Author Topic: What's an Annuity?  (Read 7035 times)

fields

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What's an Annuity?
« on: February 09, 2015, 12:51:33 PM »
My SO has two annuities with MetLife.  They are 403b accounts.  She has about $30000 in them.  I don't really understand what they are.  She contributes to them through her paycheck and chooses allocations.  How is it different from my 457 plan? 

I told her I'd read that annuities are not good investment vehicles and so maybe she should take out the money and move it somewhere else, but she said she doesn't think she can do that. 

We went online and looked at her accounts but couldn't find any information about withdrawing the money or what the fees are. 

I don't know whether she should just keep contributing to these accounts or not.  Any information or experience with annuities anyone can offer would be appreciated.

terran

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Re: What's an Annuity?
« Reply #1 on: February 09, 2015, 12:57:31 PM »
403b's and 457s (and 401k's) are types of retirement accounts that can hold various types of investments depending on what is allowed by the plan.

Annuities are types of investments (I've also heard they're generally not very good). Here's some info: http://www.bogleheads.org/wiki/Fixed_annuity

fields

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Re: What's an Annuity?
« Reply #2 on: February 09, 2015, 01:04:35 PM »
Thank you, terran.  They are actually variable annuities, so I read about those.  Learned there is a 10% early withdrawal penalty.  Anyone know how to assess whether SO's particular annuities are good investments?

Earthling

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Re: What's an Annuity?
« Reply #3 on: February 09, 2015, 01:48:34 PM »
Thank you, terran.  They are actually variable annuities, so I read about those.  Learned there is a 10% early withdrawal penalty.  Anyone know how to assess whether SO's particular annuities are good investments?

That question is impossible to answer in the abstract. As to annuities (whether fixed or variable) generally, they provide a future income stream, nothing more, nothing less. They are neither inherently good nor bad. For some retirees, an annuity (alone or as part of a suite of non-annuity investments) may make perfect sense; for others, not so.

It is also impossible to answer your question without full visibility on SO's other retirement savings (if any) and other life status details.

Social Security is effectively an annuity, too. You receive fixed payments for the rest of your life, give or take a few details.

In an annuity, you are basically foregoing potential market gains, control of monies invested, and the ability to leave a pot of money for your children in return for a guaranteed stream of income payments until you die (or a shorter time as might be provided in the annuity contract). Some people want that; some people don't.
« Last Edit: February 09, 2015, 02:13:03 PM by Earthling »

Dodge

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Re: What's an Annuity?
« Reply #4 on: February 09, 2015, 03:01:14 PM »
Find out what other options she has in her 403b, along with their fees, and we can help determine what's the best choice from a financial perspective. Something tells me that MetLife annuity had ridiculous fees.

Eric

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Re: What's an Annuity?
« Reply #5 on: February 09, 2015, 04:07:50 PM »
Anyone know how to assess whether SO's particular annuities are good investments?

Here's my fail safe guide to determining whether an annuity is a good investment:

Question: Is it an annuity?
Answer: Yes
Result:  This is a bad investment


This is tongue in cheek, as annuities can be useful as Earthling pointed out above, but there are just so many of them that are riddled with fees that the ratio of good to bad annuities has to be like 1:100

MDM

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Re: What's an Annuity?
« Reply #6 on: February 09, 2015, 04:38:26 PM »
Thank you, terran.  They are actually variable annuities, so I read about those.  Learned there is a 10% early withdrawal penalty.  Anyone know how to assess whether SO's particular annuities are good investments?

Some generic reading:
http://forum.mrmoneymustache.com/investor-alley/mom%27s-money-in-variable-annuity-paying-4-15-do-i-leave-it-alone/
http://forum.mrmoneymustache.com/investor-alley/a-new-start-with-everest-wealth-management-qa-with-the-management/
http://forum.mrmoneymustache.com/investor-alley/equity-indexed-annuity/
http://forum.mrmoneymustache.com/investor-alley/mom%27s-retirement-from-variable-annuity-to-indexed-annuity/

For these particular annuities your really need the details.  Said details are often intentionally difficult to obtain from the documentation, but you'll need to dig.

