Author Topic: Annuities  (Read 5014 times)

deborah

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Annuities
« on: June 01, 2014, 03:38:02 AM »
I feel really dumb asking this question, but I can't find the answer - and I'm sure it exists somewhere. What kinds of annuities are there, and which of them are recommended?

I thought there was only one type, but a current thread has convinced me that there are many. The more I look, the more confused I am getting (especially as everyone keeps on using acronyms).

Roots&Wings

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Re: Annuities
« Reply #1 on: June 01, 2014, 07:41:19 AM »
Have you checked out Bogleheads Annuities? http://www.bogleheads.org/wiki/Category:Annuities

Types of Annuities
- Deferred annuities are used to accumulate assets. Funds will grow at a rate that can be either fixed or variable.
- Fixed annuity: The money you put in a fixed annuity earns interest at a rate that is guaranteed for a specific period of time—ranging from one to five years or more, depending on the terms of the contract. When that period ends, a new rate may take effect—or the old rate may be offered again.
- Variable annuity: With a variable annuity, your money is put in subaccount investments that are similar to stock and bond funds. The return on your investments is subject to the risk of market fluctuation. Your total account value depends on how much risk you take, the performance of the subaccounts, and what charges and fees are deducted.
- Immediate (Income) annuities are used to convert a lump sum into an income stream (regular payments), typically for the life of the annuitant. If the income stream is fixed, it is considered a fixed immediate annuity; also known as a Single Premium Immediate Annuity (SPIA). Some fixed immediate annuities are offered with inflation-adjusted payments or graded payments that rise at a fixed rate, of for example, 3% annually. However, these options reduce the initial payment received but with the anticipation that payments will grow steadily over time. If the income stream is variable, it is considered a variable immediate annuity. Like deferred variable annuities, your money is put into subaccounts. These subaccounts can be invested in stock or bond funds. Payments will fluctuate based on the underlying subaccounts. With funds invested in stocks, it is possible that payments could grow at a rate higher than can be achieved by fixed immediate annuities.
- Equity-indexed annuity also referred to as a fixed indexed annuity, is a type of fixed annuity where earnings accumulate at a rate based on a formula linked in part to a published equity-based index, such as the Standard & Poor’s 500 Composite Stock Price IndexTM (S&P 500). An indexed annuity provides a guarantee of a minimum accumulation value, and may also offer death benefit protection and a variety of payout options. The index used, the formula that determines the indexed rate and the guaranteed minimum value, can vary from insurer to insurer.


I am no expert, but the annuity contract details and your goals will likely influence whether a given annuity product might be recommended or a good fit since each type has pros and cons.  A friend of mine (who is older and retired) has a variable annuity with Fidelity as part of overall retirement/investment strategy with various riders for living benefit, guaranteed income base, step-up and lock-in of the guaranteed income base and no requirement to annuitize...not something I've had a chance to explore fully yet though.

Annuities have always seemed inordinately complex to me (and prone to predatory tactics by insurance salespeople).  But, I recently read Erin Botsford's book "The Big Retirement Risk" and the annuity chapter was the first time I found annuities presented in an understandable way as part of a possible retirement income strategy, and perhaps worth considering further down the road.
« Last Edit: June 01, 2014, 08:09:22 AM by step-in-time »

deborah

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Re: Annuities
« Reply #2 on: June 01, 2014, 01:51:53 PM »
Thanks for that.

I followed some links for an article Nords wrote yesterday, and did some googling, and that link was one of two that I couldn't get to. Unfortunately the others were very confusing. Nords seemed to be saying that the only one two worth looking into were the Single Premium Immediate Annuity and a deferred annuity of the same sort.

Part of my problems with annuities are that they are very uncommon here in Australia. A few years ago (before I was interested in finance) annuities were very common, and there were tax and aged pension benefits in having them. Then the benefits changed, and other sorts of products (of the defined contribution type) were much more beneficial.

