Author Topic: Why you should never buy an annuity!  (Read 13946 times)

Free Forever

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Why you should never buy an annuity!
« Reply #50 on: August 29, 2017, 04:20:31 PM »
Many, but not all, of the investment oriented products offered by insurance companies can be roughly replicated using stocks , bonds and options , usually at a much lower cost, if you have the discipline and know how to do it (probably <.5% of all investors).

This is not true. Insurance companies can provide guarantees for payouts ......


I think you're just arguing a point a I didn't actually make here. I am not saying you can perfectly replicate all the products an insurance company offers. Rather I am saying you can roughly replicate some of the products.

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.

While there's a hint of truth there (since some people jump into annuities without understanding them), it also discounts very legitimate reasons for buying annuities that have nothing to do with being incompetent or lacking discipline. Respectfully I'd suggest studying the issue a bit more.

Once again you're arguing a point I didn't actually make. I'd suggest that you structure your arguments around the facts, if you need more details ask questions before making such swift and spurious conclusions. 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.
« Last Edit: August 29, 2017, 04:23:24 PM by Free Forever »

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: Why you should never buy an annuity!
« Reply #51 on: August 29, 2017, 08:10:29 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 no longer work for a living. I retired at 47 thanks in large part to this website. 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; they definitely aren't stupid or incompetent (@Nords, a longtime and senior member, comes to mind as one example). I don't have an annuity, and I certainly don't sell them, thus I have no dog in this fight. I just don't want people thinking they must be stupid or incompetent to consider buying one in order to smooth out their retirement risk.

You say you can roughly "DIY" it: No, you can't, unless you're pooling your risk and assets with a few million other people and have a team of PhD actuaries to determine the structure of your payouts.
"Not all quotes on the internet are accurate" -- Abraham Lincoln

thriftyish

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Why you should never buy an annuity!
« Reply #52 on: August 29, 2017, 09:44:00 PM »
Long time lurker, infrequent commenter. At the risk of inviting ridicule, I offer myself up as an example of someone who has invested in an annuity, and even as a young(ish) and (mostly) mentally sound person!

I am mid-30s and recently started investing part of my retirement savings in a TIAA 'traditional' annuity. Why?

Well, let me say up front that I have a significant part of my retirement savings in stock-based index funds. I value those investments for protecting my savings from inflation and supporting long-term growth.

On the other hand, I'm fairly risk-averse. I'd like to think I could stomach a 2008-esque crash, but frankly I don't trust myself. If all or most of my savings were in stocks and they dropped by 20-30%, I suspect I would be sorely tempted to sell and preserve my hard-earned savings (the principal), which of course would be a disastrous move. To guard against this I allocate a significant part of my portfolio to 'low risk' investments.

So, why not bonds? Well, I do have some investments in bonds but I recently decided to redirect the new savings for the 'low risk' part of my portfolio into TIAA traditional instead. At today's interest rates, I'm getting better returns from the annuity than a broad-based bond fund, and there is less risk of losing the principal since it is a guaranteed annuity. (TIAA has a strong history and a credit rating similar to the US government) 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. It also has fairly flexible options for payouts including lump sum.

I certainly would not feel comfortable having all my retirement savings in this annuity, and things might change down the road as my employment situation changes, but for now I value the modest interest rate and peace of mind it provides for this part of my portfolio. (and no, I do not work for TIAA!!)

Let the mocking commence...

Dicey

  • Walrus Stache
  • *******
  • Posts: 6276
  • Age: 59
  • Location: NorCal
Re: Why you should never buy an annuity!
« Reply #53 on: August 29, 2017, 11:31:59 PM »
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"?
I did it! I have a journal!
A Lot Like This
And hell yes, I am still moving confidently in the direction of my dreams...

Mighty-Dollar

  • Stubble
  • **
  • Posts: 235
Re: Why you should never buy an annuity!
« Reply #54 on: August 30, 2017, 03:27:49 AM »
The benefit of annuities vs other investment types that offer higher returns and lower costs is that they offer GUARANTEES that are not included in other investment types.  Those guarantees have a value, maybe not to you or to me, but certainly to some people.  Hence making a blanket statement like “never buy an annuity” is not useful information.
The value of that guarantee is what really can’t be overstated in annuities favor.  Two considerations in favor of those guarantees. 

What will happen to those people if there is another huge loss like in 2008 or (God forbid) multiple years in a row of large losses like the early 2000’s?
This is a total insurance salesman's strawman argument. You're talking about someone who is 100% in stocks. That's insane if you're "risk averse". NOBODY who is risk averse puts 100% of their money in stocks. They would diversify HEAVILY into BONDS! Gee look what happened in the 2000's with a bond heavy mix of 10 year treasuries and stocks. You did just fine!
http://www.investingadvicewatchdog.com/images-new/chart-2000-2015.jpg
So again what do I need a guarantee for if I'm "risk averse"? You don't. It's only insurance salesmen who will tell you that you must have your money guaranteed in exchange for insurance companies and insurance salesmen getting rich off of naive investors who have never heard of bonds.
In the last 22 years a 28/72 mix hasn't lost even 1% in any year. Annuities are easily and consistently beaten because they are inferior products. http://www.investingadvicewatchdog.com/images/28-72-year.jpg
« Last Edit: August 30, 2017, 03:30:36 AM by Mighty-Dollar »

thriftyish

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Why you should never buy an annuity!
« Reply #55 on: August 30, 2017, 07:29:56 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.


patchyfacialhair

  • Bristles
  • ***
  • Posts: 479
    • Journal
Re: Why you should never buy an annuity!
« Reply #56 on: August 30, 2017, 09:28:19 AM »
Posting to follow.

I will probably never buy an annuity (after a couple decades of growth and modest SS, I'll be set for life), but I think the most important thing for those considering one is to always keep an annuity in the insurance column of your finances.

