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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Mr Mark on August 20, 2017, 01:30:42 AM

Title: Why you should never buy an annuity!
Post by: Mr Mark on August 20, 2017, 01:30:42 AM
In these uncertain times, with stock markets at 'record highs' and scare stories about the reliability of the '4% rule', you may be tempted by a beguiling offer* to buy an annuity. A basic immediate annuity is where an insurance company agrees to pay you a fixed amount annually until death for an initial lumpsum payment.

At the moment, $1,000,000 will buy a 60 year old male about $60,000 (6%) per year for as long as you live. [For a 40 year old it would be about $48,000]

Sounds great right? Especially for those concerned about running out of money in retirement, what's not to like? 6% sounds a lot better than 4%, and without all that risk of the stock market crashing! Sign me up!

The problem is that a basic annuity is NOT an 'investment'. If you die, the payments stop and there is no return of capital. EG if you died after the first year you would have lost $940,000. This has terrible implications for the effective rate of return (and for any heirs you might have had). At 6% it takes almost 17 years of payments before you even get your original $1 million back.

A 6% annuity, assuming a low 2% annual inflation, has a 30 year real rate of return of just 2.4%**, and your annual payment just before you die in year 30 will only be worth $33,400 in 2017 dollars because of inflation. Even if you live to be 110 years old the real IRR after those 50 years of collecting payments will be a meager 3.6% with an annual payment by the end of just $22,300. Meanwhile with the 4% rule your payments not only increase to keep pace with inflation but you will almost certainly still have a huge stash to pass on to your surviving heirs!

There are many more complex annuities available - ones with payments adjusted for CPI, or with minimum payout terms, or returns somehow linked to the SP500. But the basic math remains. This is why insurance companies pay such huge commissions to the people that sell them, and why those sales people* are so keen to get you to buy them.

Don't be fooled.


**Compounded real rate of return pretax, assuming 6% nominal payout and 2% inflation
  5 years: -31.2%
10 years: -9.9%
20 years:   0.0%
30 years: +2.4%
40 years: +3.3%
50 years: +3.6%


higher inflation of course makes these returns even worse!

[edited into original post] Disclaimer: I've seen 1 potential use for these instruments of financial destruction - related to medicaid long term care liabilities. If you're a couple on Medicare/SS with (a) a big 'stash and (b) one partner is not well (early onset Alzheimers/dementia combined with other health problems typically) and (c) likely to need expensive long term nursing home care before an early death, the couple can use annuities to transfer liquid assets above the medicaid cutoff into life long income for the surviving spouse to avoid the care costs draining the assets away before being eligible for medicaid (also depends on specific state law on asset claw backs).
Title: Re: Why you should never buy an annuity!
Post by: Miss Piggy on August 20, 2017, 09:57:50 AM
A financial advisor I never trusted tried over and over again to sell me an annuity. It always felt like such a sales job...like he was trying to sell me the equivalent of a used car with no engine.
Title: Re: Why you should never buy an annuity!
Post by: JustGettingStarted1980 on August 20, 2017, 10:09:45 AM
 I've heard some good arguments on Bogle heads that an annuity might be considered "floor" longevity insurance. But for triple M followers with relatively low yearly spending, Social security should very nicely serve that purpose already at a much lower cost, while also happening to adjust with inflation.

JGS
Title: Re: Why you should never buy an annuity!
Post by: JAYSLOL on August 20, 2017, 10:25:15 AM
I've heard of annuities, and had a general idea of how they worked and figured they were probably not a great deal, but i didn't realize they were this bad!  Thats an awfully shitty return for the money.  In fact, it looks like most traditionally retirement-age people would be way better off sticking their $1M in cash under the mattress and spending $60k a year rather than this.  Good info, thank you for doing the math on this one for us, now i know what to say if someone brings them up
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on August 20, 2017, 08:16:17 PM
Thank you for doing the math on that.
Title: Re: Why you should never buy an annuity!
Post by: Mr Mark on August 20, 2017, 10:22:13 PM
No worries. I like that sort of number crunching. :-)

To highlight the badness of these investments, a financial planner is being prosecuted for putting an old lady into an annuity. She bought it for ~$165,000 and the sellers commission was something like $9,600. No wonder they try to push people into these things.

Disclaimer: I've seen 1 potential use for these instruments of financial destruction - related to medicaid long term care liabilities. If you're a couple on Medicare/SS with (a) a big 'stash and (b) one partner is not well (early onset Alzheimers/dementia combined with other health problems typically) and (c) likely to need expensive long term nursing home care before an early death, the couple can use annuities to transfer liquid assets above the medicaid cutoff into life long income for the surviving spouse to avoid the care costs draining the assets away before being eligible for medicaid (also depends on specific state law on asset claw backs).
Title: Re: Why you should never buy an annuity!
Post by: intellectsucks on August 21, 2017, 08:33:43 AM
Boy what a bunch of horseshit.  Here’s a better piece of advice: NEVER listen to anyone who tells you to NEVER use a certain type of financial product.
Annuities serve a variety of purposes and are not limited to Single Premium Immediate Annuities (the type of annuity listed in the OP).  There are many different types of annuities that serve a variety of different purposes, all appropriate in different circumstances.  Fixed or indexed annuities can be used in place of Certificate of Deposits to give the extremely risk averse a better yield with zero risk of loss, variable annuities can offer ways to use market growth to increase future income without taking on market risk, annuities of all types give you tax deferred growth.
You reference the $9600 commission paid by the insurance company as evidence of how terrible they are, but haven’t given any context to that number.  Let’s make the absolutely nonsense assumption that an investment into VTSAX admiral shares of one million generates only enough growth to cover fees.  You will end up paying $9600 in fees over 24 years, probably about the average life expectancy of the retiree in your original example.  Your fees will be much higher if you end up living longer than that or if you live outside of fantasy land and end up getting dividends and growth.  Keep in mind that the insurance company is on the hook to guarantee your returns/income for the rest of your life no matter how long you live, and they never get to charge you any additional fees.
Lastly, you present the the “Life” payout option as if it is the only way to receive income from an annuity.  A six second google search yields this article that goes into detail for all of the different ways that you can receive income from annuities: http://www.investopedia.com/articles/retirement/05/071105.asp
A quick summary: life (guaranteed income for the rest of your life, no matter how long you live), joint life (guaranteed income for the rest of your life and the rest of your beneficiary’s life), period certain (guaranteed income for a certain number of years).  Almost every annuity also offers a return of principal option (no matter what happens, the company will guarantee that you receive back at least the full amount you put in).
I’m not an annuity shill, and certainly wouldn’t recommend them as the primary investment vehicle for the majority of people, but they have their time, place and purpose, just like any other investment vehicle.  This forum and its members are looking for more detail on how to succeed financially and don’t benefit from poorly researched and misleading bullshit.  Go peddle your clickbait elsewhere.
Title: Re: Why you should never buy an annuity!
Post by: SnackDog on August 21, 2017, 09:22:04 AM
Nothing wrong with buying a high quality annuity if you understand them well and get a good one which suits your needs.  People tend to buy them once they are pretty old in order to guarantee a simplified minimum level of income (a safe floor), regardless of the mental state of the recipient.  By waiting until you are old, your life expectancy is shorter so the payouts are better and inflation risks mitigated.  We all know people who have died and left behind a partner who can't manage investments or who lived long but lost their wits.  In some cases, these people lose their investments altogether and end up with nothing. An annuity is a good hedge against this.  It has another added benefit that if you lose a personal or civil liability lawsuit (the risk of this goes up every year), you can lose all your investments but probably not your annuity income.  There are downsides, like the insurance company going bankrupt or Venezuela-style inflation.   Overall, just another tool to consider as part of your planning.  I may get one if I live to 75 or so.  I think if enough people purchased them the terms would improve a lot.  There is no point in everyone saving enough money to die with leftovers in 95% of all scenarios - we should just pool the risk and spend more!
Title: Re: Why you should never buy an annuity!
Post by: Hargrove on August 21, 2017, 07:36:37 PM
There are many different types of annuities that serve a variety of different purposes, all appropriate in different circumstances.  Fixed or indexed annuities can be used in place of Certificate of Deposits to give the extremely risk averse a better yield with zero risk of loss, variable annuities can offer ways to use market growth to increase future income without taking on market risk, annuities of all types give you tax deferred growth.

I get that different people have different preferences, but keeping a million bucks in a sock drawer is a bad retirement plan given the alternatives, and annuities are also a bad retirement plan, given the alternatives. Your argument seems to be "but some people like them," which doesn't address the substance of the OP at all.

You can make any poorly-scaled plan sound good if you ignore relevant comparisons. Why, you could cross the US in a motorized scooter, and it would be really fast when you consider how long it would take a flea to cover this same distance.
Title: Re: Why you should never buy an annuity!
Post by: Spork on August 21, 2017, 07:49:54 PM
First off, no, I won't be ever buying one.  My rule of thumb is, first and foremost, DON'T BUY WHAT YOU DO NOT COMPLETELY UNDERSTAND.  And I can assure you, even if I were to read the prospectus (is that what they're called when it's an annuity?) -- I would not fully understand it.

That said, there are certainly annuities out there that pay on death.  The original description is not fully true.  I know, as I've been the beneficiary.  In my case, the taxes sucked.  There was no basis step up like other inheritances.  But it paid out 100% of its value.
Title: Re: Why you should never buy an annuity!
Post by: Mr Mark on August 21, 2017, 10:52:47 PM
Boy what a bunch of horseshit.  Here’s a better piece of advice: NEVER listen to anyone who tells you to NEVER use a certain type of financial product.
Annuities serve a variety of purposes and are not limited to Single Premium Immediate Annuities (the type of annuity listed in the OP).  There are many different types of annuities that serve a variety of different purposes, all appropriate in different circumstances.  Fixed or indexed annuities can be used in place of Certificate of Deposits to give the extremely risk averse a better yield with zero risk of loss, variable annuities can offer ways to use market growth to increase future income without taking on market risk, annuities of all types give you tax deferred growth.
You reference the $9600 commission paid by the insurance company as evidence of how terrible they are, but haven’t given any context to that number.  Let’s make the absolutely nonsense assumption that an investment into VTSAX admiral shares of one million generates only enough growth to cover fees.  You will end up paying $9600 in fees over 24 years, probably about the average life expectancy of the retiree in your original example.  Your fees will be much higher if you end up living longer than that or if you live outside of fantasy land and end up getting dividends and growth.  Keep in mind that the insurance company is on the hook to guarantee your returns/income for the rest of your life no matter how long you live, and they never get to charge you any additional fees.
Lastly, you present the the “Life” payout option as if it is the only way to receive income from an annuity.  A six second google search yields this article that goes into detail for all of the different ways that you can receive income from annuities: http://www.investopedia.com/articles/retirement/05/071105.asp
A quick summary: life (guaranteed income for the rest of your life, no matter how long you live), joint life (guaranteed income for the rest of your life and the rest of your beneficiary’s life), period certain (guaranteed income for a certain number of years).  Almost every annuity also offers a return of principal option (no matter what happens, the company will guarantee that you receive back at least the full amount you put in).
I’m not an annuity shill, and certainly wouldn’t recommend them as the primary investment vehicle for the majority of people, but they have their time, place and purpose, just like any other investment vehicle.  This forum and its members are looking for more detail on how to succeed financially and don’t benefit from poorly researched and misleading bullshit.  Go peddle your clickbait elsewhere.

Wow, tell us what you really think!

'poorly researched and misleading bullshit' is IMHO what your post represents. For example, the PV of fees on a VTSAX portfolio of $1,000,000 over 30 years would be $4,964. The likely commission on a basic $1,000,000 immediate annuity to a salesperson would be more like $50,000 (if you read the post the example I found in the court case, it refers to a $165,000 annuity, not $1 million).

You provide no economic analysis or specific examples to justify the rather inflamatory and ad hominem statements you make. Given the assumption that the company selling these things don't have a magic way of investing, these commissions and their profits come from 3 places: taking a massive premium up front, not having to make payments to people who die and from the fees they cream off the projected portfolio yield. This is one of the reasons why the real rate of return is so poor. Your 24 yr life expectancy (actually a lot more for the average 60 yr old male, but meh) as I described would represent a compounded return (with such an immediate annuity) of just 1.3% assuming 2% inflation. The annuities also have other disadvantages I didn't get around to mentioning: they are highly illiquid, and the annuity payments are taxed as ordinary income (unlike a Vanguard VTSAX for example).

Plus the insurance company does charge additional fees with the more complex annuities you mention. Remember these instruments are not investments but a type of insurance policy. Please provide the details of what you consider a worthwhile annuity deal including the details you claim are useful (such as guarenteed principal) as these all serve to reduce the annual payment significantly.

You certainly sound like an annuity shill to me. Have you (or a close relative) recently bought an annuity of some kind?

EDIT
Also Spork, I thought I was clear that I was decribing the numbers for a basic immediate annuity, and specifically mentioned that more complex ones (including ones that promise to repay nominal principal) can be obtained.
Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on August 22, 2017, 12:33:16 AM
Here's the problem with immediate annuities... They leave you in poverty later in life! You get teased with an initial high rate of return that eventually gets surpassed by a very low risk mix of bond and stock index funds.

Also the 4% rule is a red herring. Just because it may fail doesn't mean that annuities are even close to being better. Even during the worst of times, when you have to reduce income below 4%, today's immediate annuities fail miserably by comparison.

And once you reach your life expectancy your heirs will get nothing!

And you lose your liquidity with these products. There's million reasons why you might need to get your money back.

This video says it all...
https://www.youtube.com/watch?v=QDUbQeZvJ9g

Quote
I've heard some good arguments on Bogle heads that an annuity might be considered "floor" longevity insurance.
Bogleheads is run by biased moderators who I believe are in the insurance industry. I actually got suspended for bad mouthing insurance agents. Bogleheads is a sham site.

There may be people in THIS forum who are actually insurance salesmen. intellectsucks is presenting typical insurance industry strawman arguments, anecdotes and statements of opinion instead of side by side comparison data (bond/stocks VS annuity) like in the video I referenced. intellectucks had the gall to attack the low cost index fund VTSAX using the strawman argument it has fees and annuities don't have fees. Annuities fees are BAKED INTO THE PRODUCT! Annuities are not "free". Instead of giving you a fixed 7% income rate, you get 6%. That IS the fee baked into the pathetic product!
intellectsucks also said that "the insurance company is on the hook to guarantee your returns/income for the rest of your life no matter how long you live". Again you are only guaranteed POVERTY later in life. And what do I need a guarantee in the FIRST PLACE if I'm investing in a low cost mix of a total bond market index fund and a total stock market index fund? I don't! In the last 22 years there has never been a down year where you lost more than 1% when heavily invested (72% in bonds). Again YOU DON'T NEED AN EXPENSIVE "GUARANTEE"! BTW annuity guarantees are not guaranteed in the first place. http://investingadvicewatchdog.com/images/28-72-year.jpg
Title: Re: Why you should never buy an annuity!
Post by: gerardc on August 22, 2017, 02:41:01 AM
I think annuities are a great concept in theory, the only problem is the insurance companies need to make a huge profit, so the actual numbers/offers you get suck. I could see it becoming more popular if low-fee annuities came to exist, e.g. with an owner structure like Vanguard. It's basically an insurance on your life time -- some people die sooner, some die later, and the "lucky" ones pay for the "unlucky" ones like with any insurance (here "lucky" means to die earlier, which costs less).
Title: Re: Why you should never buy an annuity!
Post by: Laserjet3051 on August 22, 2017, 02:12:15 PM
Here's the problem with immediate annuities... They leave you in poverty later in life! You get teased with an initial high rate of return that eventually gets surpassed by a very low risk mix of bond and stock index funds.



Quote
I've heard some good arguments on Bogle heads that an annuity might be considered "floor" longevity insurance.
Bogleheads is run by biased moderators who I believe are in the insurance industry. I actually got suspended for bad mouthing insurance agents. Bogleheads is a sham site.



I was following this thread to hear both sides of the story on SPIAs, but as soon as you made the above claim (in bold red) you lost all credibility. ALL.
Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on August 22, 2017, 07:11:29 PM
Quote
I was following this thread to hear both sides of the story on SPIAs, but as soon as you made the above claim (in bold red) you lost all credibility. ALL.
Nice empty post. Because why?????????? Did you even read my entire post??? I actually got suspended for bad mouthing insurance agents. Translation: Bogleheads suppresses speech against annuities and the cons who sell them.
Title: Re: Why you should never buy an annuity!
Post by: Hargrove on August 22, 2017, 07:34:04 PM
Quote
I was following this thread to hear both sides of the story on SPIAs, but as soon as you made the above claim (in bold red) you lost all credibility. ALL.
Nice empty post. Because why?????????? Did you even read my entire post??? I actually got suspended for bad mouthing insurance agents. Translation: Bogleheads suppresses speech against annuities and the cons who sell them.