NinetyFour

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Re: What's an Annuity?
« Reply #7 on: February 09, 2015, 05:06:02 PM »
My retirement funds are with TIAA.  When I decided to take advantage of the 403b plan my employer offers, I had to call TIAA and have a separate account set up for these contributions.  It is called a Variable Annuity.  However, I asked TIAA if this is really an annuity, and they said no.  They said that when I leave my employer, I can choose to have it annuitized if I want to.

You should call Met Life and get the details on your SO's 403b account.

sol

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Re: What's an Annuity?
« Reply #8 on: February 09, 2015, 05:33:02 PM »
Social Security is effectively an annuity, too.

That's the relevant explanation for most folks; it's just like social security.

It's a defined-benefit plan, like SS.  It's age based, like SS.  The details of the payout rate depend on the annuity terms, but basically it's just a privatized version of social security with voluntary contributions.  Also like SS, it's generally run by a life insurance group that is using average lifespans to determine how much they can pay out to all policy holders, which means they can shoot for a 50% success rate (and thus a much higher SWR) than any individual's private investments.

So on the one hand it's not really an investment, in the sense that you could sell it off and buy a fancy car with it.  On the other, it is an "guaranteed" stream of income in retirement and that is incredibly valuable for the majority of people who are incapable of planning for their own old age.  I put guaranteed in quotes because annuities are always subject to the risk that the issuer will default, not that it has ever happened in US history.

fields

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Re: What's an Annuity?
« Reply #9 on: February 09, 2015, 06:10:35 PM »
SO is 48 and has no other retirement savings, but is vested in a defined benefits state pension. She has debt of about $15000 on her car, no other debt, and no other assets. 

Sounds like we need to call MetLife and find out more. Any suggestions as to what specific questions we should ask?

MDM

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Re: What's an Annuity?
« Reply #10 on: February 09, 2015, 06:22:01 PM »
Any suggestions as to what specific questions we should ask?
Here are some:
- What has the account returned (interest rate net of all charges) for the past 5 (or pick a number) years?
- Can I change to a different investment with no fee?  If no, what is the fee and will that change based on the number of years the annuity is held?
- What other investment choices are there for this 403b?
- What index does the annuity use to calculate annual returns (many use the S&P 500 Price Index)?  Would you walk me through how the change in the index translates to the interest rate paid by the annuity?

For the last question, if you can program the calculation into Excel then you understand it - if not, then you don't.



fields

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Re: What's an Annuity?
« Reply #11 on: February 09, 2015, 06:25:19 PM »
Thank you, MDM, that's helpful.

pipercat

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Re: What's an Annuity?
« Reply #12 on: February 09, 2015, 06:27:31 PM »
Social Security is effectively an annuity, too.

That's the relevant explanation for most folks; it's just like social security.

It's a defined-benefit plan, like SS.  It's age based, like SS.  The details of the payout rate depend on the annuity terms, but basically it's just a privatized version of social security with voluntary contributions.  Also like SS, it's generally run by a life insurance group that is using average lifespans to determine how much they can pay out to all policy holders, which means they can shoot for a 50% success rate (and thus a much higher SWR) than any individual's private investments.

So on the one hand it's not really an investment, in the sense that you could sell it off and buy a fancy car with it.  On the other, it is an "guaranteed" stream of income in retirement and that is incredibly valuable for the majority of people who are incapable of planning for their own old age.  I put guaranteed in quotes because annuities are always subject to the risk that the issuer will default, not that it has ever happened in US history.
Thank you for this explanation.  I'm not as knowledgeable about investing as most of you, but I can understand this.  My mom has used annuities for years, and I've never quite understood them.

MDM

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Re: What's an Annuity?
« Reply #13 on: February 09, 2015, 06:52:08 PM »
Social Security is effectively an annuity, too.

That's the relevant explanation for most folks; it's just like social security.

It's a defined-benefit plan, like SS.  It's age based, like SS.  The details of the payout rate depend on the annuity terms, but basically it's just a privatized version of social security with voluntary contributions.  Also like SS, it's generally run by a life insurance group that is using average lifespans to determine how much they can pay out to all policy holders, which means they can shoot for a 50% success rate (and thus a much higher SWR) than any individual's private investments.

