Author Topic: Why you should never buy an annuity!  (Read 9042 times)

Telecaster

  • Pencil Stache
  • ****
  • Posts: 851
Re: Why you should never buy an annuity!
« Reply #100 on: September 05, 2017, 05:37:56 PM »
In my example of 7.7%, you need a pretty high inflation rate to be better off (from an annual cash flow perspective) with an inflation-adjusted 4% SWR.  This is why it makes more sense to buy an annuity when you are older and less likely to need it as long and can get better rates.  In addition, your discretionary spending tends to tail off between ages 70-100 (unless long term care is required; many people handle this with a HELOC or home sale).  The NPV of the 7.7% annual payments is ahead of inflation-adjusted 4% SWR for 30 years unless average inflation rates are pretty outrageous (e.g 7% average over 30 years).

Hmm, my math (corrections welcome!)  shows the break even point comes at about year 17, which the original $40K SWR has become $78,000, assuming 4% inflation.  The long term inflation average is 3.2% or something, so that isn't a crazy high assumption.  But kicker is that by year 30, the SWR is $130K and the annuity still pays $77,000.  The person depending on a annuity has seen their lifestyle cut by more than half.  The person going the standard SWR route (standard assumptions apply) maintained their lifestyle, and is very likely wealthy beyond their wildest dreams. 

One of those outcomes sounds great.  One of them sounds horrible.   

SnackDog

  • Pencil Stache
  • ****
  • Posts: 957
  • Location: Latin America
Re: Why you should never buy an annuity!
« Reply #101 on: September 06, 2017, 05:54:29 AM »
Your math is correct that the amount paid in year 17 is the same as the annuity pays assuming wildly high inflation of 4% average 17 years running.  However, the SWR has only just caught the annuity annual rate. The annuity was paying more for 17 years running so the total paid by year 17 is $1.03MM for the SWR method and $1.4MM with the annuity.  When you further add in the time value of money, the SWR method does not match the annuity even by 40 years.
The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind. –Thomas T. Munger

ooeei

  • Pencil Stache
  • ****
  • Posts: 959
Re: Why you should never buy an annuity!
« Reply #102 on: September 06, 2017, 06:21:21 AM »
Never is a strong word. My girlfriend's parents just bought an annuity in order to shield some of their investments from Medicaid. Medicaid has strict rules on how much money/investments you can have, but has different rules for income. Converting their investments to an annuity saved them from being forced to spend it on skilled nursing before Medicaid would kick in.

With that being said, I can't think of another situation where it's the optimal choice.

Telecaster

  • Pencil Stache
  • ****
  • Posts: 851
Re: Why you should never buy an annuity!
« Reply #103 on: September 06, 2017, 08:38:20 PM »
Your math is correct that the amount paid in year 17 is the same as the annuity pays assuming wildly high inflation of 4% average 17 years running.  However, the SWR has only just caught the annuity annual rate. The annuity was paying more for 17 years running so the total paid by year 17 is $1.03MM for the SWR method and $1.4MM with the annuity.  When you further add in the time value of money, the SWR method does not match the annuity even by 40 years.

Gotcha, I understand now.  I was just looking an annual cash flow. 

However, I'm not sure 4% inflation is wildly high.  There have been 17 year periods when inflation was higher than that.  For example, the inflation rate from 1970 to 1987 averaged 6.6%.   So it is still pretty far from worst case.  SWR of course includes worst case. 


SnackDog

  • Pencil Stache
  • ****
  • Posts: 957
  • Location: Latin America
Re: Why you should never buy an annuity!
« Reply #104 on: September 07, 2017, 08:44:37 AM »
Even in an all out worst case of 7% inflation, the annuity would be a better choice (higher present value) for the first 20 years.  It would take a lot to convince me that two decades of record inflation was ahead in order to not select the annuity.
The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind. –Thomas T. Munger

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 1136
  • Age: 51
  • Location: Ann Arbor, Michigan
Re: Why you should never buy an annuity!
« Reply #105 on: September 07, 2017, 09:24:27 AM »
Even in an all out worst case of 7% inflation, the annuity would be a better choice (higher present value) for the first 20 years.  It would take a lot to convince me that two decades of record inflation was ahead in order to not select the annuity.

I suppose in this situation one could view the annuity as long term care insurance if you have an annuity that can provide enough for such a care facility.

Free Forever

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Why you should never buy an annuity!
« Reply #106 on: September 08, 2017, 10:04:32 PM »
Do you by chance work in the insurance industry or sell insurance products? I'm not claiming to be an expert which is why I couched everything I wrote in non-concrete language.

 I was only reacting to your indication that the only reason anyone would buy an annuity is because they're incompetent, undisciplined, and risk-averse (your words). I think that could be considered pretty insulting to anyone who has purchased or considered an annuity. Some really smart people on this forum who have retired rich have made compelling cases for annuities in certain situations....

Meh... Here's what I actually wrote: "There's always going to be a legitimate market for these products, mainly people who are risk averse, will never be competent at DIY and/or lack the discipline to stick to an investing strategy."

 I didn't say "the only reason anyone would buy an annuity...etc." that's just objective reality, anyone can go back and see I didn't write that. So you're just doing the same thing as before and debunking your personalized version of the argument.


Long story short.. Annuities can be a good buy provided the terms and price are a good fit for the investors facts and circumstances.

Goldielocks

  • Magnum Stache
  • ******
  • Posts: 4310
  • Location: BC
Re: Why you should never buy an annuity!
« Reply #107 on: September 09, 2017, 05:58:17 AM »
There are different 'forms' of this annuity associated with different institutions/accounts, and the one I have is fairly liquid, so I'm confident I could transfer the $ out if need be.

Let the mocking commence...
Not mocking. Completely serious. What kind of annuity lets you "transfer the $ out if need be"?

Check out this resource - the relevant section is Section 3 - Transfers & withdrawals, and then "Contracts where TIAA traditional pays benefits immediately (typically lower interest rates)":
https://www.tiaa.org/public/pdf/TT_FAQ.pdf

The trade-off is slightly lower interest rates for increased liquidity. And it really depends on what contract your employer offers, so this likely does not apply to lots of people. But still.

Hi,  I checked out the link.

