Author Topic: Annuities  (Read 5811 times)

rayt168

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Annuities
« on: October 27, 2015, 04:25:15 PM »
Hello. I am somewhat interested in annuities.  I was familiar with the concept of annuities beforehand.  I read a couple of articles online and realized that there are various flavors.  However, before I dig even more, I thought it would be a good idea to ask fellow forum members their opinions of annuities. 

Likes or dislikes?

Is it something worth looking into?

I am 52 years old looking at FIRE in a couple more years.  Thank you for your input.
 

Frankies Girl

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Re: Annuities
« Reply #1 on: October 27, 2015, 05:15:30 PM »
Dislike intensely. My experience: It's pushed heavily in the teaching community as the "best" option for their retirement money (at least when my mother was a teacher, annuities and insurance-wrappered investing was pretty much all they wanted to discuss with her and her coworkers). Thing is, most annuities are full of fees and loads, locks in money for specific lengths of time in many cases with different earning payouts the longer you refrain from touching as "incentives" to let the companies play longer with their money, and does not perform well at all compared to something simple like index investing (and poorly when compared adding in the fee structure). And most always is sold by insurance companies (which is a big red flag right there; insurance and investing should not be combined).

My mother has a plain fixed annuity (thank goodness) in her IRA and she likes it, and if she was living really close to the edge, it would have been an okay move.  But it doesn't work as well as if she'd just invested in a simple index fund (or hell, even an actively managed fund that didn't have loads) and she would have way more control over her money. And the big thing - she didn't need the security of a fixed annuity, since she has a super pension and even gets SS as an ex-spouse that is so generous that for her lifetime she'll be making more money than when she was working (!), so she locked up her "old age" money for no reason really. She's lucky in that this particular annuity setup was so much in her favor, and the fact is they don't even offer it any more (they discontinued this annuity plan while she was still working!)

The only reason I could see for having an annuity would be A) for someone that really didn't understand investing and needed a set guaranteed income they would not have to think about; or B) Having very little money overall and needing to make sure that what they do have is protected and doled out carefully.

My 2 anyway.

« Last Edit: October 27, 2015, 05:28:52 PM by Frankies Girl »

DaveR

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Re: Annuities
« Reply #2 on: October 27, 2015, 05:19:05 PM »
Dislike.

In a nutshell, you are transferring risk to the insurance company. You're betting you win the statistical game and live longer than expected. The insurance company has some actuaries and pooled assets betting against you...and they don't play zero margin games.

There are a couple of tax advantages, so really the only time it ever makes any sense to consider one is a variable annuity if you have a large lump sum that you can't tax shelter in other ways. And even then, you probably just aren't being creative in your tax strategy.

I say steer clear, but certainly read up on them enough to understand why they say "you don't buy an annuity, you are sold one." Sales guys like their commissions....

Telecaster

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Re: Annuities
« Reply #3 on: October 27, 2015, 05:20:22 PM »
Dislike.

The only time they really make sense is for people who don't need an annuity.   

Interest Compound

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Re: Annuities
« Reply #4 on: October 27, 2015, 05:52:56 PM »
Like/Dislike depending on the situation.

An SPIA (Single Premium Immediate Annuity) is very simple, you pay X, and you receive Y a month for the rest of your life. That's it. Think of it as buying a pension on the open market. Once it's paid, it's gone, you can't get it back. There are plenty of valid situations for an SPIA. Some posters in the Variable Percentage Withdrawal thread swear by it. Maybe you're getting old, losing your cognitive abilities, and want to protect your money from yourself so you don't get scammed (or lose it all at the casino). Maybe you want to set a floor of base income in retirement that you won't dip under even if there's an extended market crash.

Immediateannuities.com says a married 65 year old couple who buys a $1,000,000 annuity, can receive a $4,755 paycheck a month for the rest of their lives. That's a 5.7% withdrawal rate that won't ever fail (if you make sure to stay under state-insured minimums). Buy an inflation-adjusted SPIA at 65, and they'll give you a 4% withdrawal rate. Not much to complain about on the surface.

The main con is that the best deals aren't indexed for inflation (just like most pensions). Also, you lose control over your money. Due to these factors, most people recommend only putting a portion of your money in an SPIA, and only if you're old enough that inflation probably won't be a big issue (unless you get an inflation-adjusted SPIA). If your basic living expenses are $1000 a month, buy a $300,000 annuity inflation-adjusted SPIA, put the rest in 100% stocks, and feel comfortable knowing you'll be able to take care of yourself even if you lose everything.

