Question:
If retirement annuity returns are on average 5% p.a, minus 1% fee that equals 4%. I am getting 4% interest on my bank savings account. Why would I consider buying a retirement annuity?
Answer:
Rye, Where did you read that the average retirement annuity return is 5% pa? You should expect an average long term REAL return of 5% pa on a balanced high equity fund (that can be in a retirement annuity wrapper). The "real" return is the return after inflation. We reference the real return because a) future inflation is unknown; and b) by using the real return you have a sense of what that money will buy you in future. The interest you get from your bank is the nominal return (ie including inflation). If you are earning 4% in your bank savings account and inflation is 5%, then you real return is -1%, ie the purchasing power of your savings is shrinking. As a long term retirement saver, you should not put your money in the bank, because the returns are just too low (not enough top pay for your retirement). The bank return may be more certain in the short term, but the retirement annuity return will be much higher in the long term. An retirement annuity also offers tax benefits that your savings account does not have.