To be clear, I think the OP (and I know that my thoughts), were discussing annuities that have immediate payouts, e.g., AFTER the person has chosen to convert / receive the lifetime, (or ten annual) payments.

The withdrawal and transfer portability that is included in the TIAA, is during the accumulation phase.   Also, the TiAA is an annuity that attempts to mimic a defined benefit pension plan in behaviour, although different "vintages" of contributions will payout different income streams.  This includes the ability for a lumpsum payout when you are terminated, or at anytime (for one type) before your start receiving income from it."not converted to lifetime income".  Once the distribution phase is triggered, then the liquidity is gone.  Similar to the example, where someone provides $500k to buy an annuity.   Accumulating the $500k outside of the annuity first, is liquid, but not after buying the immediate (start my payments now) annuity.


Goldielocks

  • Magnum Stache
  • ******
  • Posts: 4310
  • Location: BC
Re: Why you should never buy an annuity!
« Reply #108 on: September 09, 2017, 06:02:32 AM »
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
"Relatives who don't get it" thread...   

Boy, if I had a broke parent that was poor with money, come into an inheritance, I would definitely do some arm twisting to set them up in an annuity before a chance of my having to house them came up.

Telecaster

  • Pencil Stache
  • ****
  • Posts: 851
Re: Why you should never buy an annuity!
« Reply #109 on: September 09, 2017, 02:08:27 PM »
Even in an all out worst case of 7% inflation, the annuity would be a better choice (higher present value) for the first 20 years.  It would take a lot to convince me that two decades of record inflation was ahead in order to not select the annuity.

I suppose in this situation one could view the annuity as long term care insurance if you have an annuity that can provide enough for such a care facility.

I personally wouldn't use an annuity for that purpose.  Reason is that the way many of the nicer long term care facilities work (i.e. ones you would want to live in) is that you essentially buy your way in (pay up front, basically), and then pay whatever the monthly fee is.  But they typically won't kick you out when your assets are exhausted and you are relying on Medicaid.  They'll just take the Medicaid and call it even.  So you still wind up with a higher, better level of care.   If your annuity is sufficient for your monthly care initially, it probably won't be in 10 years, and definitely won't be in 20.  That limits your options. 

Don't forget the value of the portfolio you are taking the SWR from.   Firecalc says that after 20 years, worst case is the portfolio is worth $130,000, average of  $1.5 million, and high of $4.1 million.  After 20 years, not only are your monthly withdrawals almost certainly higher than the annuity payments due to inflation, you still have assets you control, and in some cases substantial assets.  That gives you options.  After 30 years, you either just ran out of cash, or you are wealthy.   With the annuity, you might as well have run out cash, because inflation has turned the payments dust and you're eating Alpo. 

If you do want to insure your care in old age, you can buy long term care insurance.  Which IMO is not a great deal, but it is a better insurance product for that application. 


BigMoneyJim

  • 5 O'Clock Shadow
  • *
  • Posts: 25
  • Age: 47
  • Location: DFW, Texas
    • Jim's Personal Finance Blog
Re: Why you should never buy an annuity!
« Reply #110 on: September 09, 2017, 03:42:53 PM »
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
"Relatives who don't get it" thread...   

Boy, if I had a broke parent that was poor with money, come into an inheritance, I would definitely do some arm twisting to set them up in an annuity before a chance of my having to house them came up.

This may hold them until they see a jg Wentworth commercial, then they cash out at 50% or worse.

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 1136
  • Age: 51
  • Location: Ann Arbor, Michigan
Re: Why you should never buy an annuity!
« Reply #111 on: September 09, 2017, 08:23:19 PM »
Even in an all out worst case of 7% inflation, the annuity would be a better choice (higher present value) for the first 20 years.  It would take a lot to convince me that two decades of record inflation was ahead in order to not select the annuity.

I suppose in this situation one could view the annuity as long term care insurance if you have an annuity that can provide enough for such a care facility.

I personally wouldn't use an annuity for that purpose.  Reason is that the way many of the nicer long term care facilities work (i.e. ones you would want to live in) is that you essentially buy your way in (pay up front, basically), and then pay whatever the monthly fee is.  But they typically won't kick you out when your assets are exhausted and you are relying on Medicaid.  They'll just take the Medicaid and call it even.  So you still wind up with a higher, better level of care.   If your annuity is sufficient for your monthly care initially, it probably won't be in 10 years, and definitely won't be in 20.  That limits your options. 

Don't forget the value of the portfolio you are taking the SWR from.   Firecalc says that after 20 years, worst case is the portfolio is worth $130,000, average of  $1.5 million, and high of $4.1 million.  After 20 years, not only are your monthly withdrawals almost certainly higher than the annuity payments due to inflation, you still have assets you control, and in some cases substantial assets.  That gives you options.  After 30 years, you either just ran out of cash, or you are wealthy.   With the annuity, you might as well have run out cash, because inflation has turned the payments dust and you're eating Alpo. 

If you do want to insure your care in old age, you can buy long term care insurance.  Which IMO is not a great deal, but it is a better insurance product for that application.

Thanks

TomTX

  • Magnum Stache
  • ******
  • Posts: 2558
  • Location: Texas
Re: Why you should never buy an annuity!
« Reply #112 on: September 10, 2017, 06:39:02 AM »
I suck at math, so maybe you guys can help.  My wife is a public employee and has the opportunity to buy up to an extra five years into her public retirement system.  Each year presently costs 28500 (at age 46) and will net approximately 200 per month (2400/yr) in retirement income at age 60.  We are considering buying the five years now.  When combined with her existing service credit and expected additional service credit at retirement, this should result in approximately $3000 / mo in guaranteed income.  The benefit is subject to cola increases after three years and there is a spousal benefit as well. 

Thoughts?

The utility of buying service time depends hugely on the details of the pension, when you plan to take the pension

I bought the maximum 3 years of credit for my state pension - not primarily for the increase in payout. Rather, it accelerates the date I can start drawing the pension by 18 months.

My logic was this:

1) The 18 months of payout is (moderately) more money than what I paid to buy the 3 years, AND will continue to have a higher payout than if I had not purchased service time. With the house paid off in a few years, the pension will be enough to cover basic expenses.