However, I am beginning to think that an annuity would be useful to me in two (separate) circumstances:

1. I would like to be absolutely sure of receiving $10,000 of income each year.

2. Decent care for elderly people seems to be a financial goldmine. For instance, my parents are looking into aged care villages, because they are finding it difficult to manage in their home - and all the places they are interested in (which are pretty average places - not the new "lifestyle centres" that are springing up) take just under half the value of your place when you leave (places are typically $400,000) - and you have been paying fees all the time you are there. Of course, you are leaving to go to a nursing home, which takes a lot more money. A deferred annuity may be a good idea to cover the exorbitant fees.

Unlike the US our government aged pension is only available to people who "need" it.

Nords

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Re: Annuities
« Reply #3 on: June 01, 2014, 03:10:33 PM »
Thanks for that.

I followed some links for an article Nords wrote yesterday, and did some googling, and that link was one of two that I couldn't get to. Unfortunately the others were very confusing. Nords seemed to be saying that the only one two worth looking into were the Single Premium Immediate Annuity and a deferred annuity of the same sort.

Part of my problems with annuities are that they are very uncommon here in Australia. A few years ago (before I was interested in finance) annuities were very common, and there were tax and aged pension benefits in having them. Then the benefits changed, and other sorts of products (of the defined contribution type) were much more beneficial.

However, I am beginning to think that an annuity would be useful to me in two (separate) circumstances:

1. I would like to be absolutely sure of receiving $10,000 of income each year.

2. Decent care for elderly people seems to be a financial goldmine. For instance, my parents are looking into aged care villages, because they are finding it difficult to manage in their home - and all the places they are interested in (which are pretty average places - not the new "lifestyle centres" that are springing up) take just under half the value of your place when you leave (places are typically $400,000) - and you have been paying fees all the time you are there. Of course, you are leaving to go to a nursing home, which takes a lot more money. A deferred annuity may be a good idea to cover the exorbitant fees.
Yes, SPIAs and deferred annuities.  The numerous other annuity products tend to be expensive while lacking in value.
For those who haven't seen the other annuity thread:
http://forum.mrmoneymustache.com/investor-alley/equity-indexed-annuity/msg304812/?topicseen#msg304812

Keep in mind that you're paying for longevity insurance, not an investment.  You can probably invest your own money for better results than an annuity, but if you want to be "absolutely sure" then you're better off with an annuity. 

I'm clueless on annuities in Australia, and your best bet might be a visit to a fee-only financial advisor.  However here's a link to Mike Piper's straightforward explanation of the how & why of SPIAs:
http://www.obliviousinvestor.com/single-premium-immediate-annuity/

Mighty-Dollar

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Re: Annuities
« Reply #4 on: February 18, 2015, 03:32:42 PM »
Quote
I would like to be absolutely sure of receiving $10,000 of income each year.
Just keep in mind that those guaranteed income payment come at a price. Never confuse interest payment rate with return on investment. Your ROI with a SPIA or other "guaranteed income" annuity will be much LESS than that annual payment rate. Also pay attention to what beneficiaries get (usually no more than the original principal amount, making your ROI  zero!). Also we have the effects of inflation. If you live to be perhaps 90 or older then those payments become the equivalent of getting less than 3%. Then all of a sudden you realize that living off of the recommended 4% while retaining your principal and letting it grow wasn't such a bad idea after all.

wildcatpt

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Re: Annuities
« Reply #5 on: February 19, 2015, 03:04:06 PM »
Suzeorman has a good easy to understand article called the Truth about annuties and the Motley fool has one called annuity fees and expenses.  The retirement refuge page that someone on here linked me to has some good videos on the subject. I feel like I really got taken advantage of because I didn't do my homework and trusted someone else. One of the downsides is how complicated they are and another is the tax  implications taxed as ordinary income when you go to sell.  I'm sorry kids you will have to pay a bunch of taxes. I have been eating a lot of Tums's lately. Once again do lots of homework and good luck.

