Annuities - Opinions Yay or Nay?

[capjak]

OK, I'm just saying this off the top of my head without checking the actual $ tradeoff...several people mentioned that it's better to buy when older because of "retirement credits."

To me the annuity salesforce using the term "mortality credits" sounds like an annuity sales job.

There is no "credit" to it at all. It just reflects that you can get a higher annuity payment per $ of annuity purchased when you are older than when you are younger, simply because statistically you're not going to be around as long. So, I'm not sure it's necessarily a "better deal" when you're older because the aggregate statistical expected payout would be the same (fewer but larger payments, same aggregate). And that further corresponds with the fact that if you are older, your risk of outliving your nest egg, all things being equal, is lower.

All that being said, I do think there may be a place for an annuity for some people in some circumstances, but it would be the simplest one possible, the SPIA. More complexity means more administrative cost and risk pricing, all things being equal.

My understanding is that mortality or survivability is calculated yearly by the insurance companies for pricing etc.(i.e. a population pool of 65 year olds, 65 year old probability of survival to 65 +1 etc..for all ages..)

I remember reading somewhere that you can approximate mortality credits by comparing the payout of a life only SPIA vs a 5/10/15/20/23 certain life SPIA. The difference (for the same aged person) is what the insurance company is "adding in" the payout for mortality credits or taking away for giving you 5 years or 10 year guaranteed payout.

If you compare a 55 year old life only vs 10 year the difference will be very small, if you do the same for an 80 year old life only vs 10 year it is significantly higher.

I am sure this is simplistic explanation of complicated math but it makes some sense to me.

 

[brewer12345]

Does anyone still sell a true CPI-linked SPIA any more?

 

[capjak]

Does anyone still sell a true CPI-linked SPIA any more?

Prudential sales one that per immediate annuities:

"Your monthly income starts at the dollar amount shown in the table and is adjusted up or down by the change in the
Bureau of Labor Statistics' CPI-U index"

Is that what you mean by true versus increasing by a percentage annually?

Not sure if your payout could be lower than what you originally purchased due deflation or not?

 

[RunningBum]

This article explains it in a way that makes some sense to me. It basically talks about getting a much better return in later years compared to something like bonds than you would when you are younger.

https://www.advisorperspectives.com...-need-to-know-about-annuity-mortality-credits

I guess I see the rationale in waiting. If I bought an annuity now at 57, I'd only get a bit higher payout than if I invest the money with equal safety on my own. That's fair, because I should have many years to recoup my purchase. If I wait longer, the payout is higher since I have fewer years to get my money back. So that means, if I outlive my expectancy, I'll do better with the higher payment from waiting to buy until later. Much like waiting until 70 over 62 to take SS is a better and better decision every year you make it past the breakeven point.

I agree "mortality credits" sounds like a marketing term, kind of implying there is some kind of integer number to quantify this complex concept.

How far off am I?

 

[copyright1997reloaded]

I think it is time to bring back the use of Tontine's. With today's ability to network and do investing on-line, it shouldn't be too hard to seed pools with annuitants with similar expected life expectancy. If this was done in a Mutual format (e.g. by someone like Vanguard), they could be a replacement of defined benefit plans.

Unfortunately (?) they are illegal in the United States.

ETA: And the Annuitants could be kept anonymous (thus reducing the probability that they try to off each other)

 

[ShokWaveRider]

I just posted this in another thread about annuities.

http://www.early-retirement.org/forums/f28/how-much-would-you-spend-97673-2.html#post2232610

 

[brett]

I do not see how one can make a blanket statement on the value of annuities.

There are too many variables. Types of annuities, one's financial situation, age, predisposition to risk, projected longevity, etc.

The only right answer is to find the best solution that meets your individual goals and needs. Could be annuities, could be something other investment option.

 

[pb4uski]

I dunno... I think it is pretty easy to make a blanket statement that other than SPIAs and plain-vanilla fixed deferred annuities that they are generally overly complex and have high direct or indirect fees and expenses.... I can't think of many exceptions to that.

 

[joeea]

I have a significant portion of my savings ( about 20%) in a variable annuity that I took out when I was 32 years old.

If I had it over, and knew what I know now, I wouldn't have taken out an annuity. I would have invested it in a Vanguard portfolio of 2 or 3 stock index funds and slowly rebalanced them more conservatively as I neared retirement. It would have outperformed the annuity.

I wouldn't buy the annuity again if I had it over, but I'm not terribly sorry I have it.

I have a similar situation.

My wife's patient was a former engineer turned financial adviser. Not knowing much at the time, we ended up purchasing some variable annuities through him.