2) As a backup, if I wanted to, I could work at another job and get 18 months of full salary (likely higher than my state salary) AND draw 18 months of pension while ending work at the same date I would have without buying the pension.
Credit card signup bonuses:

$150 bonus on $500 spend for Chase Freedom:
https://www.referyourchasecard.com/2/MU4TDQ1N3K

$50 bonus (no min spend, just use it once) plus double all cash back at the end of 1 year for Discover, including the initial $50:
https://refer.discover.com/s/37e3u

$500 bonus on $4,000 spend for Chase Sapphire Preferred:
https://www.referyourchasecard.com/6/Z8JIP66H7G

TomTX

  • Magnum Stache
  • ******
  • Posts: 2558
  • Location: Texas
Re: Why you should never buy an annuity!
« Reply #113 on: September 10, 2017, 06:51:35 AM »

Here’s an example: The CNNMoney annuity calculator puts a single life annuity payment for a 45 year old male in Pennsylvania at $1681/mo for an initial premium of $400,000.  That number comes REALLY close to the MMM family’s bare bones minimum expenses for the year, and is 25% higher than a 4% SWR on the same amount.  If you instead opt for a joint life payout, you’ll probably be in the range of $1100/mo, a pretty fair bit lower than the MMM family’s bare bones budget and around 18% less than a 4% SWR on the same amount.

False equivalency: The payout under the 4% SWR increases every year while the annuity remains the same. My typical "couples planning" is that one of us would have a decent chance of needing money until Age 95.

So, under the 4% SWR, we as a couple can start out drawing $1,333 per month - and that increases with inflation.

In your annuity example, we would start by drawing $1,100 per month, and that would remain flat for the next 50 years.

So, after our payout timeframe, our widow receives in her last year:

Annuity: $1,100 per month
SWR: $5,840 per month

Or, if you prefer inflation-adjusted numbers:

Annuity: $210 per month
SWR: $1,333 per month
Credit card signup bonuses:

$150 bonus on $500 spend for Chase Freedom:
https://www.referyourchasecard.com/2/MU4TDQ1N3K

$50 bonus (no min spend, just use it once) plus double all cash back at the end of 1 year for Discover, including the initial $50:
https://refer.discover.com/s/37e3u

$500 bonus on $4,000 spend for Chase Sapphire Preferred:
https://www.referyourchasecard.com/6/Z8JIP66H7G

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 628
Re: Why you should never buy an annuity!
« Reply #114 on: September 10, 2017, 09:28:39 AM »

Here’s an example: The CNNMoney annuity calculator puts a single life annuity payment for a 45 year old male in Pennsylvania at $1681/mo for an initial premium of $400,000.  That number comes REALLY close to the MMM family’s bare bones minimum expenses for the year, and is 25% higher than a 4% SWR on the same amount.  If you instead opt for a joint life payout, you’ll probably be in the range of $1100/mo, a pretty fair bit lower than the MMM family’s bare bones budget and around 18% less than a 4% SWR on the same amount.

False equivalency: The payout under the 4% SWR increases every year while the annuity remains the same. My typical "couples planning" is that one of us would have a decent chance of needing money until Age 95.

So, under the 4% SWR, we as a couple can start out drawing $1,333 per month - and that increases with inflation.

In your annuity example, we would start by drawing $1,100 per month, and that would remain flat for the next 50 years.

So, after our payout timeframe, our widow receives in her last year:

Annuity: $1,100 per month
SWR: $5,840 per month

Or, if you prefer inflation-adjusted numbers:

Annuity: $210 per month
SWR: $1,333 per month

Taking this a step further, comparing an annuity to the 4% rule is another false equivalency: The 4% rule intends to grow your capital, while an annuity draws it down to 0% (immediately). That's why I compared it to a withdrawal rate that also intends to draw down your capital:

Passive investing has a deep humility at its core--the aim is not to separate winners from losers, but rather to hold the entire market. Volatility is only temporary, but you can permanently cripple your portfolio trying to avoid it.

Goldielocks

  • Magnum Stache
  • ******
  • Posts: 4310
  • Location: BC
Re: Why you should never buy an annuity!
« Reply #115 on: September 10, 2017, 10:06:56 AM »
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
"Relatives who don't get it" thread...   

Boy, if I had a broke parent that was poor with money, come into an inheritance, I would definitely do some arm twisting to set them up in an annuity before a chance of my having to house them came up.

This may hold them until they see a jg Wentworth commercial, then they cash out at 50% or worse.

You can cash out of an annuity once you start taking lifetime income?!?  (other than the near term death benefit, but you need to die for that one).. Yikes.

BigMoneyJim

  • 5 O'Clock Shadow
  • *
  • Posts: 25
  • Age: 47
  • Location: DFW, Texas
    • Jim's Personal Finance Blog
Re: Why you should never buy an annuity!
« Reply #116 on: September 10, 2017, 09:53:51 PM »
You can cash out of an annuity once you start taking lifetime income?!?  (other than the near term death benefit, but you need to die for that one).. Yikes.

IKR? It's a third-party company that--as far as I understand--gives a person a cash settlement for all the future payments of such vehicles like annuities, structured settlements, etc.. Another way to prey on those who don't manage their money well IMO. But if one thinks they're desperate for cash...well yeah it's a thing.

I worked with a guy once...one of the commercials came on, and I remarked about how bad an idea that is and wonder who would do that, and he said he did. He had a structured payout from an injury situation, needed money and went to them. I don't recall exactly what it cost him, but it was 50%-ish I think.

Point being, it's hard to protect poor money managers from themselves.

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1945
Re: Why you should never buy an annuity!
« Reply #117 on: September 11, 2017, 10:31:02 AM »
This thread is full of logic fails. A lot of the people bashing annuities, saying you'll run out of enough money to live on because inflation will destroy the annuity payout over time, seem to live in a magical world with a guaranteed 4% SWR that can never fail. That is, markets will always be good enough to guarantee them a 4% withdrawal, always adjusted up for inflation, for life. Their portfolio will never go broke or go down enough that their withdrawals must be lowered -- nope, no chance of that happening. I hope they realize that "safe withdrawal rates" have NO predictive power for the future, they are all based on history only.