There is a bunch of context to a suspension we're not privy to, including your particular situation, and we wouldn't get anywhere debating it even if we knew what happened. This is also concerning a very large site which, from what I've read, is one of the big three FIRE sites (MMM, Bogleheads, and ERE) that people use as a wealth of resources, information, and inspiration. It's extremely unlikely that Bogleheads is "a sham site," and an anecdotal argument isn't very compelling proof. That's including if you were banned by a single moderator (even if that moderator was an insurance salesman), because Bogleheads is not just someone's blog or a single moderator's forum, it's an entire FIRE community.

Since we still don't have much support for annuities weighing in, I looked at
http://obliviousinvestor.com/single-premium-immediate-annuity/
and checked from there via a link from Vanguard at
https://www.incomesolutions.com/LifetimeIncomeEstimate.aspx#results-anchor
for 5k/month (60k annually) for a deposit quote.

The deposit quoted is 629,562.42 if I were 55 and buying for payments to begin at 65. The average stock return over 30yrs doesn't quite fit this 10yr napkin math, but let's say it does for the sake of averages and that we can guess that deposit invested would have grown to 1,259,124.84.

50,364.99 would be the 4% SWR on stocks invested to a long-term average after that window, coming slightly short (4,197/mo vs 5,000/mo) by 19%, but the stocks have significantly more upside if you died early or if you lived longer than 5 years.

If I were going to bet on an annuity, I suppose if the bull market continued two more years and I had just turned 55 and was utterly terrified of starting before a bear market began, and if also I did not expect to live to 75 for some reason (and didn't care about leaving money behind), OR worried about getting cleaned out from a debilitating disease's medical expenses (high rate of heart failure in the first case or perhaps Alzheimer's in the second, where I didn't think I could keep directing my investments?), then perhaps I could imagine a scenario where such a thing might seem appealing.

It still looks like the worst kind of market timing to base retirement planning on a bet on a bad deal pulling through on its rarest opportunity, but, well, I'm trying to bring us something here.
Title: Re: Why you should never buy an annuity!
Post by: Mr Mark on August 22, 2017, 10:38:13 PM
...

50,364.99 would be the 4% SWR on stocks invested to a long-term average after that window, coming slightly short (4,197/mo vs 5,000/mo) by 19%, but the stocks have significantly more upside if you died early or if you lived longer than 5 years.
...


Hargrove,
Remember the initial 4% withdrawal will be increased to keep pace with inflation while the annuity payment you got I assume is nominal(?) and thus slowly loses purchasing power.
Title: Re: Why you should never buy an annuity!
Post by: Hargrove on August 23, 2017, 04:22:39 AM
Yeah, that's why I added the life-expectancy scenarios.
Title: Re: Why you should never buy an annuity!
Post by: GenXbiker on August 23, 2017, 06:32:22 AM
The deposit quoted is 629,562.42 if I were 55 and buying for payments to begin at 65.

Remember the initial 4% withdrawal will be increased to keep pace with inflation while the annuity payment you got I assume is nominal(?) and thus slowly loses purchasing power.

Being deferred, that makes inflation an even bigger factor in devaluing the annuity.  And, even if you were to pay a lot extra for a deferred annuity that increases payments with inflation, that adjustment only starts once the payments begin but not increased for the inflation that occurred during the accumulation phase.
Title: Re: Why you should never buy an annuity!
Post by: Dicey on August 23, 2017, 10:29:10 AM
Boy what a bunch of horseshit.  Here’s a better piece of advice: NEVER listen to anyone who tells you to NEVER use a certain type of financial product....Here's even better advice: Don't listen to anyone who believes intellect sucks.

Annuities serve a variety of purposes for a very limited subset of investers and are not limited to Single Premium Immediate Annuities (the type of annuity y investment vehicle for the majority of people, but they have their time, place and purpose, just like any other investment vehicle.  Ditto.

This forum and its members are looking for more detail on how to succeed financially and don’t benefit from poorly researched and misleading bullshit. This is true. Annuities are not a meaningful or cost-effective solution for the vast majority of mustachians. Go peddle your clickbait elsewhere. Oh, dear God, please take your own advice.
Title: Re: Why you should never buy an annuity!
Post by: uwp on August 23, 2017, 01:33:49 PM
Annuities are like any other insurance product: not everyone needs/wants it, there are a lot of crappy versions of them out there, and usually the worst products pay the person selling them the most.

DISCLAIMER: I have recommended an annuity before and think they have their place sometimes.

Even Vanguard offers annuities (https://investor.vanguard.com/annuity/?lang=en (https://investor.vanguard.com/annuity/?lang=en)).
So they can't be all bad... right?


EDIT: Another commonality with other insurance products: It is designed so that the insurance company makes money; they have a longer time horizon and rarely die.
Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on August 23, 2017, 10:12:57 PM
Annuities are like any other insurance product: not everyone needs/wants it, there are a lot of crappy versions of them out there, and usually the worst products pay the person selling them the most.

DISCLAIMER: I have recommended an annuity before and think they have their place sometimes.

Even Vanguard offers annuities (https://investor.vanguard.com/annuity/?lang=en (https://investor.vanguard.com/annuity/?lang=en)).
So they can't be all bad... right?


EDIT: Another commonality with other insurance products: It is designed so that the insurance company makes money; they have a longer time horizon and rarely die.
Never mix insurance with investing.
ALL annuities are crappy products that return between 0 and 3% in best case scenarios. Even the so-called "good" annuities (SPIA's) leave you in poverty because those fixed income payments for life eventually are surpassed by bonds and stocks.
"Annuities have their place" is a phrase I hear insurance salesmen use all the time. It's nothing more than a statement of opinion that is not backed by data versus bonds and stocks.
Vanguard is simply cashing in on the opportunity. Vanguard's portfolio selector does not recommend annuities. In fact I don't know of one single robo advisor that includes annuities, and for good reason.
By the way this site is a SALES PITCH for annuities that does not even begin to cover the many negatives. http://obliviousinvestor.com/single-premium-immediate-annuity/
Here's a real critique of SPIAS http://investingadvicewatchdog.com/immediate-annuities.html
Title: Re: Why you should never buy an annuity!
Post by: gerardc on August 24, 2017, 12:55:04 AM
Here's a real critique of SPIAS http://investingadvicewatchdog.com/immediate-annuities.html
That case is pretty convincing, pretty much seals this thread.

However, it only proves one thing: current annuity terms are scammy. Why couldn't a legit company sell low-fee annuities? It seems the same phenomenon as mutual funds in the 1970's, where fees were high because people were not educated about them, and salesmen had big commissions. If we could reduce commissions and overall bullshit with annuities, I think they have the potential to be a good product -- basically lifespan financial insurance. I don't see why insurance companies can't currently provide better terms... probably because of low demand / inefficient market. I'm confident it will get better in the future, especially with all those millenials retiring early!
Title: Re: Why you should never buy an annuity!
Post by: Mr Mark on August 24, 2017, 01:31:00 AM
^ Vanguard do this already (but not with a guaranteed payout) via their Vanguard Managed Payout Fund (VPGDX)  https://investor.vanguard.com/mutual-funds/managed-payout/#/mini/overview/1498 (https://investor.vanguard.com/mutual-funds/managed-payout/#/mini/overview/1498)

Interestingly they target a trinity study-esque 4% payout (yeah!), but charge a rather nasty 0.42% in fees (boo!). It's essentially a managed fund of funds that tries to provide an automatic  ~4% SWR and keep the fund growing to keep pace with inflation. They set the payout at the start of the year and then give it out as a monthly payment. For a lot of these people for whom some posters have suggested might actually want to consider an annuity (like 'old people' just about to get SS & medicare, or widows with zero clue about investing, both groups that annuity salespeople target) it looks like a far better alternative (but with the risk that returns will vary with the value of their diversified market returns).

But there's no free lunch. We Mustachians can get away with doing our own SWR using index funds with super low fees and quite a lot of financial nouse and effort (asset allocation, IRAs, roth conversions and CD ladders, tax gain/loss harvesting, etc). It's totally unreasonable to expect someone to pick this up when they might be very old and not financially literate, and so they will have to pay higher fees than we do for someone to do all this work for them.

I wish Vanguard & AARP would start a non-profit to give people financial advice and guidance on how to invest safely in Vanguard.

EDIT
Hey interesting site, thanks for the link gerardc. I really liked the list of the false arguments used by annuity salespeople http://investingadvicewatchdog.com/annuity-lies.html (http://investingadvicewatchdog.com/annuity-lies.html). Grandma wouldn't stand a chance.
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on August 24, 2017, 05:49:36 PM
^ Vanguard do this already (but not with a guaranteed payout) via their Vanguard Managed Payout Fund (VPGDX)  https://investor.vanguard.com/mutual-funds/managed-payout/#/mini/overview/1498 (https://investor.vanguard.com/mutual-funds/managed-payout/#/mini/overview/1498)

Interestingly they target a trinity study-esque 4% payout (yeah!), but charge a rather nasty 0.42% in fees (boo!). It's essentially a managed fund of funds that tries to provide an automatic  ~4% SWR and keep the fund growing to keep pace with inflation. They set the payout at the start of the year and then give it out as a monthly payment.

So it looked like I would receive 3.62% when I used the calculator on the managed payout fund webpage. I assume the .38% I wouldn't receive is the fee I would be paying Vanguard to handle the payout.
Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on August 25, 2017, 01:18:34 AM
Here's a real critique of SPIAS http://investingadvicewatchdog.com/immediate-annuities.html
That case is pretty convincing, pretty much seals this thread.

However, it only proves one thing: current annuity terms are scammy. Why couldn't a legit company sell low-fee annuities? It seems the same phenomenon as mutual funds in the 1970's, where fees were high because people were not educated about them, and salesmen had big commissions. If we could reduce commissions and overall bullshit with annuities, I think they have the potential to be a good product -- basically lifespan financial insurance. I don't see why insurance companies can't currently provide better terms... probably because of low demand / inefficient market. I'm confident it will get better in the future, especially with all those millenials retiring early!
Retail SPIA's generally pay advisors between 3 and 4%. Vanguard pays no commissions to any advisors and Vanguard sells immediate annuities. But the costs of annuities only tells part of the story. Insurance companies are still for profit companies and they invest at least 70% in bonds (by law). Their portfolios only earn about 3% right now. If they paid out more than what a bond heavy portfolio earns then they would go out of business. So fees or no fees, you're not going to get better returns than if you were to invest on your own.
Title: Re: Why you should never buy an annuity!
Post by: AlmstRtrd on August 25, 2017, 07:28:23 AM
But the costs of annuities only tells part of the story. Insurance companies are still for profit companies and they invest at least 70% in bonds (by law). Their portfolios only earn about 3% right now. If they paid out more than what a bond heavy portfolio earns then they would go out of business. So fees or no fees, you're not going to get better returns than if you were to invest on your own.

Right, except that the companies that sell annuities are essentially collecting a lot of money on dead bodies. Many folks pass away before they hit any kind of "break even" point.

Annuities to me just feel creepy for this reason. Kinda like life insurance, only different.
Title: Re: Why you should never buy an annuity!
Post by: caracarn on August 25, 2017, 08:47:12 AM
PTF
Title: Re: Why you should never buy an annuity!
Post by: intellectsucks on August 28, 2017, 11:01:35 AM
Let me clarify my stance a little, since it seems like my post has been misinterpreted.
No one should EVER put all or the majority of their funds into ANY type of annuity, no matter the type of payout.
There is absolutely no denying that other investment types will offer a much higher rate of return over time, for a much lower cost.
 The benefit of annuities vs other investment types that offer higher returns and lower costs is that they offer GUARANTEES that are not included in other investment types.  Those guarantees have a value, maybe not to you or to me, but certainly to some people.  Hence making a blanket statement like “never buy an annuity” is not useful information.
The value of that guarantee is what really can’t be overstated in annuities favor.  Two considerations in favor of those guarantees. 
Risk tolerance is something that absolutely must be considered in evaluating your portfolio.  Unfortunately risk tolerance is very often an emotional consideration.  2008 was the last year that the S&P 500 had a negative returns.  There are people who are accumulating their staches who have literally NEVER SEEN a bear market.  What will happen to those people if there is another huge loss like in 2008 or (God forbid) multiple years in a row of large losses like the early 2000’s?  Lots of them will be panic selling and moving to cash; lots of them are ALREADY doing it trying to time the market which is another disastrous move.  My experience is that people have a much higher tolerance for risk when they know a portion of their assets are guaranteed.  Having money in an annuity is a much better option than having money sitting in cash, either because it was pulled out in the midst of a crash or because it was sitting on the sidelines waiting for the “Trump dump”.
If you or your spouse need nursing home care or its equivalent, how long will your stache last to provide that ultra-safe 4% SWR?  Costs vary, but a fairly conservative estimate will be around $10k/mo.  Average stay is a little over 2 years.  Once the patient receiving the care dies, perhaps the surviving spouse will be mentally capable of adjusting the financial plan to account for the reduced assets, perhaps not.  Or, perhaps you or your spouse will end up with costs that far exceed average and you end up impoverishing yourselves.  Having a source of guaranteed income that neither spouse can outlive certainly looks a little more attractive than at the start of this thread doesn’t it?
Here’s an example: The CNNMoney annuity calculator puts a single life annuity payment for a 45 year old male in Pennsylvania at $1681/mo for an initial premium of $400,000.  That number comes REALLY close to the MMM family’s bare bones minimum expenses for the year, and is 25% higher than a 4% SWR on the same amount.  If you instead opt for a joint life payout, you’ll probably be in the range of $1100/mo, a pretty fair bit lower than the MMM family’s bare bones budget and around 18% less than a 4% SWR on the same amount.  If you have a stache of $1 million, that leaves you with $600k to invest in VTSAX or any other mix of investments to provide higher rates of return and inflation protection.  Since you already have a guaranteed source of income, you could probably get away with a lower SWR on your remaining $600k, making your odds of growing your stache during drawdown even more likely.
Will this example provide the same level of income as a more traditional stock/bond mix?  Almost certainly not.  Will it take a big portion of your stache and make it illiquid (similar to a real estate investment)?  Yes.  However, that guaranteed income can help offset the risk of retiring in market conditions similar to 1999 where the next three years saw average losses of 14%.
To summarize my opinion: annuities are fine for some people to put a portion of their money, but terrible for others.
People who would benefit from annuities:
The extremely risk averse
People who manage their assets and have spouses who are clueless about managing those assets
People who are concerned about their income producing assets being eaten up by nursing home or other large medical costs.
People for whom annuities are not a great idea
People who are risk tolerant
Couples where both spouses are confident in their current and future ability to manage assets effectively
People who are unconcerned about future nursing home or medical costs
Title: Re: Why you should never buy an annuity!
Post by: uwp on August 28, 2017, 02:51:18 PM
Let me clarify my stance a little, since it seems like my post has been misinterpreted.

We are arguing against the crowd here.  Obviously everyone is an investing robot and doesn't mind the market going down because they know deep down in their circuit board that it always comes back up and will return a nice round 10% going forward into eternity.

Sometimes people prefer the guarantee that an annuity provides, and are willing to pay for it (through lower returns compared to 60/40).

This isn't even getting into the weeds of arguments like using annuities as bond replacements allowing you to take more risk with the rest of your portfolio.
Title: Re: Why you should never buy an annuity!
Post by: Hargrove on August 28, 2017, 04:27:05 PM
Considering that the principal is lost, guaranteed, so an early death probably means a loss and a late death means competing against the mighty market returns, the snide commentary is really not necessary. It's hard to make an argument for something stick if your talking points are "clueless demographics" and "catastrophic and prolonged economic downturn that the annuity company survives."

The market has always come back up. It's not a guarantee of future returns. However, for over 100 years, it's been the best operating advice to work with. If you want to bash the wisdom of generations on anything - investing, Shakespeare, how to scramble eggs... it should probably be with a well-thought argument.

Or, I guess, you could just complain that everyone is a robot.

I can't really accept the "extremely risk averse" argument because an annuity IS an absolutely massive risk of principal that will PROBABLY lose. It's not an easy, ultra-low-risk option for the risk averse; it's a lower-payout, significant-risk option for those terrified of risk who don't know much about finances.

