Annuity is a financial contract with a life insurance company. By paying the insurance premium the client receives lifetime benefits. Bonds are actually debt notes, issued by an issuer, a company (or state, it can also be an issuer), which needs money. People buy bonds and thus lend their money to this company expecting to receive a certain return. The full amount, terms and extent of payments of this return (if several payments are planned), as a rule, are known at the time of purchase. The ability to assess your benefits in advance is what makes a bond different from other securities.
“We find compelling evidence that households that have retirement annuities are not spending rainy day funds. When households put all their money into investments, they easily squander their savings,” says David Blanchett.
There are many types of annuities, but Americans buy fixed or variable annuity most often. Fixed annuity is a simple life annuity with a fixed amount of regular payments made throughout the policyholder’s life. Variable annuity is an annuity in which the amount of payments depends on the actual return on the investment portfolio (stocks, bonds and other financial instruments) selected by the insured. The policyholder assumes the investment risk in the hope that income payments will support a more sustainable purchasing power than return payments on a regular annuity, while the insurer takes only expense and actuarial risk. Such an annuity usually guarantees a minimum payment (or guaranteed minimum income), but the size of the minimum guarantee is low, this is due to the fact that a risky investment portfolio has a higher volatility of profitability, both upward and downward.
Photos are from open sources.