Insurance companies exist to make money, so duh, it's not "optimal." But I could see where it becomes an option once someone has all their boxes checked. Ample investments? Health insurance locked in? Social Security locked in? All other financial goals met? At that point it's not about becoming rich. Anything extra after all that could be used to purchase insurance to ensure a guaranteed payout. Is it a good rate of return? No. Is it subject to liquidity risk or other risks, like the company folding? Absolutely. But again, for the 70 year old with more money than they know what to do with, healthcare locked in, and SS locked in, it can provide peace of mind for a small portion of their overall net worth.

Mighty-Dollar

  • Stubble
  • **
  • Posts: 235
Re: Why you should never buy an annuity!
« Reply #57 on: August 30, 2017, 11:38:39 PM »
But again, for the 70 year old with more money than they know what to do with, healthcare locked in, and SS locked in, it can provide peace of mind for a small portion of their overall net worth.
CD's are the better choice then. All an annuity would do is rob heirs of inheritance and transfer that money to an insurance salesman and insurance company.

Telecaster

  • Pencil Stache
  • ****
  • Posts: 902
Re: Why you should never buy an annuity!
« Reply #58 on: August 31, 2017, 12:23:34 AM »

Sometimes people prefer the guarantee that an annuity provides, and are willing to pay for it (through lower returns compared to 60/40).


That's the thing.  The returns are very, very close to zero.  If not actually zero and possibly below zero.   Basically, all annuities do is return your principal over time.   You're lucky to get much more than that.  And in exchange for the service of them doling your money back to you, you have to give up control of your fund.  In what universe does that make sense? 

I suppose there is a scenario somewhere for somebody where an annuity makes sense.  But 99.9999% of the population should run away screaming with their hair on fire.  For the vast, and I mean vast, majority of people an annuity is a stupid, stupid, stupid thing.






Telecaster

  • Pencil Stache
  • ****
  • Posts: 902
Re: Why you should never buy an annuity!
« Reply #59 on: August 31, 2017, 12:43:07 AM »
But again, for the 70 year old with more money than they know what to do with, healthcare locked in, and SS locked in, it can provide peace of mind for a small portion of their overall net worth.

I suppose so, but in that case what do you need the insurance company for?  The OP laid it out very well.  All the annuity really does is take a lump sum and dole it back to you over time.  And our 70 year old will probably die before she gets her money back.  If the 70 year old simply puts her money in cash, she has safety and equal or greater rate of return over an annuity.  And she can access the money for anything she likes, and can leave it to her heirs, if she wishes.  I would say the person in your example is the last person on Earth who should be buying an annuity. 


patchyfacialhair

  • Bristles
  • ***
  • Posts: 479
    • Journal
Re: Why you should never buy an annuity!
« Reply #60 on: August 31, 2017, 10:00:34 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.

Dicey

  • Walrus Stache
  • *******
  • Posts: 6276
  • Age: 59
  • Location: NorCal
Re: Why you should never buy an annuity!
« Reply #61 on: August 31, 2017, 10:45:05 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?
I did it! I have a journal!
A Lot Like This
And hell yes, I am still moving confidently in the direction of my dreams...

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 3595
  • Age: 9
  • Location: WA
Re: Why you should never buy an annuity!
« Reply #62 on: August 31, 2017, 11:54:52 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?
Disagree. I don't know what my mental acuity will be in my 60s in beyond, and I may need to make financial decisions on behalf of people not in our little club. Annuities are a common financial tool, and there's virtually no cost to discussing them. Even if it's 95% negative.

uwp

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Why you should never buy an annuity!
« Reply #63 on: August 31, 2017, 12:19:59 PM »

Sometimes people prefer the guarantee that an annuity provides, and are willing to pay for it (through lower returns compared to 60/40).


That's the thing.  The returns are very, very close to zero.  If not actually zero and possibly below zero.   Basically, all annuities do is return your principal over time.   You're lucky to get much more than that. 

From the example earlier in the thread that said Vanguard would give a 70 year old male a guaranteed 7.7% payout for life.  Life expectancy for a 70 y/o male (non-smoker) is ~88. 

If you took $7,700 out of $100,000 with zero return, you would run out of money at age 82. 
Let's say you were very risk adverse (but not money in the mattress crazy) so you put it in 2% CDs, you run out of money at age 84. 
To make it last until your life expectancy of 88, you need to earn right around 4.5% annually.   
But both your parents lived to 95, so you want to budget out that far, now we are talking about 6.5%.

Of course, the mustachian answer is to spend less :)

patchyfacialhair

  • Bristles
  • ***
  • Posts: 479
    • Journal
Re: Why you should never buy an annuity!
« Reply #64 on: August 31, 2017, 12:23:22 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?

Well, I'm not OP of this tread....and....it's important to always look at both/all sides of a topic?

We're not exactly talking about a horrible product like a payday loan with a 500% interest rate or a mobile home loan. We're talking about an insurance product (although you might call it horrible...I probably would too...) that serves a purpose, and some folks see value in that. Nobody credible in this thread is advocating for an annuity as a primary investment vehicle, only that it serves its purpose as a risk management tool in certain situations.

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: Why you should never buy an annuity!
« Reply #65 on: August 31, 2017, 12:37:34 PM »
So here's the thing with annuities that I feel a lot of people are missing (maybe they aren't, but that's my impression), and the mathematician in me can't take it any longer. Many posts have put in this (false) built-in assumption that "you'll be lucky to even get your principal back," that in no circumstances would buying an annuity be better than just keeping your own principal and putting it in CD's or cash, that you're just giving away your principal for a ridiculous low return, and similar arguments.