I'd even love to hear a counterargument FROM an annuity salesperson - you would think they have some scenarios where the annuity wins if it weren't just cultivating fear and calling detractors names.
Title: Re: Why you should never buy an annuity!
Post by: DoubleDown on August 28, 2017, 05:06:40 PM
Annuities have their place, they can make sense in a variety of situations. I certainly would not put my entire portfolio into an annuity, but I do think it makes great sense to put in a sufficient amount to cover bare-bones expenses for life if those aren't covered by other income streams. In the OP's example, if you have $1M and need $20k/year to cover basic necessities (food, shelter, health care), then I would definitely consider buying an annuity at that payout for $333k. You can leave the other $667k invested to cover all other expenses beyond basic necessities (travel, eating out, transportation, etc.), and likely having plenty left over to pass down to heirs.

Having your basic expenses covered no matter what can provide a real healthy peace of mind for those who would otherwise worry about market crashes or other shocks to your net worth. You'll know that no matter what, you'll at least have a roof over your head and be able to eat. This can also help you feel more comfortable about regular spending and giving yourself a raise every year with inflation, since you won't have to worry about market ups and downs affecting your ability to survive.

Other forms of income can already fill the place of an annuity to cover basic life expenses -- pensions, Social Security, and the like. If you expect sufficient income from those, then an annuity is likely overkill.
Title: Re: Why you should never buy an annuity!
Post by: uwp on August 28, 2017, 05:50:28 PM
People appreciate the assurance that annuity income provides.  That has a value - especially to folks who are already retired. I don't know why you keep dismissing that. Also, annuities are generally insured by the state, so you can be protected in your prolonged economic downturn scenario where the insurance company went bankrupt. 
Title: Re: Why you should never buy an annuity!
Post by: bobechs on August 28, 2017, 06:13:04 PM
At least the payout on a SPIA should shut up the only-feel-(somewhat)-safe-with-a-2%/1.5%/1%-withdrawal-rate-and-the-rest-of-you-are-suckers contingent around here.

Except that nothing will ever shut them up.
Title: Re: Why you should never buy an annuity!
Post by: Free Forever on August 28, 2017, 06:13:09 PM
I'd invest some of my savings in an annuity if the terms were good enough. Like if it paid me in the ball park of inflation + 4-5% at my age (37). So never say never but it's unlikely any insurance company will offer a deal like that unless you're quite a bit older than me.

Many, but not all, of the investment oriented products offered by insurance companies can be roughly replicated using stocks , bonds and options , usually at a much lower cost, if you have the discipline and know how to do it (probably <.5% of all investors). There's always going to be a legitimate market for these products, mainly people who are risk averse, will never be competent at DIY and/or lack the discipline to stick to an investing strategy.
Title: Re: Why you should never buy an annuity!
Post by: DoubleDown on August 28, 2017, 10:07:59 PM
Many, but not all, of the investment oriented products offered by insurance companies can be roughly replicated using stocks , bonds and options , usually at a much lower cost, if you have the discipline and know how to do it (probably <.5% of all investors).

This is not true. Insurance companies can provide guarantees for payouts that you cannot achieve on your own because insurance companies pool risk across large populations. Your individual portfolio will be far more volatile than an entire insurance company's assets whose payouts have been determined through extremely sophisticated actuarial work (unless you are invested with no risk, in which case your returns will be very sub-optimal compared to an annuity).

There's always going to be a legitimate market for these products, mainly people who are risk averse, will never be competent at DIY and/or lack the discipline to stick to an investing strategy.

While there's a hint of truth there (since some people jump into annuities without understanding them), it also discounts very legitimate reasons for buying annuities that have nothing to do with being incompetent or lacking discipline. Respectfully I'd suggest studying the issue a bit more. There are some very smart people here on this board and elsewhere who understand that annuities can have a very legitimate place in a smart investor's plan. We haven't even touched on tax and withdrawal implications, which are other advantages of annuities. The fact that you think an individual investor can DIY an annuity suggests some further learning would be helpful.
Title: Re: Why you should never buy an annuity!
Post by: Paul der Krake on August 28, 2017, 11:16:33 PM
Annuities protect against two things:
- making disastrous decisions in your old age
- living significantly longer than expected

That's it. You don't get extra points for dying with the highest return on your investments.

That being said, buyer beware. It's an industry ripe with snake oil.
Title: Re: Why you should never buy an annuity!
Post by: GenXbiker on August 29, 2017, 04:20:28 AM

I don't even have kids that would be left out, and I still can't see a situation that I would ever want to buy an annuity.
Title: Re: Why you should never buy an annuity!
Post by: SnackDog on August 29, 2017, 05:00:20 AM
It can be great longevity insurance.  If you are a 70 year old male, Vanguard will give you a guaranteed 7.7% payout for life.  At age 70, unless inflation is absolutely raging, it is a pretty good proposition for at least a portion of your money.  It is almost double the 4% SWR.  You can turn $1 million into $77,000 per year.
Title: Re: Why you should never buy an annuity!
Post by: shawndoggy on August 29, 2017, 06:34:56 AM
I suck at math, so maybe you guys can help.  My wife is a public employee and has the opportunity to buy up to an extra five years into her public retirement system.  Each year presently costs 28500 (at age 46) and will net approximately 200 per month (2400/yr) in retirement income at age 60.  We are considering buying the five years now.  When combined with her existing service credit and expected additional service credit at retirement, this should result in approximately $3000 / mo in guaranteed income.  The benefit is subject to cola increases after three years and there is a spousal benefit as well. 

Thoughts?
Title: Re: Why you should never buy an annuity!
Post by: Dicey on August 29, 2017, 07:42:07 AM
I don't even have kids that would be left out, and I still can't see a situation that I would ever want to buy an annuity.
That's what's so very odd about this thread. Sure, annuities might be good in a few very specific circumstances. You could say the same for Whole Life insurance or a full service broker. It's just that none of those options is particularly mustachian. In fact, they're all solidly anti-mustachian.  One must wonder why the OP is promoting them so fervently here, in the land of DIY investment portfolios. Sheesh, look at the flak an Edward Jones account generates. Annuities are an order of magnitude worse for all but a tiny subset of the population.

Most, if not all, mustachians can achieve their goals without ever knowing a thing about annuities. Well, except one: annuities are very expensive for the buyer and very, very lucrative for the seller.
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on August 29, 2017, 07:43:14 AM
I suck at math, so maybe you guys can help.  My wife is a public employee and has the opportunity to buy up to an extra five years into her public retirement system.  Each year presently costs 28500 (at age 46) and will net approximately 200 per month (2400/yr) in retirement income at age 60.  We are considering buying the five years now.  When combined with her existing service credit and expected additional service credit at retirement, this should result in approximately $3000 / mo in guaranteed income.  The benefit is subject to cola increases after three years and there is a spousal benefit as well. 

Thoughts?

Whenever I have a question like this, I like to use the Present Value function on an Excel Spreadsheet.
For example, I would want to compare how the 28500 times five years would have grown by age 60 and then what the 4% safe withdrawal rate would be at that point versus the guaranteed payout of the present value of $2400 times five would be worth.
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on August 29, 2017, 07:53:52 AM

That's what's so very odd about this thread. Sure, annuities might be good in a few very specific circumstances. You could say the same for Whole Life insurance or a full service broker. It's just that none of those options is particularly mustachian. In fact, they're all solidly anti-mustachian.  One must wonder why the OP is promoting them so fervently here, in the land of DIY investment portfolios. Sheesh, look at the flak an Edward Jones account generates. Annuities are an order of magnitude worse for all but a tiny subset of the population.

Most, if not all, mustachians can achieve their goals without ever knowing a thing about annuities. Well, except one: annuities are very expensive for the buyer and very, very lucrative for the seller.

It can be great longevity insurance.  If you are a 70 year old male, Vanguard will give you a guaranteed 7.7% payout for life.  At age 70, unless inflation is absolutely raging, it is a pretty good proposition for at least a portion of your money.  It is almost double the 4% SWR.  You can turn $1 million into $77,000 per year.

I agree with both opinions above.
Still SnackDog raises a good point about perhaps using annuities as longevity insurance since if I were 75 years old I could get a great payout from the annuity. I might use a portion of my stash at that point to buy an immediate annuity.

I'd like to know what happened to those customers of AIG who bought annuities ?  Did they lose their money during AIG's bankruptcy ? A government bailout helped AIG stay afloat and recover.
Annuities are protected by state insurance commissioners. However, if it's anything like what happens to pensions in bankruptcy, then the insurance company is going to be allowed to reduce the payout to the annuity customers. Some states have insurance commissioners and/or laws that favor the insurance company over the policyholder.
Why do annuity contracts have to hundreds of pages in legalese?

I have a nephew who just recently got a job with New York Life Insurance company, and the pay is strictly by commission, there's not even a base salary. Sad!
Title: Re: Why you should never buy an annuity!
Post by: Rubic on August 29, 2017, 08:23:53 AM

Still SnackDog raises a good point about perhaps using annuities as longevity insurance
since if I were 75 years old I could get a great payout from the annuity. I might use a portion
of my stash at that point to buy an immediate annuity.

If you're a US citizen and your area of concern is longevity insurance, your best bet is to
defer social security benefits until age 70. 

https://www.kitces.com/blog/how-delaying-social-security-can-be-the-best-long-term-investment-or-annuity-money-can-buy/

There's nothing preventing you from considering an annuity at age 75, but most likely
your stash will be so large by then that you won't need it.
Title: Re: Why you should never buy an annuity!
Post by: Paul der Krake on August 29, 2017, 08:27:21 AM
I'd like to know what happened to those customers of AIG who bought annuities ?  Did they lose their money during AIG's bankruptcy ? A government bailout helped AIG stay afloat and recover.
Annuities are protected by state insurance commissioners. However, if it's anything like what happens to pensions in bankruptcy, then the insurance company is going to be allowed to reduce the payout to the annuity customers. Some states have insurance commissioners and/or laws that favor the insurance company over the policyholder.
Good summary of what happens to policy holders:
http://www.kiplinger.com/article/insurance/T003-C001-S001-what-the-aig-bailout-means-for-you.html

For AIG specifically, AFAICT all claims have been and continue to be paid.
Title: Re: Why you should never buy an annuity!
Post by: shawndoggy on August 29, 2017, 08:51:41 AM
Whenever I have a question like this, I like to use the Present Value function on an Excel Spreadsheet.
For example, I would want to compare how the 28500 times five years would have grown by age 60 and then what the 4% safe withdrawal rate would be at that point versus the guaranteed payout of the present value of $2400 times five would be worth.

Right.  So I get that to get $12K a year, I need $300000. 

Right now I can buy that $12K a year stream (starting in 14 years) for 142500.  It looks like 142500 turns into approximately 300k with a 5.4% rate of return.

So I guess the question is whether a guaranteed 5.4% rate of return makes sense for a portion of the portfolio to generate some guaranteed income?

The additional factor here is that my wife's retirement comp is based on her highest 3 years of salary.  In the unlikely event she could bump her salary up from its current rate between now and age 60, the income stream would also increase (i.e. in the extreme, if she doubled her state salary, she'd also double her retirement, and the 12k a year would turn into 24k a year for the same 142500 investment).  Realistically she's close to being topped out, but cola and step increases should bump her salary by 2-3% per year between now and retirement too.

Title: Re: Why you should never buy an annuity!
Post by: caracarn on August 29, 2017, 08:55:20 AM

Still SnackDog raises a good point about perhaps using annuities as longevity insurance
since if I were 75 years old I could get a great payout from the annuity. I might use a portion
of my stash at that point to buy an immediate annuity.

If you're a US citizen and your area of concern is longevity insurance, your best bet is to
defer social security benefits until age 70. 

https://www.kitces.com/blog/how-delaying-social-security-can-be-the-best-long-term-investment-or-annuity-money-can-buy/

There's nothing preventing you from considering an annuity at age 75, but most likely
your stash will be so large by then that you won't need it.
A very interesting analysis.  I have felt delaying SS payments was a solid strategy unless you had a family history of death before 70.  Takes a little longer to get a true benefit but the survivorship analysis was helpful too.  With my wife being several years younger than I this becomes something we should certainly discuss as the time nears to decide when to pull the lever and release the SS funding.
Title: Re: Why you should never buy an annuity!
Post by: intellectsucks on August 29, 2017, 09:09:23 AM
@Hargrove-Losing the principal due to early death in an annuity only applies when choosing the “single life” payout option.  As I’ve pointed out multiple times, there are other payout options, including ones that offer return of principal guarantees.  As for the rest of your points, I guess we’re just going to have to agree to disagree.  I do not believe that risk averse people (even if they are “mustachians”) will be more comfortable with market risk than with inflation risk.  You do.
Regarding the “catastrophic and prolonged economic downturn that the annuity company survives”, it doesn’t have to be catastrophic, or especially prolonged.  Sequence of returns risk is very real and requires planning to mitigate.  In my mind, using an annuity as a portion of your stache to provide a set minimum level of income is a perfectly reasonable way to lessen or eliminate that risk.  It certainly isn’t the only way to mitigate that risk, and there’s nothing wrong with mitigating it another way or even with choosing to ignore your risk if you’re comfortable changing your plan later on.
@DoubleDown-The peace of mind factor is so huge.  Great reply.
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on August 29, 2017, 09:26:09 AM
With interest rates this low, and since these insurance companies are required to invest 70% in bonds, buying an annuity right now means you are at one of the lowest yield rates on an annuity.
There's anticipation that interest rates will gradually rise. So if I were an insurance company, I would really want to sell annuities like crazy right now, talking them up in message boards, etc., because if interest rates eventually do go up, and yield on bonds rise, then the insurance company will make a lot of money having to give only low payouts to policy holders who were unlucky enough to buy policies during low interest rate environments.
Title: Re: Why you should never buy an annuity!
Post by: Free Forever on August 29, 2017, 04:20:31 PM
Many, but not all, of the investment oriented products offered by insurance companies can be roughly replicated using stocks , bonds and options , usually at a much lower cost, if you have the discipline and know how to do it (probably <.5% of all investors).

This is not true. Insurance companies can provide guarantees for payouts ......


I think you're just arguing a point a I didn't actually make here. I am not saying you can perfectly replicate all the products an insurance company offers. Rather I am saying you can roughly replicate some of the products.

There's always going to be a legitimate market for these products, mainly people who are risk averse, will never be competent at DIY and/or lack the discipline to stick to an investing strategy.

While there's a hint of truth there (since some people jump into annuities without understanding them), it also discounts very legitimate reasons for buying annuities that have nothing to do with being incompetent or lacking discipline. Respectfully I'd suggest studying the issue a bit more.

Once again you're arguing a point I didn't actually make. I'd suggest that you structure your arguments around the facts, if you need more details ask questions before making such swift and spurious conclusions. Do you by chance work in the insurance industry or sell insurance products? I'm not claiming to be an expert which is why I couched everything I wrote in non-concrete language.
Title: Re: Why you should never buy an annuity!
Post by: DoubleDown on August 29, 2017, 08:10:29 PM
Do you by chance work in the insurance industry or sell insurance products? I'm not claiming to be an expert which is why I couched everything I wrote in non-concrete language.

I no longer work for a living. I retired at 47 thanks in large part to this website. I was only reacting to your indication that the only reason anyone would buy an annuity is because they're incompetent, undisciplined, and risk-averse (your words). I think that could be considered pretty insulting to anyone who has purchased or considered an annuity. Some really smart people on this forum who have retired rich have made compelling cases for annuities in certain situations; they definitely aren't stupid or incompetent (@Nords, a longtime and senior member, comes to mind as one example). I don't have an annuity, and I certainly don't sell them, thus I have no dog in this fight. I just don't want people thinking they must be stupid or incompetent to consider buying one in order to smooth out their retirement risk.

You say you can roughly "DIY" it: No, you can't, unless you're pooling your risk and assets with a few million other people and have a team of PhD actuaries to determine the structure of your payouts.
Title: Re: Why you should never buy an annuity!
Post by: thriftyish on August 29, 2017, 09:44:00 PM
Long time lurker, infrequent commenter. At the risk of inviting ridicule, I offer myself up as an example of someone who has invested in an annuity, and even as a young(ish) and (mostly) mentally sound person!

I am mid-30s and recently started investing part of my retirement savings in a TIAA 'traditional' annuity. Why?

Well, let me say up front that I have a significant part of my retirement savings in stock-based index funds. I value those investments for protecting my savings from inflation and supporting long-term growth.

On the other hand, I'm fairly risk-averse. I'd like to think I could stomach a 2008-esque crash, but frankly I don't trust myself. If all or most of my savings were in stocks and they dropped by 20-30%, I suspect I would be sorely tempted to sell and preserve my hard-earned savings (the principal), which of course would be a disastrous move. To guard against this I allocate a significant part of my portfolio to 'low risk' investments.

