Author Topic: Is there an advantage to having 80% in annuities  (Read 3014 times)

Recliner

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Is there an advantage to having 80% in annuities
« on: August 13, 2017, 11:48:20 AM »
My dad is 72 and is a retired teacher. Between his social security and his pension he gets about $40k/year. He has a paid off house and the $40k totally covers all of his living expenses for the lifestyle he enjoys with a little actually left over each year.
He also has $750k in various investment accounts.

Taxable account: $75k in tax exempt municipal bond fund. He's added $13k to it this year because of a required minimum distribution from his IRA. He paid a 3.5% load fee on that $13k

Roth IRA: $75k in a stock mutual fund that has a 15 year return that's 1% below the s&p 15 year return and 3% below the 5 year. It has an expense ratio of 1.2%

IRA: $325k in fixed annuities that he's had for just over 5 years. He gets an average of $600/month in interest credits added to its balance every month.

variable annuity: $275 that he's had for 15 years. It's value has gone up 16.6% in the last 18 months.

I would recommend moving his taxable account and Roth IRA to vanguard and into index funds that give him the appropriate level of risk he's comfortable with.
I've told him to find out the fee for removing the fixed annuity that's in his IRA that he's had for 5 years (I'm assuming it's 2% or 3% of the total value) Then I'd move it to vanguard index funds too
The variable annuities I'm not sure about. He's already bought into them and they don't appear to be doing too bad. Worse than index funds over the last 18 months I can see, but way better than the rest of his investments

MDM

  • Walrus Stache
  • *******
  • Posts: 9248
Re: Is there an advantage to having 80% in annuities
« Reply #1 on: August 13, 2017, 09:42:56 PM »
Fixed annuity in an IRA?  A minor advantage of an annuity is the interest accumulating tax free until withdrawn, but in an IRA that advantage is meaningless.

Variable annuities are usually terrible for the investor, but good for the sales person and the insurance company (which leads to the joke about "two out of three is pretty good, eh?").  The devils (surrender fees, caps on annual increases, etc.) are in the details of the annuity contract.  No alternative to reading that if you want to understand the true situation.

In your dad's situation (SS + pension covers spending needs, good amount of other investments) there seems neither a need for nor a reasonable case to support any use of annuities in any form.

See Mom made a mistake? Annuities - Bogleheads.org for related discussion.
« Last Edit: August 13, 2017, 09:45:21 PM by MDM »

Mighty-Dollar

  • Bristles
  • ***
  • Posts: 377
Re: Is there an advantage to having 80% in annuities
« Reply #2 on: August 14, 2017, 02:10:35 PM »
All annuities are inferior products. A low risk mix of about 30% total stock market index fund and 70% total bond market index will EASILY and CONSISTENTLY beat ANY annuity.

Smoke and mirrors. They tease people with a high INITIAL rate of return that eventually loses out to traditional investing. Heirs (you?) also get screwed. Once annuitants reach their life expectancy there is usually nothing left for beneficiaries.

Keep your eye on the ball: Internal rate of return. All annuities pay 0 - 3% annualized return on investment. Surrender early and you may get less than a 0% internal rate of return.
« Last Edit: August 14, 2017, 02:12:45 PM by Mighty-Dollar »

Financial.Velociraptor

  • Handlebar Stache
  • *****
  • Posts: 1394
  • Age: 46
  • Location: Houston TX
  • Devour your prey raptors!
    • Financial Velociraptor
Re: Is there an advantage to having 80% in annuities
« Reply #3 on: August 14, 2017, 04:46:22 PM »
My father retired several years ago and took his entire 401k and put it in a bank IRA CD earning 6% or so.  It expired after 5 years and he was getting offers of less than 1% for a new CD term.  He asked for help and I tried to steer him to closed end bond funds and blue chips stocks but his number 1 (really only) criteria was "it can't EVER go down.  It is everything I worked all my life for."

With that dictate, all I could do was find him an insurance annuity that was RMD compliant.  We got him 3.30%.  He has an option to reset the rate upward once if market conditions permit.  I should maybe have him check current rates.  The entire term expires at year 7 and he has to be about halfway through that.  Even 3.5% would move the needle for him.

For most people, an annuity is a poor choice.  But for the hyper conservative investor, they are the only game in town.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1314
Re: Is there an advantage to having 80% in annuities
« Reply #4 on: August 14, 2017, 09:56:01 PM »
There's no time like the present to fix a mistake.

It might be worthwhile to have a lawyer analyze the annuity contract and identify the least-expensive way out of it.

The variable annuity's recent performance is an anomaly and not a good reason to hold it.

If he likes mid-single-digit returns, your dad might like a partial REIT portfolio. In one of his IRAs those dividends could accumulate tax free. Better yet, click the "reinvest" option to buy more shares with dividends.


