Tim, how you could overlook such important variables in your analysis is beyond me. (I hope that you left them out as a test to see if we are paying attention.)

First is that buying a lifetime annuity is hardly risk free. When you turn your life savings over to a company that promises to make a payment to you each month for 50 years you are gambling that the company will (a) continue to exist; (b) not go bankrupt; and (c) will actually make those payments. These risks can be minimized but not eliminated, and it is quite rational to take these risks into account when making a purchase decision. (Recent events make all too clear that a company could be rated AAA today but be bankrupt five years from now. So too could any insurers who purport to stand behind their obligations.)

The paper you cite simply wishes away these problems, saying things like "a bond has return R and poses no risk, since it pays the same irrespective of state." It is poor scholarship to assume away variables and them claim irrationality.

Second is that purchasing an annuity means giving up control of one's money. I might take the deal of $650 per month in exchange for $100K now, but what if my son needs a $50K operation to save his life in five years and all of my money is gone? It is not irrational to wish to maintain control in case of contingency, even though such control comes at a price.

Third is that annuities have a bad rap in the U.S. for a good reason. In addition to being needlessly complex, and overpriced, many of the people who sell them use fear and financial mumbo jumbo in an attempt to talk their way into fat commissions, regardless of whether the annuity is appropriate for a particular buyer.

I believe that the Wall Street Journal's Jonathan Clements once warned us that "Variable annuities are a favorite with unscrupulous investment advisers, who can collect ridiculously high commissions by foisting these turkeys onto unsuspecting investors."

In conclusion I have to say that I am tired of reading papers that argue that some consumer choice is irrational. Arguing irrationality should be viewed the same way we view arguments that someone has invented a perpetual motion machine: In both cases, someone is overlooking something big.

If Brown and friends are going to explore "the idea that aversion to annuities is not a fully rational phenomenon" it would be helpful if they were more thorough in their analysis.

To summarize, caveat emptor.

On losing control of one's money, I'm pretty sure that annuities can be sold in whole or in part or used for collateral on a loan. Again, caveat emptor.

Like all forms of insurance, annuities are a gamble. A buyer of an annuity is gambling on being long-lived.

Besides how long you live, you are also gambling on these things happening :

1) Inflation rate will stay low

2) The company paying you won't go under

3) You won't need a large sum of money

Most annuity is a 'con job' - the seller knows you will not live for another 20 years at the time of purchase, and the person is better off keeping T-bills under your mattress.

"the seller knows you will not live for another 20 years at the time of purchase"

So how does the seller know this? Will the seller hire a hit man after 20 years?

"the person is better off keeping T-bills under your mattress"

Here you are gambling that you won't outlive your stash and that your house won't burn down.

If you were to buy a house, it would be prudent to hire a house inspector. Similarly, an actuary could tell you if a given annuity was a good deal or a bad one. Sweeping generalizations like "most annuity is a con job" are not really helpful.

I don't think most of your objections hold, Bart, pwoxby, Robin.

Objection: What if your son needs a 50K operation in 5 years?

Why not buy health insurance to deal with this risk? Note that not buying an annuity doesn't necessarily make you better off in this situation. What if you live longer than you expect and thereby eat up the money you could have spent on your son's health insurance?

Objection: Overpriced

Yeah, but why are they overpriced? As Tim noted, If most people are irrationally averse to buying them, they will be overpriced because only the people who expect to live the longest will be interested. They might be overpriced because of the irrationality.

Objection: Annuities are a gamble that you will live a long life.

Yeah, but not buying annuities is also a gamble--that you will live a short life. Annuitie in a rational market should work to minimize risk.

Objection: Annuities are a gamble that inflation will stay low

Not really. Annuities are a gamble that inflation will stay close to expected inflation, perhaps, and therefore increase the overall risk of the transaction, but can't this problem be solved by adjusting the payouts for inflation?

Objection: Annuity is a con job

If annuity is run by overpriced conners, someone should be able to undercut the conners and still make a profit, thereby putting the con men out of business.

650 a month implies $7800 a year on a 100,000 dollar bond.

You can not get that rate in the market today risk free.

Annuities pay the current long treasury rate.

Currently something like 4.4%

So you need to put up about $178,000 to get paid $650 a month if you buy an annuity anywhere today.

If that is not true, please post the site offering 7.8% because I have a couple of dollars to put into that game.

If you understand that, then you do not fall for the sales pitch.

These things are a crime to families because the company keeps your principal when it could have been delivered to children.

My guess on the reason that people buy them is ignorance. The guy in some insurance office is not going to tell you that they pay the same return as treasuries. If you are reading this, you have access to that information because it's all over the internet.

If you do not care about your principal, have no kids or feel like Warren Buffet and do not want to leave them your money, find a charity that you like and buy your annuity through them. This way your money goes to a cause that you felt deserved it rather than some huckster looking to buy a second home.

Education is a choice you might consider.

NOTHRC, you might be correct, but that still begs for explanation.

If annuities offered by insurance companies today just pay the treasury rate then someone should be able to offer a higher rate and still make a profit. This should effectively undercut the current insurance companies thus driving down the market price to a reasonable level. If this is not happening, why not?

"Annuities pay the current long treasury rate."

"... the company keeps your principal ..."

These statements are patently absurd. If people really believe this is how annuities work, no wonder they have a poor reputation. The scheme described above isn't an annuity. It is simple theft.

"If that is not true, please post the site offering 7.8% because I have a couple of dollars to put into that game."

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Education is a choice you might consider.

The link you provided requires that you be 68 if you are male with differentiated ages and payots for men and women.

Since men currently have a life expectancy of roughly 78 years That means a rough payout of only 10 years.

$2113.28/mo on a $300k investment is roughly 8.5% ROI.