The thing is, no one knows if it's a bad or good purchase for themselves, individually, unless they have a magic crystal ball that tells them exactly when they'll die. Sure, you might die early or at your statistically expected life span, in which case the insurance company has made a decent profit off of your principal. But you might outlive your lifespan by many years or decades, in which case you got to take the insurance company for an expensive ride on their dime.

Of course the actuaries at these companies have worked it all out so that by knowing the statistical expected lifespans of the population at large, they can afford those people who outlive their expected life span. For as many that die later, an equal number will die earlier. And on top of that, they have built in a healthy profit margin plus making money by investing your principal (hopefully for a better return than they are giving to you, from their perspective). Since they have pooled the risk across so many customers, it's a very safe bet that they will make out nicely overall, and the fact that they have been around for hundreds of years is a testament to the longevity of this business model.

But it is patently false for anyone to say it's just a guarantee that you'll be worse off by purchasing an annuity. You could have a life expectancy of 80 years and live to be 100, in which case the insurance company has lost a significant amount of money on you (i.e., you won). It's almost like a bookie -- they've taken an equal number of bets for each team and built in a cut so they make out no matter what. But that doesn't mean no one ever makes a winning bet with the bookie. Statistically speaking, about half the people "win" against the insurance company and get more in return for their principal than expected, and another half get less by dying early or when "expected." The insurance company just gets their profit margin on top of all of it, so everyone's satisfied.

So for the last time it's not necessarily about being lazy, incompetent, stupid, overly risk-averse, and so on. It can be a reasonable way of purchasing a guaranteed rate of return that will pay out for life, and you won't know if you made an overall optimal choice until/unless you know the exact date of your death.

YMMV.
"Not all quotes on the internet are accurate" -- Abraham Lincoln

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 1337
  • Age: 52
  • Location: Ann Arbor, Michigan
Re: Why you should never buy an annuity!
« Reply #66 on: August 31, 2017, 12:47:34 PM »
In an ideal world, you could buy a bigger social security check instead of having to purchase an annuity from an insurance company.

GenXbiker

  • Bristles
  • ***
  • Posts: 330
Re: Why you should never buy an annuity!
« Reply #67 on: August 31, 2017, 01:02:44 PM »

I'll leave it to the suckers to buy the annuities.

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 1337
  • Age: 52
  • Location: Ann Arbor, Michigan
Re: Why you should never buy an annuity!
« Reply #68 on: August 31, 2017, 01:12:57 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?
Disagree. I don't know what my mental acuity will be in my 60s in beyond, and I may need to make financial decisions on behalf of people not in our little club. Annuities are a common financial tool, and there's virtually no cost to discussing them. Even if it's 95% negative.

That's a good point. It's hard to know if the cure is worse than the problem. If I my mental acuity is fading and I buy annuities have I just allowed the insurance company to take advantage of me ?

Telecaster

  • Pencil Stache
  • ****
  • Posts: 902
Re: Why you should never buy an annuity!
« Reply #69 on: August 31, 2017, 01:31:13 PM »

Sometimes people prefer the guarantee that an annuity provides, and are willing to pay for it (through lower returns compared to 60/40).


That's the thing.  The returns are very, very close to zero.  If not actually zero and possibly below zero.   Basically, all annuities do is return your principal over time.   You're lucky to get much more than that. 

From the example earlier in the thread that said Vanguard would give a 70 year old male a guaranteed 7.7% payout for life.  Life expectancy for a 70 y/o male (non-smoker) is ~88. 

If you took $7,700 out of $100,000 with zero return, you would run out of money at age 82. 
Let's say you were very risk adverse (but not money in the mattress crazy) so you put it in 2% CDs, you run out of money at age 84. 
To make it last until your life expectancy of 88, you need to earn right around 4.5% annually.   
But both your parents lived to 95, so you want to budget out that far, now we are talking about 6.5%.

Of course, the mustachian answer is to spend less :)

That sounds about right, but mea culpa I should have specified real rate of return.   I just checked the SSA life expectancy tables and it says a 70 year old male can expect to life about 14 more years (that's for the general population).  Remember half the population will be dead before reaching their life expectancy.  Right there, half won't get even the 2%. 

Next, annuities are not commonly indexed to inflation (like in your example).   You can buy them, but they cost quite a bit more.  If you include any reasonable estimate for inflation, most people won't get any real return on their annuities.  Yes of course, some people will be the odds and it works out great for them.  But most people won't and that's why I said you have got to be lucky.   


Dicey

  • Walrus Stache
  • *******
  • Posts: 6276
  • Age: 59
  • Location: NorCal
Re: Why you should never buy an annuity!
« Reply #70 on: August 31, 2017, 01:33:22 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?
Disagree. I don't know what my mental acuity will be in my 60s in beyond, and I may need to make financial decisions on behalf of people not in our little club. Annuities are a common financial tool, and there's virtually no cost to discussing them. Even if it's 95% negative.
But wait! You're only nine! There will be some loads of shiny, overpriced, guaranteed things to chose from, should the time ever come that you truly need one.
I did it! I have a journal!
A Lot Like This
And hell yes, I am still moving confidently in the direction of my dreams...

uwp

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Why you should never buy an annuity!
« Reply #71 on: August 31, 2017, 01:39:53 PM »
  Yes of course, some people will be the odds and it works out great for them.  But most people won't and that's why I said you have got to be lucky.   

Yes.
It's almost like it is an insurance product sold to protect against running out of money because you live longer than expected.

Hargrove

  • Pencil Stache
  • ****
  • Posts: 532
Re: Why you should never buy an annuity!
« Reply #72 on: August 31, 2017, 02:37:44 PM »
So here's the thing with annuities that I feel a lot of people are missing (maybe they aren't, but that's my impression), and the mathematician in me can't take it any longer. Many posts have put in this (false) built-in assumption that "you'll be lucky to even get your principal back," that in no circumstances would buying an annuity be better than just keeping your own principal and putting it in CD's or cash, that you're just giving away your principal for a ridiculous low return, and similar arguments.

