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.
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.
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.
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.QuoteI'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.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.
QuoteI 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.
...
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.
...
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.
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.
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.Never mix insurance with investing.
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.
Here's a real critique of SPIAS http://investingadvicewatchdog.com/immediate-annuities.htmlThat case is pretty convincing, pretty much seals this thread.
^ 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.
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.Here's a real critique of SPIAS http://investingadvicewatchdog.com/immediate-annuities.htmlThat 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!
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.
Let me clarify my stance a little, since it seems like my post has been misinterpreted.
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.
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.
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?
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.
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.Good summary of what happens to policy holders:
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.
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.
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.
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.
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 ......
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.
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.
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.Not mocking. Completely serious. What kind of annuity lets you "transfer the $ out if need be"?
Let the mocking commence...
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.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!
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?
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.Not mocking. Completely serious. What kind of annuity lets you "transfer the $ out if need be"?
Let the mocking commence...
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.
Sometimes people prefer the guarantee that an annuity provides, and are willing to pay for it (through lower returns compared to 60/40).
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.
Fair enough, but how many 70 yo folks do you know have many F's to give?I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
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.
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.Fair enough, but how many 70 yo folks do you know have many F's to give?I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
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.
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.
Fair enough, but how many 70 yo folks do you know have many F's to give?I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
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.
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.Fair enough, but how many 70 yo folks do you know have many F's to give?I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
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.
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 :)
But wait! You're only nine! There will beDisagree. 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.Fair enough, but how many 70 yo folks do you know have many F's to give?I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
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.
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.
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.
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.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 ?
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.
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 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!
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.Fair enough, but how many 70 yo folks do you know have many F's to give?I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
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.
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.
Thanks, Mr. Mark. ^Fixed it^
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.
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?
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?
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.
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.
A simple immediate annuity....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".
Their sale is based on fear, and that bugs me.
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%
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 benefits of dying as soon as possible aren't normally a selling point from annuity salesman for some reason.
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.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.
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.
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.
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/
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!
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).
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.
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.
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....
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.Not mocking. Completely serious. What kind of annuity lets you "transfer the $ out if need be"?
Let the mocking commence...
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.
"Relatives who don't get it" thread...Fair enough, but how many 70 yo folks do you know have many F's to give?I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
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.
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.
"Relatives who don't get it" thread...Fair enough, but how many 70 yo folks do you know have many F's to give?I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
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.
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.
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.
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?
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.
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
"Relatives who don't get it" thread...Fair enough, but how many 70 yo folks do you know have many F's to give?I believe that's exactly no one in this group, so what is the point of having this discussion here on the MMM Forum?
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.
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.
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.
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.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.
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).
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).
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.
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.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.
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).
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.And more bad faith arguments!
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.
In up and down markets, TIAA Traditional preserves the value of your savings. In fact, your balance will grow every day—guaranteed.
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.
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.
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.
If there isn’t any identifiable expense ratio, how can I compare the competitiveness of TIAA Traditional to other guaranteed annuities?
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.
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.
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.
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
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.
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"?
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.
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).
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.