Annuities As a Prudent Investment

Annuities are often criticized because there are other investment opportunities that could provide higher returns. Annuities are not perfect for all investment goals, but they certainly have their purpose in many portfolios – especially for retirement planning.

One of the benefits of annuities is that they cannot fall prey to investor instincts that drive people to invest in more risky investments with a higher rate of return that don’t always pan out. Annuities keep money locked away safely so that investor moments of weakness do not overcome a safe strategy. In fact, incorporating annuities can strengthen your portfolio to allow you to take more upside risks.

Daniel Kahnemann won a Nobel Prize for proving the theory false that people act consistent with their financial interest. The natural desire to get all you can in a return takes over often. Annuities are not optimal in theory, but they provide reliable and predictable returns that can be worth the sacrifice of high-risk, high-return moves or even facilitate high-risk investments – especially when planning for retirement.

See Frank Murtha, The Psychological Value of Annuities, Financial Advisor, Feb. 6, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.