Annuities and their role in our investing plan

[FinanceDude]

My father put all of his worldly assets into a variable annuity that can not be touched for another 2 years. The annuity is in some high fee mutual funds (proprietary to the company) and has a 2% annual fee on top. This annuity will survive his death by about 7 years before my siblings and I split it up. When it does come out, it was set up to cause the maximum amount of tax confusion for all of us.

My FIL put about 80% of his meager liquid assets into two deferred annuities. He got a guaranteed 3% (?) but it was tax deferred. The only problem with tax deferral is that my in-laws total income is about $50K annually and almost all of it is from pensions. Tax deferral isn't worth much to them. DW triggered the 3% penalty to get the cash out to cover their nursing home and assisted living expenses.

I know it's too late now, but a lot of annuities have a "nursing home" waiver that enables him to take out money without penalty for nursing home care................

 

[FinanceDude]

And I agree that the best, most ethical, lowest cost annuities (that narrows it down to about 5% of the products out there, right?) are definitely a decent option for those with no financial savvy. I was willing to let my friend be if the annuity his "advisor" was pushing wasn't too smelly, since he is finances averse. Unfortunately, that was not the case.

Biggest problem is that annuities are complex animals. There's little if no transparency so clients can know what they're getting. To be sure, a number of insurance people don't even fully understand what they're selling.............

Also, these "low-cost" providers typically don't have the riders and other things that provide guarantees for the clients. One can debate the promise of the "guaranty" or such, but there ARE a number of folks that won't have access to pensions, COLA pensions, and the like, and want a guaranteed income stream.

I don't get all the sales to seniors out there. 7-10 year surrender charges for a 75 year-old client?

An immediate annuity for someone who is irresponsible with money that got a large inheritence/settlement is probably not a horrible idea.

An immediate annuity for someone who needs a guaranteed stream of income outside of SS and is older and not in good health might be a decent prospect.

The final thing I would like to say is that there are a LOT of financially savvy smart folks on here who make all of this sound easy. However, for the average Joe, a mutual fund sounds bewildering......................

 

[2B]

I know it's too late now, but a lot of annuities have a "nursing home" waiver that enables him to take out money without penalty for nursing home care................

We got that on one of his annuities. It took three months to process the paperwork through the annuity company. The other one only had a death or seven years clause.

 

[cute fuzzy bunny]

I'm surprised the annuity satisfaction levels are so low.

I'm not...considering the array of problems with the sales people and the complexity of the product, chances are good that a fair percentage of buyers will develop buyers remorse.

And this is one of the fun things about polls. The results you get are rather reflective of who you have filling in the answers. This is a very peculiar slice of humanity.

I guess I wasn't the only one who read it this way.

I suspect most people read it this way. Once again, the intent was to determine who was dead set against an annuity, who wasnt and who had an open mind.

There were several complaints by people with half assed schemes that specific individuals and the board as a whole were hard anti annuity people that were just jumping on them because they hate all annuities.

It seems there are a small # of people who wouldnt buy them no matter what, but in general the overall board is open minded. If you leave out "if the numbers make sense", you make it an emotional game...the numbers part merely tugs at the sensibility string a little.

I'd also bet five bucks that if I sub-polled the 11 people who voted #1 as to whether they'd recommend an annuity to a friend or relative if the numbers made sense for that person, we'd get a fairly decent number to say "yes". The no-way/no-how folks are probably have thoroughly investigated the option and decided that it cant in any form work for them.

But maybe they're hard headed and totally against it and think they'd be lousy for anybody.

Hell, even 2B the anti-annuity troll said he'd buy one if the numbers made sense

 

[2B]

Hell, even 2B the anti-annuity troll said he'd buy one if the numbers made sense

I still haven't seen any that do.

I will admit that with Vanguard and other low fee firms entering the market there is hope that the killer fees of earlier annuities will fade. Annuites can have a place for people wanting to trade free cash for stable income. The "longevity insurance" aspect is a reasonable rationale. It just is sad that when life expectancies are in the high 70's that a typical annuity requires someone to live into the high 80's to beat self-annuitizing. Having to outlive your mortality table by almost a decade seems rather steep.

 

[ERD50]

It just is sad that when life expectancies are in the high 70's that a typical annuity requires someone to live into the high 80's to beat self-annuitizing. Having to outlive your mortality table by almost a decade seems rather steep.

Yes, but by that same thought process, none of us would have fire insurance on our house. The Ins Co has to make a profit - so the 'numbers don't make sense'. Especially if you are more careful than the average insured (I bet we are, on average). We should self-insure our house (after we pay off the mortgage obviously - oh, oh - another slippery topic).

So, there is more to it than 'numbers'. When you buy an annuity you are buying insurance. You can't really expect the numbers to make sense from a pure investment view - some of the money goes to protect yourself against the chance that you far outlive your average life expectancy. The only way to do that on your own is to lower your SWR or increase your net worth (effectively the same thing) a bunch.

So, I suppose if you calculated what you would need to add to your net worth to self-annuitize against your worst(best?) case life expectancy, and that was cheaper than what you would pay an annuity company, then self-annuitizing makes sense. But, the Ins Co actually has an advantage - they don't worry about the worst/best case - they can worry about the average.

At any rate, a low cost annuity will come closer to fitting the requirement than most of the annuities being 'pushed'.

-ERD50

 

[2B]

ERD50,

I don't see anywhere we don't agree. My home owners' cost says that my house should be a total loss every 50 years. I don't see 2% of the houses in my neighborhood burning down every year so the insurance company has got to be making a killing. In fact, I don't remember ever seeing a house burn down since one of my neighbors torched his own place for the insurance money (which he didn't get -- he did get something else). I do carry the maximum deductible to minimize my cost but it's still crazy. The only real reason I carry insurance is the liability aspect. I can cover most every financial loss except the one inflicted upon me by a jury.

2B

 

[cute fuzzy bunny]

As long as you factor in bankruptcy risk, inflation risk and perhaps the need for long term/in-home/institutional care when you're 100-120 years old.

Annuities might be a fairly safe bet in the short to medium haul, but if you're going to "belt/suspenders/staple" the pants, you need to adjust that safety to a 50-70 year period. Its not a small adjustment.

 

[Brat]

I spend way too much time noodling our retirement investments.

Just for giggles I plugged in the # in Vanguard for an inflation adjusted joint 100% annuity. Were we to take the net from the sale of our home, deduct the cost of the entry fee for a nice CC apartment, the income annuity would pay for the maintance charge for the rest of our joint lives. SS, pension, and IRAs would be more than enough to fund 'discretionary' spending (already have almost paid up LTC insurance). Humm... Dementia proof.