So, why not bonds? Well, I do have some investments in bonds but I recently decided to redirect the new savings for the 'low risk' part of my portfolio into TIAA traditional instead. At today's interest rates, I'm getting better returns from the annuity than a broad-based bond fund, and there is less risk of losing the principal since it is a guaranteed annuity. (TIAA has a strong history and a credit rating similar to the US government) There are different 'forms' of this annuity associated with different institutions/accounts, and the one I have is fairly liquid, so I'm confident I could transfer the $ out if need be. It also has fairly flexible options for payouts including lump sum.

I certainly would not feel comfortable having all my retirement savings in this annuity, and things might change down the road as my employment situation changes, but for now I value the modest interest rate and peace of mind it provides for this part of my portfolio. (and no, I do not work for TIAA!!)

Let the mocking commence...
Title: Re: Why you should never buy an annuity!
Post by: Dicey on August 29, 2017, 11:31:59 PM
There are different 'forms' of this annuity associated with different institutions/accounts, and the one I have is fairly liquid, so I'm confident I could transfer the $ out if need be.

Let the mocking commence...
Not mocking. Completely serious. What kind of annuity lets you "transfer the $ out if need be"?
Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on August 30, 2017, 03:27:49 AM
The benefit of annuities vs other investment types that offer higher returns and lower costs is that they offer GUARANTEES that are not included in other investment types.  Those guarantees have a value, maybe not to you or to me, but certainly to some people.  Hence making a blanket statement like “never buy an annuity” is not useful information.
The value of that guarantee is what really can’t be overstated in annuities favor.  Two considerations in favor of those guarantees. 

What will happen to those people if there is another huge loss like in 2008 or (God forbid) multiple years in a row of large losses like the early 2000’s?
This is a total insurance salesman's strawman argument. You're talking about someone who is 100% in stocks. That's insane if you're "risk averse". NOBODY who is risk averse puts 100% of their money in stocks. They would diversify HEAVILY into BONDS! Gee look what happened in the 2000's with a bond heavy mix of 10 year treasuries and stocks. You did just fine!
http://www.investingadvicewatchdog.com/images-new/chart-2000-2015.jpg
So again what do I need a guarantee for if I'm "risk averse"? You don't. It's only insurance salesmen who will tell you that you must have your money guaranteed in exchange for insurance companies and insurance salesmen getting rich off of naive investors who have never heard of bonds.
In the last 22 years a 28/72 mix hasn't lost even 1% in any year. Annuities are easily and consistently beaten because they are inferior products. http://www.investingadvicewatchdog.com/images/28-72-year.jpg
Title: Re: Why you should never buy an annuity!
Post by: thriftyish on August 30, 2017, 07:29:56 AM
There are different 'forms' of this annuity associated with different institutions/accounts, and the one I have is fairly liquid, so I'm confident I could transfer the $ out if need be.

Let the mocking commence...
Not mocking. Completely serious. What kind of annuity lets you "transfer the $ out if need be"?

Check out this resource - the relevant section is Section 3 - Transfers & withdrawals, and then "Contracts where TIAA traditional pays benefits immediately (typically lower interest rates)":
https://www.tiaa.org/public/pdf/TT_FAQ.pdf

The trade-off is slightly lower interest rates for increased liquidity. And it really depends on what contract your employer offers, so this likely does not apply to lots of people. But still.

Title: Re: Why you should never buy an annuity!
Post by: patchyfacialhair on August 30, 2017, 09:28:19 AM
Posting to follow.

I will probably never buy an annuity (after a couple decades of growth and modest SS, I'll be set for life), but I think the most important thing for those considering one is to always keep an annuity in the insurance column of your finances.

Insurance companies exist to make money, so duh, it's not "optimal." But I could see where it becomes an option once someone has all their boxes checked. Ample investments? Health insurance locked in? Social Security locked in? All other financial goals met? At that point it's not about becoming rich. Anything extra after all that could be used to purchase insurance to ensure a guaranteed payout. Is it a good rate of return? No. Is it subject to liquidity risk or other risks, like the company folding? Absolutely. But again, for the 70 year old with more money than they know what to do with, healthcare locked in, and SS locked in, it can provide peace of mind for a small portion of their overall net worth.
Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on August 30, 2017, 11:38:39 PM
But again, for the 70 year old with more money than they know what to do with, healthcare locked in, and SS locked in, it can provide peace of mind for a small portion of their overall net worth.
CD's are the better choice then. All an annuity would do is rob heirs of inheritance and transfer that money to an insurance salesman and insurance company.
Title: Re: Why you should never buy an annuity!
Post by: Telecaster on August 31, 2017, 12:23:34 AM

Sometimes people prefer the guarantee that an annuity provides, and are willing to pay for it (through lower returns compared to 60/40).


That's the thing.  The returns are very, very close to zero.  If not actually zero and possibly below zero.   Basically, all annuities do is return your principal over time.   You're lucky to get much more than that.  And in exchange for the service of them doling your money back to you, you have to give up control of your fund.  In what universe does that make sense? 

I suppose there is a scenario somewhere for somebody where an annuity makes sense.  But 99.9999% of the population should run away screaming with their hair on fire.  For the vast, and I mean vast, majority of people an annuity is a stupid, stupid, stupid thing.





Title: Re: Why you should never buy an annuity!
Post by: Telecaster on August 31, 2017, 12:43:07 AM
But again, for the 70 year old with more money than they know what to do with, healthcare locked in, and SS locked in, it can provide peace of mind for a small portion of their overall net worth.

I suppose so, but in that case what do you need the insurance company for?  The OP laid it out very well.  All the annuity really does is take a lump sum and dole it back to you over time.  And our 70 year old will probably die before she gets her money back.  If the 70 year old simply puts her money in cash, she has safety and equal or greater rate of return over an annuity.  And she can access the money for anything she likes, and can leave it to her heirs, if she wishes.  I would say the person in your example is the last person on Earth who should be buying an annuity. 

Title: Re: Why you should never buy an annuity!
Post by: patchyfacialhair on August 31, 2017, 10:00:34 AM
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.
Title: Re: Why you should never buy an annuity!
Post by: Dicey on August 31, 2017, 10:45:05 AM
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
Title: Re: Why you should never buy an annuity!
Post by: Paul der Krake on August 31, 2017, 11:54:52 AM
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
Disagree. I don't know what my mental acuity will be in my 60s in beyond, and I may need to make financial decisions on behalf of people not in our little club. Annuities are a common financial tool, and there's virtually no cost to discussing them. Even if it's 95% negative.
Title: Re: Why you should never buy an annuity!
Post by: uwp on August 31, 2017, 12:19:59 PM

Sometimes people prefer the guarantee that an annuity provides, and are willing to pay for it (through lower returns compared to 60/40).


That's the thing.  The returns are very, very close to zero.  If not actually zero and possibly below zero.   Basically, all annuities do is return your principal over time.   You're lucky to get much more than that. 

From the example earlier in the thread that said Vanguard would give a 70 year old male a guaranteed 7.7% payout for life.  Life expectancy for a 70 y/o male (non-smoker) is ~88. 

If you took $7,700 out of $100,000 with zero return, you would run out of money at age 82. 
Let's say you were very risk adverse (but not money in the mattress crazy) so you put it in 2% CDs, you run out of money at age 84. 
To make it last until your life expectancy of 88, you need to earn right around 4.5% annually.   
But both your parents lived to 95, so you want to budget out that far, now we are talking about 6.5%.

Of course, the mustachian answer is to spend less :)
Title: Re: Why you should never buy an annuity!
Post by: patchyfacialhair on August 31, 2017, 12:23:22 PM
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?

Well, I'm not OP of this tread....and....it's important to always look at both/all sides of a topic?

We're not exactly talking about a horrible product like a payday loan with a 500% interest rate or a mobile home loan. We're talking about an insurance product (although you might call it horrible...I probably would too...) that serves a purpose, and some folks see value in that. Nobody credible in this thread is advocating for an annuity as a primary investment vehicle, only that it serves its purpose as a risk management tool in certain situations.
Title: Re: Why you should never buy an annuity!
Post by: DoubleDown on August 31, 2017, 12:37:34 PM
So here's the thing with annuities that I feel a lot of people are missing (maybe they aren't, but that's my impression), and the mathematician in me can't take it any longer. Many posts have put in this (false) built-in assumption that "you'll be lucky to even get your principal back," that in no circumstances would buying an annuity be better than just keeping your own principal and putting it in CD's or cash, that you're just giving away your principal for a ridiculous low return, and similar arguments.

The thing is, no one knows if it's a bad or good purchase for themselves, individually, unless they have a magic crystal ball that tells them exactly when they'll die. Sure, you might die early or at your statistically expected life span, in which case the insurance company has made a decent profit off of your principal. But you might outlive your lifespan by many years or decades, in which case you got to take the insurance company for an expensive ride on their dime.

Of course the actuaries at these companies have worked it all out so that by knowing the statistical expected lifespans of the population at large, they can afford those people who outlive their expected life span. For as many that die later, an equal number will die earlier. And on top of that, they have built in a healthy profit margin plus making money by investing your principal (hopefully for a better return than they are giving to you, from their perspective). Since they have pooled the risk across so many customers, it's a very safe bet that they will make out nicely overall, and the fact that they have been around for hundreds of years is a testament to the longevity of this business model.

But it is patently false for anyone to say it's just a guarantee that you'll be worse off by purchasing an annuity. You could have a life expectancy of 80 years and live to be 100, in which case the insurance company has lost a significant amount of money on you (i.e., you won). It's almost like a bookie -- they've taken an equal number of bets for each team and built in a cut so they make out no matter what. But that doesn't mean no one ever makes a winning bet with the bookie. Statistically speaking, about half the people "win" against the insurance company and get more in return for their principal than expected, and another half get less by dying early or when "expected." The insurance company just gets their profit margin on top of all of it, so everyone's satisfied.

So for the last time it's not necessarily about being lazy, incompetent, stupid, overly risk-averse, and so on. It can be a reasonable way of purchasing a guaranteed rate of return that will pay out for life, and you won't know if you made an overall optimal choice until/unless you know the exact date of your death.

YMMV.
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on August 31, 2017, 12:47:34 PM
In an ideal world, you could buy a bigger social security check instead of having to purchase an annuity from an insurance company.
Title: Re: Why you should never buy an annuity!
Post by: GenXbiker on August 31, 2017, 01:02:44 PM

I'll leave it to the suckers to buy the annuities.
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on August 31, 2017, 01:12:57 PM
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
Disagree. I don't know what my mental acuity will be in my 60s in beyond, and I may need to make financial decisions on behalf of people not in our little club. Annuities are a common financial tool, and there's virtually no cost to discussing them. Even if it's 95% negative.

That's a good point. It's hard to know if the cure is worse than the problem. If I my mental acuity is fading and I buy annuities have I just allowed the insurance company to take advantage of me ?
Title: Re: Why you should never buy an annuity!
Post by: Telecaster on August 31, 2017, 01:31:13 PM

Sometimes people prefer the guarantee that an annuity provides, and are willing to pay for it (through lower returns compared to 60/40).


That's the thing.  The returns are very, very close to zero.  If not actually zero and possibly below zero.   Basically, all annuities do is return your principal over time.   You're lucky to get much more than that. 

From the example earlier in the thread that said Vanguard would give a 70 year old male a guaranteed 7.7% payout for life.  Life expectancy for a 70 y/o male (non-smoker) is ~88. 

If you took $7,700 out of $100,000 with zero return, you would run out of money at age 82. 
Let's say you were very risk adverse (but not money in the mattress crazy) so you put it in 2% CDs, you run out of money at age 84. 
To make it last until your life expectancy of 88, you need to earn right around 4.5% annually.   
But both your parents lived to 95, so you want to budget out that far, now we are talking about 6.5%.

Of course, the mustachian answer is to spend less :)

That sounds about right, but mea culpa I should have specified real rate of return.   I just checked the SSA life expectancy tables and it says a 70 year old male can expect to life about 14 more years (that's for the general population).  Remember half the population will be dead before reaching their life expectancy.  Right there, half won't get even the 2%. 

Next, annuities are not commonly indexed to inflation (like in your example).   You can buy them, but they cost quite a bit more.  If you include any reasonable estimate for inflation, most people won't get any real return on their annuities.  Yes of course, some people will be the odds and it works out great for them.  But most people won't and that's why I said you have got to be lucky.   

Title: Re: Why you should never buy an annuity!
Post by: Dicey on August 31, 2017, 01:33:22 PM
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
Disagree. I don't know what my mental acuity will be in my 60s in beyond, and I may need to make financial decisions on behalf of people not in our little club. Annuities are a common financial tool, and there's virtually no cost to discussing them. Even if it's 95% negative.
But wait! You're only nine! There will be some loads of shiny, overpriced, guaranteed things to chose from, should the time ever come that you truly need one.
Title: Re: Why you should never buy an annuity!
Post by: uwp on August 31, 2017, 01:39:53 PM
  Yes of course, some people will be the odds and it works out great for them.  But most people won't and that's why I said you have got to be lucky.   

Yes.
It's almost like it is an insurance product sold to protect against running out of money because you live longer than expected.
Title: Re: Why you should never buy an annuity!
Post by: Hargrove on August 31, 2017, 02:37:44 PM
So here's the thing with annuities that I feel a lot of people are missing (maybe they aren't, but that's my impression), and the mathematician in me can't take it any longer. Many posts have put in this (false) built-in assumption that "you'll be lucky to even get your principal back," that in no circumstances would buying an annuity be better than just keeping your own principal and putting it in CD's or cash, that you're just giving away your principal for a ridiculous low return, and similar arguments.

The thing is, no one knows if it's a bad or good purchase for themselves, individually, unless they have a magic crystal ball that tells them exactly when they'll die.

This particular post is a common false equivalency.

It is completely irrelevant when you die, or if you know when you'll die, in terms of comparing annuities to OTHER investment vehicles, where (surprize!) you ALSO don't know when you'll die. You're not comparing the annuity to your magical knowledge, you're comparing it to other investment vehicles assuming exactly the same imperfect knowledge.
Title: Re: Why you should never buy an annuity!
Post by: uwp on August 31, 2017, 02:49:57 PM
This particular post is a common false equivalency.

It is completely irrelevant when you die, or if you know when you'll die, in terms of comparing annuities to OTHER investment vehicles, where (surprize!) you ALSO don't know when you'll die. You're not comparing the annuity to your magical knowledge, you're comparing it to other investment vehicles assuming exactly the same imperfect knowledge.

It is relevant when you die.  Because you don't know when you will die, most people work with a safe withdrawal rate.  Annuities allow you to surpass that. 

Sure, you may die at 80, and not live to see a great return on the annuity,  but you had 10 years of spending $7,700/year rather than $4,000/year (more than $30,000 extra).  I bet your dead body is really excited about the excess returns you had by investing in a 28/72 portfolio while you spent thousands less while alive.
Title: Re: Why you should never buy an annuity!
Post by: Paul der Krake on August 31, 2017, 03:10:07 PM
Disagree. I don't know what my mental acuity will be in my 60s in beyond, and I may need to make financial decisions on behalf of people not in our little club. Annuities are a common financial tool, and there's virtually no cost to discussing them. Even if it's 95% negative.

That's a good point. It's hard to know if the cure is worse than the problem. If I my mental acuity is fading and I buy annuities have I just allowed the insurance company to take advantage of me ?
Well, it's a tradeoff. You are okay being "taken advantaged of" now, because it's better than really, really, screwing yourself later on. Think, day trading in your 70s with all of your IRA because you're convinced you know something others don't.

And it's not just your mental acuity, it's that of a surviving spouse who may not know or care.
Title: Re: Why you should never buy an annuity!
Post by: DoubleDown on August 31, 2017, 05:36:48 PM
So here's the thing with annuities that I feel a lot of people are missing (maybe they aren't, but that's my impression), and the mathematician in me can't take it any longer. Many posts have put in this (false) built-in assumption that "you'll be lucky to even get your principal back," that in no circumstances would buying an annuity be better than just keeping your own principal and putting it in CD's or cash, that you're just giving away your principal for a ridiculous low return, and similar arguments.

The thing is, no one knows if it's a bad or good purchase for themselves, individually, unless they have a magic crystal ball that tells them exactly when they'll die.

This particular post is a common false equivalency.

It is completely irrelevant when you die, or if you know when you'll die, in terms of comparing annuities to OTHER investment vehicles, where (surprize!) you ALSO don't know when you'll die. You're not comparing the annuity to your magical knowledge, you're comparing it to other investment vehicles assuming exactly the same imperfect knowledge.

