7 reasons not to buy an annuity

[REWahoo]

Yes, I know you're thinking "Crap, another anti-annuity thread", but this time it's different - at least a little different. This article was written by an annuity salesman (!) and lists the following reasons you should NOT buy one:

You don't need an annuity...

1. If you can professionally manage the money yourself
2. If you want real market type growth
3. If you are thinking about replacing your LTC policy
4. If you want everything packed into one product
5. If you are only being shown one product from one insurance carrier
6. If you don't need additional lifetime income
7. If you see no need to transfer risk

Perhaps the most useful information in the article was this recommendation:

If the sales pitch sounds too good to be true, then write down in detail exactly how you think the annuity being proposed is going to work according to what the agent said. Then sign and date that list, and have the agent sign and date it as well so you can have them fully endorse their recommendation. This is just an effective and simple idea to fully flush out the contractual realities of the policy.

7 reasons not to buy an annuity

 

[MichaelB]

Interesting article with a good, frank inside view. Thanks. I thought point 6 was a pretty good summary view of annuities for most people and situations.

Whether you need income to start immediately or sometime in the future, annuities are the only product on the planet that will pay you regardless of how long you live. If you don't see yourself needing additional income guarantees for the rest of your life and you are pretty good at managing your own money, then you probably have no need for an annuity.

 

[pb4uski]

I read a couple of his articles and they both seemed to me to be quite sensible.

 

[sengsational]

The annuity salesman doing this pitch kind of reminds me a little bit of the 30 foot tall letters on a rooftop near an airport: "VASECTOMIES REVERSED" (the truth is, it's hard and doesn't really work reliably). But then, when you land, every other billboard is an ad for Vasectomies. The unsuspecting person is softened by the incorrect message and made a more likely buyer. "If I compare across issuers (think I'm kinda smart about annuities), maybe an annuity would be ok".

 

[chris2008]

You don't need an annuity...
1. If you can professionally manage the money yourself

... and if you are sure that you can do this till the very last day of your life.

I am quite sure that I do not want to do the investing game any more once I will be older than 80 or 85. At that age I want to be sure that enough money is rolling in regularly to cover my expenses without my constant involvement.
And when I even think of dementia...

 

[REWahoo]

I am quite sure that I do not want to do the investing game any more once I will be older than 80 or 85. At that age I want to be sure that enough money is rolling in regularly to cover my expenses without my constant involvement.

An annuity isn't my first choice to address this concern.

In the event I make it to 80 or 85, my plan is to have virtually everything in a balanced fund (Wellesley and/or Wellington) and have a monthly distribution go to a checking account. No worries about rebalancing or any other aspect of the investing game.

 

[chris2008]

@REWahoo:
I see your point, but with a balanced fund the risk of longevity remains - unless you add additional money as a safety margin to the fund.

 

[REWahoo]

@REWahoo:
I see your point, but with a balanced fund the risk of longevity remains - unless you add additional money as a safety margin to the fund.

At age 80 or 85 I can only hope I need to worry about longevity risk. Plus, how do you know I'll need to add $? FIRECalc says the odds are I'll have far more than I need by that time.

If not, I can always consider a SPIA.

 

[W2R]

At age 80 or 85 I can only hope I need to worry about longevity risk. Plus, how do you know I'll need to add $? FIRECalc says the odds are I'll have far more than I need by that time.

If not, I can always consider a SPIA.

The cost of an SPIA at age 80-85 shouldn't be too much. For me, it would provide more peace of mind so it would be something worth buying if I get to that age. After all, some other expenses will be less, so why not spend $100K or so on an annuity to supplement SS as one enters one's final years?

Especially if dementia sets in, I think it would be nice to have.

 

[REWahoo]

The cost of an SPIA at age 80-85 should be too much.

I don't want to bring up dementia, but did you mean shouldn't rather than should?

 

[Midpack]

Seems like an even handed article.

I am not planning on an annuity, but I check my "annuitization hurdle" quarterly anyway. If I ever annuitize some of our portfolio, presumably it'll be a SPIA in 15-20 years or more worst case.

I feel bad for anyone who needs to buy an annuity today, they're more expensive for a given payout today than most any time during our lifetimes. Odds are they will be cheaper if you can wait (higher rates/yields and fewer years). Lots of threads about it...

 

[W2R]

I don't want to bring up dementia, but did you mean shouldn't rather than should?

Oops! Thanks, fixed it. That was probably Freudian, since occasionally I am concerned that the cost of SPIA's will be high just when I need one.

 

[obgyn65]

I am also planning to buy some SPIAs in the future.

I bought a couple of small deferred annuities last year. They will begin payout when I reach 62. I like the tax deferral aspect.

Seems like an even handed article.

I am not planning on an annuity, but I check my "annuitization hurdle" quarterly anyway. If I ever annuitize some of our portfolio, presumably it'll be a SPIA in 15-20 years or more worst case.

I feel bad for anyone who needs to buy an annuity today, they're more expensive for a given payout today than most any time during our lifetimes. Odds are they will be cheaper if you can wait (higher rates/yields and fewer years). Lots of threads about it...

 

[Midpack]

I am also planning to buy some SPIAs in the future.

I bought a couple of small deferred annuities last year. They will begin payout when I reach 62. I like the tax deferral aspect.

I am NOT planning on buying a SPIA or any annuity product (since you quoted me). Only if I have to enact plan D, in which case it probably wouldn't be effective anyway...

 

[steelyman]

I am NOT planning on buying a SPIA (since you quoted me). Only if I have to enact plan D, in which case it probably wouldn't be effective anyway...

Nor am I.

