Final answer:
A lifetime annuity is a financial product offered by insurance companies that provides fixed payments each month for the remainder of a person's life. It offers security and predictability for retirement income compared to more volatile investments like stocks and bonds. While lifetime annuities are safer, they must be balanced against potential inflation eroding fixed incomes.
Step-by-step explanation:
Understanding Lifetime Annuities
The financial product offered by insurance companies that provides fixed monthly payments for the remainder of a person's life, in exchange for an investment, is known as a lifetime annuity. This is in contrast to options like stock investments, which generally involve purchasing shares in a company that may pay dividends but do not guarantee fixed monthly payments.
Saving for old age is a concern many individuals have as they approach retirement. People employ private market options like savings accounts, property investment, stocks, and bonds to ensure they have enough income when they cease working. Annuities stand out as a more secure form of investment compared to the volatility of stocks and bonds. They offer fixed annual or monthly payments, that could be purchased with a lump sum or through regular premiums over time, making annuities a safer investment with predictable returns.
The appeal of annuities, especially lifetime annuities, is largely due to their security and predictability. In the context of employer-sponsored retirement strategies, 401(k)s often include annuities as an investment option, taking advantage of deferred tax benefits. Furthermore, compared to pensions, which are also fixed payments known as "defined benefit" plans, annuities can be privately purchased, offering a similar level of stability in retirement income.
It is crucial to understand that annuities are insurance products. The insurance company guarantees the annuity payments, alleviating the purchaser from the risk of outliving their savings, which is a significant concern for retirees. However, one should take into account factors like inflation, which can erode the purchasing power of fixed incomes over time, even with a lifetime annuity.