The thing is, no one knows if it's a bad or good purchase for themselves, individually, unless they have a magic crystal ball that tells them exactly when they'll die.

This particular post is a common false equivalency.

It is completely irrelevant when you die, or if you know when you'll die, in terms of comparing annuities to OTHER investment vehicles, where (surprize!) you ALSO don't know when you'll die. You're not comparing the annuity to your magical knowledge, you're comparing it to other investment vehicles assuming exactly the same imperfect knowledge.

uwp

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Why you should never buy an annuity!
« Reply #73 on: August 31, 2017, 02:49:57 PM »
This particular post is a common false equivalency.

It is completely irrelevant when you die, or if you know when you'll die, in terms of comparing annuities to OTHER investment vehicles, where (surprize!) you ALSO don't know when you'll die. You're not comparing the annuity to your magical knowledge, you're comparing it to other investment vehicles assuming exactly the same imperfect knowledge.

It is relevant when you die.  Because you don't know when you will die, most people work with a safe withdrawal rate.  Annuities allow you to surpass that. 

Sure, you may die at 80, and not live to see a great return on the annuity,  but you had 10 years of spending $7,700/year rather than $4,000/year (more than $30,000 extra).  I bet your dead body is really excited about the excess returns you had by investing in a 28/72 portfolio while you spent thousands less while alive.

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 3595
  • Age: 9
  • Location: WA
Re: Why you should never buy an annuity!
« Reply #74 on: August 31, 2017, 03:10:07 PM »
Disagree. I don't know what my mental acuity will be in my 60s in beyond, and I may need to make financial decisions on behalf of people not in our little club. Annuities are a common financial tool, and there's virtually no cost to discussing them. Even if it's 95% negative.

That's a good point. It's hard to know if the cure is worse than the problem. If I my mental acuity is fading and I buy annuities have I just allowed the insurance company to take advantage of me ?
Well, it's a tradeoff. You are okay being "taken advantaged of" now, because it's better than really, really, screwing yourself later on. Think, day trading in your 70s with all of your IRA because you're convinced you know something others don't.

And it's not just your mental acuity, it's that of a surviving spouse who may not know or care.

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: Why you should never buy an annuity!
« Reply #75 on: August 31, 2017, 05:36:48 PM »
So here's the thing with annuities that I feel a lot of people are missing (maybe they aren't, but that's my impression), and the mathematician in me can't take it any longer. Many posts have put in this (false) built-in assumption that "you'll be lucky to even get your principal back," that in no circumstances would buying an annuity be better than just keeping your own principal and putting it in CD's or cash, that you're just giving away your principal for a ridiculous low return, and similar arguments.

The thing is, no one knows if it's a bad or good purchase for themselves, individually, unless they have a magic crystal ball that tells them exactly when they'll die.

This particular post is a common false equivalency.

It is completely irrelevant when you die, or if you know when you'll die, in terms of comparing annuities to OTHER investment vehicles, where (surprize!) you ALSO don't know when you'll die. You're not comparing the annuity to your magical knowledge, you're comparing it to other investment vehicles assuming exactly the same imperfect knowledge.

Yeah, not a false equivalency. Our lack of knowledge about the future is the whole point of insurance/annuities. If I knew my house would never catch on fire or have a disaster, I could drop insurance on it now. Same with health insurance, etc. Or I could buy it the day before I know disaster will strike. Insurance/annuities allow you to protect against disaster in exchange for a premium. In the case of retirement funding, the "disaster" scenario of course is outliving your money, which is a very real possibility. An annuity protects against that.

If it weren't serious business, it would almost be comical how some what I will call financially immature people here seem to think it will be all good times in the future, as they've only been investing during a bull market and have never lived through a long recession, a depression, a 50% drop in their portfolio values, etc.
"Not all quotes on the internet are accurate" -- Abraham Lincoln

Telecaster

  • Pencil Stache
  • ****
  • Posts: 902
Re: Why you should never buy an annuity!
« Reply #76 on: August 31, 2017, 09:54:28 PM »

Yeah, not a false equivalency. Our lack of knowledge about the future is the whole point of insurance/annuities. If I knew my house would never catch on fire or have a disaster, I could drop insurance on it now. Same with health insurance, etc. Or I could buy it the day before I know disaster will strike. Insurance/annuities allow you to protect against disaster in exchange for a premium. In the case of retirement funding, the "disaster" scenario of course is outliving your money, which is a very real possibility. An annuity protects against that.

Does it really?  Let's say you are one of the happy few who lives long enough to see a positive return on an annuity.  Let's say you receive returns for 40 years, which as per the OP would give you a real rate of return of 3.3%.  Not amazing, but at least it is there, right? 

Unless of course you needed that money to live on in 35 or 40 years.  In that case you are screwed.  That annuity payment that was generous in 1977 won't buy shoelaces in 2017.  Inflation has turned it to dust.  You can buy inflation indexed annuities--but they cost substantially more money.  If you have substantially more money to start off with...well, then you are less likely to run out and therefore have less need of an annuity's protections. 

uwp had an interesting observation that I hadn't thought of, namely annuities can actually provide you with a higher standard of living....as long as you are willing to die early.  That's a fair point. The benefits of dying as soon as possible aren't normally a selling point from annuity salesman for some reason.   




Interest Compound

  • Pencil Stache
  • ****
  • Posts: 637
Re: Why you should never buy an annuity!
« Reply #77 on: August 31, 2017, 11:30:18 PM »
Whenever I have a question like this, I like to use the Present Value function on an Excel Spreadsheet.
For example, I would want to compare how the 28500 times five years would have grown by age 60 and then what the 4% safe withdrawal rate would be at that point versus the guaranteed payout of the present value of $2400 times five would be worth.