Furthermore, they are adopting the classic straw-man fallacy, acting as though anyone in this thread is advocating annuitizing one's entire portfolio, versus just enough to provide a reasonable standard of living (even counting for inflation over time). You know, when you annuitize just a portion of your portfolio, you typically leave yourself plenty (probably even the majority) of your portfolio to continue working in the markets. Furthermore, by doing this, you can leave that remaining portion aggressively invested, without worry or panicking and making stupid moves during downturns, knowing that your basic needs are covered by the annuity.
"Not all quotes on the internet are accurate" -- Abraham Lincoln

Goldielocks

  • Magnum Stache
  • ******
  • Posts: 4310
  • Location: BC
Re: Why you should never buy an annuity!
« Reply #118 on: September 11, 2017, 10:39:54 AM »
You can cash out of an annuity once you start taking lifetime income?!?  (other than the near term death benefit, but you need to die for that one).. Yikes.

IKR? It's a third-party company that--as far as I understand--gives a person a cash settlement for all the future payments of such vehicles like annuities, structured settlements, etc.. Another way to prey on those who don't manage their money well IMO. But if one thinks they're desperate for cash...well yeah it's a thing.

I worked with a guy once...one of the commercials came on, and I remarked about how bad an idea that is and wonder who would do that, and he said he did. He had a structured payout from an injury situation, needed money and went to them. I don't recall exactly what it cost him, but it was 50%-ish I think.

Point being, it's hard to protect poor money managers from themselves.

That is horrible.   Like someone giving you a (poor) cash payout for all of your future SS checks...!

Mighty-Dollar

  • Stubble
  • **
  • Posts: 220
Re: Why you should never buy an annuity!
« Reply #119 on: September 11, 2017, 04:32:06 PM »
seem to live in a magical world with a guaranteed 4% SWR that can never fail. That is, markets will always be good enough to guarantee them a 4% withdrawal, always adjusted up for inflation, for life. Their portfolio will never go broke or go down enough that their withdrawals must be lowered -- nope, no chance of that happening. I hope they realize that "safe withdrawal rates" have NO predictive power for the future, they are all based on history only.

Furthermore, they are adopting the classic straw-man fallacy, acting as though anyone in this thread is advocating annuitizing one's entire portfolio, versus just enough to provide a reasonable standard of living (even counting for inflation over time).
Your first point is one of the top insurance industry deceptions. You're suggesting that just because the arbitrary 4% rule may "fail", that an annuity will do better. This is just plain false. Even when starting in 1966 (the worst year to begin retirement) today's immediate annuity did far WORSE than the 3.4% you had to take out. This is a FACT! https://www.youtube.com/watch?v=QDUbQeZvJ9g These were tough times and there was nothing you could do about it. An annuity would have only made things WORSE.
And your second argument is nothing more than an admission that annuities are inferior financial products. Like saying you're only putting "some" of your money into an annuity so it's not that bad. Why would I even want to put "some" of my money into an inferior, over-taxed, death benefit depleting product than cannot be rebalanced? It makes no sense. It only makes sense to you insurance salespeople. At least put "some" money into this annuity and then I'll earn "some" lavish commission money.
You could make the same argument with Ponzi schemes. Don't get too upset because you're only putting "some" of your money into this bad financial scheme.
Your second post is also circular reasoning. You ASSUMED than annuities give you a "reasonable standard of living". FALSE. You get left in POVERTY later in life and heirs get zero return on investment.
« Last Edit: September 11, 2017, 09:55:27 PM by Mighty-Dollar »

TomTX

  • Magnum Stache
  • ******
  • Posts: 2558
  • Location: Texas
Re: Why you should never buy an annuity!
« Reply #120 on: September 11, 2017, 04:38:01 PM »
This thread is full of logic fails. A lot of the people bashing annuities, saying you'll run out of enough money to live on because inflation will destroy the annuity payout over time, seem to live in a magical world with a guaranteed 4% SWR that can never fail. That is, markets will always be good enough to guarantee them a 4% withdrawal, always adjusted up for inflation, for life. Their portfolio will never go broke or go down enough that their withdrawals must be lowered -- nope, no chance of that happening. I hope they realize that "safe withdrawal rates" have NO predictive power for the future, they are all based on history only.

Furthermore, they are adopting the classic straw-man fallacy, acting as though anyone in this thread is advocating annuitizing one's entire portfolio, versus just enough to provide a reasonable standard of living (even counting for inflation over time).

Bullshit. You're the one strawmanning hard.

Figure out how to address the absolute shit returns and failure to inflation adjust on the annuity side, then we can discuss.
Credit card signup bonuses:

$150 bonus on $500 spend for Chase Freedom:
https://www.referyourchasecard.com/2/MU4TDQ1N3K

$50 bonus (no min spend, just use it once) plus double all cash back at the end of 1 year for Discover, including the initial $50:
https://refer.discover.com/s/37e3u

$500 bonus on $4,000 spend for Chase Sapphire Preferred:
https://www.referyourchasecard.com/6/Z8JIP66H7G

Telecaster

  • Pencil Stache
  • ****
  • Posts: 851
Re: Why you should never buy an annuity!
« Reply #121 on: September 11, 2017, 06:59:31 PM »
This thread is full of logic fails. A lot of the people bashing annuities, saying you'll run out of enough money to live on because inflation will destroy the annuity payout over time, seem to live in a magical world with a guaranteed 4% SWR that can never fail. That is, markets will always be good enough to guarantee them a 4% withdrawal, always adjusted up for inflation, for life. Their portfolio will never go broke or go down enough that their withdrawals must be lowered -- nope, no chance of that happening. I hope they realize that "safe withdrawal rates" have NO predictive power for the future, they are all based on history only.

Let's flip that around.  The pro-annunity folks seem to live in a magical world where insurance companies never go out of business, and will continue paying out money through thick and thin.  That sound reasonable? 

That of course, is not true.  Insurance companies can and do go out of business.  What happens next various from state to state.  Every state as a guaranty association to mitigate the worst of the risks and basically they force other insurance companies to buy your policies. 

But they don't have to make you whole.  For example, here in WA State annuity benefits (present value) are limited to $500,000 per contract owner.  Not per policy.   So spreading the risk around between companies doesn't help you much.  The usual advice is to only buy insurance from top rated companies.  Moody's rated Enron's bonds as investment grade just four days before it filed bankruptcy and we all know about the role the ratings agencies played in the 2007 financial crisis.

