Definition

• An annuity is insurance against living too long. You have some retirement funds but you do not know how long you will live. An annuity allows you to convert those funds into a series of payments every month for the rest of your life.
  
  

Risk of Death

• The amount you will be paid each month depends upon the estimate of how long you will live. If you die sooner than this, of course, you will get out less than you paid in. However, you also now have other problems than simply losing money.
  
  

Risk of Inflation

• An annuity is usually a fixed sum each month. So if inflation rises, this sum will be worth less in the future. Periods of high inflation can be extremely painful to those living on the fixed incomes of an annuity. It is possible to purchase inflation-proof annuities but these are more expensive.
  
  

Rrisk of Bankruptcy

• The insurance company you purchased the annuity from could go bankrupt. There are government rules about this and normally annuity payments are still made. But it is theoretically possible that you could lose everything.
  
  

Considerations

• The risks of early death, inflation and bankruptcy are risks that are inherent in our economy and life. We can mitigate them to some extent but they will always be there.