An annuity is an insurance-company contract that provides a stream of lifetime income, helping reduce longevity risk—the possibility of outliving one’s money. section 6.4 section 1.3
Evaluate an annuity as a trade-off between guaranteed income and practical cost:
- Immediate annuities begin paying income immediately, while deferred annuities delay payments. section 6.4
- Lifetime payments address longevity risk, but annuities often carry high fees. section 6.4 section 1.3
- Compare annuities with lump-sum or steady-stream defined-benefit pension choices rather than evaluating income in isolation. section 6.4
Lifecycle-model evaluation
A lifecycle model can compare annuity options by incorporating an individual’s circumstances, including when payments begin and the cost of reducing longevity risk. The same modeling approach can analyze lifetime-income alternatives such as pensions. section 6.4