Yeah, not a false equivalency. Our lack of knowledge about the future is the whole point of insurance/annuities. If I knew my house would never catch on fire or have a disaster, I could drop insurance on it now. Same with health insurance, etc. Or I could buy it the day before I know disaster will strike. Insurance/annuities allow you to protect against disaster in exchange for a premium. In the case of retirement funding, the "disaster" scenario of course is outliving your money, which is a very real possibility. An annuity protects against that.

If it weren't serious business, it would almost be comical how some what I will call financially immature people here seem to think it will be all good times in the future, as they've only been investing during a bull market and have never lived through a long recession, a depression, a 50% drop in their portfolio values, etc.
Title: Re: Why you should never buy an annuity!
Post by: Telecaster on August 31, 2017, 09:54:28 PM

Yeah, not a false equivalency. Our lack of knowledge about the future is the whole point of insurance/annuities. If I knew my house would never catch on fire or have a disaster, I could drop insurance on it now. Same with health insurance, etc. Or I could buy it the day before I know disaster will strike. Insurance/annuities allow you to protect against disaster in exchange for a premium. In the case of retirement funding, the "disaster" scenario of course is outliving your money, which is a very real possibility. An annuity protects against that.

Does it really?  Let's say you are one of the happy few who lives long enough to see a positive return on an annuity.  Let's say you receive returns for 40 years, which as per the OP would give you a real rate of return of 3.3%.  Not amazing, but at least it is there, right? 

Unless of course you needed that money to live on in 35 or 40 years.  In that case you are screwed.  That annuity payment that was generous in 1977 won't buy shoelaces in 2017.  Inflation has turned it to dust.  You can buy inflation indexed annuities--but they cost substantially more money.  If you have substantially more money to start off with...well, then you are less likely to run out and therefore have less need of an annuity's protections. 

uwp had an interesting observation that I hadn't thought of, namely annuities can actually provide you with a higher standard of living....as long as you are willing to die early.  That's a fair point. The benefits of dying as soon as possible aren't normally a selling point from annuity salesman for some reason.   



Title: Re: Why you should never buy an annuity!
Post by: Interest Compound on August 31, 2017, 11:30:18 PM
Whenever I have a question like this, I like to use the Present Value function on an Excel Spreadsheet.
For example, I would want to compare how the 28500 times five years would have grown by age 60 and then what the 4% safe withdrawal rate would be at that point versus the guaranteed payout of the present value of $2400 times five would be worth.

Right.  So I get that to get $12K a year, I need $300000. 

Right now I can buy that $12K a year stream (starting in 14 years) for 142500.  It looks like 142500 turns into approximately 300k with a 5.4% rate of return.

So I guess the question is whether a guaranteed 5.4% rate of return makes sense for a portion of the portfolio to generate some guaranteed income?

The additional factor here is that my wife's retirement comp is based on her highest 3 years of salary.  In the unlikely event she could bump her salary up from its current rate between now and age 60, the income stream would also increase (i.e. in the extreme, if she doubled her state salary, she'd also double her retirement, and the 12k a year would turn into 24k a year for the same 142500 investment).  Realistically she's close to being topped out, but cola and step increases should bump her salary by 2-3% per year between now and retirement too.

Don't forget, when comparing against the 4% rule, that the 4% rule is fully inflation adjusted, and you get to control it. They mentioned the benefit is subject to cola increases after year 3, but are those increases fully inflation adjusted?

If inflation goes up 10% one year, will the benefit increase payouts by 10%?
Title: Re: Why you should never buy an annuity!
Post by: Interest Compound on August 31, 2017, 11:58:32 PM
Don't be fooled.


**Compounded real rate of return pretax, assuming 6% nominal payout and 2% inflation
  5 years: -31.2%
10 years: -9.9%
20 years:   0.0%
30 years: +2.4%
40 years: +3.3%
50 years: +3.6%


higher inflation of course makes these returns even worse!

Great post! I did the math and compared this to a 60 year old using a Variable Percentage Withdrawal (https://www.bogleheads.org/wiki/Variable_percentage_withdrawal):

(http://i.imgur.com/v1qrJZ5l.png)

Thanks very much for this post, I never thought a SPIA was really this bad!
Title: Re: Why you should never buy an annuity!
Post by: Dicey on September 01, 2017, 12:05:45 AM
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?

Well, I'm not OP of this tread....and....it's important to always look at both/all sides of a topic?

We're not exactly talking about a horrible product like a payday loan with a 500% interest rate or a mobile home loan. We're talking about an insurance product (although you might call it horrible...I probably would too...) that serves a purpose, and some folks see value in that. Nobody credible in this thread is advocating for an annuity as a primary investment vehicle, only that it serves its purpose as a risk management tool in certain situations.
I see your point, but it seemed that intellectsucks was actually shilling them here, to which I politely suggest he's in front of the wrong audience. If you're saying the intellectsucks is not credible, you might know something I don't. Mine was just a feeling from reading their posts multiple times.

As for importance of knowing both sides, I completely agree with you. But annuities are like Whole Life Insurance, which we excoriate routinely in favor of Term Life Insurance. One's mustachian and one's not, which is pretty black and white, IMO.

ETA: as Mr Mark just tactfully pointed out, it was not hIm, but intellectsucks who seemed to be the annuity cheerleader, (and patchyfacialhair to a lesser degree). I have edited this post to correct my errors. I apologize to Mr Mark for my blunder. Mea culpa.

I know I'm being a bit blustery on this topic, but for the most part, annuities are insanely inefficient, therefore, completely anti-mustachian. For anyone who doesn't know this, the great MMM doesn't even carry Homeowner's Insurance! Annuities? Are you kidding? #Getouttahere!
Title: Re: Why you should never buy an annuity!
Post by: Mr Mark on September 01, 2017, 02:56:44 AM
Dicey I think you're confusing me (actual OP) with a commenter. I think (and demonstrate with the math) that annuities are a really really bad return and 99.999% of mustachians should avoid.

I have not seen any real evidence to the contrary on this thread, just vague opinions about how supposedly "for some people it can sometimes be ok and is still suboptimal "

They seem to be either people who have bought an annuity (and are trying to justify their error) or perhaps people who sell them.
Title: Re: Why you should never buy an annuity!
Post by: Dicey on September 01, 2017, 05:35:06 AM
Thanks, Mr. Mark. ^Fixed it^
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on September 01, 2017, 07:57:05 AM
Thank you for that math Compound Interest.
Title: Re: Why you should never buy an annuity!
Post by: SnackDog on September 01, 2017, 09:22:56 AM
In my example of 7.7%, you need a pretty high inflation rate to be better off (from an annual cash flow perspective) with an inflation-adjusted 4% SWR.  This is why it makes more sense to buy an annuity when you are older and less likely to need it as long and can get better rates.  In addition, your discretionary spending tends to tail off between ages 70-100 (unless long term care is required; many people handle this with a HELOC or home sale).  The NPV of the 7.7% annual payments is ahead of inflation-adjusted 4% SWR for 30 years unless average inflation rates are pretty outrageous (e.g 7% average over 30 years).

Basically, you will have more money to spend every year with an annuity then you would with SWR but nothing in your investment account when you die.  The overall financial picture including your investment account does not favor the annuity however your actual cash flow will be higher with the annuity.  In 90% of market scenarios you will die with a fortune if you don't annuitize, but that does you no good on an annual withdrawal (unless you want to reset to 4% starting point each time your account balance rises enough to make that higher than the current inflation-adjusted WR, but that's another topic).

But you don't have to choose either/or - you can have the best of both worlds.  If you have $5MM at age 70, buy a $1MM annuity to cover you base living costs ($77,000/yr) and invest $4MM and withdraw 4% SWR.  This is what many people with the option to do both are looking at these days (e.g. doctors, airline pilots, etc).  I am certainly not in the business of selling them but I will consider them when the time comes.
Title: Re: Why you should never buy an annuity!
Post by: Al1961 on September 01, 2017, 10:17:12 AM
I keep seeing comments about comparing annuities to OTHER investment vehicles. I don't think an annuity is an investment. It's an insurance contract, a completely different product class to market investments.

Up until a few years ago, if you had a locked in RRSP (or similar plan), you were legally required to purchase an annuity as the only vehicle to withdraw funds. The reasoning was that locked in RRSPs were funded only through lump sum withdrawals from pension plans. The annuity requirement was to provide individuals with a replacement income stream for the pension given up.

You can now roll the funds into a Life Income Fund, purchase whatever investments you want, and take prescribed required minimum withdrawals (there is also a maximum permitted withdrawal).

----------

The "return" on an annuity has three components:
-principal
-interest
-mortality credits (if you live long enough)

When looking at term-certain annuities, there are no mortality credits, and it looks like the interest component of the return is about 2.8%. Not great, but better than most GICs currently offered in Canada.

For the extremely risk adverse, like my mother who only invests in GICs, you get your principal back, and a small nominal interest payment. If you die, your estate collects the balance of the annuity. Not great, but it will mostly preserve your wealth.

------------

So why would anyone purchase one? Certainly not for inflation protection, but:
-longevity insurance
-risk tolerance
-protection from poor financial decisions if severe cognitive decline occurs
-partial protection from elder abuse, which often manifests as financial abuse
-provide long-term income for people who cant manage money well/spendthrifts.

-------------

I'm getting up there in age, and did look into annuities a bit. Both joint life and term certain annuities. They are not attractive at the moment, but at age 70 or 75 I might, because:
-my wife has very limited interest in learning about, or managing, investments
-there is a history of dementia in my family
-with pension, CPP+OAS (both deferred to age 70) and a small annuity we would have a very generous income. And still have a good stash. That means NO 4% WR worries, not that there is any reason to worry now, but who knows how we'll think as we become aged.
Title: Re: Why you should never buy an annuity!
Post by: Mr Mark on September 01, 2017, 12:33:17 PM
Thanks, Mr. Mark. ^Fixed it^

Thanks D!
X

I really hate to be accused of recommending annuities. ;-)
Title: Re: Why you should never buy an annuity!
Post by: DoubleDown on September 01, 2017, 02:44:10 PM

Yeah, not a false equivalency. Our lack of knowledge about the future is the whole point of insurance/annuities. If I knew my house would never catch on fire or have a disaster, I could drop insurance on it now. Same with health insurance, etc. Or I could buy it the day before I know disaster will strike. Insurance/annuities allow you to protect against disaster in exchange for a premium. In the case of retirement funding, the "disaster" scenario of course is outliving your money, which is a very real possibility. An annuity protects against that.

Does it really?  Let's say you are one of the happy few who lives long enough to see a positive return on an annuity.  Let's say you receive returns for 40 years, which as per the OP would give you a real rate of return of 3.3%.  Not amazing, but at least it is there, right? 

Unless of course you needed that money to live on in 35 or 40 years.  In that case you are screwed.  That annuity payment that was generous in 1977 won't buy shoelaces in 2017.  Inflation has turned it to dust.  You can buy inflation indexed annuities--but they cost substantially more money.  If you have substantially more money to start off with...well, then you are less likely to run out and therefore have less need of an annuity's protections. 

Yes it does, provided you purchase enough "insurance." Again, it's like any other insurance:

Does collision or comprehensive insurance always provide full replacement value of your vehicle? Not likely, unless you pay enough for it.

Will you homeowner's insurance payout provide you enough to fully rebuild your home to its former glory with all the contents? Unlikely, unless you pay enough for it.

Will an annuity pay you enough to afford a fantastic standard of living for 50 years? Unlikely, unless you pay enough for it.

Yet none of these considerations mean insurance (or an annuity) is just a bad bet for everyone. Everyone keeps talking about the poor return on an annuity (which is true), but they are ignoring that there are also no guarantees that investment returns will be able to keep up with inflation. Hey, remember the 80's? Anyone live in Japan?

Or where's the assurance that everyone will be rock solid investors, keeping their money in the markets and lowering their standard of living substantially if, say, the stock market has a 40-50% downturn that lasts for 5-10 years or more? It seems some are discounting the possibility of some really, really bad and extended down periods for the stock market.

I don't have an annuity, but I am grateful for an inflation-adjusted pension and SS I will get. Those two things will give me enough guaranteed income to live comfortably forever, and therefore prevent me from getting worked up over market ups and downs. If I did not have those things, I would consider annuitizing a portion of my portfolio to cover basic living expenses so I wouldn't have to worry in my old age.
Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on September 02, 2017, 04:56:03 PM
I keep seeing comments about comparing annuities to OTHER investment vehicles. I don't think an annuity is an investment. It's an insurance contract, a completely different product class to market investments.
Nonsense. An annuity is a place where you put your money to go to work for you -- just like any other investment. And you want the BEST option! Just because annuities are "classified" as insurance products is meaningless. It's comical to say "Annuities should never be compared to stocks and bonds". That's really a crafty attempt to eliminate the competition. Insurance salesmen use the deception all the time. Insurance salesman?
Title: Re: Why you should never buy an annuity!
Post by: Al1961 on September 02, 2017, 07:34:41 PM
I keep seeing comments about comparing annuities to OTHER investment vehicles. I don't think an annuity is an investment. It's an insurance contract, a completely different product class to market investments.
Nonsense. An annuity is a place where you put your money to go to work for you -- just like any other investment. And you want the BEST option! Just because annuities are "classified" as insurance products is meaningless. It's comical to say "Annuities should never be compared to stocks and bonds". That's really a crafty attempt to eliminate the competition. Insurance salesmen use the deception all the time. Insurance salesman?

Speaking of nonsense....
Title: Re: Why you should never buy an annuity!
Post by: BigMoneyJim on September 02, 2017, 09:49:43 PM
I'll jump on the anti-annuity dogpile.

A simple immediate annuity is a bet against an insurance company. If they're good, you're not going to come out ahead. If they're bad, they could become insolvent.

Their sale is based on fear, and that bugs me.

Don't get me started on the indexed and deferred annuities.
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on September 03, 2017, 10:54:33 AM

A simple immediate annuity is a bet against an insurance company. If they're good, you're not going to come out ahead. If they're bad, they could become insolvent.


Presumably annuity holders with AIG were made whole with their policy when AIG was declared insolvent and saved by the federal government.
Not sure going forward if future bankruptcies will be saved by federal help.
Title: Re: Why you should never buy an annuity!
Post by: Telecaster on September 03, 2017, 01:18:50 PM

A simple immediate annuity is a bet against an insurance company. If they're good, you're not going to come out ahead. If they're bad, they could become insolvent.


Presumably annuity holders with AIG were made whole with their policy when AIG was declared insolvent and saved by the federal government.
Not sure going forward if future bankruptcies will be saved by federal help.

Unlikely.  AIG was a special case.   Annuities are protected by state guaranty funds.  However, that is not a guaranty you will be made whole.  The payout will be subject to court order and the state legislature appropriating the funds.

Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on September 04, 2017, 04:35:31 PM
A simple immediate annuity....

Their sale is based on fear, and that bugs me.
Immediate annuities are also sold based on lies like "if you live very long then you really make out like a bandit with an immediate annuity". The complete opposite is true. Immediate annuities are "longevity poverty" not "longevity protection".
And they use catch phrases like "income for life that you can never outlive". They always omit the operative word "ADEQUATE" income.
Your internal rate of return with SPIA's is no different than any other insurance product. You're gonna get between zero and 3% (in a best case scenario). Those are piddly returns. As always the insurance company wins.
Title: Re: Why you should never buy an annuity!
Post by: Goldielocks on September 05, 2017, 12:17:30 AM
A basic immediate annuity is where an insurance company agrees to pay you a fixed amount annually until death for an initial lumpsum payment.

At the moment, $1,000,000 will buy a 60 year old male about $60,000 (6%) per year for as long as you live. [For a 40 year old it would be about $48,000]

...
The problem is that a basic annuity is NOT an 'investment'. If you die, the payments stop and there is no return of capital. EG if you died after the first year you would have lost $940,000. This has terrible implications for the effective rate of return (and for any heirs you might have had). At 6% it takes almost 17 years of payments before you even get your original $1 million back.

....

Don't be fooled.


**Compounded real rate of return pretax, assuming 6% nominal payout and 2% inflation
  5 years: -31.2%
10 years: -9.9%
20 years:   0.0%
30 years: +2.4%
40 years: +3.3%
50 years: +3.6%



OP is correct that these are poor returns.  Most annuities sold have a guaranteed return of prinicipal (minus penalty) if you die within a short time frame, but that is minor compared to the returns.

 However the problem annuities solve is this... "My biggest problem is the chance that I will run out of money if I live longer than 85years old"...   It is not a problem that they need to earn more interest, it is mitigating the risk of running out of money.   $1 Million in savings spent at $60k per year only lasts 17 years, after all.  (Put into savings or gov't bonds because the risk of any loss is too high for the person, as the person ages it may be harder to make good investment decisions, etc.)

