Investment Myths

Mar 2015 //

Myths such as the alleged equivalence of risk and volatility abound in investing, perhaps because it is often to the economic advantage of the perpetrators of such myths.  One common myth is that buying an annuity will prove to be a wise choice for retirement income.  Here’s our take on retirement income for those who are approaching retirement:   Either you have accumulated a nest egg sufficient to provide long-term income with purchasing power protection, or you haven’t.  If you haven’t, purchasing an annuity isn’t likely to solve your problem.   After all, if you purchase an annuity, you simply give your money to an insurance company, which typically invests it in stocks, bonds (which are likely to under­perform stocks over the long term) and real estate—something you could do without having the insurance company’s profit and sometimes steep expenses reduce your return.  The insurance company uses your funds (comingled with those of other annuity purchasers) to pay you a monthly income.  However, since the insurance company’s after-expense rate of return over the long term is apt to be meaningfully lower than the return achievable in a simple stock index fund, for investors willing to invest in stocks for the long run and living to an average life expectancy, annuities will decrease, not increase, their retirement income plus estate.