Vanguard has a good annuity section:

https://investor.vanguard.com/annuity/

Some additional resources:
http://whitecoatinvestor.com/spia-the-good-annuity/
http://www.obliviousinvestor.com/single-premium-immediate-annuity/

MDM

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Re: Annuities
« Reply #5 on: October 27, 2015, 08:54:50 PM »
There is a current discussion at bogleheads about an annuity offered in lieu of a lump sum pension: https://www.bogleheads.org/forum/viewtopic.php?f=1&t=175975.  In that particular case, and with some SPIAs, it may be a good decision to take the annuity.

For the vast majority of "annuities" as a catch-all term, however, the annuity sales person will likely make more money than the sucker customer will.  But don't take my word for it: see all the cautions the SEC throws up in http://www.sec.gov/answers/annuity.htm and https://www.sec.gov/investor/alerts/secindexedannuities.pdf and links therein.

spokey doke

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Re: Annuities
« Reply #6 on: October 28, 2015, 08:04:57 AM »
The discussions of TIAA Traditional Annuity over on Bogleheads seem pretty positive about that option in fulfilling fixed income portions of retirement portfolios (or at least there are plenty of people who are invested and seem pleased that they are)...

MarciaB

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Re: Annuities
« Reply #7 on: October 28, 2015, 09:29:05 AM »

An SPIA (Single Premium Immediate Annuity) is very simple, you pay X, and you receive Y a month for the rest of your life. That's it. Think of it as buying a pension on the open market. Once it's paid, it's gone, you can't get it back.



This is the single best description of a SPIA I have ever heard. Thanks for making this so clear.

regulator

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Re: Annuities
« Reply #8 on: October 28, 2015, 09:46:01 AM »
It depends, as there are several flavors of annuity:

- Variable annuity: Never a good idea.  Stay away.

- Equity Indexed or Fixed Index annuity: Run.  Sleazebag product with high internal fees and lots of sizzle, no steak.

- Fixed annuity: CD-type.  Can be an OK place for safe money if the rate offered is competitive with other options and the insurer has a strong credit rating.

- SPIA: Can be a good choice for those who want to buy a pension.  Only buy from strong insurers (Aa3/AA- or better).

- Deferred annuity AKA longevity insurance: Can be a good choice for those who want to hedge the risk of living to extreme old age.  Only buy from strong insurers.

Left

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Re: Annuities
« Reply #9 on: October 28, 2015, 09:52:51 AM »
I've thought about it as well, the thing I don't mind about it is if I use it in place of bond payments. A lot of people (not using the 4% rule) use bonds as a base for their budget.

but is that $1k/month for $300k a real number or made up? Just asking because it comes out at exactly 4%, but there are dividend paying etfs/indexes that return that as well so I don't see the advantage to an insurance company doing it for me, and when they pay out more than that, they are just returning the principle to you, which is why it is tax free (your money originally). You could do same by just drawing principle along with dividends

plus with indexing, you want to diversify away from any one company... unless I misunderstood it, a spia is with one company, so if they go belly up, you lose it all too. I don't recall ever hearing that your money is protected against them going bankrupted. Unlike vanguard where even when they go bankrupted, we still "own" the shares, it just might be worthless shares :S
« Last Edit: October 28, 2015, 09:54:24 AM by eyem »

Interest Compound

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Re: Annuities
« Reply #10 on: October 28, 2015, 10:35:51 AM »
I've thought about it as well, the thing I don't mind about it is if I use it in place of bond payments. A lot of people (not using the 4% rule) use bonds as a base for their budget.

but is that $1k/month for $300k a real number or made up? Just asking because it comes out at exactly 4%, but there are dividend paying etfs/indexes that return that as well so I don't see the advantage to an insurance company doing it for me, and when they pay out more than that, they are just returning the principle to you, which is why it is tax free (your money originally). You could do same by just drawing principle along with dividends

plus with indexing, you want to diversify away from any one company... unless I misunderstood it, a spia is with one company, so if they go belly up, you lose it all too. I don't recall ever hearing that your money is protected against them going bankrupted. Unlike vanguard where even when they go bankrupted, we still "own" the shares, it just might be worthless shares :S

The number is not made up. I logged in through my Vanguard account, clicked here:

https://investor.vanguard.com/annuity/fixed

then "Log on and get a quote through Vanguard Annuity Access". I put in the numbers for a 65 year old who wants a $1000 monthly payment that's inflation-adjusted. Here are the quotes I got back:



