuity products keep your money safe from both the markets and from you overspending it. If you have worked at all during your lifetime, you already own an annuity: Social Security. It’s the best inflation-adjusted annuity you could ask for. Mr. Haithcock pondered whether those annuity haters out there also hate receiving their Social Security check every month. Probably not!
One of the big reasons that people avoid annuity products is because they fear that if they have money tied up in an annuity, they will miss out on big gains in the markets. There is certainly a chance for upside potential and it’s usually wise to have some of your money invested in the markets to potentially reap the gains should they rise. But it’s also wise to have insurance against running out of money during your lifetime. When you have an annuity, you transfer some of your risk to an insurance company. You can protect your principal and create a guaranteed lifetime income stream. Many lottery winners have gone bankrupt within a couple years of winning that money. If you could talk to them, they would undoubtedly say that they should’ve taken the annuity rather than the lump sum. Even if you don’t win the lottery, because most of us won’t, you probably still have a large sum of retirement savings to make decisions about. Purchasing an annuity will keep you from spending your money too fast and is the only way to solve for your longevity risk. While annuity products are not right for everyone, many people could benefit from the contractual guarantees, principal protection and guaranteed lifetime income that they offer.
Written by Rachel Summit