 Insurance programs like annuities are the answer to this specific risk.  Insurance company takes the risk that you will live longer, in exchange for a fee in the form of low real rate of return and the chance you may die earlier.  Yes, they cost a fair amount for that guarantee, but it is the only "guarantee" in town.

This is a problem for people without SS, or who have poor spending habits with their own money, a disability that prevents them from self-directed investing, or just plain not a huge amount of money, and no home asset.

NOTE -- as this specific problem is resolved once a person has SS or another asset to guarantee $24k per year of income, the amount to invest in an annuity by a 60 year old is actually < $400k, to get a basic living guaranteed income.
Title: Re: Why you should never buy an annuity!
Post by: Goldielocks on September 05, 2017, 12:26:02 AM
Here's the problem with immediate annuities... They leave you in poverty later in life! You get teased with an initial high rate of return that eventually gets surpassed by a very low risk mix of bond and stock index funds.

.....
And once you reach your life expectancy your heirs will get nothing!
And you lose your liquidity with these products. There's million reasons why you might need to get your money back.

The annuity that the OP indicated, was a fixed annuity, with a set monthly payout... very different from your first point about rates decreasing... although the OP wasn't in favor of that type either.

The second two points are very true.. again, an annuity is actually buying insurance, not an investment, and while many contracts will have a partial payout in the early years, that is just a bonus to remove doubts to increase sales, and not the original reason why they were created.   
Losing one's liquidity is exactly why some people with bad spending habits should buy them, or MMM kids should encourage their anti -MMM parents to buy them.

Third -- may I point out that once you are DEAD, you no longer care about the horrible returns and losing money, if you die early.  You will not know.  Your kids should not have planned on an inheritance and should be glad you did not move in with them as your backup plan.
Title: Re: Why you should never buy an annuity!
Post by: uwp on September 05, 2017, 02:17:28 PM

The benefits of dying as soon as possible aren't normally a selling point from annuity salesman for some reason.   

Serious question, who is happier with their investment choice: the dead 80 y/o who spent $77,000 the last 10 years, or the dead 80 y/o who spent $45,000?

Spoiler: show
trick question, they're both dead.


Some people are trying to leave a big inheritance, some people are trying to retire as early as possible, and some people are trying (or need) to spend as much as they can without running out.

Title: Re: Why you should never buy an annuity!
Post by: Rubic on September 05, 2017, 02:37:15 PM
I'm not a fan of annuities for most situations, but here's an interesting article
by Darrow Kirkpatrick:

http://www.caniretireyet.com/annuity-shopping-time-buy-deferred-income-annuity/
Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on September 05, 2017, 04:08:56 PM
The annuity that the OP indicated, was a fixed annuity, with a set monthly payout... very different from your first point about rates decreasing... although the OP wasn't in favor of that type either.

The second two points are very true.. again, an annuity is actually buying insurance, not an investment, and while many contracts will have a partial payout in the early years, that is just a bonus to remove doubts to increase sales, and not the original reason why they were created.   
Losing one's liquidity is exactly why some people with bad spending habits should buy them, or MMM kids should encourage their anti -MMM parents to buy them.

Third -- may I point out that once you are DEAD, you no longer care about the horrible returns and losing money, if you die early.  You will not know.  Your kids should not have planned on an inheritance and should be glad you did not move in with them as your backup plan.
A fixed annuity will leave annuitants in poverty. It's that simple. A much much much better choice is a low risk mix of bond and stock index funds. You will do much much much better -- not you the insurance salesman, but the investor.
Second, IT DOESN'T MATTER if an annuity is categorized as "insurance product". An annuity is a place where you put your money to work, and you want the best return for what is typically the low desired level of risk if that is indeed what they need. Any time your money is put to work in an instrument that has a guarantee, you will get inferior returns. People who have bad spending habits simply need education about the spending rules (ala the 4% / 30 year rule. Insurance salesmen NEVER educate investors on this. That's the problem.
Your third point is comical but typical of you insurance salesmen. Just screw over your heirs and give that money to an insurance company. No thanks.
Title: Re: Why you should never buy an annuity!
Post by: uwp on September 05, 2017, 04:55:33 PM
People who have bad spending habits simply need education about the spending rules (ala the 4% / 30 year rule. Insurance salesmen NEVER educate investors on this. That's the problem.
Your third point is comical but typical of you insurance salesmen. Just screw over your heirs and give that money to an insurance company. No thanks.

It can be difficult for someone in their 70s to just throttle down spending, a lot of their costs are fixed.  And often they can't just go back to work.
And many people that old may not have heirs (or a desire to leave money to ones they did have).

Folks in this thread are having a real hard problem putting themselves in a different mindset from FIRE with 4% withdrawal for life.
Title: Re: Why you should never buy an annuity!
Post by: Telecaster on September 05, 2017, 05:16:09 PM
I'm not a fan of annuities for most situations, but here's an interesting article
by Darrow Kirkpatrick:

http://www.caniretireyet.com/annuity-shopping-time-buy-deferred-income-annuity/

Worth a read.  I thought this part was interesting:

Quote
There is no inflation adjustment in the deferral interim. The representative was not aware of any products that offer full inflation protection. In other words, in our case where we might be waiting 25 years for the income to begin, just what that first year’s paycheck would be worth in today’s dollars is a total gamble. The amount would adjust for inflation once the income began, but the starting point, and therefore the ultimate value of the annuity, would be an unknown.

The suggested solution: You must bring more money to table if you want inflation protection in the interim. For example, in our case, if inflation held at its approximate historical value of 3% for 25 years, we’d need to invest almost exactly twice the amount of money, to preserve purchasing in today’s dollars. But it would still be a gamble. That amount might be too much, or too little, to match today’s purchasing power...

...If I buy a product now in nominal dollars, without inflation guarantees, its value in 25 years is almost a complete crapshoot. Without inflation adjustment over multi-decade time spans, you really have no idea what you’re getting!

A bit of fresh air there.  He's at least considering inflation when examining the annuity.  For some reason, people who are pro-annuity almost never take inflation into account.   If he wanted to be a bit more conservative, he could use a higher inflation rate, say 4.5%.  In that case, he'd need triple the amount of money.   Ratched that up to 5.5% and you'd need close to quadruple your starting amount.   To put it another way, if the annuity isn't adjusted for inflation, your "guaranteed income"  will very likely be half and could be 75% less in real terms than what it was at the beginning of the period.   Is that too conservative?  Well, there have been 25 year periods when inflation has exceeded that amount.   If you were depending on an annuity to guarantee your future income, you very well could be eating Alpo and working as a greeter at Wal-Mart. 

But you don't run out of money.  You just run out of enough money. 








Title: Re: Why you should never buy an annuity!
Post by: Telecaster on September 05, 2017, 05:37:56 PM
In my example of 7.7%, you need a pretty high inflation rate to be better off (from an annual cash flow perspective) with an inflation-adjusted 4% SWR.  This is why it makes more sense to buy an annuity when you are older and less likely to need it as long and can get better rates.  In addition, your discretionary spending tends to tail off between ages 70-100 (unless long term care is required; many people handle this with a HELOC or home sale).  The NPV of the 7.7% annual payments is ahead of inflation-adjusted 4% SWR for 30 years unless average inflation rates are pretty outrageous (e.g 7% average over 30 years).

Hmm, my math (corrections welcome!)  shows the break even point comes at about year 17, which the original $40K SWR has become $78,000, assuming 4% inflation.  The long term inflation average is 3.2% or something, so that isn't a crazy high assumption.  But kicker is that by year 30, the SWR is $130K and the annuity still pays $77,000.  The person depending on a annuity has seen their lifestyle cut by more than half.  The person going the standard SWR route (standard assumptions apply) maintained their lifestyle, and is very likely wealthy beyond their wildest dreams. 

One of those outcomes sounds great.  One of them sounds horrible.   
Title: Re: Why you should never buy an annuity!
Post by: SnackDog on September 06, 2017, 05:54:29 AM
Your math is correct that the amount paid in year 17 is the same as the annuity pays assuming wildly high inflation of 4% average 17 years running.  However, the SWR has only just caught the annuity annual rate. The annuity was paying more for 17 years running so the total paid by year 17 is $1.03MM for the SWR method and $1.4MM with the annuity.  When you further add in the time value of money, the SWR method does not match the annuity even by 40 years.
Title: Re: Why you should never buy an annuity!
Post by: ooeei on September 06, 2017, 06:21:21 AM
Never is a strong word. My girlfriend's parents just bought an annuity in order to shield some of their investments from Medicaid. Medicaid has strict rules on how much money/investments you can have, but has different rules for income. Converting their investments to an annuity saved them from being forced to spend it on skilled nursing before Medicaid would kick in.

With that being said, I can't think of another situation where it's the optimal choice.
Title: Re: Why you should never buy an annuity!
Post by: Telecaster on September 06, 2017, 08:38:20 PM
Your math is correct that the amount paid in year 17 is the same as the annuity pays assuming wildly high inflation of 4% average 17 years running.  However, the SWR has only just caught the annuity annual rate. The annuity was paying more for 17 years running so the total paid by year 17 is $1.03MM for the SWR method and $1.4MM with the annuity.  When you further add in the time value of money, the SWR method does not match the annuity even by 40 years.

Gotcha, I understand now.  I was just looking an annual cash flow. 

However, I'm not sure 4% inflation is wildly high.  There have been 17 year periods when inflation was higher than that.  For example, the inflation rate from 1970 to 1987 averaged 6.6%.   So it is still pretty far from worst case.  SWR of course includes worst case. 

Title: Re: Why you should never buy an annuity!
Post by: SnackDog on September 07, 2017, 08:44:37 AM
Even in an all out worst case of 7% inflation, the annuity would be a better choice (higher present value) for the first 20 years.  It would take a lot to convince me that two decades of record inflation was ahead in order to not select the annuity.
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on September 07, 2017, 09:24:27 AM
Even in an all out worst case of 7% inflation, the annuity would be a better choice (higher present value) for the first 20 years.  It would take a lot to convince me that two decades of record inflation was ahead in order to not select the annuity.

I suppose in this situation one could view the annuity as long term care insurance if you have an annuity that can provide enough for such a care facility.
Title: Re: Why you should never buy an annuity!
Post by: Free Forever on September 08, 2017, 10:04:32 PM
Do you by chance work in the insurance industry or sell insurance products? I'm not claiming to be an expert which is why I couched everything I wrote in non-concrete language.

 I was only reacting to your indication that the only reason anyone would buy an annuity is because they're incompetent, undisciplined, and risk-averse (your words). I think that could be considered pretty insulting to anyone who has purchased or considered an annuity. Some really smart people on this forum who have retired rich have made compelling cases for annuities in certain situations....

Meh... Here's what I actually wrote: "There's always going to be a legitimate market for these products, mainly people who are risk averse, will never be competent at DIY and/or lack the discipline to stick to an investing strategy."

 I didn't say "the only reason anyone would buy an annuity...etc." that's just objective reality, anyone can go back and see I didn't write that. So you're just doing the same thing as before and debunking your personalized version of the argument.


Long story short.. Annuities can be a good buy provided the terms and price are a good fit for the investors facts and circumstances.
Title: Re: Why you should never buy an annuity!
Post by: Goldielocks on September 09, 2017, 05:58:17 AM
There are different 'forms' of this annuity associated with different institutions/accounts, and the one I have is fairly liquid, so I'm confident I could transfer the $ out if need be.

Let the mocking commence...
Not mocking. Completely serious. What kind of annuity lets you "transfer the $ out if need be"?

Check out this resource - the relevant section is Section 3 - Transfers & withdrawals, and then "Contracts where TIAA traditional pays benefits immediately (typically lower interest rates)":
https://www.tiaa.org/public/pdf/TT_FAQ.pdf

The trade-off is slightly lower interest rates for increased liquidity. And it really depends on what contract your employer offers, so this likely does not apply to lots of people. But still.

Hi,  I checked out the link.

To be clear, I think the OP (and I know that my thoughts), were discussing annuities that have immediate payouts, e.g., AFTER the person has chosen to convert / receive the lifetime, (or ten annual) payments.

The withdrawal and transfer portability that is included in the TIAA, is during the accumulation phase.   Also, the TiAA is an annuity that attempts to mimic a defined benefit pension plan in behaviour, although different "vintages" of contributions will payout different income streams.  This includes the ability for a lumpsum payout when you are terminated, or at anytime (for one type) before your start receiving income from it."not converted to lifetime income".  Once the distribution phase is triggered, then the liquidity is gone.  Similar to the example, where someone provides $500k to buy an annuity.   Accumulating the $500k outside of the annuity first, is liquid, but not after buying the immediate (start my payments now) annuity.

Title: Re: Why you should never buy an annuity!
Post by: Goldielocks on September 09, 2017, 06:02:32 AM
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
"Relatives who don't get it" thread...   

Boy, if I had a broke parent that was poor with money, come into an inheritance, I would definitely do some arm twisting to set them up in an annuity before a chance of my having to house them came up.
Title: Re: Why you should never buy an annuity!
Post by: Telecaster on September 09, 2017, 02:08:27 PM
Even in an all out worst case of 7% inflation, the annuity would be a better choice (higher present value) for the first 20 years.  It would take a lot to convince me that two decades of record inflation was ahead in order to not select the annuity.

I suppose in this situation one could view the annuity as long term care insurance if you have an annuity that can provide enough for such a care facility.

I personally wouldn't use an annuity for that purpose.  Reason is that the way many of the nicer long term care facilities work (i.e. ones you would want to live in) is that you essentially buy your way in (pay up front, basically), and then pay whatever the monthly fee is.  But they typically won't kick you out when your assets are exhausted and you are relying on Medicaid.  They'll just take the Medicaid and call it even.  So you still wind up with a higher, better level of care.   If your annuity is sufficient for your monthly care initially, it probably won't be in 10 years, and definitely won't be in 20.  That limits your options. 

Don't forget the value of the portfolio you are taking the SWR from.   Firecalc says that after 20 years, worst case is the portfolio is worth $130,000, average of  $1.5 million, and high of $4.1 million.  After 20 years, not only are your monthly withdrawals almost certainly higher than the annuity payments due to inflation, you still have assets you control, and in some cases substantial assets.  That gives you options.  After 30 years, you either just ran out of cash, or you are wealthy.   With the annuity, you might as well have run out cash, because inflation has turned the payments dust and you're eating Alpo. 

If you do want to insure your care in old age, you can buy long term care insurance.  Which IMO is not a great deal, but it is a better insurance product for that application. 

Title: Re: Why you should never buy an annuity!
Post by: BigMoneyJim on September 09, 2017, 03:42:53 PM
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
"Relatives who don't get it" thread...   

Boy, if I had a broke parent that was poor with money, come into an inheritance, I would definitely do some arm twisting to set them up in an annuity before a chance of my having to house them came up.

This may hold them until they see a jg Wentworth commercial, then they cash out at 50% or worse.
Title: Re: Why you should never buy an annuity!
Post by: DavidAnnArbor on September 09, 2017, 08:23:19 PM
Even in an all out worst case of 7% inflation, the annuity would be a better choice (higher present value) for the first 20 years.  It would take a lot to convince me that two decades of record inflation was ahead in order to not select the annuity.

I suppose in this situation one could view the annuity as long term care insurance if you have an annuity that can provide enough for such a care facility.

I personally wouldn't use an annuity for that purpose.  Reason is that the way many of the nicer long term care facilities work (i.e. ones you would want to live in) is that you essentially buy your way in (pay up front, basically), and then pay whatever the monthly fee is.  But they typically won't kick you out when your assets are exhausted and you are relying on Medicaid.  They'll just take the Medicaid and call it even.  So you still wind up with a higher, better level of care.   If your annuity is sufficient for your monthly care initially, it probably won't be in 10 years, and definitely won't be in 20.  That limits your options. 

Don't forget the value of the portfolio you are taking the SWR from.   Firecalc says that after 20 years, worst case is the portfolio is worth $130,000, average of  $1.5 million, and high of $4.1 million.  After 20 years, not only are your monthly withdrawals almost certainly higher than the annuity payments due to inflation, you still have assets you control, and in some cases substantial assets.  That gives you options.  After 30 years, you either just ran out of cash, or you are wealthy.   With the annuity, you might as well have run out cash, because inflation has turned the payments dust and you're eating Alpo. 

If you do want to insure your care in old age, you can buy long term care insurance.  Which IMO is not a great deal, but it is a better insurance product for that application.