Insurance companies are able to offer competitive rates vs. bonds, because they pool your money with other (typically older) investors, and they keep the money when someone dies. Bonds issuers are obligated to continue payments, no matter if the original purchaser dies or not. This is why annuity rates get much more competitive as you get older. Look at how the numbers change when I run them for a 35 year old instead of a 65 year old:



Most states have guaranty funds to help pay the claims of financially impaired insurance companies, here's a nice table showing the limits:

http://www.annuityadvantage.com/stateguarantee.htm

NorCal

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Re: Annuities
« Reply #11 on: October 28, 2015, 11:13:13 AM »
Strongly like in principal, skeptical in practice.

One of the biggest risks in retirement is longevity risk, and annuities are one of the only methods of mitigating this risk.  I would never advocate putting the majority of a portfolio in an annuity, but I would consider putting enough in to cover a lifetime of property taxes and food.

In practice, I'm skeptical due to the high fees and complexity of the products.  I would only consider annuities that are structured simply and where fees are clearly spelled out. 

I've personally never shopped for an annuity or analyzed pricing in order to make an informed decision.

Beaker

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Re: Annuities
« Reply #12 on: October 28, 2015, 11:43:33 AM »
Wade Pfau has been talking about them on his blog for a while. He seems to really like them for longevity insurance. He has also advocated an approach of "annuitize the floor and invest the rest", basically cover your minimal living expenses from an annuity and invest the remainder for the gains. It seems like a viable approach, but you'd want to be very careful about fees and such.

Here are a couple of his articles that make a decent starting point. There are others on his blog.
Substituting Income Annuities For Bond Funds in Retirement
Retirement Income Strategies with Annuities

Telecaster

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Re: Annuities
« Reply #13 on: October 28, 2015, 03:50:24 PM »
If your basic living expenses are $1000 a month, buy a $300,000 annuity inflation-adjusted SPIA, put the rest in 100% stocks, and feel comfortable knowing you'll be able to take care of yourself even if you lose everything.

That's kinda goes to my point about how annuities really only make sense if you don't need them.

If you have $1MM then your SWR is triple your expenses.    You have absolutely no need for the annuity.   

Interest Compound

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Re: Annuities
« Reply #14 on: October 28, 2015, 04:20:57 PM »
but is that $1k/month for $300k a real number or made up? Just asking because it comes out at exactly 4%, but there are dividend paying etfs/indexes that return that as well so I don't see the advantage to an insurance company doing it for me, and when they pay out more than that, they are just returning the principle to you, which is why it is tax free (your money originally). You could do same by just drawing principle along with dividends

Think of it this way, you're 65 years old looking for stability, and have $1,000,000 saved. You can get an SPIA guaranteed to pay $60,000 (6% of original amount) for the rest of your life. Or you can get an inflation-adjusted SPIA guaranteed to pay $40,000 (4% of original amount+inflation) for the rest of your life. Direct deposited directly to your bank account monthly. No variation, no worrying about the markets, that's it.

Even if you find an ETF/Fund which currently returns 6%, there's no guarantee it will return 6% forever. If you want something inflation-adjusted TIPS aren't very stable either, and they aren't currently returning 4%+inflation anyway. Sure you can tell them to go 80/20 stocks/bonds, my personal preference, but why take on the risk when they've already won the game?

YoungInvestor

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Re: Annuities
« Reply #15 on: October 28, 2015, 04:29:51 PM »
It's an hassle-free income option with longevity insurance built in and almost absolute certainty about the payout.

Comparing it to VTSAX is not intellectually honest, in my opinion. They do not serve the same purpose at all.

Interest Compound

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Re: Annuities
« Reply #16 on: October 28, 2015, 04:47:39 PM »
If your basic living expenses are $1000 a month, buy a $300,000 annuity inflation-adjusted SPIA, put the rest in 100% stocks, and feel comfortable knowing you'll be able to take care of yourself even if you lose everything.

That's kinda goes to my point about how annuities really only make sense if you don't need them.

If you have $1MM then your SWR is triple your expenses.    You have absolutely no need for the annuity.

By "basic living expenses" I pretty much meant just rent/taxes and food. Think of it as your bond exposure. If someone is 65 years old they might be 60/40 stocks/bonds. Now instead of putting $400,000 in bonds, they can put $400,000 in an SPIA paying 6% guaranteed yearly, or 4%+inflation adjustments if they go that route.