You're right, the future could be worse than the past, in which case if you are following the 4% rule you would have to lower your withdrawal rate.  But if the future is worse than the past, some of the companies who get hit the hardest are insurance companies, as we saw in 2007 and the following few years when several large insurance companies went insolvent. 

Regardless, you are still making a logical fallacy yourself, that of false equivalency.  You are (seem to be, anyway) saying that the virtually certain inflation risk of the annuity is the same as the risk the future being worse than the past. 










Mighty-Dollar

  • Stubble
  • **
  • Posts: 220
Re: Why you should never buy an annuity!
« Reply #122 on: September 11, 2017, 10:02:18 PM »
BTW guess who funds that annuity guarantee fund? The insurance companies! And who do you think they pass along the costs to? Annuitants.

In the event of a systemic failure of insurance companies, those guarantee funds could become depleted.

The truth is that these guarantee funds have yet to be tested. If bonds do terribly then this could be the straw that breaks the camel's back. By law insurance companies must invest at least 70% in bonds. Some invest much more than that. And what does that tell you? That with an annuity you ARE NOT going to earn better than what a bond heavy portfolio earns. If insurance companies were paying out better than what bonds earn, minus expenses including Mr. Annuity Salesman's high commission, minus funding of the guarantee fund, minus profit for the insurance company, etc, they would all go out of business.

beltim

  • Magnum Stache
  • ******
  • Posts: 2739
Re: Why you should never buy an annuity!
« Reply #123 on: September 11, 2017, 10:35:00 PM »
seem to live in a magical world with a guaranteed 4% SWR that can never fail. That is, markets will always be good enough to guarantee them a 4% withdrawal, always adjusted up for inflation, for life. Their portfolio will never go broke or go down enough that their withdrawals must be lowered -- nope, no chance of that happening. I hope they realize that "safe withdrawal rates" have NO predictive power for the future, they are all based on history only.

Furthermore, they are adopting the classic straw-man fallacy, acting as though anyone in this thread is advocating annuitizing one's entire portfolio, versus just enough to provide a reasonable standard of living (even counting for inflation over time).
Your first point is one of the top insurance industry deceptions. You're suggesting that just because the arbitrary 4% rule may "fail", that an annuity will do better. This is just plain false. Even when starting in 1966 (the worst year to begin retirement) today's immediate annuity did far WORSE than the 3.4% you had to take out. This is a FACT! https://www.youtube.com/watch?v=QDUbQeZvJ9g These were tough times and there was nothing you could do about it. An annuity would have only made things WORSE.

Bond yields were much higher in 1966, so annuity rates should have been much higher in 1966 than today.  You need to use contemporary annuity rates to try to prove your point.

And your second argument is nothing more than an admission that annuities are inferior financial products. Like saying you're only putting "some" of your money into an annuity so it's not that bad. Why would I even want to put "some" of my money into an inferior, over-taxed, death benefit depleting product than cannot be rebalanced? It makes no sense.

Even if true, people invest in "inferior" financial products all the time.  Only put "some" of your money into a bond because it doesn't have the upside potential of stocks.  Only put "some" of your money in savings accounts because you want it safe in a year for a house purchase.  People use "inferior" financial products all the time.

It only makes sense to you insurance salespeople. At least put "some" money into this annuity and then I'll earn "some" lavish commission money.

And the ad hominem attacks start - the only way someone could disagree with you is if they have an ulterior motive?

You could make the same argument with Ponzi schemes. Don't get too upset because you're only putting "some" of your money into this bad financial scheme.
And more bad faith arguments!

Listen, there just aren't that many insurance salesmen on this site.  You're making bombastic arguments way beyond the data, and then when people call you out on it, you accuse them of being insurance salesmen.  We're not, and so that completely fails at an argument.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1009
  • Location: Detroit, MI
  • Achieved Financial Independence summer 2014. RE'18
Re: Why you should never buy an annuity!
« Reply #124 on: September 12, 2017, 01:07:17 AM »
^
Beltim has a point, we should try to dial down the ad hominem/snide remarks.

The "you" in my original post was of course refering to Mustachians. That there could be financially illiterate people with a huge stach who might do better in some possible scenarios with an annuity as a part of their portfolio is just not the point.

But the insurance industry pitch on annuities is very seductive and uses fear, ignorance and multiple apples to oranges comparisons, plus subtle language that's technically true but financially misleading at best.  I can almost hear the "specially-trained Consultants"  salespeople giving their pitch to these suckers, never lying but only emphasising the 'good' sounding bits. I'll give some examples from the TIAA [Teachers Insurance and Annuity Association] pdf link above they use for selling their annuities. (see quotes below from their sales pitch. Emphasis is mine.)

As a onetime semi-professional spin doctor in the corporate world, I have to hand it to the writers of this evil crap for so cleverly making such a terrible financial product sound like something you should have for your retirement.

Quote
An annuity can be used to save while you work and is the only financial product that can guarantee to pay you lifetime income when you retire.

A lot their stuff totally depends on your definition of "income". They use it specifically to refer to pre-tax nominal (ie not inflation adjusted) payments. They never refer to rates of return (because they are so poor) or highlight how much inflation will reduce the effective purchasing power of the payments.

Quote
In up and down markets, TIAA Traditional preserves the value of your savings. In fact, your balance will grow every day—guaranteed.

This refers to the accummulation/saving phase of the policy. It is using the scary notion (commonly held by many people in my experience) that stock markets regularly crash and that therefore they are dangerous places to invest, totally ignoring the facts that those investments also pay regular (and often tax free) cash dividends and that you only experience the 'down market' when you panic and sell. Note that again, "value" means nominal balance, not inflation corrected. And not mentioned that if the market does go on a blinding bull run you are guaranteed to lose HUGE gains. But granny never has to worry her little head about seeing a lower number on her statement and 'losing' that hard faught saving, whew.

Quote
Launched in 1918, TIAA Traditional is intended to be a core component of a diversified retirement savings portfolio. It was designed specifically to help participants like you save for retirement and create a foundation of income that you can’t outlive.

