The deferred variable annuity will mitigate against longevity risk which is the risk of living too long by paying out an income stream for the remaining life of the purchaser of the annuity. Savings risk relates to consuming too much now and not saving enough for retirement. Purchasing an annuity may help to decrease savings risk because this forces the person to save a portion of their income but the main purpose of an annuity is to provide an income stream for life. Financial market risk is the risk of a person’s wealth decreasing due to a downturn in the financial markets. A remedy for financial risk is to diversify your assets. A variable annuity can hedge against financial risk because they offer the ability to diversify among many different types of equity and fixed income investments. Thus, even though a deferred variable annuity can help to reduce savings risk and financial market risk through diversification options, the main purpose of an annuity is to provide an income stream for life which reduces longevity risk |
