Nice to meet you, too!
I have also received emails from readers saying they would never consider investing their hard-earned retirement money in the stock market.
And so it goes. People have strong opinions about both. Because I believe that the most important requirement for a good retirement plan is that the clients can sleep at night, I rarely try very hard to convince them to change their beliefs, though I do try to present fair assessments of both alternatives.
If you firmly believe that annuities or the stock market are not for you, you are probably right.
I have always believed that life annuities can play a critical role in many retirement plans but my appreciation for them has increased over the years. For anyone who is on the fence about life annuities, I'd like to share some different perspectives that may help you decide.
A life annuity is a contract typically sold by an insurance company to an “annuitant” (often a retiree) guaranteeing periodic payments for as long as the annuitant lives. In retirement planning, we use annuities to mitigate longevity risk, the risk of outliving our retirement savings.
The payout for a single male aged 65 today is about $560 per month, or $6,737 annually for a $100,000 annuity. That's about 6.7% annually. That is not equivalent to a 6.7% investment return because part of this payout is a non-taxed return of your own capital. The equivalent investment return will depend on how long you live. It will begin with a negative return and, should you live long enough, it will eventually exceed the payout rate. 
The insurance company invests the premiums you pay in bonds. It also uses premiums paid by annuitants who don't live a long time to pay annuitants who do live a long time using what are referred to as “mortality credits.” The payouts you receive come from bond interest, from a partial return of your own capital and, if you live longer than average, from mortality credits.
Perhaps the greatest objection to life annuities, and the one my wife's friend found unacceptable, is the fact that a life annuity typically has no value after the annuitant dies. True, some annuities offer riders that guarantee income for a number of years (period certain) or guarantee repayment of some principal to beneficiaries, but these riders are expensive and may not be worth the cost.
The fear is that the retiree will buy an annuity and die before enough payments have been received to cover the annuity's cost. This is what had happened to my friend's sister-in-law and why the return on investment for an annuity starts out negative.
This is the same “break-even” analysis that many use to justify claiming Social Security benefits as soon as possible and the problems are similar. Both Social Security retirement benefits and life annuities are insurance – not investments – that mitigate the risk of living a long, expensive retirement. If the annuitant doesn't live a long life, then he or she would clearly have been better off not purchasing the annuity, but that isn't something we can predict.
That insurance has value whether or not we make a claim. The retiree who purchases an annuity at age 65 but only lives to age 70 mitigates the risk of a long life even though he didn't happen to live to an old age. People who purchase car insurance but don't have an accident rarely argue that their premiums were wasted, nor do homeowners who buy insurance but don't have a fire of flood claim. Many retirees considering annuities apparently don't see longevity insurance in the same way as they view other policies but purchasing life annuities and delaying Social Security benefits provide a very real transfer-of-risk insurance benefit.
For every story of a relative who purchased a life annuity and didn't live long after the purchase there is a story of someone who benefited from mortality credits. You may do better or worse when purchasing an annuity, but in either case you were insured against a long, expensive retirement.
“Some prominent figures who are noted for their use of annuities include: Benjamin Franklin assisting the cities of Boston and Philadelphia; Babe Ruth avoiding losses during the great depression, and O. J. Simpson protecting his income from lawsuits and creditors. Ben Bernanke in 2006 disclosed that his major financial assets are two annuities.” —Wikipedia 
Liquidity is another concern for the purchaser of a life annuity. The annuitant takes a large sum of cash that could easily be spent and purchases a life annuity whose value can only be spent as periodic payments. Let's assume a retiree decides to spend $100,000 of cash on a life annuity that pays $6,000 a year. She no longer has access to the $100,000 to cover large bills; she only has $6,000 per year in liquid assets, albeit for the rest of her life.
One alternative to purchasing a life annuity is to “self-annuitize” with a “sustainable withdrawal rate.” SWR strategies work by over-saving. The funds that must be kept on hand to reduce the probability of depleting one's savings aren't really available for spending, either. They are needed to generate future income and to ride out periods of poor market returns. Furthermore, it has been shown that this strategy is economically inefficient (i.e, expensive).
Liquidity is a valid concern and retirees need to consider their remaining liquidity should they purchase an annuity. This consideration, however, should take into account the true liquidity of alternative strategies. Those savings may not be as liquid as you thought.
For households that will fund retirement with a mixture of annuities and investments annuities will enable a more aggressive investment portfolio. A household that has a significant floor of Social Security benefits and life annuities can absorb market losses more confidently knowing that its base income is secure.
Different Perspectives on Life Annuities
- The insurance has value even if we don't “make a claim” (live to an old age)
- Annuity alternatives may not have the liquidity they appear to have
- Annuities give the retiree more confidence to invest a market portfolio more aggressively
- Some retirees lack interest in investing
She doesn't actually feel that way, though. She's not that keen on handing over part of our savings to insurance companies for annuities. Still, she hasn't threatened to walk out if I mention them.
David Blanchett, Michael Finke and Wade Pfau published a paper entitled “Planning for a More Expensive Retirement”  in the March issue of Journal of Financial Planning. The paper contains a wealth of data explaining why funding retirement is quite expensive today. The following chart from that paper shows that the cost of buying one dollar of real annuity income at age 65 has more than doubled since 1982.
The cost of a dollar of real annuity income increased as the result of two trends: a long-term decline in interest rates and an increase in life expectancy, both of which tend to increase the cost (lower the payout) of annuities. While interest rates are historically low and may revert to the mean going forward, life expectancies should continue to increase, though perhaps at a slower rate than over the past three decades. In other words, while two factors lowered annuity payouts only one is likely to reverse.
 Payout Rates and Returns on Income Annuities, Wade Pfau.
 Annuity (American), History, Wikipedia.
 The 4% Rule—At What Price?, Jason S. Scott, William F. Sharpe, and John G. Watson, April 2008.
 Planning for a More Expensive Retirement, Blanchett, Finke, Pfau, 2017.