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Annuities Form the Basis For Most Investments

This is for you, Steve Hart.

Annuities are important, both in and of themselves, and because they form the basis of most investments.

Regular bonds are "straight" annuities, albeit with a terminal life. You get "fixed income (coupons) over the life, and a return of principal on the maturity date.

TIPS (Treasury Inflation Protected Securities) are indexed annuities. They pay lower coupons than straight bonds, but are indexed to the CPI, and thus, provide protection against "inflation" as conventionally measured. The problem is that inflation-related "gains" are taxable, uniess they are held in a non-taxable account such as an IRA.

Stocks combine the features of variable annuities (dividends) with quasi TIP-like characteristics (Bill Gross of Pimco has pointed out that in the past century, the investment return on U.S. blue chip stocks was dvidiends, plus inflation, plus, 0.6% a year real.) The problem is that this return comes in capricious ways at the whims of the market, and is not as certain as a normal bond return.