We've already gotten rid of several. The remaining three have come off their surrender period recently, so I'll be revisiting them soon. In total they are currently worth about $600k, and starting next year I could annuitize them and get a bit over $30k/year for the rest of our lives, or I could let them grow and decide later.

I wouldn't ever buy them again. But once out of the surrender period, it's a more difficult decision.

The guy we bought them from has passed on. While he did earn a nice commission from us, he wasn't all bad. He got us to finally get a will, homestead declaration, etc. And he got me interested in learning more about finances - at which point I realized that he wasn't the kind of adviser we needed. We dropped him and moved on.

We now work with a fee-only fiduciary financial planner when we need some help. She has been great. We are due to check in with her in a few weeks. We recently sold our primary residence and have moved in full time to our beach house. We need to decide what to do with the proceeds. We'll be deciding how much to keep in cash, how much to invest, and if we should pay off the mortgage on the beach house (probably not, but it needs a bit more discussion).

 

[brewer12345]

Prudential sales one that per immediate annuities:

"Your monthly income starts at the dollar amount shown in the table and is adjusted up or down by the change in the
Bureau of Labor Statistics' CPI-U index"

Is that what you mean by true versus increasing by a percentage annually?

Not sure if your payout could be lower than what you originally purchased due deflation or not?

Yes, that is what I meant. Thanks.

 

[pb4uski]

Does anyone still sell a true CPI-linked SPIA any more?

I have a faint recollection of my company talking about such a product when I was employed by a mid-sized insurer. I think we all agreed that it would be a good product and would be attractive to retirees. The struggle was how to invest the premium in matching assets whose return would increase with inflation so we could maintain a constant spread... I think it probably could have been done, but it would have been complicated to scale it to hundreds of millions... it ultimately lost steam.

 

[corn18]

I just did my monthly check on a 15 year period certain SPIA with no COLA. 1.58% APR. That is pathetic. I'll check again next month. I love how they say the payout rate is 8.24%. While that is absolutely the truth, they certainly don't advertise the APR as 1.58%.

 

[ziggy29]

I dunno... I think it is pretty easy to make a blanket statement that other than SPIAs and plain-vanilla fixed deferred annuities that they are generally overly complex and have high direct or indirect fees and expenses.... I can't think of many exceptions to that.

+1. If it has words like "variable" or "equity-indexed" or some such, it's pretty much always a good idea to run. Depending on circumstances, a SPIA might actually make some sense for some folks.

 

[haha]

You can buy an inflation adjusted life (or joint life) deferred annuity that has a much better payout rate than 3% by delaying SS.

Count on it, this is way too intelligent a move to expect that a large number of people will choose to do this.

Ha

 

[Richard4444]

I have about 8% of my total NW in SPIAs and am very comfortable with that. Having no children (or large obligations to heirs), I am receiving a payout of ~ 7% on $ that would otherwise be in CDs or the like and when I pass, I have no problem leaving that amount of principal on the table. I guess I am in the minority here and have no regrets whatsoever.

Rich

 

[Dawg52]

I have about 8% of my total NW in SPIAs and am very comfortable with that. Having no children (or large obligations to heirs), I am receiving a payout of ~ 7% on $ that would otherwise be in CDs or the like and when I pass, I have no problem leaving that amount of principal on the table. I guess I am in the minority here and have no regrets whatsoever.

Rich

If I ever buy an SPIA it would be in the 8% range. Just enough(along with SS) to cover the annual budget. I don't think many have a problem with annuitizing a small portion of your portfolio. I think of it as another diversification tool. Having said that.....I'm still not sure I will ever pull the trigger. Like many here I would like to see more favorable interest rates factored in.

 

[ziggy29]

Count on it, this is way too intelligent a move to expect that a large number of people will choose to do this.

Well, if they did, it might go away, sort of like "file and suspend"...

 

[ShokWaveRider]

I was wondering if there is a way to create one's own Immediate Pension Type Annuity from Cash on hand. What I mean is emulating a SPIA but without the insurance company.

I looked on the net and there are only suggestions from creating one using TIPS or EE bonds, but they require waiting 20 years or so. They are not immediate.

If one had say $500k to invest and wanted to emulate a SPIA. Is there are way to do it that is guaranteed to have no investment fluctuation other than intentional depletion due to withdrawal or potential inflation consequences?

 

[Chuckanut]

Well, if they did, it might go away, sort of like "file and suspend"...

If they keep raising the full retirement age, delayed SS will go away on its own.

 

[RunningBum]

I was wondering if there is a way to create one's own Immediate Pension Type Annuity from Cash on hand. What I mean is emulating a SPIA but without the insurance company.