This is a wonderful little paragraph! So they're saying 'we've been around a long time' - implying they are safe and successful. And of course just because their product was "intended" or "designed specifically" to do something doesn't mean it actually does that thing. And they regularly use this 'foundation of income' language. Nothing about said (nominal) income's actual size or effective usefulness, naturally. This is especially annoying as most of their targets will be receiving social security, which is a product that does provide a pretty good foundation for retirement (and one that's inflation adjusted AND guaranteed by the Federal Government).

Quote
Can TIAA Traditional provide guaranteed income for life? Yes. With TIAA Traditional you have the confidence in knowing you won’t outlive your lifetime income payments and you won’t need to worry about market performance reducing the amount of your guaranteed income in retirement.

Again, look at how carefully that sentence is crafted. What does their "guarenteed income" actually mean? A constant number of dollars pretax that slowly erodes in value and stops when you die (yes, I know you can pay more for adding a spouse or specifiying say 10 years of payments). And the bit about not having to worry about that scary market thingy reducing the amount you get (note, here they avoid using the word value).

Quote
How does the amount of lifetime income I can receive from TIAA Traditional compare to taking non-guaranteed
income using a 4% systematic withdrawal “rule of thumb”?
An annuity, like TIAA Traditional, is the only retirement savings option that offers income you cannot outlive—guaranteed for life. By converting to lifetime income, TIAA Traditional may [Mr M: but more probably will NOT] provide you with more income in retirement than you could receive if you utilized a 4% per year systematic withdrawal approach that is sometimes recommended in retirement planning literature; and by selecting lifetime income you will not be at risk of running out of money in retirement. For example under TIAA’s payout income rates, a career TIAA Traditional contributor who retired and began lifetime income in January of 2016 would have received almost twice as much initial lifetime income and a new contributor would have received 50% more initial lifetime income than under a typical 4% systematic withdrawal strategy.1 Of course, past payout income rates are not indicative of future payout income rates. In addition, TIAA Traditional’s lifetime income option ensures that you won’t outlive your income and that market performance will not reduce the amount of your guaranteed income in retirement.

This is where they get super sneaky, by explicitly appearing to take on that 4% 'rule of thumb' you might have heard about. They set up a strawman of a fixed 4% withdrawal scheme and emphasise that it might conceivably fail and you would run out of money. Nothing about inflation (arguably by far the biggest risk FIRE people face), taxation (annuity payments are taxed as ordinary income while a good portfolio is almost tax free), portfolio liquidity (your initial payment is locked up with an annuity), leaving inheritance (again, standard annuity leaves no remaining stash if you die), or the risk that they go bust (not a huge risk for a well run insurance company, and why they are often forced by regulators to invest heavily in treasury and investment grade bonds). And the great sounding "initial" income that's so much higher.

Quote
If there isn’t any identifiable expense ratio, how can I compare the competitiveness of TIAA Traditional to other guaranteed annuities?

This is wonderful. Note they don't try to compare their competitiveness with other types of investments, but against other annuities. Brilliant. Earlier they emphasise that with the annuity there are no deferred fees and that they account for 'expenses' in the (lower) interest rate that they pay.

And then at the end comes the fine print. Despite a constant refrain of how this product is 'designed' for retirement, apparently singing the praises of annuities is not actually a recommendation at all.
Quote
This material is for informational or educational purposes only and does not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made in consultation with an investor’s personal advisor based on the investor’s own objectives and circumstances. All guarantees are based on TIAA’s claims-paying ability. TIAA Traditional is a guaranteed insurance contract and not an investment for federal securities law purposes. Past performance is no guarantee of future results.... Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.


Oh, and they might actually go bust afterall, so caveat emptor.

The material has many other great examples of financial BS. Overall I'd recommend reading this propaganda and trying to see how they are trying to influence you and mislead you with the language they use.
« Last Edit: September 12, 2017, 01:18:24 AM by Mr Mark »
Mr. Mark

Mighty-Dollar

  • Stubble
  • **
  • Posts: 220
Re: Why you should never buy an annuity!
« Reply #125 on: September 12, 2017, 01:12:58 AM »
Listen, there just aren't that many insurance salesmen on this site.  You're making bombastic arguments way beyond the data, and then when people call you out on it, you accuse them of being insurance salesmen.  We're not, and so that completely fails at an argument.
We don't know who is who on a forum. People are anonymous. But it's very easy to pick out an insurance salesman by their words. They use the same old anecdotes, strawman arguments, and statements of opinion.

Quote
People use "inferior" financial products all the time.
Annuities are sold -- not bought. No roboadvisor recommends annuities because they are inferior financial products that leave you in poverty later in life.

Quote
Bond yields were much higher in 1966, so annuity rates should have been much higher in 1966 than today.
We are dealing with the now. A 65 year old can get an immediate annuity that pays about 6%. That is a FACT! For what it's worth 1966 onward had low bond returns. If we see a repeat of 1966 onward then today's SPIA should be easily beaten. Actuaries are well aware of this therefore insurance companies are not playing Santa Claus. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
« Last Edit: September 12, 2017, 01:20:32 AM by Mighty-Dollar »

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1009
  • Location: Detroit, MI
  • Achieved Financial Independence summer 2014. RE'18
Re: Why you should never buy an annuity!
« Reply #126 on: September 12, 2017, 01:31:57 AM »
Never is a strong word. My girlfriend's parents just bought an annuity in order to shield some of their investments from Medicaid. Medicaid has strict rules on how much money/investments you can have, but has different rules for income. Converting their investments to an annuity saved them from being forced to spend it on skilled nursing before Medicaid would kick in.

With that being said, I can't think of another situation where it's the optimal choice.

FWIW I actually listed that specific medicaid exeption scenario as a possible situation where an annuity could be useful. Even then there may be other ways to acheive that using trusts if you are really wealthy and do it soon enough.

Perhaps I should have said "pretty much always never"?
Mr. Mark

Anon in Alaska

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Why you should never buy an annuity!
« Reply #127 on: September 12, 2017, 02:18:58 AM »
If you buy a annuity, and tell your heirs you have done so, you will reduce the odds that they will murder you for the inheritance; since the money will stop when you're dead....
"Homines est! Dici omnes! Soylens viridis HOMINES EST!"