Right.  So I get that to get $12K a year, I need $300000. 

Right now I can buy that $12K a year stream (starting in 14 years) for 142500.  It looks like 142500 turns into approximately 300k with a 5.4% rate of return.

So I guess the question is whether a guaranteed 5.4% rate of return makes sense for a portion of the portfolio to generate some guaranteed income?

The additional factor here is that my wife's retirement comp is based on her highest 3 years of salary.  In the unlikely event she could bump her salary up from its current rate between now and age 60, the income stream would also increase (i.e. in the extreme, if she doubled her state salary, she'd also double her retirement, and the 12k a year would turn into 24k a year for the same 142500 investment).  Realistically she's close to being topped out, but cola and step increases should bump her salary by 2-3% per year between now and retirement too.

Don't forget, when comparing against the 4% rule, that the 4% rule is fully inflation adjusted, and you get to control it. They mentioned the benefit is subject to cola increases after year 3, but are those increases fully inflation adjusted?

If inflation goes up 10% one year, will the benefit increase payouts by 10%?
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.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 637
Re: Why you should never buy an annuity!
« Reply #78 on: August 31, 2017, 11:58:32 PM »
Don't be fooled.


**Compounded real rate of return pretax, assuming 6% nominal payout and 2% inflation
  5 years: -31.2%
10 years: -9.9%
20 years:   0.0%
30 years: +2.4%
40 years: +3.3%
50 years: +3.6%


higher inflation of course makes these returns even worse!

Great post! I did the math and compared this to a 60 year old using a Variable Percentage Withdrawal:



Thanks very much for this post, I never thought a SPIA was really this bad!
« Last Edit: September 01, 2017, 12:02:30 AM by Interest Compound »
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.

Dicey

  • Walrus Stache
  • *******
  • Posts: 6276
  • Age: 59
  • Location: NorCal
Re: Why you should never buy an annuity!
« Reply #79 on: September 01, 2017, 12:05:45 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?

Well, I'm not OP of this tread....and....it's important to always look at both/all sides of a topic?

We're not exactly talking about a horrible product like a payday loan with a 500% interest rate or a mobile home loan. We're talking about an insurance product (although you might call it horrible...I probably would too...) that serves a purpose, and some folks see value in that. Nobody credible in this thread is advocating for an annuity as a primary investment vehicle, only that it serves its purpose as a risk management tool in certain situations.
I see your point, but it seemed that intellectsucks was actually shilling them here, to which I politely suggest he's in front of the wrong audience. If you're saying the intellectsucks is not credible, you might know something I don't. Mine was just a feeling from reading their posts multiple times.

As for importance of knowing both sides, I completely agree with you. But annuities are like Whole Life Insurance, which we excoriate routinely in favor of Term Life Insurance. One's mustachian and one's not, which is pretty black and white, IMO.

ETA: as Mr Mark just tactfully pointed out, it was not hIm, but intellectsucks who seemed to be the annuity cheerleader, (and patchyfacialhair to a lesser degree). I have edited this post to correct my errors. I apologize to Mr Mark for my blunder. Mea culpa.

I know I'm being a bit blustery on this topic, but for the most part, annuities are insanely inefficient, therefore, completely anti-mustachian. For anyone who doesn't know this, the great MMM doesn't even carry Homeowner's Insurance! Annuities? Are you kidding? #Getouttahere!
« Last Edit: September 01, 2017, 05:32:29 AM by Dicey »
I did it! I have a journal!
A Lot Like This
And hell yes, I am still moving confidently in the direction of my dreams...

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1044
  • Location: Detroit, MI
  • Achieved Financial Independence summer 2014. RE'18
Re: Why you should never buy an annuity!
« Reply #80 on: September 01, 2017, 02:56:44 AM »
Dicey I think you're confusing me (actual OP) with a commenter. I think (and demonstrate with the math) that annuities are a really really bad return and 99.999% of mustachians should avoid.

I have not seen any real evidence to the contrary on this thread, just vague opinions about how supposedly "for some people it can sometimes be ok and is still suboptimal "

They seem to be either people who have bought an annuity (and are trying to justify their error) or perhaps people who sell them.
Mr. Mark

Dicey

  • Walrus Stache
  • *******
  • Posts: 6276
  • Age: 59
  • Location: NorCal
Re: Why you should never buy an annuity!
« Reply #81 on: September 01, 2017, 05:35:06 AM »
Thanks, Mr. Mark. ^Fixed it^
I did it! I have a journal!
A Lot Like This
And hell yes, I am still moving confidently in the direction of my dreams...

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 1337
  • Age: 52
  • Location: Ann Arbor, Michigan
Re: Why you should never buy an annuity!
« Reply #82 on: September 01, 2017, 07:57:05 AM »
Thank you for that math Compound Interest.

SnackDog

  • Pencil Stache
  • ****
  • Posts: 986
  • Location: Latin America
Re: Why you should never buy an annuity!
« Reply #83 on: September 01, 2017, 09:22:56 AM »
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).

Basically, you will have more money to spend every year with an annuity then you would with SWR but nothing in your investment account when you die.  The overall financial picture including your investment account does not favor the annuity however your actual cash flow will be higher with the annuity.  In 90% of market scenarios you will die with a fortune if you don't annuitize, but that does you no good on an annual withdrawal (unless you want to reset to 4% starting point each time your account balance rises enough to make that higher than the current inflation-adjusted WR, but that's another topic).

But you don't have to choose either/or - you can have the best of both worlds.  If you have $5MM at age 70, buy a $1MM annuity to cover you base living costs ($77,000/yr) and invest $4MM and withdraw 4% SWR.  This is what many people with the option to do both are looking at these days (e.g. doctors, airline pilots, etc).  I am certainly not in the business of selling them but I will consider them when the time comes.
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

Al1961

  • Stubble
  • **
  • Posts: 229
  • Age: 56
  • Location: Alberta - B.C.
  • Dad of a husky Husky
Re: Why you should never buy an annuity!
« Reply #84 on: September 01, 2017, 10:17:12 AM »
I keep seeing comments about comparing annuities to OTHER investment vehicles. I don't think an annuity is an investment. It's an insurance contract, a completely different product class to market investments.