Mighty-Dollar

  • Bristles
  • ***
  • Posts: 377
Re: Is there an advantage to having 80% in annuities
« Reply #5 on: August 15, 2017, 02:58:21 AM »
Quote
his number 1 (really only) criteria was "it can't EVER go down.  It is everything I worked all my life for."
No risk, no reward. The big question is how much is he taking out of his nest egg per year?

Is he aware of how low risk a 28/72 portfolio is? Yes you can lose, but this low risk approach hasn't done worse than losing 1% in 22 years.

Financial.Velociraptor

  • Handlebar Stache
  • *****
  • Posts: 1394
  • Age: 46
  • Location: Houston TX
  • Devour your prey raptors!
    • Financial Velociraptor
Re: Is there an advantage to having 80% in annuities
« Reply #6 on: August 15, 2017, 10:26:39 AM »
Quote
his number 1 (really only) criteria was "it can't EVER go down.  It is everything I worked all my life for."
No risk, no reward. The big question is how much is he taking out of his nest egg per year?

Is he aware of how low risk a 28/72 portfolio is? Yes you can lose, but this low risk approach hasn't done worse than losing 1% in 22 years.


I've tried persuading him into very conservative strategies for hope of more yield.  Those red years in your table?  A complete non-starter for him.  He will never accept a single down year.  Not even a penny.  He took a little to buy a car but thereafter takes out just RMD.  His interest rate leaves him with a few thousand in growth over and above RMD for now.  Honestly, his house is paid and he can get by on just his SS.  Plus he gets 180 bucks twice a month for serving on the local water board plus some more when he attends the offsite state wide meetings.  He's paying for peace of mind and to him it is worth it. At least he is beating the bank CD rate.

Recliner

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Is there an advantage to having 80% in annuities
« Reply #7 on: August 16, 2017, 08:38:47 AM »
So the fixed annuity in his IRA worth $325,000 would cost a little over $12k in early withdrawal fees if he moved it. He's had it 5 years. It gets 2.25% interest.

I'm not sure he'll be willing to pay that fee even if it means he only gets 2.25% for the next several years.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6724
Re: Is there an advantage to having 80% in annuities
« Reply #8 on: August 16, 2017, 08:45:52 AM »
If his SS + pension is more than he needs to spend and he's then got $750K in investments on top of that so it's really not vital to his financial health to do anything with that $750K to optimize it. So I'd ask him what he wants to do with his investments and see what he says. I would not be focused on what you want to do with his investments.

Mighty-Dollar

  • Bristles
  • ***
  • Posts: 377
Re: Is there an advantage to having 80% in annuities
« Reply #9 on: August 22, 2017, 07:02:36 PM »
He will never accept a single down year.  Not even a penny. 
I'll bet that's because he doesn't realize how low risk a 28/72 mix is. All he knows is that stocks alone are risky. You have to show him historical data or he will continue to have this false belief that traditional investing is too risky. He also needs to understand that it's not about investing for one year. He's investing for many years.
He also needs to understand that the internal rate of return with immediate annuities is going to be zero if he lives to reach his life expectancy. In a very best case scenario if a 65 year old reaches age 95, their internal rate of return will be about 3%. Those are terrible returns after 30 years! Even starting at the worst year to begin retirement (1966 onward) you not only maintained your nest egg (for heirs) but you earned 3.4% per year (pegged to inflation). You were enjoying TWICE as much income at about age 87 with traditional investing as compared to a SPIA. Win, win, win. http://investingadvicewatchdog.com/images-new/1966-onward.jpg
« Last Edit: August 23, 2017, 10:44:28 PM by Mighty-Dollar »

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1150
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Is there an advantage to having 80% in annuities
« Reply #10 on: August 22, 2017, 10:54:14 PM »
My father retired several years ago and took his entire 401k and put it in a bank IRA CD earning 6% or so.  It expired after 5 years and he was getting offers of less than 1% for a new CD term.  He asked for help and I tried to steer him to closed end bond funds and blue chips stocks but his number 1 (really only) criteria was "it can't EVER go down.  It is everything I worked all my life for."

With that dictate, all I could do was find him an insurance annuity that was RMD compliant.  We got him 3.30%.  He has an option to reset the rate upward once if market conditions permit.  I should maybe have him check current rates.  The entire term expires at year 7 and he has to be about halfway through that.  Even 3.5% would move the needle for him.

For most people, an annuity is a poor choice.  But for the hyper conservative investor, they are the only game in town.

Of course, keeping the nominal amount at a constant means inflation is eating away at it, like a bucket full of water but with a small leak. And in his situation I can see why he doesn't have to get returns - he's not depending on it in the same way a FIREee would be. He's FI even with really crappy returns on his portfolio.

Here at MMM by educating ourselves and using the power of maths we should not be "hyperconservative investors" as it means you won't retire early.  But for people like your Dad this is the attraction that the annuity salespeople exploit. They seek to make the equity market scary and complex and rely on irrational loss aversion.

So instead of illiquid annuities, wouldn't US Treasury TIPs be an alternative?