IF A SALESPERSON had tried to get me to sink my hard-earned money into an investment that’s illiquid or issued by an insurance company, I would have shut down in a New York minute—until now. My spouse and I recently became owners of a deferred income annuity (DIA), with plans to put perhaps 15% of our savings into these products. Also known as longevity insurance, a DIA involves plunking down money today in return for regular monthly income starting at a future date. What convinced us to buy DIAs?

• Income hedge. We want income we can’t outlive. The DIAs will provide us with a safety net if the withdrawals from our 401(k), IRA and taxable savings fall short of what we expect or if our Social Security benefits get cut.
• Shrinking yields. Treasury bonds—both the conventional type and those that are indexed to inflation—are mainstay riskless assets in our portfolio. But today, they yield less than inflation. Yields on municipal and higher-quality corporate bonds are also disappointing, especially when you factor in the added risk involved. By contrast, with a DIA, we can collect handsome income, in part because the insurance company will be effectively returning part of our initial investment to us each month.
• Longevity risk. Some of us will live much longer than our birth year cohort. It’s impossible to know how life will go, but my spouse and I are keen to stay independent to the end.
• Simplicity. Our plan is to collect income from annuities and Social Security, while also taking required minimum distributions from our retirement accounts. Put these three together, and we have a simple plan for turning our savings into retirement income. That simplicity will be useful as we age.

My first concern with buying an annuity was the usual—that our chosen insurer could go belly up or fail to generate the income needed to meet its obligation to us. After the 2008 subprime mortgage fiasco, I’m skeptical of ratings agencies. But I used their ratings and my own review of audited financial statements to choose a top-rated insurer for our first purchase. Annuities are not 100% guaranteed by the FDIC or anybody else. But should an insurer fail, our state’s guaranty association provides a mechanism to recover a portion of our premiums. My bigger concern was inflation. We bought a joint annuity with a 3% annual cost-of-living adjustment. The DIA will pay guaranteed income every month starting when I’m age 72 and ending when the second of us leaves this vale of tears. The 3% inflation rider reflects my bet that inflation will be similar to the historical average. [xyz-ihs snippet="Mobile-Subscribe"] Yes, I remember the high inflation of the 1970s. But for a broader perspective, I reread Triumph of the Optimists, which shows annual U.S. inflation averaged 3.2% during the last century. Since then, personal consumption expenditure inflation has averaged less than 3%, according to FRED, the data tool maintained by the Federal Reserve Bank of St. Louis. What if inflation is much higher in future? With dependable income streams from both Social Security and our DIAs, we can afford to keep a healthy amount of stock market exposure in our investment accounts, which should help if 1940s- or 1970s-style inflation returns. My last question was about the likely benefits, beyond the peace of mind offered by guaranteed lifetime income, and the costs involved. Ideally, we’ll get back our investment plus a modest rate of return. The two big variables are how long we’ll live and the related issue of opportunity cost—how we would have fared if we’d used the money instead to, say, buy bonds. Bottom line: We have decent odds of breaking even on our DIAs while achieving the main point of our investment, which is hedging longevity risk. For our DIA purchase, we turned to the same online sellers who offer immediate fixed annuities. The buying process was straightforward, though much slower and more complex than buying a mutual fund. Our purchase took just under two weeks from quote to policy delivery. It would likely have gone faster if we’d used a local insurance agent, rather than buying online. There’s a healthy stack of paperwork involved—less than closing on a house, but far more than a mutual fund prospectus plus a trade confirmation. If I could change one thing about DIAs, it would be to increase the transparency about the transaction costs involved. We received no cost disclosures similar to those offered by mutual funds. To be sure, all costs are already reflected in the income you’re quoted. Still, I would like to have known more. For selling an immediate or deferred income annuity, it seems a salesperson might collect a commission of between 1% and 5% of the sum invested. That’s certainly high compared to index fund costs. But it’s a lot less than other annuities, notably variable annuities and equity-indexed annuities, which between them have given annuities such a bad reputation. David Powell has written software or led engineering teams for 36 years. He enjoys work, vegan fine dining, cycling and travel with his spouse. His previous articles include Beat the Cheats, Get Me a Margarita and Making a Mesh. [xyz-ihs snippet="Donate"]

