Annuities

[pb4uski]

.....The numbers he uses in annuity cost examples are in the range of this board's old favorite, the 4% withdrawal rate. In some cases the annuity seems to provide even more. If I understood his first example, a $1M portfolio would buy an annuity that paid $50K -- 5%. I don't know how to reconcile that with a 4% number except to question it. If true, certainly buying such an annuity should be attractive to all of us -- a 25% raise with running-out-of-money risk eliminated at no cost The article is from 2012 so interest rate differences probably don't explain it. ....

I think the main difference is because the 4% rule is designed assuming that withdrawals increase for inflation and most SPIA's have fixed benefits. Another difference is that the 4% rule is typically based on underlying assets that are 40-60% equities and most insurers back annuity blocks with bonds rather than equities. 5% sounds a bit low... according to immediateannuities.com the payout rate for an immediate annuity (with refund) for a 65 yo male in NY would be 6.2% and 5.9% for a female.... not sure what age the 5% payout rate was for.

.... Sounds like you were in the business. What percentage of annuitants live long enough to take the insuror's profit to zero? I'm still guessing not many.

I was.... with an insurer from the mid 1980s to the late 1990s... was Controller/CAO for the company and I was CFO for our annuities line of business for a few years during my tenure. At least for us, and I think for most insurers, the vast majority of annuities are in accumulation phase and very little (as a percentage of the total) is in payout phase.... since mortality is so predictable and mortality variances are so slight the last part isn't anything that we would have spent brain cells on... besides, typically the smallest subset that profitability would bessessed for would be a block or cohort of policies... never for individual policies.

 

[copyright1997reloaded]

Possibly naive question here. With an asset base that is not annualized, don' I have to plan for an expected lifespan that is well beyond the median and set my SWR based on that? For example, according to social security, a 65 year old male should live (on average) to 84.3 years of age. So, annuities (such as social security but also SPIA provider (subject to adverse selection issues) can plan for a median death of a age 65 annuity at 84.3 years while I, if trying to figure out a SWR, need to adjust it well beyond age 84.3.

So, absent profits (which are a huge consideration in reality), can't the SPIA offer a higher return vs a DIY approach?

 

[SpartacusSchmartacus]

Someone said it - best for people who do not know financials. Probably not good for the ones who signed up to this forum cuz they want to learn. I don't care for them but it sure worked out for OJ Simpson cuz the payments cannot be ever taken from him.

 

[OldShooter]

I think the main difference is because the 4% rule is designed assuming that withdrawals increase for inflation and most SPIA's have fixed benefits. Another difference is that the 4% rule is typically based on underlying assets that are 40-60% equities and most insurers back annuity blocks with bonds rather than equities. 5% sounds a bit low... according to immediate annuities.com the payout rate for an immediate annuity (with refund) for a 65 yo male in NY would be 6.2% and 5.9% for a female.... not sure what age the 5% payout rate was for. ...

I was looking at the first example on page 1 of the article. The annuity was not fully COLA'd but the payout increased 3% a year. Annuitant was 65.

" ... Mark has only one feasible choice: buy a single premium immediate life annuity. This would pay him an annual income of $50,916 indexed at 3% for the rest of his life, calculated as $1,000,000 ÷ $19.64. ... "

So $50,916 is a payout of 5.09%. Re underlying assets I don't think the customer cares what the insurance company does with the cash. (Other than becming insolvent.) I guess the only other variable is life expectancy from age 65 but I wouldn't think Canada would be much different than US. So I dunno. Looks like a deal to jump on unless one is very pessimistic about inflation. (Not your dog, not your fight, I know. But those numbers plus his home-made model of the future make me suspicious of the whole article.)

 

[ncbill]

I was looking at the first example on page 1 of the article. The annuity was not fully COLA'd but the payout increased 3% a year. Annuitant was 65.

" ... Mark has only one feasible choice: buy a single premium immediate life annuity. This would pay him an annual income of $50,916 indexed at 3% for the rest of his life, calculated as $1,000,000 ÷ $19.64. ... "

So $50,916 is a payout of 5.09%. Re underlying assets I don't think the customer cares what the insurance company does with the cash. (Other than becming insolvent.) I guess the only other variable is life expectancy from age 65 but I wouldn't think Canada would be much different than US. So I dunno. Looks like a deal to jump on unless one is very pessimistic about inflation. (Not your dog, not your fight, I know. But those numbers plus his home-made model of the future make me suspicious of the whole article.)

Again, some people have to do it.