SnackDog

  • Pencil Stache
  • ****
  • Posts: 957
  • Location: Latin America
Re: Why you should never buy an annuity!
« Reply #128 on: September 12, 2017, 04:08:34 AM »
Most of the arguments against annuities here are by people who are confusing single premium immediate annuities (SPIAs) with other products such as deferred annuities or variable annuities. The difference is akin to term life insurance vs whole life.  There is no ïnvestment or return component to an SPIA.  No salesperson is involved.  You can purchase them directly off the Vanguard web site.  Since there is no investment return variable, there is no sense comparing returns only yields which are typically around 6-8% per annum (yield is inversely related to forecast longevity so the later the payments start, the higher the yield).  A bond or stock investment over a long term may have a wide range of investment return, but it doesn't matter since we have learned that in the best of circumstances the safest amount to withdraw is 4% SWR plus inflation.  Since annuities pay so much higher, they will put more spending money in one's pocket over 30 years (unless inflation averages more than the yield).  The reason they pay so much is nothing to do with the return on the underlying bond investments but on the actuarial statistics that show you will only live to age 81 so if you start payments at age 70, they only will need to pay you 11 years on average. 

I'm a huge fan of this pooled risk.  We are all using 4% SWR to get 95% confidence our savings will last 30 years.  That means each one of us individually must save enough to hit 95% confidence so for most outcomes we are all wildly under-spending.   If we self-insured our homes this way we would each escrow enough money to rebuild them if they burnt down.  It's lunacy.  Pool the risk and everyone comes out ahead including insurers and insurees.
The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind. –Thomas T. Munger

ooeei

  • Pencil Stache
  • ****
  • Posts: 959
Re: Why you should never buy an annuity!
« Reply #129 on: September 12, 2017, 07:23:55 AM »
Never is a strong word. My girlfriend's parents just bought an annuity in order to shield some of their investments from Medicaid. Medicaid has strict rules on how much money/investments you can have, but has different rules for income. Converting their investments to an annuity saved them from being forced to spend it on skilled nursing before Medicaid would kick in.

With that being said, I can't think of another situation where it's the optimal choice.

FWIW I actually listed that specific medicaid exeption scenario as a possible situation where an annuity could be useful. Even then there may be other ways to acheive that using trusts if you are really wealthy and do it soon enough.

Perhaps I should have said "pretty much always never"?

Just went back and found that post, sorry I missed it the first time.

I get that it's a super specific exception, but I think it's important to point out. There was a company the assisted living place pointed them to that set up annuities for this purpose, and I instantly told them not to go there because annuities aren't good (and they are pretty well invested otherwise). Luckily they really wanted to see what it was about, so I sat in on the call and sure enough it wasn't a scam.

Based on this forum and a few other investment pieces I'd read, I'd had "ANNUITIES ARE A SCAM" drilled into my head to the point that I almost lost them a significant chunk of money.

And while you can probably do similar things with trusts, that's just you running your own annuity. Once you have the level of wealth that makes that worth it, I doubt you'll be relying on Medicaid for long term care. Let me put it this way, if they had a lot of money he'd be staying at a way nicer place, and Medicaid wouldn't be an issue.

Finances_With_Purpose

  • Stubble
  • **
  • Posts: 152
    • Finances With Purpose: deploying resources wisely to live vigorously
Re: Why you should never buy an annuity!
« Reply #130 on: September 12, 2017, 04:30:14 PM »
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
"Relatives who don't get it" thread...   

Boy, if I had a broke parent that was poor with money, come into an inheritance, I would definitely do some arm twisting to set them up in an annuity before a chance of my having to house them came up.

This may hold them until they see a jg Wentworth commercial, then they cash out at 50% or worse.

You read my mind!  Was going to post same - couldn't remember his name - and then saw this and began laughing in my chair.  Those commercials are so sad. 

Whoever brought up Medicaid has a good point, though: annuities can be useful in very particular situations like that one.  (And the one post about not wanting to be murdered by heirs.)  They do have a role - they're just profoundly oversold by salesman who make huge commissions.

Annuity salesmen tried to get at my (non-savvy) mother when she went to sign up for Medicare.  It was a bit of a fiasco.  Same salesmen urged her that one rating company who called the 2008 crisis rated the insurer they were selling as top-notch - but a simple google search showed that (while true) the ratings company went bust as a fraud and was being prosecuted by the SEC.  They forgot to mention that part.  (I doubt they even knew.)

Annuities are a favorite of salesmen who don't understand the products or the client's needs...but know the right things to say, know that nobody died because of their annuity, and that they make a big, fat commission for every single sale. 

The incentives in the financial world are a mess...

I am considering whether I should start a financial planning side business (fee only, no sales of any products) just to help people avoid the madness. 

gerardc

  • Bristles
  • ***
  • Posts: 380
  • Age: 33
  • Location: SF bay area
Re: Why you should never buy an annuity!
« Reply #131 on: September 12, 2017, 08:33:38 PM »
In my example of 7.7%, you need a pretty high inflation rate to be better off (from an annual cash flow perspective) with an inflation-adjusted 4% SWR. This is why it makes more sense to buy an annuity when you are older and less likely to need it as long and can get better rates.

The thing is, if you start at 70 years old, you can afford a SWR higher than 4% and still have a high probability of success. Even 6% WR has 50% success rate for 50 year periods, so I bet you can start pretty high and still adjust for inflation. You really need to compare annuities with an equivalent portfolio withdrawal strategy for this analysis to make any sense.

This is what the post at http://investingadvicewatchdog.com/immediate-annuities.html does. NOTHING in this thread comes close to even put a tiny dent in that analysis.

Telecaster

  • Pencil Stache
  • ****
  • Posts: 851
Re: Why you should never buy an annuity!
« Reply #132 on: September 13, 2017, 01:58:29 PM »
Most of the arguments against annuities here are by people who are confusing single premium immediate annuities (SPIAs) with other products such as deferred annuities or variable annuities. The difference is akin to term life insurance vs whole life.  There is no ïnvestment or return component to an SPIA.  No salesperson is involved.  You can purchase them directly off the Vanguard web site.  Since there is no investment return variable, there is no sense comparing returns only yields which are typically around 6-8% per annum (yield is inversely related to forecast longevity so the later the payments start, the higher the yield).  A bond or stock investment over a long term may have a wide range of investment return, but it doesn't matter since we have learned that in the best of circumstances the safest amount to withdraw is 4% SWR plus inflation.  Since annuities pay so much higher, they will put more spending money in one's pocket over 30 years (unless inflation averages more than the yield). 