Up until a few years ago, if you had a locked in RRSP (or similar plan), you were legally required to purchase an annuity as the only vehicle to withdraw funds. The reasoning was that locked in RRSPs were funded only through lump sum withdrawals from pension plans. The annuity requirement was to provide individuals with a replacement income stream for the pension given up.

You can now roll the funds into a Life Income Fund, purchase whatever investments you want, and take prescribed required minimum withdrawals (there is also a maximum permitted withdrawal).

----------

The "return" on an annuity has three components:
-principal
-interest
-mortality credits (if you live long enough)

When looking at term-certain annuities, there are no mortality credits, and it looks like the interest component of the return is about 2.8%. Not great, but better than most GICs currently offered in Canada.

For the extremely risk adverse, like my mother who only invests in GICs, you get your principal back, and a small nominal interest payment. If you die, your estate collects the balance of the annuity. Not great, but it will mostly preserve your wealth.

------------

So why would anyone purchase one? Certainly not for inflation protection, but:
-longevity insurance
-risk tolerance
-protection from poor financial decisions if severe cognitive decline occurs
-partial protection from elder abuse, which often manifests as financial abuse
-provide long-term income for people who cant manage money well/spendthrifts.

-------------

I'm getting up there in age, and did look into annuities a bit. Both joint life and term certain annuities. They are not attractive at the moment, but at age 70 or 75 I might, because:
-my wife has very limited interest in learning about, or managing, investments
-there is a history of dementia in my family
-with pension, CPP+OAS (both deferred to age 70) and a small annuity we would have a very generous income. And still have a good stash. That means NO 4% WR worries, not that there is any reason to worry now, but who knows how we'll think as we become aged.
FIREd July 2014

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1044
  • Location: Detroit, MI
  • Achieved Financial Independence summer 2014. RE'18
Re: Why you should never buy an annuity!
« Reply #85 on: September 01, 2017, 12:33:17 PM »
Thanks, Mr. Mark. ^Fixed it^

Thanks D!
X

I really hate to be accused of recommending annuities. ;-)
Mr. Mark

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: Why you should never buy an annuity!
« Reply #86 on: September 01, 2017, 02:44:10 PM »

Yeah, not a false equivalency. Our lack of knowledge about the future is the whole point of insurance/annuities. If I knew my house would never catch on fire or have a disaster, I could drop insurance on it now. Same with health insurance, etc. Or I could buy it the day before I know disaster will strike. Insurance/annuities allow you to protect against disaster in exchange for a premium. In the case of retirement funding, the "disaster" scenario of course is outliving your money, which is a very real possibility. An annuity protects against that.

Does it really?  Let's say you are one of the happy few who lives long enough to see a positive return on an annuity.  Let's say you receive returns for 40 years, which as per the OP would give you a real rate of return of 3.3%.  Not amazing, but at least it is there, right? 

Unless of course you needed that money to live on in 35 or 40 years.  In that case you are screwed.  That annuity payment that was generous in 1977 won't buy shoelaces in 2017.  Inflation has turned it to dust.  You can buy inflation indexed annuities--but they cost substantially more money.  If you have substantially more money to start off with...well, then you are less likely to run out and therefore have less need of an annuity's protections. 

Yes it does, provided you purchase enough "insurance." Again, it's like any other insurance:

Does collision or comprehensive insurance always provide full replacement value of your vehicle? Not likely, unless you pay enough for it.

Will you homeowner's insurance payout provide you enough to fully rebuild your home to its former glory with all the contents? Unlikely, unless you pay enough for it.

Will an annuity pay you enough to afford a fantastic standard of living for 50 years? Unlikely, unless you pay enough for it.

Yet none of these considerations mean insurance (or an annuity) is just a bad bet for everyone. Everyone keeps talking about the poor return on an annuity (which is true), but they are ignoring that there are also no guarantees that investment returns will be able to keep up with inflation. Hey, remember the 80's? Anyone live in Japan?

Or where's the assurance that everyone will be rock solid investors, keeping their money in the markets and lowering their standard of living substantially if, say, the stock market has a 40-50% downturn that lasts for 5-10 years or more? It seems some are discounting the possibility of some really, really bad and extended down periods for the stock market.

I don't have an annuity, but I am grateful for an inflation-adjusted pension and SS I will get. Those two things will give me enough guaranteed income to live comfortably forever, and therefore prevent me from getting worked up over market ups and downs. If I did not have those things, I would consider annuitizing a portion of my portfolio to cover basic living expenses so I wouldn't have to worry in my old age.
"Not all quotes on the internet are accurate" -- Abraham Lincoln

Mighty-Dollar

  • Stubble
  • **
  • Posts: 235
Re: Why you should never buy an annuity!
« Reply #87 on: September 02, 2017, 04:56:03 PM »
I keep seeing comments about comparing annuities to OTHER investment vehicles. I don't think an annuity is an investment. It's an insurance contract, a completely different product class to market investments.
Nonsense. An annuity is a place where you put your money to go to work for you -- just like any other investment. And you want the BEST option! Just because annuities are "classified" as insurance products is meaningless. It's comical to say "Annuities should never be compared to stocks and bonds". That's really a crafty attempt to eliminate the competition. Insurance salesmen use the deception all the time. Insurance salesman?