An older relative I'm helping has just been diagnosed with stage IV cancer, 5-year survival rate ~20%.

They want to stay at home as long as possible, but have under $2,000/month in income from SS.

Annuitizing their remaining funds & choosing the "5 year certain" option roughly doubles their income over what is likely to be the time they have left.

It's something I'll be discussing with them...soon.

 

[capjak]

I was looking at the first example on page 1 of the article. The annuity was not fully COLA'd but the payout increased 3% a year. Annuitant was 65.

" ... Mark has only one feasible choice: buy a single premium immediate life annuity. This would pay him an annual income of $50,916 indexed at 3% for the rest of his life, calculated as $1,000,000 ÷ $19.64. ... "

A CPI annuity and 3% are very close in cost, I assume it is that the insurance company (Prudential) calculates longterm average inflation at a little bit higher than 3%. According to immediate annuity.com for a 65 yo male payout is 6.72% no COLA, 4.91% at 3% COLA, 4.82% CPI.

Remember 4% Withdrawal usually results in a legacy (sometimes a very large legacy) where an annuity does not.

 

[pb4uski]

Again, some people have to do it.

An older relative I'm helping has just been diagnosed with stage IV cancer, 5-year survival rate ~20%.

They want to stay at home as long as possible, but have under $2,000/month in income from SS.

Annuitizing their remaining funds & choosing the "5 year certain" option roughly doubles their income over what is likely to be the time they have left.

It's something I'll be discussing with them...soon.

The 5 year certain is just getting their money back with a little interest... probably about 2% or so.... they could do just as well or perhaps even better with a CD ladder or putting it in VMMXX and arranging an automatic monthly withdrawal equal to the annuity benefit.

 

[Red Badger]

1. You can buy a SPIA with inflation adjustment or with COLA from 1% to 5%. (both result in significant lower payments)

2. You can ladder purchases just like a CD to try to market time interest rates, and the SPIA returns more as you get older due to life expectancy and mortality credits.

Just answering your issues, not recommending them.

I would not recommend them either. But a salesperson at the insurance company might. BTW a flawed answer is not much of an answer IMHO (#1 - a rider - very expensive; #2 - market timing). However YMMV!

 

[capjak]

BTW a flawed answer is not much of an answer IMHO (#1 - a rider - very expensive; #2 - market timing). However YMMV!

#1 "significant Lower Payments" = Expensive
#2 Laddering CDs and SPIA is a fairly accepted practice when rates are low and are trending upwards



See my other post with the link for a more complete answer. I pride myself on being Flawless.

 

[pb4uski]

..... When faced with a similar decision, we chose to take the surrender value and annuitize a LI policy (different from cashing out and buying an annuity). ....

Do you mean that you chose to annuitize rather than take the surrender value and buy an annuity?

Once you take the surrender value, your ability to annuitize vanishes.... in other words, taking the surrender value and cashing out are the same thing.

 

[Chuckanut]

Someone said it - best for people who do not know financials. .

[Putting Contrarian hat on]

Sometimes I [-]fear[/-] think that people who have financial smarts are like gym rats. Nothing the 'ordinary' people do is good enough, one always has to try harder, go longer, suffer even more pain for a little more gain.

For many ordinary people things like 4% rules, financial calculators, asset allocation, sequence of return risk, etc. etc. etc. are more than they can handle. Like me at the gym (I just want to maintain a level of fitness that lets me live my life and hopefully keeps me healthy) they want to make sure they can pay the rent, put food on the table and take a vacation to Lake Runamuk every few years. Give them a CD ladder, no matter how financially sensible, at some point they will break a CD or two and spend the money on that fancy new car or lend it to a friend/relative who promises to pay it back within 12 months, etc. etc. etc.

I think we forget that most people in this forum are like the body builders at the gym - a small minority who actually enjoy what others consider to be a bother that should be minimized.

[Removing Contrarian hat]

I do admit that if a friend brings up an annuity purchase to me, even a SPIA, I often recommend they use CDs combined with some Wellesly which may give them more to spend in the long run, and let them keep more of their principle. Some agree with me, others want the security blanket an annuity provides.

Note: If you are a gym rat and a financially astute individual, please know that no offense is intended.

 

[ncbill]

The 5 year certain is just getting their money back with a little interest... probably about 2% or so.... they could do just as well or perhaps even better with a CD ladder or putting it in VMMXX and arranging an automatic monthly withdrawal equal to the annuity benefit.

Yeah, after today's meeting with the eldercare lawyer we'll likely just be liquidating to cash & getting her house ready to sell.

