Author Topic: Why can't there be an honest annuity?  (Read 951 times)

wageslave23

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Why can't there be an honest annuity?
« on: April 24, 2019, 12:19:39 PM »
This is just theorizing, but to me annuities should be the best option for retirees who don't care about leaving money to their heirs.  The market historically returns 7+%.  If someone needs 4% of their stache to retire, then they need to be prepared for the "worst" case scenario of living to 100.  But will probably only live to 80.  In exchange for the upside of having a ton of money left when they die to bequeath to their heirs, the retiree would be given 100% guarantee to not outlive their money.  The company would make out like a bandit in the "average" clients situation and only occasionally lose out on the outliers who live to 100 or when the market has a historically bad period.  Why is it that I generally only see 2% guaranteed returns on annuities.  Seems like annuity companies are overly stacking the deck in their favor to the point that they don't make sense for most people.  Also, does anyone know of an annuity that is closer to "fair" in this regard?

wageslave23

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Re: Why can't there be an honest annuity?
« Reply #1 on: April 24, 2019, 12:22:00 PM »
Maybe MMM community could start a coop where MMM'ers pool their money together to self fund an annuity.  That way you don't have to save until you hit 99% success rate and then likely die with $1M+. 

PathtoFIRE

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Re: Why can't there be an honest annuity?
« Reply #2 on: April 24, 2019, 12:37:38 PM »
Vanguard offers annuities, although they're offered through an insurance company. I haven't researched this much, but this is where I'd start:
https://www.bogleheads.org/wiki/Category:Annuities

Several problems I see with an MMM coop annuity program. First, I think it'd have to offer an inflation-adjusted payout equivalent to a withdrawal rate of more than 4% or more, regardless of age, to make it enticing to a lot of people here, I'm not sure if that's really possible, especially at the beginning when it would be just getting started. Second, as a group we rely heavily on tax-deferred and tax-free retirement vehicles, and there's not really a good mechanism that I know of to transfer those to a service like this. But I agree, it seems at least theoretically possible, and I'd certainly give something like this strong consideration if it were available.

ChpBstrd

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Re: Why can't there be an honest annuity?
« Reply #3 on: April 24, 2019, 01:19:20 PM »
Because with a 4% WR one is almost guaranteed to not outlive their income stream anyway. You’d have to engineer a higher WR plus the lifetime guarantee in order to attract sophisticated investors. That would leave little room for advertising, operational expenses, etc.

The MMM crowd would demolish an annuity company, with enhanced longevity due to exercise and less consumption of tobacco, fast food, and sugary beverages. Fortunately for the companies, MMMers generally avoid annuities.

samirol

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Re: Why can't there be an honest annuity?
« Reply #4 on: April 24, 2019, 02:43:58 PM »
SPIAs (single premium immediate annuities) definitely have a role within retirement planning because they help manage several risks in retirement that bonds alone don't cover. They have asset protection benefits in many states, can alleviate the effects of decreased mental acuity in the later stages of life, address longetivity risks, and can mitigate the behavioral risks of relying purely on investments for retirement income. Annuities are an insurance product designed to help reduce risk, one of the biggest challenges is that people as a whole drastically underestimate risks.

Wade Pfau has written some good stuff on annuities and retirement income
https://retirementresearcher.com/better-retirement-income-insurance-investments/

wageslave23

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Re: Why can't there be an honest annuity?
« Reply #5 on: April 24, 2019, 05:39:07 PM »
SPIAs (single premium immediate annuities) definitely have a role within retirement planning because they help manage several risks in retirement that bonds alone don't cover. They have asset protection benefits in many states, can alleviate the effects of decreased mental acuity in the later stages of life, address longetivity risks, and can mitigate the behavioral risks of relying purely on investments for retirement income. Annuities are an insurance product designed to help reduce risk, one of the biggest challenges is that people as a whole drastically underestimate risks.

Wade Pfau has written some good stuff on annuities and retirement income
https://retirementresearcher.com/better-retirement-income-insurance-investments/

I agree.  But is there one that doesn't rape you by offering a ridiculously low rate of return?

Indexer

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Re: Why can't there be an honest annuity?
« Reply #6 on: April 24, 2019, 06:28:04 PM »
SPIAs (single premium immediate annuities) definitely have a role within retirement planning because they help manage several risks in retirement that bonds alone don't cover. They have asset protection benefits in many states, can alleviate the effects of decreased mental acuity in the later stages of life, address longetivity risks, and can mitigate the behavioral risks of relying purely on investments for retirement income. Annuities are an insurance product designed to help reduce risk, one of the biggest challenges is that people as a whole drastically underestimate risks.

Wade Pfau has written some good stuff on annuities and retirement income
https://retirementresearcher.com/better-retirement-income-insurance-investments/

I agree.  But is there one that doesn't rape you by offering a ridiculously low rate of return?

Call Vanguard. Their annuity reps are paid a salary, not commissions, the same as their advisors. This means they will give you honest answers at lower costs.

reeshau

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Re: Why can't there be an honest annuity?
« Reply #7 on: April 25, 2019, 02:10:42 AM »
SPIAs (single premium immediate annuities) definitely have a role within retirement planning because they help manage several risks in retirement that bonds alone don't cover. They have asset protection benefits in many states, can alleviate the effects of decreased mental acuity in the later stages of life, address longetivity risks, and can mitigate the behavioral risks of relying purely on investments for retirement income. Annuities are an insurance product designed to help reduce risk, one of the biggest challenges is that people as a whole drastically underestimate risks.

Wade Pfau has written some good stuff on annuities and retirement income
https://retirementresearcher.com/better-retirement-income-insurance-investments/

I agree.  But is there one that doesn't rape you by offering a ridiculously low rate of return?

While I have never been a fan of annuities, I agree with @samirol 's comments.  In terms of your question, I would simply say that they are also operating in the current market, with below-inflation returns on bonds (or nominally negative, in the global market) and stock markets at record levels.  All insurance companies are being squeezed by these over-ripe markets.

When you buy an annuity, you are introducing a middleman to your investing.  In return for taking on market risk, they want their cut.  If you look at it this way, then you can evaluate whether they are worth it or not to you, personally.  Having said this, there are plenty of predators out there looking to baffle people with bullsh!t and take more than their fair share based on asymmetrical knowledge or outright naivety.