So on the one hand it's not really an investment, in the sense that you could sell it off and buy a fancy car with it.  On the other, it is an "guaranteed" stream of income in retirement and that is incredibly valuable for the majority of people who are incapable of planning for their own old age.  I put guaranteed in quotes because annuities are always subject to the risk that the issuer will default, not that it has ever happened in US history.
There is one form of annuity, the Single Premium Immediate Annuity, that might be good.

See http://www.obliviousinvestor.com/single-premium-immediate-annuity/ and http://whitecoatinvestor.com/spia-the-good-annuity/.

For all others, see http://www.finra.org/investors/protectyourself/investoralerts/annuitiesandinsurance/p010614Caveat emptor.


PEIslander

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Re: What's an Annuity?
« Reply #14 on: February 09, 2015, 07:31:49 PM »
Another way to look at annuities is to consider lottery winnings. Let's make up some numbers... You know how a lottery might offer the winner $1m per year or, say, a one-time cash settlement of $10m? In effect, if you chose the $1m/year option the lottery company would buy an annuity for $10m that would pay out the $1m/year. The lottery company is just as happy to give you the $10m as that's all the prize is really worth to them.

Similarly, the OP's wife 'account' has a current cash value of $30k and when she retires that account becomes an annuity that pays a steady paycheck. As Sol noted the insurance company sponsor of the annuity will determine what amount will be contractually be paid out. In effect your wife will be on the side of hoping she lives forever while the insurance company kind-a hopes she doesn't (Note the situation is the reverse of life insurance). The insurance companies are very good at making what they believe to be a safe bet -- one that is most likely profitable for them. If you were going out to buy an annuity tomorrow you'd find the market is a competitive one. Different insurance companies will offer slightly different payouts to compete for your business (just like how mortgage lenders will compete for your business). I imagine the 403b versions of annuities lack that competitiveness. MetLife in this example has the OP and her coworkers locked in so it doesn't need to be as competitive as the open market is. They likely make more profit on these 403b annuities.

As some others have said, annuities can be a practical option. If you think you are going to live a long time they could be worthwhile. On the other hand you could buy an expensive annuity tomorrow and then die after the first monthly paycheck. That would suck! Assuming there is no life insurance features bundled into it, your estate would get nothing.

Annuities are fairly commonly sold to people who get big insurance settlements. The insurance agent who helps with the settlement is more than happy to help with financial products like annuities. As has been noted, annuities can be sold to trade those future paychecks for a lump sum. You may have seen commercials on TV where happy people turned their monthly settlements into big cash payouts so they can now live the good life. You can bet those buyers are making even more money than the original insurance company! In our lottery example, say you took the yearly $1m option but soon regretted that choice. You see the commercial and call the 1-800 number. You sign over the settlement to them and they pay you say $5m. They feature your happy testimonial on their next commercial...

johnstein

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Re: What's an Annuity?
« Reply #15 on: February 10, 2015, 10:28:08 AM »
I read many publications stating that annuity protects you from creditors.  So if you have some cash, but not enough to make setting up a trust viable, annuity may be a good option to protect your assets.


sol

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Re: What's an Annuity?
« Reply #16 on: February 10, 2015, 02:31:39 PM »
I think this is a common misconception.  There was a link posted here recently that explained why annuities and trusts are no longer the effective asset shields that they used to be. 

Basically everything that is attached to your estate is now vulnerable to creditors, so if you really want to protect something you have to give it away.  It's all very Zen.

fields

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Re: What's an Annuity?
« Reply #17 on: February 10, 2015, 02:41:49 PM »
Sol, that made me laugh!  Thank you!

Just how worried should I be that assets are vulnerable to the company's creditors?

MDM

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Re: What's an Annuity?
« Reply #18 on: February 10, 2015, 02:57:15 PM »
Just how worried should I be that assets are vulnerable to the company's creditors?
Depends on the specific company.  In general, it's probably fair to bracket it by:
- less worried than you should be about the terms and performance of the annuity itself, even assuming the company remains strong.
- more worried than you should be about an asteroid destroying life on Earth before the annuity runs out.