 

[SpartacusSchmartacus]

Note: If you are a gym rat and a financially astute individual, please know that no offense is intended.

HA! none taken, that's funny (and true)!

But you do look better with the contrarian hat on ... just sayin

 

[38Chevy454]

..... others want the security blanket an annuity provides.

But for most people that is a very expensive security blanket!


I am with the majority on here that feel competent to control my finances so an annuity is not needed. Plus being an engineer, I can do math and see where annuities are not a good solution for my financial investment strategy.

 

[ShokWaveRider]

How about MYGA's anyone have any of those. "Multi Year Guaranteed Annuity"

 

[Rosedala]

I think annuities are mostly for people who suck at math, but don't know they suck at math. Somewhat akin to folks who buy lottery tickets.

I know I suck when it comes to math, so I refrain from buying annuities and lottery tickets.

Hi Red, what do you think of CD-type annuities? They are very simple as to not require to read volumes of small print and still not understand everything, and on maturity you withdraw the entire account or leave part or all rolled over into the same or another one at the same institution or outside.

Nine years ago I bought such annuity from Jackson Life Ins. of NY at 5.30% which is maturing in 3 weeks. They said I can roll it over for one year or for 5 years at the guaranteed 3% min. Or, I can withdraw part or all without paying fees or surrender charges now or anytime during the annuity.

This site: depositaccounts.com scrutinizes banks and credit unions for highest interests and for the institutions' backgrounds, plus articles of much interest to investors. Reading some of them I learned that at least 2 more increases on interests are expected in 2018 but it doesn't refer to annuities.

If you mean other kinds of annuities, well, around 40 years ago or so I, young and stupid, lured by 9% interest and knowing nothing about annuities, I bought it and each year they reduced the interest. I'm still receiving their kind of annuitization where they stopped interest altogether sometime ago. There was no way to get out of it then, later, or now. You had to pay an exorbitant surrender charge or annuitize only on their own terms. Now I'm waiting very anxiously for February 2019 to finish having anything to do with them.

Just thought many on this thread would be interested.

P.S. BTW, most probably I'm THE worst in math but CD Annuities don't require special math efforts, I think...

 

[Cid79]

My old pension will allow me to roll the lump sum into my personal IRA. This will prevent taxes initially.

 

[Running_Man]

I was looking at the first example on page 1 of the article. The annuity was not fully COLA'd but the payout increased 3% a year. Annuitant was 65.

" ... Mark has only one feasible choice: buy a single premium immediate life annuity. This would pay him an annual income of $50,916 indexed at 3% for the rest of his life, calculated as $1,000,000 ÷ $19.64. ... "

So $50,916 is a payout of 5.09%. Re underlying assets I don't think the customer cares what the insurance company does with the cash. (Other than becming insolvent.) I guess the only other variable is life expectancy from age 65 but I wouldn't think Canada would be much different than US. So I dunno. Looks like a deal to jump on unless one is very pessimistic about inflation. (Not your dog, not your fight, I know. But those numbers plus his home-made model of the future make me suspicious of the whole article.)

In October 2007 when I was 55 I bought an annuity with 100K that paid $4,000 annually and has a 4% annual step up with a 28 year guarantee period. I bought as a fixed asset substitute and could care less what the company makes on it's investment as long as I am paid. In fact I hope they continue to make great profits. It is only as an alternative to other fixed investments that I rated it as an investment. Same should go today, the profit the seller garners on the investment is irrelevant. As it has greatly exceeded inflation I think I should have invested more.

In the OP's case, if he does not need the money he should judge it against other investments he would make with the money if he would pull it out, 4% annual is a pretty good rate at the present time.

 

[Walt34]

I know a number of people who if it were not for the hand holding of a professional Financial Advisor would end up in their mid 60's coming out of the SS office thinking "Is that all I have to live on for the rest of my life?!?!?!"

IOW, the money they spent on annuities and load funds would have been squandered on things like fancier cars, more restaurant meals, and investments such as 'beanie babys'. Instead they have something more than their SS check to live on.

Due to their views/fears on investing, these people would have done nothing otherwise. At least they have something more to live on than just their SS check.

DW's nephew is one of those people. They have a pretty good income, but at the age of 45 he just started putting away funds for retirement. At a family party a while back, somehow that topic came up and he's investing at Edward Jones. Both me and his BIL quickly got on his case about it, with their hidden fees and expenses, and his response was "I don't care! I don't want to have to think about it!"

