Banks need to make money on their products. Instead of offering annuities they could just put that money into the stock market* . So they need to make as much as they would in an index matching fund plus operating expenses plus a profit.
So their actuary says, "this guy will (statistically speaking) live another 23.2 years. If we pay him x dollars a month, we'll break even on his premiums". And the actuary's boss says, ok, pay him x-.12x.
Banks could compete on that -12%, but only so far. The cost of administering the program, plus profit is the friction, the waste that you're losing out on, and it's usually far more than the risk you're mediating by not putting it all in an index fund.
Basically, the bank is an unnecessary middleman. But a) they've got good salespeople and b) most people don't control their money optimally, so the waste of annuity may be less than the waste an undisciplined investor may make.
*This is an oversimplification, there are issues of risk diversification, and probably some laws about where banks invest their money.
Can you explain further?
I know I said I'd be gone... but this was just a comment originally, and I noticed it may actually be relevant.
Elharo said in Munchkin Ideas:
I'm interested in the following:
Why should people invest in retirement? Or, instead, why should someone invest as much as most do in retirement.
Few facts that make it a boggling question for me:
You are 10% to 20% likely to die before you enjoy even your first retirement year.
People adjust much more to harsh economical conditions than they believe they would. They remain happy, as many studies by Seligman and others show.
People who retire are only happier as retirees if they retired by choice (I lost the paper, sorry).
Most people here live in rich countries - darn, hate to be the exception! - , and their state would happily provide them with at least the maximal retirement plan legal in my country (aprox 2000 dollars/month). And surely would provide them with double the minimal (about 200/month) if they needed.
If you have descendants, they may support you in case you are still alive, and if you are not rich enough to keep a house, you have a good excuse to be in company of loved ones (you have nowhere else to go).
Last, but not least: That person is not even you that much anyway.
Given all that, I have no clue what the whole fuss about retirement plans, and being 60% of a rich old person with a crappy body is all about, specially if you are in the grave.
I mean, in the cryopreservation chamber, of course.
Edit: A related question not worth its own post, but maybe worth discussing, is Should inheritance "jump" a generation. Everyone inheriting from grandparents, instead of parents? Just the abstract ethical question. Regardless of implementation procedure.