Al1961

  • Stubble
  • **
  • Posts: 229
  • Age: 56
  • Location: Alberta - B.C.
  • Dad of a husky Husky
Re: Why you should never buy an annuity!
« Reply #88 on: September 02, 2017, 07:34:41 PM »
I keep seeing comments about comparing annuities to OTHER investment vehicles. I don't think an annuity is an investment. It's an insurance contract, a completely different product class to market investments.
Nonsense. An annuity is a place where you put your money to go to work for you -- just like any other investment. And you want the BEST option! Just because annuities are "classified" as insurance products is meaningless. It's comical to say "Annuities should never be compared to stocks and bonds". That's really a crafty attempt to eliminate the competition. Insurance salesmen use the deception all the time. Insurance salesman?

Speaking of nonsense....
FIREd July 2014

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 #89 on: September 02, 2017, 09:49:43 PM »
I'll jump on the anti-annuity dogpile.

A simple immediate annuity is a bet against an insurance company. If they're good, you're not going to come out ahead. If they're bad, they could become insolvent.

Their sale is based on fear, and that bugs me.

Don't get me started on the indexed and deferred annuities.

DavidAnnArbor

  • Handlebar Stache
  • *****
  • Posts: 1337
  • Age: 52
  • Location: Ann Arbor, Michigan
Re: Why you should never buy an annuity!
« Reply #90 on: September 03, 2017, 10:54:33 AM »

A simple immediate annuity is a bet against an insurance company. If they're good, you're not going to come out ahead. If they're bad, they could become insolvent.


Presumably annuity holders with AIG were made whole with their policy when AIG was declared insolvent and saved by the federal government.
Not sure going forward if future bankruptcies will be saved by federal help.

Telecaster

  • Pencil Stache
  • ****
  • Posts: 902
Re: Why you should never buy an annuity!
« Reply #91 on: September 03, 2017, 01:18:50 PM »

A simple immediate annuity is a bet against an insurance company. If they're good, you're not going to come out ahead. If they're bad, they could become insolvent.


Presumably annuity holders with AIG were made whole with their policy when AIG was declared insolvent and saved by the federal government.
Not sure going forward if future bankruptcies will be saved by federal help.

Unlikely.  AIG was a special case.   Annuities are protected by state guaranty funds.  However, that is not a guaranty you will be made whole.  The payout will be subject to court order and the state legislature appropriating the funds.


Mighty-Dollar

  • Stubble
  • **
  • Posts: 235
Re: Why you should never buy an annuity!
« Reply #92 on: September 04, 2017, 04:35:31 PM »
A simple immediate annuity....

Their sale is based on fear, and that bugs me.
Immediate annuities are also sold based on lies like "if you live very long then you really make out like a bandit with an immediate annuity". The complete opposite is true. Immediate annuities are "longevity poverty" not "longevity protection".
And they use catch phrases like "income for life that you can never outlive". They always omit the operative word "ADEQUATE" income.
Your internal rate of return with SPIA's is no different than any other insurance product. You're gonna get between zero and 3% (in a best case scenario). Those are piddly returns. As always the insurance company wins.

Goldielocks

  • Magnum Stache
  • ******
  • Posts: 4805
  • Location: BC
Re: Why you should never buy an annuity!
« Reply #93 on: September 05, 2017, 12:17:30 AM »
A basic immediate annuity is where an insurance company agrees to pay you a fixed amount annually until death for an initial lumpsum payment.

At the moment, $1,000,000 will buy a 60 year old male about $60,000 (6%) per year for as long as you live. [For a 40 year old it would be about $48,000]

...
The problem is that a basic annuity is NOT an 'investment'. If you die, the payments stop and there is no return of capital. EG if you died after the first year you would have lost $940,000. This has terrible implications for the effective rate of return (and for any heirs you might have had). At 6% it takes almost 17 years of payments before you even get your original $1 million back.

....

Don't be fooled.


**Compounded real rate of return pretax, assuming 6% nominal payout and 2% inflation
  5 years: -31.2%
10 years: -9.9%
20 years:   0.0%
30 years: +2.4%
40 years: +3.3%
50 years: +3.6%



OP is correct that these are poor returns.  Most annuities sold have a guaranteed return of prinicipal (minus penalty) if you die within a short time frame, but that is minor compared to the returns.

 However the problem annuities solve is this... "My biggest problem is the chance that I will run out of money if I live longer than 85years old"...   It is not a problem that they need to earn more interest, it is mitigating the risk of running out of money.   $1 Million in savings spent at $60k per year only lasts 17 years, after all.  (Put into savings or gov't bonds because the risk of any loss is too high for the person, as the person ages it may be harder to make good investment decisions, etc.)

 Insurance programs like annuities are the answer to this specific risk.  Insurance company takes the risk that you will live longer, in exchange for a fee in the form of low real rate of return and the chance you may die earlier.  Yes, they cost a fair amount for that guarantee, but it is the only "guarantee" in town.

This is a problem for people without SS, or who have poor spending habits with their own money, a disability that prevents them from self-directed investing, or just plain not a huge amount of money, and no home asset.

NOTE -- as this specific problem is resolved once a person has SS or another asset to guarantee $24k per year of income, the amount to invest in an annuity by a 60 year old is actually < $400k, to get a basic living guaranteed income.

Goldielocks

  • Magnum Stache
  • ******
  • Posts: 4805
  • Location: BC
Re: Why you should never buy an annuity!
« Reply #94 on: September 05, 2017, 12:26:02 AM »
Here's the problem with immediate annuities... They leave you in poverty later in life! You get teased with an initial high rate of return that eventually gets surpassed by a very low risk mix of bond and stock index funds.

.....
And once you reach your life expectancy your heirs will get nothing!
And you lose your liquidity with these products. There's million reasons why you might need to get your money back.

The annuity that the OP indicated, was a fixed annuity, with a set monthly payout... very different from your first point about rates decreasing... although the OP wasn't in favor of that type either.