I looked on the net and there are only suggestions from creating one using TIPS or EE bonds, but they require waiting 20 years or so. They are not immediate.

If one had say $500k to invest and wanted to emulate a SPIA. Is there are way to do it that is guaranteed to have no investment fluctuation other than intentional depletion due to withdrawal or potential inflation consequences?

I don't see how. It's not the investment fluctuation that's the major issue. It's that it pays out on schedule whether you die tomorrow or live to 130. How would you cover that? It's insurance, and you're pooling "risk" of longevity with others, which you can't do with a group of one unless you cover the absolute "worst" case of living long.

As I think was mentioned in this thread, a tontine would be another way to do something similar, but those aren't legal in the US anymore.

 

[Chuckanut]

I'm not a big fan of annuities and would not buy one myself. However, I think they have their place for some people, often for psychological reasons. In any case, below is some Food for Thought.

Below are three old ads for annuities.

$200 from 1950
$250 from 1954
$300 from 1961

 

[flintnational]

I was wondering if there is a way to create one's own Immediate Pension Type Annuity from Cash on hand. What I mean is emulating a SPIA but without the insurance company.

I looked on the net and there are only suggestions from creating one using TIPS or EE bonds, but they require waiting 20 years or so. They are not immediate.

If one had say $500k to invest and wanted to emulate a SPIA. Is there are way to do it that is guaranteed to have no investment fluctuation other than intentional depletion due to withdrawal or potential inflation consequences?

Just thinking out load, and I don't see a way to completely avoid insurance, but you might be able to build a CD ladder based "annuity" income stream from say age 65 to age 85. Also at age 65 buy a deferred annuity that will begin payments at age 85. While this plan does not totally eliminate buying a commercial annuity, it does reduce the annuity expenditure while also providing the longevity protection if you live past age 85.

 

[pb4uski]

I was wondering if there is a way to create one's own Immediate Pension Type Annuity from Cash on hand. What I mean is emulating a SPIA but without the insurance company.

I looked on the net and there are only suggestions from creating one using TIPS or EE bonds, but they require waiting 20 years or so. They are not immediate.

If one had say $500k to invest and wanted to emulate a SPIA. Is there are way to do it that is guaranteed to have no investment fluctuation other than intentional depletion due to withdrawal or potential inflation consequences?

You could come close with a CD or Treasury bond ladder with annual or quarterly rungs... I guess even monthly rungs if you wanted to be anal about it. You could also build the rungs to have increasing maturity amounts for inflation, but only at a predetermined fixed rate unless you used TIPs.

While you wouldn't get mortality credits but you could extend the ladder out a long ways to mitigate longevity risk.... on the plus side, your heirs and charities would get a residual benefit if you die before the ladder runs out where with the SPIA they would get nothing.

 

[Independent]

Other examples, someone mentioned inflation. How does that play into SPIA pricing vs interest rates?

Someone else mentioned that they aren't good for younger people, more for people who are already at an age when life expectancy starts falling off more quickly, like late 70s, I think? I'm not clear why that is, could someone explain?

I agree with capjak's earlier post.

SPIAs are insurance products. I'd buy to protect against the "bad" financial result of living "too long".

If I want a fixed income for a fixed period, I'm better off with CDs and bonds than an annuity. The expense loads on SPIAs (which are hidden, but still real) are higher.

So if I'm young enough that the first 10 or 20 years of SPIA payments are nearly a sure thing, it seems I'm better off with a bond ladder for that period. I would certainly get quotes on both sides before I'd buy the SPIA.

At least one company (I think MetLife) offers a zero cash value SPDA that I buy today but doesn't start payments until 20 (or so) years from now. If I die before the payments start, I get nothing back. That's pure longevity insurance to me, and it's a format that I could imagine buying. Again, I'd have to look at the pricing before I'd buy.

Note that the cheapest SPIA I can buy is offered by the federal gov't -- deferring the start of SS as long as possible. Right now, it has the best rates.

 

[capjak]

Just thinking out load, and I don't see a way to completely avoid insurance, but you might be able to build a CD ladder based "annuity" income stream from say age 65 to age 85. Also at age 65 buy a deferred annuity that will begin payments at age 85. While this plan does not totally eliminate buying a commercial annuity, it does reduce the annuity expenditure while also providing the longevity protection if you live past age 85.

I think that is a good alternative as you get the flexibility till 80 or 85 and at that age you move to annuity for significantly reduced cost.

There is also the QLAC option but have not reviewed it but it is limited to $125,000 (when I see the government limiting something it warrants investigation).