A Lack Of Definition Leads To A Lack Of Understanding

In keeping up with the daily articles and posts about retirement, I have noticed discrepancies in the use of the term “annuity”, which has developed into a point of contention. This inconsistency in a clear definition of annuities has plagued these articles, which in turn hurts the reader, the writer and the annuity business.

A recent example of this growing problem arose a few days ago while I was comparing two retirement advice articles from two different sources. In Lisa Hay’s recent article from Market Watch, titled 6 Money Mistakes To Avoid In Retirement, her second warning is “not to fall for an annuity sales pitch”; while in Steve Vernon’s article titled, How Long Will Your Retire Savings Last, from CBS Money Watch, he states, “one way to avoid running out of money before you die is to buy an annuity from an insurance company.”

Do these two writers disagree about the efficacy of a single type of annuity, as the lay reader would assume? No, in fact they’re referring to two totally different forms of annuity.

If you’re an annuity maven, you can figure out that Hay is talking about deferred variable or possibly indexed annuities when she refers to “the impact of high annuity fees, and the negative tax consequences when withdrawals begin.” And you can decipher from Vernon’s article that he’s talking about a fixed payout annuity when he describes the annuity as one that “guarantees you a monthly payment no matter how long you live and no matter what happens in the economy.”

I cannot lay all the blame on writers or editors who want to use “annuity” to describe any type of contract. The solution is that that we simply need to come up with better definitions for the different types of annuities, rather than make blanket statements about them. By strictly defining the different types of annuities, we can create better terminology, which will lead to a greater understanding. Once the names become more comprehensible, they can be better explained.

In an upcoming post I will propose a solution to the pervasive nature of this problem.