Among people who have some financial wherewithal and employ competent ethical advisors, most won’t buy an immediate annuity because they shouldn’t. They shouldn’t because they are unlikely to find the characteristics attractive relative to other alternatives and more importantly, their goals.  Annuities are very good for long life spans and rather lousy for addressing many other needs. Most people don’t buy annuities because most people have other goals beyond lifetime income.

The basic structure is very simple. A lump sum is exchanged for a fixed-income stream payable for life. The highest payout comes from contracts purchased with payments to a male. According to an informal survey of low-cost annuity providers, a 65-year-old male would get an annual payment of about 6.7% for as long as he lives. There are several things that dissuade most people from making this choice.

Most irrevocable decisions are frightening. It is a common human desire to have options and flexibility versus constraints. In order to get that 6.7%, this client would give up all access to his funds forever.

If he thinks about such a thing, he may come to the conclusion that inflation could erode the purchasing power of this income stream. Further, unless and until he lives to age 80, he will not receive back the money used to buy the annuity. The effect on his net worth for this purchase will be negative until that point.

Which gets us to what is, by far, the biggest deterrent to buying an immediate annuity: the issue of legacy. In over 20 years of practicing financial planning, never has anyone ever told me that an insurance company was among the parties they would like to benefit from their assets. Family, friends, charity – yes.  An insurance company — well, it’ll be a cold day.

Spouses in particular are not fans. “You mean if he dies, I get nothing?” The couple quickly turns to looking at contracts that have a term certain, or more commonly, contracts that pay for as long as either lives. If both spouses are 65 and no decrease in payouts is acceptable at the first death among the couple, the payout drops to 5.6%. They won’t even breakeven unless one of them lives to be 83. If one of them lives 30 years until age 95, the pre-tax investment return is only 3.74%.

If this couple wanted anyone other than the insurance company to get some of the money that bought the annuity, they may opt for an annuity with a refund provision. This causes payments to drop.  If they prefer they have some access to funds during their lives, their payment will be lower. If they want their payment to have some sort of inflation adjustment, the payment will be even lower.  In fact, a contract covering the lives of a married couple, both age 65 with inflation-adjusted payments that do not reduce at the first death will have annual payments of around 3.8%.

A payout of 3.8% adjusted for CPI might sound competitive compared with the 4% safe initial withdrawal rates so frequently discussed regarding retirement income. But the two are not particularly comparable. Most sustainable withdrawal rate studies cover a 30-year time frame. The annuity rate will continue for as long as one of the spouses is alive regardless of duration but provides no legacy.

Using the 4% number as a guideline while managing a portfolio offers a high probability that some legacy will remain. While 4% never failed historically, most outcomes would have sustained much higher withdrawal rates or similar rates for much longer periods.  In fact, last year Prof Wade Pfau looked at end values using a 4.5% initial rate. Ninety-six percent — 96%! — of the results after 30 years provided a legacy of at least the sum available on day one of retirement. The median result was 460% of the starting value and a still impressive 69% of the asset levels after 30 years of retirement withdrawals had kept up with inflation with the median real final wealth coming in at 161% of the starting value.

A low-cost annuity from a good company offers a no-fuss 100% probability of lifetime income and a 0% probability of a legacy. Compare that to the result of managing a lump sum: It offers a very high probability of lifetime income and a very high probability of a substantial legacy. That is a substantial difference.

Of course, we should not discount the substantial difference in the amount of work, expertise, handholding and luck required to successfully manage a retirement portfolio. It’s a big deal, it’s not easy and it is not a no-fuss “set it and forget it” choice.

Most people, however, know little to nothing about sustainable withdrawal rates or their nuances and are not focused on the numbers just described. What is top of mind in making these decisions for most people are the other people that matter most in their lives. We know that money doesn’t buy love, but money provides ways to express one’s love of others. I know a few estate planning attorneys who have had great success in getting people passed their reluctance and procrastination by framing the estate planning documents as their last “love letter” to their survivors. These documents are, for many, the last form of communication their heirs will receive from them.

I’m not saying by any stretch that buying an annuity means that one doesn’t love their family. I am saying that most people want to leave assets to those they care about. This may explain why I find many people are more open to the idea of a charitable gift annuity over a commercial annuity, even though the charitable gift annuity’s payments may be lower and an insurance company is backing the deal. Lifetime income, no hassles and benefiting causes they care about appeals to many.

I would be remiss if I did not mention that there should be a difference from an investment perspective between the annuity and a portfolio. The annuity provides insurance against the financial ramifications of extended lifespans. The cost includes a profit for the insurance company. But would anyone really want to buy an annuity from an insurance company that is not profitable? From a purely investment standpoint, the immediate annuity should offer a lower expected result in the aggregate than that of alternatives that accept greater investment risks.

The decision to buy an immediate annuity is not one made based on the aggregate, however. It is deeply personal. The irrevocable choice to buy an annuity for any part of their savings will affect those close to the purchasers in some way.  People like guarantees, but they like flexibility and the chance for a better result too. Moreover, people want to provide for those they love and that motivation makes the annuity puzzle not so puzzling.

Dan Moisand, CFP, has been featured as one of the America’s top independent financial advisors by most leading financial advisor publications. He has spoken to advisor groups on five continents on topics such as managing investments and navigating tax complexities for retirees, retirement readiness, and most topics relating to the development of the financial planning profession.  He practices in Melbourne, Fla.  You can reach him at dan@moisandfitzgerald.com.