CFA view: Generally a combination of stocks, bonds, fixed, and variable annuities likely offers the best combination at retirement.
Can we just buy bonds to replace annuity? Thanks.
You can tailor the maturity and cash flow on annuities more easily than on bonds.
Thanks,
Can I say if Asset management firm has the ability to tailor it, they can buy the bonds to replace annuities. Otherwise, let insurance company do this job.
Or any additional benefit to buy the annuity directly?
I can’t think of any specific benefit of an annuity over a bond, assuming that you can adjust the maturity/cash flow appropriately.
I dont think its as simple as you have put it as there are many factors to consider. And in my exprience annuities are better for these reasons:
safer - you usually buy from a regulated insurance company instead of any corporate bond
Annuity are for life…
Annuities can be linked to inflation (IPA)…common in UK (and not that common in US) - see HERE
Generally there are tax advantages…depends with jurisdictions. But most govt promote saving into retirement by buying annuities and hence tax on these are usually soft!
Thanks, from the pricing angle, is it easy to justify the price is fair? Not sure if the untransparency will easily hurt the investor…
Because annuities are (or, at least, can be) custom instruments, I’d imagine that they’re more expensive than publicly traded bonds.
I don’t know about the UK, but indexing for inflation is not all that common for lifeco annuities here in North America.
yep --common in UK (and now i understand they are not that common in US). I have put a link to investopedia about UK inflation adjusted annuities.
plus, if you annuitize, then your annuity dies with you. And if you don’t annuitize, then all you really have is the underlying investments, minus the insurance charges.
Yes, inflation protection (maintaining real value) can also be considered an advantage for the variable annuties
For retirement, we should have defined benefit pension plan from government so annuities are less necessary? (or if we have enough DB…not necessary for annuities?)
Still try to accept the concept of annuity is one of important constitution for retirement …
Yes but DB plans from government are not common anymore - think if it is not available then what ?