Thanks
Title: Re: Why you should never buy an annuity!
Post by: TomTX on September 10, 2017, 06:39:02 AM
I suck at math, so maybe you guys can help.  My wife is a public employee and has the opportunity to buy up to an extra five years into her public retirement system.  Each year presently costs 28500 (at age 46) and will net approximately 200 per month (2400/yr) in retirement income at age 60.  We are considering buying the five years now.  When combined with her existing service credit and expected additional service credit at retirement, this should result in approximately $3000 / mo in guaranteed income.  The benefit is subject to cola increases after three years and there is a spousal benefit as well. 

Thoughts?

The utility of buying service time depends hugely on the details of the pension, when you plan to take the pension

I bought the maximum 3 years of credit for my state pension - not primarily for the increase in payout. Rather, it accelerates the date I can start drawing the pension by 18 months.

My logic was this:

1) The 18 months of payout is (moderately) more money than what I paid to buy the 3 years, AND will continue to have a higher payout than if I had not purchased service time. With the house paid off in a few years, the pension will be enough to cover basic expenses.

2) As a backup, if I wanted to, I could work at another job and get 18 months of full salary (likely higher than my state salary) AND draw 18 months of pension while ending work at the same date I would have without buying the pension.
Title: Re: Why you should never buy an annuity!
Post by: TomTX on September 10, 2017, 06:51:35 AM

Here’s an example: The CNNMoney annuity calculator puts a single life annuity payment for a 45 year old male in Pennsylvania at $1681/mo for an initial premium of $400,000.  That number comes REALLY close to the MMM family’s bare bones minimum expenses for the year, and is 25% higher than a 4% SWR on the same amount.  If you instead opt for a joint life payout, you’ll probably be in the range of $1100/mo, a pretty fair bit lower than the MMM family’s bare bones budget and around 18% less than a 4% SWR on the same amount.

False equivalency: The payout under the 4% SWR increases every year while the annuity remains the same. My typical "couples planning" is that one of us would have a decent chance of needing money until Age 95.

So, under the 4% SWR, we as a couple can start out drawing $1,333 per month - and that increases with inflation.

In your annuity example, we would start by drawing $1,100 per month, and that would remain flat for the next 50 years.

So, after our payout timeframe, our widow receives in her last year:

Annuity: $1,100 per month
SWR: $5,840 per month

Or, if you prefer inflation-adjusted numbers:

Annuity: $210 per month
SWR: $1,333 per month
Title: Re: Why you should never buy an annuity!
Post by: Interest Compound on September 10, 2017, 09:28:39 AM

Here’s an example: The CNNMoney annuity calculator puts a single life annuity payment for a 45 year old male in Pennsylvania at $1681/mo for an initial premium of $400,000.  That number comes REALLY close to the MMM family’s bare bones minimum expenses for the year, and is 25% higher than a 4% SWR on the same amount.  If you instead opt for a joint life payout, you’ll probably be in the range of $1100/mo, a pretty fair bit lower than the MMM family’s bare bones budget and around 18% less than a 4% SWR on the same amount.

False equivalency: The payout under the 4% SWR increases every year while the annuity remains the same. My typical "couples planning" is that one of us would have a decent chance of needing money until Age 95.

So, under the 4% SWR, we as a couple can start out drawing $1,333 per month - and that increases with inflation.

In your annuity example, we would start by drawing $1,100 per month, and that would remain flat for the next 50 years.

So, after our payout timeframe, our widow receives in her last year:

Annuity: $1,100 per month
SWR: $5,840 per month

Or, if you prefer inflation-adjusted numbers:

Annuity: $210 per month
SWR: $1,333 per month

Taking this a step further, comparing an annuity to the 4% rule is another false equivalency: The 4% rule intends to grow your capital, while an annuity draws it down to 0% (immediately). That's why I compared it to a withdrawal rate that also intends to draw down your capital:

(http://i.imgur.com/v1qrJZ5l.png)
Title: Re: Why you should never buy an annuity!
Post by: Goldielocks on September 10, 2017, 10:06:56 AM
Fair enough, but how many 70 yo folks do you know have many F's to give?

At that point in their lives, they're tired of hearing everyone's arguments for optimization. "You should be in the market." "You should be in bonds." "Guaranteed income is best" "Don't buy an annuity, buy a CD." At that point it's all noise for some of those folks.

It's easy to see why some just throw their hands up and figure "at least I know how much will be in my account on the 5th of every month, and that won't change no matter my circumstances. Also, I don't care about what happens when I'm dead, since I'll be dead."

As I mentioned before, annuities are not my cuppa tea, but the product offers another option (an expensive one) for folks that don't want to learn about what's best.

I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
"Relatives who don't get it" thread...   

Boy, if I had a broke parent that was poor with money, come into an inheritance, I would definitely do some arm twisting to set them up in an annuity before a chance of my having to house them came up.

This may hold them until they see a jg Wentworth commercial, then they cash out at 50% or worse.

You can cash out of an annuity once you start taking lifetime income?!?  (other than the near term death benefit, but you need to die for that one).. Yikes.
Title: Re: Why you should never buy an annuity!
Post by: BigMoneyJim on September 10, 2017, 09:53:51 PM
You can cash out of an annuity once you start taking lifetime income?!?  (other than the near term death benefit, but you need to die for that one).. Yikes.

IKR? It's a third-party company that--as far as I understand--gives a person a cash settlement for all the future payments of such vehicles like annuities, structured settlements, etc.. Another way to prey on those who don't manage their money well IMO. But if one thinks they're desperate for cash...well yeah it's a thing.

I worked with a guy once...one of the commercials came on, and I remarked about how bad an idea that is and wonder who would do that, and he said he did. He had a structured payout from an injury situation, needed money and went to them. I don't recall exactly what it cost him, but it was 50%-ish I think.

Point being, it's hard to protect poor money managers from themselves.
Title: Re: Why you should never buy an annuity!
Post by: DoubleDown on September 11, 2017, 10:31:02 AM
This thread is full of logic fails. A lot of the people bashing annuities, saying you'll run out of enough money to live on because inflation will destroy the annuity payout over time, seem to live in a magical world with a guaranteed 4% SWR that can never fail. That is, markets will always be good enough to guarantee them a 4% withdrawal, always adjusted up for inflation, for life. Their portfolio will never go broke or go down enough that their withdrawals must be lowered -- nope, no chance of that happening. I hope they realize that "safe withdrawal rates" have NO predictive power for the future, they are all based on history only.

Furthermore, they are adopting the classic straw-man fallacy, acting as though anyone in this thread is advocating annuitizing one's entire portfolio, versus just enough to provide a reasonable standard of living (even counting for inflation over time). You know, when you annuitize just a portion of your portfolio, you typically leave yourself plenty (probably even the majority) of your portfolio to continue working in the markets. Furthermore, by doing this, you can leave that remaining portion aggressively invested, without worry or panicking and making stupid moves during downturns, knowing that your basic needs are covered by the annuity.
Title: Re: Why you should never buy an annuity!
Post by: Goldielocks on September 11, 2017, 10:39:54 AM
You can cash out of an annuity once you start taking lifetime income?!?  (other than the near term death benefit, but you need to die for that one).. Yikes.

IKR? It's a third-party company that--as far as I understand--gives a person a cash settlement for all the future payments of such vehicles like annuities, structured settlements, etc.. Another way to prey on those who don't manage their money well IMO. But if one thinks they're desperate for cash...well yeah it's a thing.

I worked with a guy once...one of the commercials came on, and I remarked about how bad an idea that is and wonder who would do that, and he said he did. He had a structured payout from an injury situation, needed money and went to them. I don't recall exactly what it cost him, but it was 50%-ish I think.

Point being, it's hard to protect poor money managers from themselves.

That is horrible.   Like someone giving you a (poor) cash payout for all of your future SS checks...!
Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on September 11, 2017, 04:32:06 PM
seem to live in a magical world with a guaranteed 4% SWR that can never fail. That is, markets will always be good enough to guarantee them a 4% withdrawal, always adjusted up for inflation, for life. Their portfolio will never go broke or go down enough that their withdrawals must be lowered -- nope, no chance of that happening. I hope they realize that "safe withdrawal rates" have NO predictive power for the future, they are all based on history only.

Furthermore, they are adopting the classic straw-man fallacy, acting as though anyone in this thread is advocating annuitizing one's entire portfolio, versus just enough to provide a reasonable standard of living (even counting for inflation over time).
Your first point is one of the top insurance industry deceptions. You're suggesting that just because the arbitrary 4% rule may "fail", that an annuity will do better. This is just plain false. Even when starting in 1966 (the worst year to begin retirement) today's immediate annuity did far WORSE than the 3.4% you had to take out. This is a FACT! https://www.youtube.com/watch?v=QDUbQeZvJ9g These were tough times and there was nothing you could do about it. An annuity would have only made things WORSE.
And your second argument is nothing more than an admission that annuities are inferior financial products. Like saying you're only putting "some" of your money into an annuity so it's not that bad. Why would I even want to put "some" of my money into an inferior, over-taxed, death benefit depleting product than cannot be rebalanced? It makes no sense. It only makes sense to you insurance salespeople. At least put "some" money into this annuity and then I'll earn "some" lavish commission money.
You could make the same argument with Ponzi schemes. Don't get too upset because you're only putting "some" of your money into this bad financial scheme.
Your second post is also circular reasoning. You ASSUMED than annuities give you a "reasonable standard of living". FALSE. You get left in POVERTY later in life and heirs get zero return on investment.
Title: Re: Why you should never buy an annuity!
Post by: TomTX on September 11, 2017, 04:38:01 PM
This thread is full of logic fails. A lot of the people bashing annuities, saying you'll run out of enough money to live on because inflation will destroy the annuity payout over time, seem to live in a magical world with a guaranteed 4% SWR that can never fail. That is, markets will always be good enough to guarantee them a 4% withdrawal, always adjusted up for inflation, for life. Their portfolio will never go broke or go down enough that their withdrawals must be lowered -- nope, no chance of that happening. I hope they realize that "safe withdrawal rates" have NO predictive power for the future, they are all based on history only.

Furthermore, they are adopting the classic straw-man fallacy, acting as though anyone in this thread is advocating annuitizing one's entire portfolio, versus just enough to provide a reasonable standard of living (even counting for inflation over time).

Bullshit. You're the one strawmanning hard.

Figure out how to address the absolute shit returns and failure to inflation adjust on the annuity side, then we can discuss.
Title: Re: Why you should never buy an annuity!
Post by: Telecaster on September 11, 2017, 06:59:31 PM
This thread is full of logic fails. A lot of the people bashing annuities, saying you'll run out of enough money to live on because inflation will destroy the annuity payout over time, seem to live in a magical world with a guaranteed 4% SWR that can never fail. That is, markets will always be good enough to guarantee them a 4% withdrawal, always adjusted up for inflation, for life. Their portfolio will never go broke or go down enough that their withdrawals must be lowered -- nope, no chance of that happening. I hope they realize that "safe withdrawal rates" have NO predictive power for the future, they are all based on history only.

Let's flip that around.  The pro-annunity folks seem to live in a magical world where insurance companies never go out of business, and will continue paying out money through thick and thin.  That sound reasonable? 

That of course, is not true.  Insurance companies can and do go out of business.  What happens next various from state to state.  Every state as a guaranty association to mitigate the worst of the risks and basically they force other insurance companies to buy your policies. 

But they don't have to make you whole.  For example, here in WA State annuity benefits (present value) are limited to $500,000 per contract owner.  Not per policy.   So spreading the risk around between companies doesn't help you much.  The usual advice is to only buy insurance from top rated companies.  Moody's rated Enron's bonds as investment grade just four days before it filed bankruptcy and we all know about the role the ratings agencies played in the 2007 financial crisis.

You're right, the future could be worse than the past, in which case if you are following the 4% rule you would have to lower your withdrawal rate.  But if the future is worse than the past, some of the companies who get hit the hardest are insurance companies, as we saw in 2007 and the following few years when several large insurance companies went insolvent. 

Regardless, you are still making a logical fallacy yourself, that of false equivalency.  You are (seem to be, anyway) saying that the virtually certain inflation risk of the annuity is the same as the risk the future being worse than the past. 









Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on September 11, 2017, 10:02:18 PM
BTW guess who funds that annuity guarantee fund? The insurance companies! And who do you think they pass along the costs to? Annuitants.

In the event of a systemic failure of insurance companies, those guarantee funds could become depleted.

The truth is that these guarantee funds have yet to be tested. If bonds do terribly then this could be the straw that breaks the camel's back. By law insurance companies must invest at least 70% in bonds. Some invest much more than that. And what does that tell you? That with an annuity you ARE NOT going to earn better than what a bond heavy portfolio earns. If insurance companies were paying out better than what bonds earn, minus expenses including Mr. Annuity Salesman's high commission, minus funding of the guarantee fund, minus profit for the insurance company, etc, they would all go out of business.
Title: Re: Why you should never buy an annuity!
Post by: beltim on September 11, 2017, 10:35:00 PM
seem to live in a magical world with a guaranteed 4% SWR that can never fail. That is, markets will always be good enough to guarantee them a 4% withdrawal, always adjusted up for inflation, for life. Their portfolio will never go broke or go down enough that their withdrawals must be lowered -- nope, no chance of that happening. I hope they realize that "safe withdrawal rates" have NO predictive power for the future, they are all based on history only.

Furthermore, they are adopting the classic straw-man fallacy, acting as though anyone in this thread is advocating annuitizing one's entire portfolio, versus just enough to provide a reasonable standard of living (even counting for inflation over time).
Your first point is one of the top insurance industry deceptions. You're suggesting that just because the arbitrary 4% rule may "fail", that an annuity will do better. This is just plain false. Even when starting in 1966 (the worst year to begin retirement) today's immediate annuity did far WORSE than the 3.4% you had to take out. This is a FACT! https://www.youtube.com/watch?v=QDUbQeZvJ9g These were tough times and there was nothing you could do about it. An annuity would have only made things WORSE.

Bond yields were much higher in 1966, so annuity rates should have been much higher in 1966 than today.  You need to use contemporary annuity rates to try to prove your point.

And your second argument is nothing more than an admission that annuities are inferior financial products. Like saying you're only putting "some" of your money into an annuity so it's not that bad. Why would I even want to put "some" of my money into an inferior, over-taxed, death benefit depleting product than cannot be rebalanced? It makes no sense.

Even if true, people invest in "inferior" financial products all the time.  Only put "some" of your money into a bond because it doesn't have the upside potential of stocks.  Only put "some" of your money in savings accounts because you want it safe in a year for a house purchase.  People use "inferior" financial products all the time.

It only makes sense to you insurance salespeople. At least put "some" money into this annuity and then I'll earn "some" lavish commission money.

And the ad hominem attacks start - the only way someone could disagree with you is if they have an ulterior motive?

You could make the same argument with Ponzi schemes. Don't get too upset because you're only putting "some" of your money into this bad financial scheme.
And more bad faith arguments!

Listen, there just aren't that many insurance salesmen on this site.  You're making bombastic arguments way beyond the data, and then when people call you out on it, you accuse them of being insurance salesmen.  We're not, and so that completely fails at an argument.
Title: Re: Why you should never buy an annuity!
Post by: Mr Mark on September 12, 2017, 01:07:17 AM
^
Beltim has a point, we should try to dial down the ad hominem/snide remarks.

The "you" in my original post was of course refering to Mustachians. That there could be financially illiterate people with a huge stach who might do better in some possible scenarios with an annuity as a part of their portfolio is just not the point.

But the insurance industry pitch on annuities is very seductive and uses fear, ignorance and multiple apples to oranges comparisons, plus subtle language that's technically true but financially misleading at best.  I can almost hear the "specially-trained Consultants"  salespeople giving their pitch to these suckers, never lying but only emphasising the 'good' sounding bits. I'll give some examples from the TIAA [Teachers Insurance and Annuity Association] pdf link above they use for selling their annuities. (see quotes below from their sales pitch. Emphasis is mine.)

As a onetime semi-professional spin doctor in the corporate world, I have to hand it to the writers of this evil crap for so cleverly making such a terrible financial product sound like something you should have for your retirement.

Quote
An annuity can be used to save while you work and is the only financial product that can guarantee to pay you lifetime income when you retire.

A lot their stuff totally depends on your definition of "income". They use it specifically to refer to pre-tax nominal (ie not inflation adjusted) payments. They never refer to rates of return (because they are so poor) or highlight how much inflation will reduce the effective purchasing power of the payments.

Quote
In up and down markets, TIAA Traditional preserves the value of your savings. In fact, your balance will grow every day—guaranteed.