Slight but important correction.   We've learned in the worst of circumstances the SWR is 4% plus inflation.   Your comparing the worst case WR of balanced portfolio with an annuity and average inflation.

How is it valid to compare worst case of strategy and average case of another?  Hint:  It isn't. 

Your point about getting more money out annuity in the initial years is misleading for the following reason:  Inflation, again.  In a mere 20 or so years, inflation has cut the value of the annuity payments in half.   That means with an annuity you either

1)  Wind up eating Alpo, or
2)  You save the extra money you get in the early years, so you can spend it later and maintain your lifestyle. 

Obviously 1) isn't very attractive.  But you go with 2), then the extra money the annuity paid you in the early years did you no good at all because you couldn't spend it. 
 

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1009
  • Location: Detroit, MI
  • Achieved Financial Independence summer 2014. RE'18
Re: Why you should never buy an annuity!
« Reply #133 on: September 14, 2017, 03:17:20 AM »
Most of the arguments against annuities here are by people who are confusing single premium immediate annuities (SPIAs) with other products such as deferred annuities or variable annuities. The difference is akin to term life insurance vs whole life.  There is no ïnvestment or return component to an SPIA.  No salesperson is involved.  You can purchase them directly off the Vanguard web site.  Since there is no investment return variable, there is no sense comparing returns only yields which are typically around 6-8% per annum (yield is inversely related to forecast longevity so the later the payments start, the higher the yield).  A bond or stock investment over a long term may have a wide range of investment return, but it doesn't matter since we have learned that in the best of circumstances the safest amount to withdraw is 4% SWR plus inflation.  Since annuities pay so much higher, they will put more spending money in one's pocket over 30 years (unless inflation averages more than the yield). 

Slight but important correction.   We've learned in the worst of circumstances the SWR is 4% plus inflation.   Your comparing the worst case WR of balanced portfolio with an annuity and average inflation.

How is it valid to compare worst case of strategy and average case of another?  Hint:  It isn't. 

Your point about getting more money out annuity in the initial years is misleading for the following reason:  Inflation, again.  In a mere 20 or so years, inflation has cut the value of the annuity payments in half.   That means with an annuity you either

1)  Wind up eating Alpo, or
2)  You save the extra money you get in the early years, so you can spend it later and maintain your lifestyle. 

Obviously 1) isn't very attractive.  But you go with 2), then the extra money the annuity paid you in the early years did you no good at all because you couldn't spend it.

Snackdog,
again you are mixing up some serious assumptions as noted earlier.
If you start a SWR scheme at 70 you can go much higher than 4% SWR if you don't want to have a significant stach left after 30 years (which is what you imply by ignoring the lost initial payment for the SPIA).

You are also forgetting that annuity payments count as ordinary income and will therefore be taxed at 15% assuming you have some SS and/or RMDs. The 4% SWR methods of capital gains and qualified dividends are currently tax free.

Also 'high' inflation does not have to be sustained over the entire 30 yr period to mess up the value of the annuity payment - a short burst of inflation with a few years of 4% or 5% will do it just as easily.

Here are the real-term (inflation adjusted) post-tax (15%) annual payments for a 65 yr male with an initial 6% SPIA (current quotes) vs a 4% SWR with $1mill (note this ignores the likely large & liquid portfolio a 4% scheme would preserve). In red is when the SPIA payments fall below the 4% method. You can see that you get less money with the annuity well before expected mortality age of late 80s, and total payouts (which=PV) even if you live until 95 are less for the SPIA in all cases are less. Eventually your annuity probably won't even buy telecaster's favourite dog food.

AGE   4% SWR Real   6% initial 2% inflation 3% inflation    4% inflation    5% inflation    6% inflation
65   40000   51000   51000   51000   51000   51000
66   40000   50000   49515   49038   48571   48113
67   40000   49020   48072   47152   46259   45390
68   40000   48058   46672   45339   44056   42821
69   40000   47116   45313   43595   41958   40397
70   40000   46192   43993   41918   39960   38110
71   40000   45287   42712   40306   38057   35953
72   40000   44399   41468   38756   36245   33918
73   40000   43528   40260   37265   34519   31998
74   40000   42675   39087   35832   32875   30187
75   40000   41838   37949   34454   31310   28478
76   40000   41017   36843   33129   29819   26866
77   40000   40213   35770   31854   28399   25345
78   40000   39425   34729   30629   27046   23911
79   40000   38652   33717   29451   25758   22557
80   40000   37894   32735   28318   24532   21281
81   40000   37151   31782   27229   23364   20076
82   40000   36422   30856   26182   22251   18940
83   40000   35708   29957   25175   21192   17868
84   40000   35008   29085   24207   20182   16856
85   40000   34322   28237   23276   19221   15902
86   40000   33649   27415   22381   18306   15002
87   40000   32989   26617   21520   17434   14153
88   40000   32342   25841   20692   16604   13352
89   40000   31708   25089   19896   15813   12596
90   40000   31086   24358   19131   15060   11883
91   40000   30477   23648   18395   14343   11210
92   40000   29879   22960   17688   13660   10576
93   40000   29293   22291   17007   13010   9977
94   40000   28719   21642   16353   12390   9412
95   40000   28156   21011   15724   11800   8880
total   1240000   1193219   1050623   932894   834995   753006

Mr. Mark

SnackDog

  • Pencil Stache
  • ****
  • Posts: 957
  • Location: Latin America
Re: Why you should never buy an annuity!
« Reply #134 on: September 14, 2017, 10:06:25 AM »
The 4% SWR is the recommended rate to not end up with $0 after 30 years (90% probability if I recall). You are correct that you can certainly spend as much as you want, but your probability of running out before 30 years increases.

Taxes are an important consideration in both scenarios and will be person dependent. If you fund an annuity with post-tax dollars, taxes on withdrawals may be quite low (probably zero for first ten years or so).  If you follow the SWR method you will pay taxes on your gains at some point unless it is all invested in state muni bonds or something. 

Your inflation- and tax-adjusted profiles are about right (I get slightly different), but in any case I think you will find the net present value of the annuity over 30 years is still higher.  The NPV function in Excel can be used for this comparison.
The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind. –Thomas T. Munger