So despite their high fees, businesses like EJ do better than what at least some of their clients would do on their own. Something, even part of something, is better than nothing.

 

[braumeister]

... his response was "I don't care! I don't want to have to think about it!"

So despite their high fees, businesses like EJ do better than what at least some of their clients would do on their own. Something, even part of something, is better than nothing.

That's just sad.

Very understandable, but sad.

 

[Red Badger]

Hi Red, what do you think of CD-type annuities? They are very simple as to not require to read volumes of small print and still not understand everything, and on maturity you withdraw the entire account or leave part or all rolled over into the same or another one at the same institution or outside.

Nine years ago I bought such annuity from Jackson Life Ins. of NY at 5.30% which is maturing in 3 weeks. They said I can roll it over for one year or for 5 years at the guaranteed 3% min. Or, I can withdraw part or all without paying fees or surrender charges now or anytime during the annuity.

This site: depositaccounts.com scrutinizes banks and credit unions for highest interests and for the institutions' backgrounds, plus articles of much interest to investors. Reading some of them I learned that at least 2 more increases on interests are expected in 2018 but it doesn't refer to annuities.

If you mean other kinds of annuities, well, around 40 years ago or so I, young and stupid, lured by 9% interest and knowing nothing about annuities, I bought it and each year they reduced the interest. I'm still receiving their kind of annuitization where they stopped interest altogether sometime ago. There was no way to get out of it then, later, or now. You had to pay an exorbitant surrender charge or annuitize only on their own terms. Now I'm waiting very anxiously for February 2019 to finish having anything to do with them.

Just thought many on this thread would be interested.

P.S. BTW, most probably I'm THE worst in math but CD Annuities don't require special math efforts, I think...

I'm not hostile to SPIA's. But the ones that have COLA/inflation riders are often just products to get the sales team free trips and other rewards. My reservations about SPIA's is inflation and the current low interest environment.

My dad owned a couple of restaurants during the 70's. Inflation almost did him in. He survived and recovered, but I saw the damage inflation could do to a business model. Same for retirement. If one has an SPIA for a modest part of income, that's diversification (not for me, but probably fine for others). But if the annuity is a significant part of a portfolio, it's risk the frightens me. I remember WIN buttons.

As to your question about CD annuities. I don't know enough to answer, but I'm a big fan of easy to understand investments... and CD's. Just prior to pulling the rip cord, I laddered a bunch of CD's to get us from 60 to 62. Rates are lousy, but the money should be fairly safe.

 

[YVRRocketSurgery]

But for most people that is a very expensive security blanket!


I am with the majority on here that feel competent to control my finances so an annuity is not needed. Plus being an engineer, I can do math and see where annuities are not a good solution for my financial investment strategy.

Personally, I'm not retired yet and haven't made up my mind on annuitizing some capital at some point during retirement. The concept wasn't not appealing to me at all but a few books I've read have loosened my stance.


Any thoughts as to what the plan is if you start to lose competency?

Eg. My MIL controlled the finances while my FIL just brought home his paychecks and got a monthly stipend . However, around age 70, she started to become very forgetful. Sometimes she can't recall what she just talked about literally 2 minutes ago and starts the same discussion over again. Doctor's test are still somewhat inconclusive if she has early stage dementia. DW and SIL now manage their parents investments conservatively so their it provides them with good monthly cashflow (though not via annuities (yet?)) as FIL never developed the skillset to manage their money. The inlaws are lucky that they can rely their daughters (I try to stay out of it) to look after them with their best interests in mind. However, I suspect people that don't have someone they can trust to champion for them who "start to lose it" mentally are somewhat more vulnerable with lump sum capital versus guaranteed income streams like an annuity.

 

[MI-Roger]

+1 While much less efficient and suboptimal than investing in no-load, low-cost mutual funds, something is better than the nothing that they would likely have if left to their own devices.

Although I am more than capable of making sophisticated investment decisions today at age 62, I am not confident that ability will remain uncompromised for another 30 years. Additionally, my wife has no interest in such decisions even today.

 

[Chuckanut]

Although I am more than capable of making sophisticated investment decisions today at age 62, I am not confident that ability will remain uncompromised for another 30 years. Additionally, my wife has no interest in such decisions even today.

A good point. I would not argue against a person doing that if it helps him/her sleep better at night and they have made some accounting for inflation. One can do a lot worse.

And there are other alternatives that will allow one to keep control of their funds, starting with income generating funds such as Schwab's monthly income funds and one of this group's favorites - Wellesly.