This refers to the accummulation/saving phase of the policy. It is using the scary notion (commonly held by many people in my experience) that stock markets regularly crash and that therefore they are dangerous places to invest, totally ignoring the facts that those investments also pay regular (and often tax free) cash dividends and that you only experience the 'down market' when you panic and sell. Note that again, "value" means nominal balance, not inflation corrected. And not mentioned that if the market does go on a blinding bull run you are guaranteed to lose HUGE gains. But granny never has to worry her little head about seeing a lower number on her statement and 'losing' that hard faught saving, whew.

Quote
Launched in 1918, TIAA Traditional is intended to be a core component of a diversified retirement savings portfolio. It was designed specifically to help participants like you save for retirement and create a foundation of income that you can’t outlive.

This is a wonderful little paragraph! So they're saying 'we've been around a long time' - implying they are safe and successful. And of course just because their product was "intended" or "designed specifically" to do something doesn't mean it actually does that thing. And they regularly use this 'foundation of income' language. Nothing about said (nominal) income's actual size or effective usefulness, naturally. This is especially annoying as most of their targets will be receiving social security, which is a product that does provide a pretty good foundation for retirement (and one that's inflation adjusted AND guaranteed by the Federal Government).

Quote
Can TIAA Traditional provide guaranteed income for life? Yes. With TIAA Traditional you have the confidence in knowing you won’t outlive your lifetime income payments and you won’t need to worry about market performance reducing the amount of your guaranteed income in retirement.

Again, look at how carefully that sentence is crafted. What does their "guarenteed income" actually mean? A constant number of dollars pretax that slowly erodes in value and stops when you die (yes, I know you can pay more for adding a spouse or specifiying say 10 years of payments). And the bit about not having to worry about that scary market thingy reducing the amount you get (note, here they avoid using the word value).

Quote
How does the amount of lifetime income I can receive from TIAA Traditional compare to taking non-guaranteed
income using a 4% systematic withdrawal “rule of thumb”?
An annuity, like TIAA Traditional, is the only retirement savings option that offers income you cannot outlive—guaranteed for life. By converting to lifetime income, TIAA Traditional may [Mr M: but more probably will NOT] provide you with more income in retirement than you could receive if you utilized a 4% per year systematic withdrawal approach that is sometimes recommended in retirement planning literature; and by selecting lifetime income you will not be at risk of running out of money in retirement. For example under TIAA’s payout income rates, a career TIAA Traditional contributor who retired and began lifetime income in January of 2016 would have received almost twice as much initial lifetime income and a new contributor would have received 50% more initial lifetime income than under a typical 4% systematic withdrawal strategy.1 Of course, past payout income rates are not indicative of future payout income rates. In addition, TIAA Traditional’s lifetime income option ensures that you won’t outlive your income and that market performance will not reduce the amount of your guaranteed income in retirement.

This is where they get super sneaky, by explicitly appearing to take on that 4% 'rule of thumb' you might have heard about. They set up a strawman of a fixed 4% withdrawal scheme and emphasise that it might conceivably fail and you would run out of money. Nothing about inflation (arguably by far the biggest risk FIRE people face), taxation (annuity payments are taxed as ordinary income while a good portfolio is almost tax free), portfolio liquidity (your initial payment is locked up with an annuity), leaving inheritance (again, standard annuity leaves no remaining stash if you die), or the risk that they go bust (not a huge risk for a well run insurance company, and why they are often forced by regulators to invest heavily in treasury and investment grade bonds). And the great sounding "initial" income that's so much higher.

Quote
If there isn’t any identifiable expense ratio, how can I compare the competitiveness of TIAA Traditional to other guaranteed annuities?

This is wonderful. Note they don't try to compare their competitiveness with other types of investments, but against other annuities. Brilliant. Earlier they emphasise that with the annuity there are no deferred fees and that they account for 'expenses' in the (lower) interest rate that they pay.

And then at the end comes the fine print. Despite a constant refrain of how this product is 'designed' for retirement, apparently singing the praises of annuities is not actually a recommendation at all.
Quote
This material is for informational or educational purposes only and does not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made in consultation with an investor’s personal advisor based on the investor’s own objectives and circumstances. All guarantees are based on TIAA’s claims-paying ability. TIAA Traditional is a guaranteed insurance contract and not an investment for federal securities law purposes. Past performance is no guarantee of future results.... Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.


Oh, and they might actually go bust afterall, so caveat emptor.

The material has many other great examples of financial BS. Overall I'd recommend reading this propaganda and trying to see how they are trying to influence you and mislead you with the language they use.
Title: Re: Why you should never buy an annuity!
Post by: Mighty-Dollar on September 12, 2017, 01:12:58 AM
Listen, there just aren't that many insurance salesmen on this site.  You're making bombastic arguments way beyond the data, and then when people call you out on it, you accuse them of being insurance salesmen.  We're not, and so that completely fails at an argument.
We don't know who is who on a forum. People are anonymous. But it's very easy to pick out an insurance salesman by their words. They use the same old anecdotes, strawman arguments, and statements of opinion.

Quote
People use "inferior" financial products all the time.
Annuities are sold -- not bought. No roboadvisor recommends annuities because they are inferior financial products that leave you in poverty later in life.

Quote
Bond yields were much higher in 1966, so annuity rates should have been much higher in 1966 than today.
We are dealing with the now. A 65 year old can get an immediate annuity that pays about 6%. That is a FACT! For what it's worth 1966 onward had low bond returns. If we see a repeat of 1966 onward then today's SPIA should be easily beaten. Actuaries are well aware of this therefore insurance companies are not playing Santa Claus. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Title: Re: Why you should never buy an annuity!
Post by: Mr Mark on September 12, 2017, 01:31:57 AM
Never is a strong word. My girlfriend's parents just bought an annuity in order to shield some of their investments from Medicaid. Medicaid has strict rules on how much money/investments you can have, but has different rules for income. Converting their investments to an annuity saved them from being forced to spend it on skilled nursing before Medicaid would kick in.

With that being said, I can't think of another situation where it's the optimal choice.

FWIW I actually listed that specific medicaid exeption scenario as a possible situation where an annuity could be useful. Even then there may be other ways to acheive that using trusts if you are really wealthy and do it soon enough.

Perhaps I should have said "pretty much always never"?
Title: Re: Why you should never buy an annuity!
Post by: Anon in Alaska on September 12, 2017, 02:18:58 AM
If you buy a annuity, and tell your heirs you have done so, you will reduce the odds that they will murder you for the inheritance; since the money will stop when you're dead....
Title: Re: Why you should never buy an annuity!
Post by: SnackDog on September 12, 2017, 04:08:34 AM
Most of the arguments against annuities here are by people who are confusing single premium immediate annuities (SPIAs) with other products such as deferred annuities or variable annuities. The difference is akin to term life insurance vs whole life.  There is no ïnvestment or return component to an SPIA.  No salesperson is involved.  You can purchase them directly off the Vanguard web site.  Since there is no investment return variable, there is no sense comparing returns only yields which are typically around 6-8% per annum (yield is inversely related to forecast longevity so the later the payments start, the higher the yield).  A bond or stock investment over a long term may have a wide range of investment return, but it doesn't matter since we have learned that in the best of circumstances the safest amount to withdraw is 4% SWR plus inflation.  Since annuities pay so much higher, they will put more spending money in one's pocket over 30 years (unless inflation averages more than the yield).  The reason they pay so much is nothing to do with the return on the underlying bond investments but on the actuarial statistics that show you will only live to age 81 so if you start payments at age 70, they only will need to pay you 11 years on average. 

I'm a huge fan of this pooled risk.  We are all using 4% SWR to get 95% confidence our savings will last 30 years.  That means each one of us individually must save enough to hit 95% confidence so for most outcomes we are all wildly under-spending.   If we self-insured our homes this way we would each escrow enough money to rebuild them if they burnt down.  It's lunacy.  Pool the risk and everyone comes out ahead including insurers and insurees.
Title: Re: Why you should never buy an annuity!
Post by: ooeei on September 12, 2017, 07:23:55 AM
Never is a strong word. My girlfriend's parents just bought an annuity in order to shield some of their investments from Medicaid. Medicaid has strict rules on how much money/investments you can have, but has different rules for income. Converting their investments to an annuity saved them from being forced to spend it on skilled nursing before Medicaid would kick in.

With that being said, I can't think of another situation where it's the optimal choice.

FWIW I actually listed that specific medicaid exeption scenario as a possible situation where an annuity could be useful. Even then there may be other ways to acheive that using trusts if you are really wealthy and do it soon enough.

Perhaps I should have said "pretty much always never"?

Just went back and found that post, sorry I missed it the first time.

I get that it's a super specific exception, but I think it's important to point out. There was a company the assisted living place pointed them to that set up annuities for this purpose, and I instantly told them not to go there because annuities aren't good (and they are pretty well invested otherwise). Luckily they really wanted to see what it was about, so I sat in on the call and sure enough it wasn't a scam.

Based on this forum and a few other investment pieces I'd read, I'd had "ANNUITIES ARE A SCAM" drilled into my head to the point that I almost lost them a significant chunk of money.

And while you can probably do similar things with trusts, that's just you running your own annuity. Once you have the level of wealth that makes that worth it, I doubt you'll be relying on Medicaid for long term care. Let me put it this way, if they had a lot of money he'd be staying at a way nicer place, and Medicaid wouldn't be an issue.
Title: Re: Why you should never buy an annuity!
Post by: gerardc on September 12, 2017, 08:33:38 PM
In my example of 7.7%, you need a pretty high inflation rate to be better off (from an annual cash flow perspective) with an inflation-adjusted 4% SWR. This is why it makes more sense to buy an annuity when you are older and less likely to need it as long and can get better rates.

The thing is, if you start at 70 years old, you can afford a SWR higher than 4% and still have a high probability of success. Even 6% WR has 50% success rate for 50 year periods, so I bet you can start pretty high and still adjust for inflation. You really need to compare annuities with an equivalent portfolio withdrawal strategy for this analysis to make any sense.

This is what the post at http://investingadvicewatchdog.com/immediate-annuities.html does. NOTHING in this thread comes close to even put a tiny dent in that analysis.
Title: Re: Why you should never buy an annuity!
Post by: Telecaster on September 13, 2017, 01:58:29 PM
Most of the arguments against annuities here are by people who are confusing single premium immediate annuities (SPIAs) with other products such as deferred annuities or variable annuities. The difference is akin to term life insurance vs whole life.  There is no ïnvestment or return component to an SPIA.  No salesperson is involved.  You can purchase them directly off the Vanguard web site.  Since there is no investment return variable, there is no sense comparing returns only yields which are typically around 6-8% per annum (yield is inversely related to forecast longevity so the later the payments start, the higher the yield).  A bond or stock investment over a long term may have a wide range of investment return, but it doesn't matter since we have learned that in the best of circumstances the safest amount to withdraw is 4% SWR plus inflation.  Since annuities pay so much higher, they will put more spending money in one's pocket over 30 years (unless inflation averages more than the yield). 

Slight but important correction.   We've learned in the worst of circumstances the SWR is 4% plus inflation.   Your comparing the worst case WR of balanced portfolio with an annuity and average inflation.

How is it valid to compare worst case of strategy and average case of another?  Hint:  It isn't. 

Your point about getting more money out annuity in the initial years is misleading for the following reason:  Inflation, again.  In a mere 20 or so years, inflation has cut the value of the annuity payments in half.   That means with an annuity you either

1)  Wind up eating Alpo, or
2)  You save the extra money you get in the early years, so you can spend it later and maintain your lifestyle. 

Obviously 1) isn't very attractive.  But you go with 2), then the extra money the annuity paid you in the early years did you no good at all because you couldn't spend it. 
 
Title: Re: Why you should never buy an annuity!
Post by: Mr Mark on September 14, 2017, 03:17:20 AM
Most of the arguments against annuities here are by people who are confusing single premium immediate annuities (SPIAs) with other products such as deferred annuities or variable annuities. The difference is akin to term life insurance vs whole life.  There is no ïnvestment or return component to an SPIA.  No salesperson is involved.  You can purchase them directly off the Vanguard web site.  Since there is no investment return variable, there is no sense comparing returns only yields which are typically around 6-8% per annum (yield is inversely related to forecast longevity so the later the payments start, the higher the yield).  A bond or stock investment over a long term may have a wide range of investment return, but it doesn't matter since we have learned that in the best of circumstances the safest amount to withdraw is 4% SWR plus inflation.  Since annuities pay so much higher, they will put more spending money in one's pocket over 30 years (unless inflation averages more than the yield). 

Slight but important correction.   We've learned in the worst of circumstances the SWR is 4% plus inflation.   Your comparing the worst case WR of balanced portfolio with an annuity and average inflation.

How is it valid to compare worst case of strategy and average case of another?  Hint:  It isn't. 

Your point about getting more money out annuity in the initial years is misleading for the following reason:  Inflation, again.  In a mere 20 or so years, inflation has cut the value of the annuity payments in half.   That means with an annuity you either

1)  Wind up eating Alpo, or
2)  You save the extra money you get in the early years, so you can spend it later and maintain your lifestyle. 

Obviously 1) isn't very attractive.  But you go with 2), then the extra money the annuity paid you in the early years did you no good at all because you couldn't spend it.

Snackdog,
again you are mixing up some serious assumptions as noted earlier.
If you start a SWR scheme at 70 you can go much higher than 4% SWR if you don't want to have a significant stach left after 30 years (which is what you imply by ignoring the lost initial payment for the SPIA).

You are also forgetting that annuity payments count as ordinary income and will therefore be taxed at 15% assuming you have some SS and/or RMDs. The 4% SWR methods of capital gains and qualified dividends are currently tax free.

Also 'high' inflation does not have to be sustained over the entire 30 yr period to mess up the value of the annuity payment - a short burst of inflation with a few years of 4% or 5% will do it just as easily.

Here are the real-term (inflation adjusted) post-tax (15%) annual payments for a 65 yr male with an initial 6% SPIA (current quotes) vs a 4% SWR with $1mill (note this ignores the likely large & liquid portfolio a 4% scheme would preserve). In red is when the SPIA payments fall below the 4% method. You can see that you get less money with the annuity well before expected mortality age of late 80s, and total payouts (which=PV) even if you live until 95 are less for the SPIA in all cases are less. Eventually your annuity probably won't even buy telecaster's favourite dog food.

AGE   4% SWR Real   6% initial 2% inflation 3% inflation    4% inflation    5% inflation    6% inflation
65   40000   51000   51000   51000   51000   51000
66   40000   50000   49515   49038   48571   48113
67   40000   49020   48072   47152   46259   45390
68   40000   48058   46672   45339   44056   42821
69   40000   47116   45313   43595   41958   40397
70   40000   46192   43993   41918   39960   38110
71   40000   45287   42712   40306   38057   35953
72   40000   44399   41468   38756   36245   33918
73   40000   43528   40260   37265   34519   31998
74   40000   42675   39087   35832   32875   30187
75   40000   41838   37949   34454   31310   28478
76   40000   41017   36843   33129   29819   26866
77   40000   40213   35770   31854   28399   25345
78   40000   39425   34729   30629   27046   23911
79   40000   38652   33717   29451   25758   22557
80   40000   37894   32735   28318   24532   21281
81   40000   37151   31782   27229   23364   20076
82   40000   36422   30856   26182   22251   18940
83   40000   35708   29957   25175   21192   17868
84   40000   35008   29085   24207   20182   16856
85   40000   34322   28237   23276   19221   15902
86   40000   33649   27415   22381   18306   15002
87   40000   32989   26617   21520   17434   14153
88   40000   32342   25841   20692   16604   13352
89   40000   31708   25089   19896   15813   12596
90   40000   31086   24358   19131   15060   11883
91   40000   30477   23648   18395   14343   11210
92   40000   29879   22960   17688   13660   10576
93   40000   29293   22291   17007   13010   9977
94   40000   28719   21642   16353   12390   9412
95   40000   28156   21011   15724   11800   8880
total   1240000   1193219   1050623   932894   834995   753006

Title: Re: Why you should never buy an annuity!
Post by: SnackDog on September 14, 2017, 10:06:25 AM
The 4% SWR is the recommended rate to not end up with $0 after 30 years (90% probability if I recall). You are correct that you can certainly spend as much as you want, but your probability of running out before 30 years increases.

Taxes are an important consideration in both scenarios and will be person dependent. If you fund an annuity with post-tax dollars, taxes on withdrawals may be quite low (probably zero for first ten years or so).  If you follow the SWR method you will pay taxes on your gains at some point unless it is all invested in state muni bonds or something. 

Your inflation- and tax-adjusted profiles are about right (I get slightly different), but in any case I think you will find the net present value of the annuity over 30 years is still higher.  The NPV function in Excel can be used for this comparison.