 

[Free To Canoe]

....I feel bad for anyone who needs to buy an annuity today, they're more expensive for a given payout today than most any time during our lifetimes. Odds are they will be cheaper if you can wait (higher rates/yields and fewer years). Lots of threads about it...

A friend of mine is buying today.
I have grudgingly come to the conclusion that an annuity may be the right thing for some people who cannot manage their money. Better to have something coming in than nothing at all.

 

[nun]

A friend of mine is buying today.
I have grudgingly come to the conclusion that an annuity may be the right thing for some people who cannot manage their money. Better to have something coming in than nothing at all.

Bad annuities don't belong in any portfolio, but there is often a place for good ones.

TIAA-Traditional is a pretty good one. I've had a deferred TIAA-Traditional Annuity for 22 years and it has averaged a 4.3% annual return. It is currently accumulating at 3.75%, which is pretty good for fixed income these days, that rate varies with the prevailing long term rates and is guaranteed never to fall below 3%. I just got a quote for income starting at age 55 and using the minimum 3% return the payout rate is 6.2%. The payout will actually be higher as the declared interest rate is always above 3%.

 

[ETFs_Rule]

Why stop at 7 reasons? Here's a few more....

8. A Tax nightmare
9. One of the most expensive of all financial products
10. No ability to strategically rebalance after market declines (with SPIA's, fixed, indexed, immediate, etc)
11. So-called "advantage" of tax deferral is over rated and may be negated.
12. Extremely limited ability to use loses to write off taxable gains from annuity distributions
13. "Guarantee" against loss of principal actually may not be guaranteed if insurance company fails
14. Fixed accounts may not be guaranteed if insurance company fails
15. Terrible for heirs. No stepped up cost basis.

 

[nun]

Why stop at 7 reasons? Here's a few more....

8. A Tax nightmare
9. One of the most expensive of all financial products
10. No ability to strategically rebalance after market declines (with SPIA's, fixed, indexed, immediate, etc)
11. So-called "advantage" of tax deferral is over rated and may be negated.
12. Extremely limited ability to use loses to write off taxable gains from annuity distributions
13. "Guarantee" against loss of principal actually may not be guaranteed if insurance company fails
14. Fixed accounts may not be guaranteed if insurance company fails
15. Terrible for heirs. No stepped up cost basis.

All valid point for the worst annuities.

However, some annuities ie TIAA-Traditional deferred annuity with its range of payout choices, some that include passing principal onto your heirs, and single life annuity payout rates of 7% for a 55 year old make, can be useful as part of a fixed income allocation.

 

[clifp]

When/if interest rates rise, I'll consider buying a deferred annuity. Although in my case I don't think I'll have payments start before age 80.

I viewed it both has financial insurance and also bimbo/dementia insurance. An Anna Nicole Smith waltzed into my life takes all my money and then doesn't have the decency to wait until I am dead before splitting. That way I'll have social security and an annuity in case disaster happens.


There isn't much penalty for waiting, so I am in no hurry to give the insurance companies my money. The one question that I am mulling over is how much to buy. I am thinking about COLA amount about equal to my social security check.

 

[nun]

When/if interest rates rise, I'll consider buying a deferred annuity. Although in my case I don't think I'll have payments start before age 80.

True interest rates suck at the moment. That's where TIAA-Traditional is different from many annuity products because it's interest rate tracks the prevailing long term rates with a guaranteed minimum of 3%. The pay out options also mean that you can make it into a true life time income annuity of arrange it to operate more like a very long term CD with access to your principal over a period of 10 years.

 

[Phil_1960]

Hi. I'm new to this website and seeking opinions on Annuities. I've ready many postings on several sub-forums on the site. I have found many interesting points. We are early 50s, and are in a financial position where we can start working part time. In the process of laying out a financial plan with a Fidelity Advisor, he is recommending using a portion of our IRA funds to purchase a Fixed Deferred Annuity with a 3% COLA. This Annuity would provide a low-risk future funding/income base. The annuity would start paying @ 65, about 12 years from now. The proposed Annuity would require ~27% of our current investible funds, which would then provide about a 42% of our future projected income needs on a yearly basis (all referenced to today's dollars - to keep apples-apples). The remaining income needs would amply be covered by the remaining investible funds and social security.

Please share your thoughts an opinions on this strategy.

Thanks, Phil

 

[ETFs_Rule]

Hi. I'm new to this website and seeking opinions on Annuities. I've ready many postings on several sub-forums on the site. I have found many interesting points. We are early 50s, and are in a financial position where we can start working part time. In the process of laying out a financial plan with a Fidelity Advisor, he is recommending using a portion of our IRA funds to purchase a Fixed Deferred Annuity with a 3% COLA. This Annuity would provide a low-risk future funding/income base. The annuity would start paying @ 65, about 12 years from now. The proposed Annuity would require ~27% of our current investible funds, which would then provide about a 42% of our future projected income needs on a yearly basis (all referenced to today's dollars - to keep apples-apples). The remaining income needs would amply be covered by the remaining investible funds and social security.

Please share your thoughts an opinions on this strategy.

Thanks, Phil

That "adviser" from Fidelty is a salesman -- Not a fiduciary. Legally that salesman does not work for you and your best interests even though it might appears that way. They are trying to sell you commission based products that pay themselves and Fidelity the highest commissions. Find a fiduciary fee-only registered investment adviser for a one time consultation.

Here's a quote from Forbes Magazine: "We don’t recommend an allocation to annuities for ANY portion of your portfolio. We believe an age-appropriate allocation to bonds provides a similar boost to the likelihood you will have sufficient assets in retirement."

 

[nun]

I'd look into deferring SS before I bought the annuities that are on offer now. What are the expenses and payout rate of this deferred annuity. I guarantee that they will not be good.