Deferred Annuities

Why most deferred variable annuities choose not to annuitize, while most deferred fixed annuities are eventually annuitized?

What you mean by “not to annuitize” in the case of variable annuities? That is not a constant payment?

The idea of variable annuities is to float as the reference (benchmark) asset does. Sometimes, the variable annuity would outperform a fixed annuity (as expense of more risk bearing), so it is even able to provide cash withdrawals. The choose between a fixed annuity and a variable annuity depends most on the risk tolerance (ability) of the retiree.

In practice, most people who purchased a variable annuity’s main purpose is to get the tax-deferral investment feature of the variable annuity. For example, if you max out 401K, contributed to ROTH/Traditional IRA and still got pile of cash wants to invest and you are in high tax bracket so tax-deferral is valuable…thus Variable annuity comes into consideration.

Volume 2 page 423 last sentence of section In contrast to deferred variable annuities, which most investors choose not to annuitize, most deferred fixed annuities are eventually annuitized.

My understanding is investors do not turn deferred variable annuities into annuity. Rather they just cash out the contract value. I do not know why?

Again, you need to consider motivation of these two investor groups (buying fix annuity and buying variable annuity).

In practice, fix annuity buyer has a much higher tendency to annuitize because they are mainly income driven. Variable annuity buyers typically are not income-driven, their main desire to seek out more tax-deferred growth.

Probably because investors that choose a deferred variable annuity want to take advantage of investing their capitals for a period of time in replicating a reference asset (say S&P 500) and then break up the contract just before the annuity exercise time, so “they choose not to annuitize”. Instead, they will probably buy a fixed annuity with their new, higher capital.

I understand this like buying futures on cattle and selling the position a day before the settlement day.

There’s an additional motivation for doing this, however: not wanting hoof prints all over your living room carpet.