Buying an Annuity vs. Building Your Own ‘Annuity’

The ‘annuity puzzle’ is a term used in the financial services business to describe a paradox in the way people think about annuities.

Annuities, of course, are contracts issued by insurance companies (see our guide to four major types of insurance) in which paying a sum of money entitles you to a stream of income for life. There are many variations of how this arrangement can work and how the money you pay is invested, which is the reason there are many varieties of annuities.

Loving and Hating Annuities

The paradox is this: Most people love the assured income for life part of the annuity equation. Intuitively, that steady income is the equivalent of having a pension, which few of us have these days. But to get that ‘pension,’ people have to part with a sum of money.