THERE'S BEEN DRAMA recently in a normally quiet corner of the market. This story got its start back in 2015, when Warren Buffett helped to merge food makers Kraft and Heinz. At first, it looked like a smart idea. Through cost-cutting, the combined company was expected to save more than $1 billion in annual operating expenses. “This is my kind of transaction,” Buffett said at the time, “uniting two world-class organizations and delivering shareholder value. I’m excited by the opportunities for what this new combined organization will achieve.” The excitement was short-lived, and many observers were skeptical from the start, mainly because Buffett had teamed up with a private equity firm called 3G to make the purchase. 3G had a reputation for being overly zealous when it came to cost-cutting. Initially, Buffett defended 3G. They “could not be better partners,” he wrote in his 2015 annual letter. But within a few years, it became clear that the skeptics had been right. Sales at the combined company began falling, and in 2018, Buffett’s Berkshire Hathaway recorded a $15 billion write-down on the value of its Kraft Heinz holdings. The following year, Buffett publicly acknowledged that the merger had been a mistake and that Berkshire had overpaid for its stake. “The business does not earn more because you pay more for it,” he said. In the years since, Kraft Heinz has continued to struggle with declining sales. To address the problem, in January of this year, the company brought in a new CEO, Steve Cahillane, and tasked him with splitting the company back up again. By that point, though, Buffett had changed his mind again. His view was that it was now better to leave the combined company intact rather than going through the costly exercise of trying to break it back up. A breakup, he said, wouldn’t create value. “It doesn’t do a thing, you know, for what the ketchup tastes like.” Despite his influence, though, the break-up plan appeared to be moving forward, and Cahillane took the helm on January 1 with that mandate.  Within weeks, Cahillane came around to Buffett’s point of view. The company’s woes were more fundamental, he told the board, and breaking it up wouldn’t address those core issues. Where things go next is an open question.  This story is notable because of Warren Buffett’s involvement, but it turns out not to be so unusual. Studies over the years have found that corporate mergers and acquisitions, on average, do not create value. According to a study by KPMG of more than 3,000 acquisitions, 57% of deals were found to detract from shareholder value rather than increase it. Other research puts the failure rate in the neighborhood of 70%. Aswath Damodaran, a finance professor at NYU, sums it up this way: “More value is destroyed by acquisitions than by any other action that companies take.” Why do so many transactions detract from shareholder value? Economist Richard Thaler attributes it to what he calls the “winner’s curse.” This phenomenon was first identified in the petroleum industry, where competitive auctions are held for oil leases. Research found that the winners of these competitive auctions often ended up disappointed—not because they didn’t find any oil, but simply because they had overpaid. Thaler explains that auctions—especially when there are large numbers of bidders—can cause some participants to become emotional, to the point that they become undisciplined and end up bidding too much. The winners in these situations are thus “cursed” because they’re the ones who were willing to overpay the most and thus tend to be most disappointed. Thaler found that the winner’s curse dynamic appears across industries, and that is what explains the poor track record of corporate acquisitions. Competitive situations, whether it was in the Kraft-Heinz case, or in the one that recently played out in the competition for Paramount, can cause prices to go too high. That’s great for sellers but a key reason why acquirers often end up regretting their decisions and why a large number of corporate takeovers end up being reversed. So why, despite all this data, do corporate managers—including even Warren Buffett—pursue these transactions? There are three key reasons.  The first is that they’re an easy way for companies to combat stagnant growth—much easier than the hard work of developing new products. This helps explain the Kraft-Heinz tie-up. According to a write-up in 2015, when the merger was first announced, many of Kraft’s businesses had been stalled out, delivering zero or even negative growth. Another reason mergers and acquisitions are popular despite the odds: Corporate managers tend to overestimate the economic benefits—so-called synergies—that will result from a transaction. Consider companies like Kraft and Heinz. It was easy to make the argument that two companies in the same industry would be able to gain significant efficiencies by combining operations and realizing economies of scale. And since some number of transactions do succeed, even if it’s only a minority, it’s natural for corporate managers to believe that their transaction will be the one to beat the odds. In a 1986 paper, economist Richard Roll identified a related phenomenon, which he dubbed “the hubris hypothesis.” The logic is as follows: Corporate managers who find themselves in a position to be making acquisitions are, by definition, probably doing well. Their stock prices are up, and they likely have cash in the bank. Because their businesses are strong, they’re more likely to feel self-confident in their ability to succeed with a merger or an acquisition even when the data suggests the odds are against them. The lesson for individual investors? Companies will probably always pursue transactions like this that end up subtracting from shareholder value. But since there’s no way to predict when this will happen, I see this as yet another reason to choose broadly-diversified index funds, where any one company’s mistake generally won’t have too much of a negative impact. Also, to the extent that the company being acquired is also in the index, passive fund investors can enjoy the benefits that accrue to that company’s shareholders.   Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.