MDM

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Re: Annuities
« Reply #6 on: February 19, 2015, 03:50:39 PM »
A couple more threads - some overlap, some new, to what has already been posted here:
http://forum.mrmoneymustache.com/investor-alley/i-think-i-did-a-real-bad-thing/
http://forum.mrmoneymustache.com/ask-a-mustachian/what%27s-an-annuity/

The short version is what Nords has already said: most are bad for you, with the possible exceptions of SPIAs and deferred annuites.

Most if not all of the above is from a USA perspective.  Based on threads such as http://forum.mrmoneymustache.com/investor-alley/i-dun-goofed/, however, chicanery in retirement investments exists worldwide....


ltruitt

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What is an annuity?
« Reply #7 on: February 02, 2017, 02:51:35 PM »
An annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and in return obtain regular disbursements beginning either immediately or at some point in the future. The whole point of annuities is to provide a steady stream of income during retirement.

There are 5 popular types of annuities:
-Fixed Annuities: are insurance products that are guaranteed to return both the principal you invest plus a fixed rate of interest. Similar to a CD, except a fixed annuity grows tax-deferred. They are considered to be one of the safest investment vehicles.
-Variable Annuities: is a contract sold by an insurance company. The contract provides the holder with future payments based on the performance of the contract's underlying securities. The insurer guarantees a minimum payment, but the rate of return on the underlying securities may vary.
-Indexed Annuities:is a financial product that individuals can use as an investment in their retirement portfolio. Typically, annuities are purchased from insurance companies in one lump sum payment or through series of contributions. Sold as a contract, the money grows over a period of time regardless to how individuals purchase an annuity.
-Immediate Annuities: is an annuity that is purchased with a single lump-sum payment and in exchange, pays a guaranteed income that starts almost immediately.
-Hybrid Annuities: the newer evolution in the annuity product word. They combine fixed and variable annuity components.

If you want to learn more on what an annuity is, [MOD EDIT: Spam link removed.]
« Last Edit: March 07, 2017, 11:50:38 AM by arebelspy »

happy

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Re: Annuities
« Reply #8 on: February 02, 2017, 03:09:37 PM »
Hi Deb,
I've only done a little investigating on Aussie annuities - I abandoned my research since I decided they were too expensive for me. We seem to have a few types available http://www.challenger.com.au/annuities/Types.asp?cid=sem_google&gclid=Cj0KEQiAzsvEBRDEluzk96e4rqABEiQAezEOoClsqV4WHMpvNe1S2bLH3KRnvBOrIDdmrDQKwmysheIaAr9-8P8HAQ.  I know nothing about this company, just that they come up first in my google search and I found out costs/types pretty quickly from their website.

I decided that for me  at this point in my retirement planning I wasn't willing to pay the cost, but will reconsider if things go well and I have excess.  In your situation I think its a good way to add diversification and certainty to your income streams.

deborah

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Re: Annuities
« Reply #9 on: February 02, 2017, 03:52:23 PM »
Yes, Challenger is one of only two companies that sell annuities here. They do appear to be a reasonable proposition when you are in your 70s as they pay out a fair bit at that stage.

Interest Compound

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Re: Annuities
« Reply #10 on: February 02, 2017, 03:58:15 PM »
Note, the original post is from mid 2014.

That said, SPIAs (I like to call them "A pension you can buy on the open market") are the only annuity worth anything, and depending on your circumstances, it isn't worth much.

Here are two calculators that help show you the general math:

https://www.immediateannuities.com/
https://gie.fidelity.com/estimator/gie/gielanding (this one includes a 2% yearly adjustment for inflation)

You'll find the payments are generally equivalent to a 3% withdrawal on a typical portfolio. 3% is low enough that it never would've failed in history had you decided to simply withdrawal 3% instead of purchase an SPIA.

SPIAs typically become worth it, only after earning some "mortality credits". These credits can only be earned the hard way, by aging. If you're 70 you'll get a much better deal on an SPIA than if you're 30. And this makes sense. You're more likely to die soon, so the company probably won't have to give you as many payments.

In general, SPIAs are very susceptible to inflation, and don't make sense for anyone intending to retire early.