Stockmarket INDEX funds on average return 9%. So that's a 0.5% skim on $300k = $1500/yr. Now that's not a massive ROI. OTOH it is almost risk free and its an invesment made with other-peoples money.

Add in that supposedly these companies "beat the market" on average. For every 1% of above market performance they achieve, they earn $3000 in pure profit. And they do this while playing with OTHER PEOPLE'S MONEY!

Now if you go for the guaranteed 20 years of payments, you only get $2026 which is a 6.7% ROI, Now we are looking at a 2.3% cost against index funds. That's $6,900 premium if the insurance company does nothing but invest your $$ in a stock market index fund. Not a bad job if you can get it.

If you look at it from an "rational consumer" perspective. I am paying $575/mo or roughly a 28% premium of my monthly income, to "insure" that there isn't a significant market downturn during the 20 years of my annuity. That's $138,000 of income that I am foregoing. And actually it is worse. If instead I reinvested that income and did not touch it, after 20 years, my initial $300,000 investment would be $562,000 to give to my children.

So that's hardly a good deal that everyone can get a part of.

Your link is to life expectancy at birth. That, quite obviously, is not what you should be using. Try life expectancy from time of retirement. You'll see that there is a substantial difference. Furthermore, the individual circumstances of a person's health, health history, and family health history all come into play when considering an annuity. To repeat, generalizations are not helpful here.

Comparing annuities with stock index funds is clearly comparing apples with oranges. The nature of the risks are very different.

Life expectancy at retirement is higher than life expectancy at birth (because you have outlived the injury related fatalities of youth). Which means THE NUMBERS ARE WORSE! The longer you live, the worse the traditional annuity works out to be. If for every year that you live the Insurance company EARNS $6,900 on YOUR MONEY then the longer you live, the more that adds up to.

Nice try, the typical teaser ad designed to get you on the phone so that they can start spinning you. Face to face contact or at least phone contact is the most successful sales tactic.

a few years ago, they did not need to include the disclaimer. Now they do. Here it is. Like i said education is important. Reading down to the bottom of the page makes sense.

This chart is provided for illustrative purposes only. The payout amounts are hypothetical and do not reflect a current offer. They were determined using annuity rates in effect as of 02/08/2008, and are rounded to the nearest dollar. Annuity rates were provided by Symetra Life Insurance Company and are subject to change at any time at the discretion of Symetra Life. Request an individual quote from Symetra Life for your specific annuity payout amount.

The implied rate in this is over 9%. If you pay any attention to the one guy in the country most qualified to speak about matters financial, Warren Buffet, you will understand that double digit returns over long periods of time are not only unlikely, they are for the most part non existent. That's the equivalent of the recent mortgage scams where they say that they will loan you 500,000 at 1 percent and your monthly payment is 300 dollars.

As with those, if you do not read down to the bottom of the page or do the arithmetic, it sounds inviting but the caveat is that the 300 dollar payment jumps to 1500 in a years time and that your total repayment amounts to over a million.

Someone else indicated that. The idea that they pay treasury rates was preposterous. Let me clarify and apologize for not having done so in the earlier post that what i am talking about is immediate life annuities.

Of course, if you buy a term product and invest over a period of time the pay out rises as your investment compounds. If you can find one of those that pays at a better compounding rate than treasuries and pays out your principal to your heirs then I would love to see that too.

I have asked brokers about these and the honest ones say that it is a play on fear, ignorance and a general disinterest in learning how other things work. Years ago, there was limited access to the types of products that would allow you do to this yourself for a much lower cost. Things are always changing and that has changed too.

So the offer still stands. post a link to a site that offers a rate for an immediate life annuity better than treasuries where you can sign up for the product on line.

If you own one of these things, do yourself a favor and look around. You can do better. Obviously, since i am posting no links here i am not trying to sell you anything and have nothing to gain from you getting an education other than the incremental benefit which will accrue to society when ignorance decreases.

I have young children so I care about that. The last thing that I intend to do here is insult anyone. If you feel insulted, feel free to take a minute and look at where that feeling arises from.

@ degsme:

"The longer you live, the worse the traditional annuity works out to be."

Don't you realize how stupid that sounds? So I'd be best off financially to die the day after I buy an annuity? Your argument leads to this reductio ad absurdum.

The reason your argument reduces to an absurdity is that you still insist on comparing apples to oranges. Higher risk, higher yield investments always look better than lower risk, lower yield investments if you, duh, ignore the risk.

As for the take of the insurance company, that is their motivation to assume risk. That's the very essence of the concept of insurance - risk management. If you insist on ignoring risk then no kind of insurance, annuity or otherwise, makes sense. Which seems to be exactly the conclusion you have reached.

@ NOTHRC:

"They were determined using annuity rates in effect as of 02/08/2008, and are rounded to the nearest dollar."

Exactly.

"The implied rate in this is over 9%. If you pay any attention to the one guy in the country most qualified to speak about matters financial, Warren Buffet, you will understand that double digit returns over long periods of time are not only unlikely, they are for the most part non existent."

Last time I checked, "9" was a single digit.

Your earlier statements that annuities pay out treasury rates and none of the principal are dead wrong and show that you, or your broker, don't understand the concept of an annuity.

The very reason that annuities pay out attractive rates of return is that the principal is being paid out with the interest. Read again what Buffet said. He qualified his statement by specifying "long periods of time". Annuities, by definition, pay out for a finite amount of time.

"If you feel insulted, feel free to take a minute and look at where that feeling arises from."

Insulted? No. Annoyed? Yes. Let me simply challenge you to support your claims that "Annuities pay the current long treasury rate." and "... the company keeps your principal ...". Is that too much to ask?

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