The second two points are very true.. again, an annuity is actually buying insurance, not an investment, and while many contracts will have a partial payout in the early years, that is just a bonus to remove doubts to increase sales, and not the original reason why they were created.   
Losing one's liquidity is exactly why some people with bad spending habits should buy them, or MMM kids should encourage their anti -MMM parents to buy them.

Third -- may I point out that once you are DEAD, you no longer care about the horrible returns and losing money, if you die early.  You will not know.  Your kids should not have planned on an inheritance and should be glad you did not move in with them as your backup plan.

uwp

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Why you should never buy an annuity!
« Reply #95 on: September 05, 2017, 02:17:28 PM »

The benefits of dying as soon as possible aren't normally a selling point from annuity salesman for some reason.   

Serious question, who is happier with their investment choice: the dead 80 y/o who spent $77,000 the last 10 years, or the dead 80 y/o who spent $45,000?

trick question, they're both dead.

Some people are trying to leave a big inheritance, some people are trying to retire as early as possible, and some people are trying (or need) to spend as much as they can without running out.


Rubic

  • Pencil Stache
  • ****
  • Posts: 845
Re: Why you should never buy an annuity!
« Reply #96 on: September 05, 2017, 02:37:15 PM »
I'm not a fan of annuities for most situations, but here's an interesting article
by Darrow Kirkpatrick:

http://www.caniretireyet.com/annuity-shopping-time-buy-deferred-income-annuity/

Mighty-Dollar

  • Stubble
  • **
  • Posts: 235
Re: Why you should never buy an annuity!
« Reply #97 on: September 05, 2017, 04:08:56 PM »
The annuity that the OP indicated, was a fixed annuity, with a set monthly payout... very different from your first point about rates decreasing... although the OP wasn't in favor of that type either.

The second two points are very true.. again, an annuity is actually buying insurance, not an investment, and while many contracts will have a partial payout in the early years, that is just a bonus to remove doubts to increase sales, and not the original reason why they were created.   
Losing one's liquidity is exactly why some people with bad spending habits should buy them, or MMM kids should encourage their anti -MMM parents to buy them.

Third -- may I point out that once you are DEAD, you no longer care about the horrible returns and losing money, if you die early.  You will not know.  Your kids should not have planned on an inheritance and should be glad you did not move in with them as your backup plan.
A fixed annuity will leave annuitants in poverty. It's that simple. A much much much better choice is a low risk mix of bond and stock index funds. You will do much much much better -- not you the insurance salesman, but the investor.
Second, IT DOESN'T MATTER if an annuity is categorized as "insurance product". An annuity is a place where you put your money to work, and you want the best return for what is typically the low desired level of risk if that is indeed what they need. Any time your money is put to work in an instrument that has a guarantee, you will get inferior returns. People who have bad spending habits simply need education about the spending rules (ala the 4% / 30 year rule. Insurance salesmen NEVER educate investors on this. That's the problem.
Your third point is comical but typical of you insurance salesmen. Just screw over your heirs and give that money to an insurance company. No thanks.
« Last Edit: September 05, 2017, 04:10:51 PM by Mighty-Dollar »

uwp

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Why you should never buy an annuity!
« Reply #98 on: September 05, 2017, 04:55:33 PM »
People who have bad spending habits simply need education about the spending rules (ala the 4% / 30 year rule. Insurance salesmen NEVER educate investors on this. That's the problem.
Your third point is comical but typical of you insurance salesmen. Just screw over your heirs and give that money to an insurance company. No thanks.

It can be difficult for someone in their 70s to just throttle down spending, a lot of their costs are fixed.  And often they can't just go back to work.
And many people that old may not have heirs (or a desire to leave money to ones they did have).

Folks in this thread are having a real hard problem putting themselves in a different mindset from FIRE with 4% withdrawal for life.

Telecaster

  • Pencil Stache
  • ****
  • Posts: 902
Re: Why you should never buy an annuity!
« Reply #99 on: September 05, 2017, 05:16:09 PM »
I'm not a fan of annuities for most situations, but here's an interesting article
by Darrow Kirkpatrick:

http://www.caniretireyet.com/annuity-shopping-time-buy-deferred-income-annuity/

Worth a read.  I thought this part was interesting:

Quote
There is no inflation adjustment in the deferral interim. The representative was not aware of any products that offer full inflation protection. In other words, in our case where we might be waiting 25 years for the income to begin, just what that first year’s paycheck would be worth in today’s dollars is a total gamble. The amount would adjust for inflation once the income began, but the starting point, and therefore the ultimate value of the annuity, would be an unknown.

The suggested solution: You must bring more money to table if you want inflation protection in the interim. For example, in our case, if inflation held at its approximate historical value of 3% for 25 years, we’d need to invest almost exactly twice the amount of money, to preserve purchasing in today’s dollars. But it would still be a gamble. That amount might be too much, or too little, to match today’s purchasing power...

...If I buy a product now in nominal dollars, without inflation guarantees, its value in 25 years is almost a complete crapshoot. Without inflation adjustment over multi-decade time spans, you really have no idea what you’re getting!

A bit of fresh air there.  He's at least considering inflation when examining the annuity.  For some reason, people who are pro-annuity almost never take inflation into account.   If he wanted to be a bit more conservative, he could use a higher inflation rate, say 4.5%.  In that case, he'd need triple the amount of money.   Ratched that up to 5.5% and you'd need close to quadruple your starting amount.   To put it another way, if the annuity isn't adjusted for inflation, your "guaranteed income"  will very likely be half and could be 75% less in real terms than what it was at the beginning of the period.   Is that too conservative?  Well, there have been 25 year periods when inflation has exceeded that amount.   If you were depending on an annuity to guarantee your future income, you very well could be eating Alpo and working as a greeter at Wal-Mart. 

But you don't run out of money.  You just run out of enough money.