All those who have all their money in one stock, raise your hand. One bond?
Wouldn't it be more correct to say that investing in an annuity is like deliberately putting all your money in a bank with no FDIC insurance? In both cases all the money rests with the fate of a single company, and you stand in line ahead of the stockholders if things go south.
I reserve my comments for those asking about purchasing SPIA or VAs. Just don't ask me to recommend an annuity for you.
Not sure I see the difference between an annuity and a defined benefit pension (even adjusted for inflation). It seems the major difference is whether someone made an active decision. With pensions, people get them from their employer and don't make an active decision in many cases. If people had an option to take an actuarially equivalent lump sum payment it would be the same decision as investing in an annuity. It would be interesting for people who had a pension to defend their decision on not taking the lump sum payment and investing in it rather than keeping the cash flow.
Having read a number of these debates, would love to figure out the key assumptions on where people really disagree on this issue (seriously).
Not sure I see the difference between an annuity and a defined benefit pension (even adjusted for inflation). It seems the major difference is whether someone made an active decision. With pensions, people get them from their employer and don't make an active decision in many cases. If people had an option to take an actuarially equivalent lump sum payment it would be the same decision as investing in an annuity. It would be interesting for people who had a pension to defend their decision on not taking the lump sum payment and investing in it rather than keeping the cash flow.
I think a big issue is people's attitudes towards insurance. If you die early with an annuity the money goes to the insurance company. In the other situation, the money goes to your heirs. That's a very personal decision on legacy that doesn't have an mathematically correct answer.
I think another big issue is people's attitudes towards risk. Of course, mathematically the annuity will be a worse decision -- the insurance company is making money off these products. But the benefits of reducing risk and volatility may be worth it, if its not too expensive. Again another area on where people can legitimately disagree.
I am interesting in figuring out the right answer for myself, as I'll need to make the decision about either keeping a defined benefit plan or taking the lump sum in a few years when leaving my employer.
Cheers,
Having read a number of these debates, would love to figure out the key assumptions on where people really disagree on this issue (seriously).
I don't quite understand why you care so much what others think. If you are convinced you have found an investing plan that satisfies you, sail on. It's not important nor even possible to sway others to agree with you if they are locked into other plans. You may be right, they may be right, we may all be wrong. Time will tell.
Old saying - don't try to teach a pig to sing. It wastes your time and annoys the pig.
Harley
Hint: don't respond to the resident annuity troll.
Tough choice and 90% choose the lump sum apparently, although I expect I will be choosing the pension for my main employee pension in 2010. A couple of years ago I started receiving a pension from a former employer. I had the choice of a lump sum or pension, and decided on the pension.
The best way to take a pension - Jul. 1, 2008
One thing these days is that a pension is insured up to a certain value following some big name pension catastrophies in recent years, and the pension funding is more tightly regulated than it used it be to also.
Isn't it true that if you need LTC and don't have insurance, the nursing home can come after your portfolio, but not a fixed annuity? I mean sure, they can probably take the income stream if you owe it...but that seems a bit different than taking your portfolio. For example, if you go in for 2 years, they might go through your entire portfolio in that time, whereas with an annuity you'd continue to have income even after coming out of the nursing home.
I know one other advantage of annuities (at least fixed ones) is that they are "unattachable" in most states in the cases of bankruptcy or lawsuits.
I can tell you that in my professional capacity I have seen numerous occasions when the lump sum option has worked out very badly for unsophisticated recipients. It's very easy for people here, generally highly knowledgeable investors, to pontificate how it makes no sense to purchase annuities or take a defined-benefit pension from a company (in which case the total PBGC-insurance is capped at around $51K annually), when one can make his own investment decisions and replicate all of the essential features of a SPIA all by himself. This do-it-yourself approach can go badly for a vast majority of people. Annuities have their place for many; it's not something I would recommend for myself or anyone who can adequately manage their own portfolio of securities, but I know a lot of family members I wouldn't hestitate to suggest that they look into this because of KISS and because the risk of self-inflicted harm is very real to them if they start trying to manage their own portfolio.