^
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.
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.
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.
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).
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).
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.
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.
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.