Final answer:
Under a pure life annuity, retirees receive a steady, fixed income from an insurance company for life, providing financial stability in old age. The downside is the potential for reduced purchasing power due to inflation over time. Annuities are considered safer but may result in lower total income compared to riskier investments.
Step-by-step explanation:
Under a pure life annuity, an income is payable by an insurance company to an individual for their entire lifetime, typically commencing after retirement. The main feature of a life annuity is the guarantee of a steady stream of income, which is especially valuable for retirees who wish to ensure financial stability in their old age when it might not be possible to work due to health reasons or other factors.
One of the challenges with fixed income annuities is the impact of inflation. Even with low inflation rates, the purchasing power of a fixed income can diminish significantly over time. For instance, a retiree who starts receiving a fixed annuity at age 65 could experience a loss of buying power if inflation causes prices to increase by even just 1% to 2% per year over a couple of decades.