Annuities - Opinions Yay or Nay?

[SoReadyToRetire]

I used to listen to Clark Howard on the radio all the time. I always remember that he said to NEVER buy annuities, because they're too much of a ripoff. That has stuck with me.

HOWEVER--now that I'm so close to retiring, and the stock market has been flying so high, I fear/expect another big crash. I'd really like to hang onto the gains I've made over the last few years (wouldn't we all).

Annuities seem like a reasonable way to do that, given that you get a guaranteed income in bad times and a little bit of a "raise" in good times (if I understand correctly).

What do y'all think about annuities as a way to preserve present wealth?

(Btw, I'd like to retire in 1.5 years at the MOST, and right now my hubby and I combined have $770K in our IRAs/401k's.) I'd hate for even December 2018 to happen again soon and bring us to our knees at this point!!!

 

[SumDay]

Do you have pensions? When will you take Social Security? Have you tracked your spending? If the answer to the first two questions is yes, how much of your budget will that cover?

And what % does FireCalc give you? These are all things to consider, IMHO.

I'm pretty comfortable with our asset allocation right now. We're only 50% in stocks, with 40 in bonds and 10% in cash. We MAY buy a Single Premium Immediate Annuity (SPIA) when we hit our 70's, depending on how things are going. I've been told that's the age to do it, since premiums are lowest. Too far down the road for me to think about at this point.

 

[aja8888]

Buying an annuity is like buying a pension. You give up the large stash to buy a monthly check (usually without COLA).

If you are young, it's generally not a good choice to buy an annuity, unless, of course, you have millions.

 

[Lewis Clark]

My best friend used to work for New York Life, one of the biggest annuity sellers in the country. I asked him this question a couple of years ago.

He was not a fan of annuities in general due to their fees. Single premium immediate annuities were ok in his opinion for some customers. But avoid variable annuities because their fees are very high.

 

[razztazz]

I am not in the camp of hard core anti-annuity people, but I don't own one myself either

If you are expecting a sizable stock market retrenchment, and if you want to hold onto gains, rather than go permanent with an annuity you could just re-adjust your asset allocation to less-stock / more fixed income for a few years.

If we actually have a significant correction you will have some sense that the dust has settled and if you want readjust to more stocks / less fixed income. Some call that a tactical re-balancing. Some call it market timing. (I would suggest nodding and smiling politely if they do) Either way you maintain control of your money.

 

[corn18]

I used to listen to Clark Howard on the radio all the time. I always remember that he said to NEVER buy annuities, because they're too much of a ripoff. That has stuck with me.

HOWEVER--now that I'm so close to retiring, and the stock market has been flying so high, I fear/expect another big crash. I'd really like to hang onto the gains I've made over the last few years (wouldn't we all).

Annuities seem like a reasonable way to do that, given that you get a guaranteed income in bad times and a little bit of a "raise" in good times (if I understand correctly).

What do y'all think about annuities as a way to preserve present wealth?

(Btw, I'd like to retire in 1.5 years at the MOST, and right now my hubby and I combined have $770K in our IRAs/401k's.) I'd hate for even December 2018 to happen again soon and bring us to our knees at this point!!!

It sounds like you are referring to a variable or indexed annuity. Those are absolutely a ripoff and the insurance company charges ridiculous fees for them. And the paperwork is usually over 50 pages long. STAY AWAY!

Now, Single Premium Immediate Annuities (SPIA) are a different animal. Those can be very useful. But, getting one before age 75 or so means getting anemic returns, think 2% or so. But it is guaranteed. The best time to buy a SPIA is when the mortality credits start kicking in around age 75-78.

If you want to have a pension like income, then look at a SPIA indexed to inflation. These are expensive, though.

 

[RunningBum]

I don't want to buy an annuity of any kind right now with interest rates still relatively low. With many of them you would be locking in a rate, so it wouldn't be a very good inflation hedge. If we had a spike in interest rates I might might look at an SPIA, probably further down the line.

 

[ShokWaveRider]

If interest rates were a little higher, Say 5%, it would be fine, but honestly they are not paying as much as if you manage the money yourself, at least not in my opinion. Annuities may be a good option in a high interest rate environment.

 

[Mdlerth]

Balance is key in investing and tightrope-walking

If you are uncomfortable with equity exposure as you approach The Big Day, couldn't you park some of your money in fixed income or "stable value" options within your retirement accounts? Annuities can be hard to get out of if you should change your mind, but most retirement accounts offer the ability to move your dough among multiple options without too many restrictions.

It may not be unanimous on this board, but from discussions I've read here the majority takes the side against annuities. Even the pro-annuity camp often suggests the conditions under which an annuity is appropriate are limited.

It sounds like you may not be familiar with the concept of an Asset Allocation strategy. Many folks here, including yours truly, rely on a balance among equities (for example, stocks and index funds), fixed income instruments (bonds and CDs) and cash (includes actual cash, savings accounts, etc). Higher fractions of your nest egg devoted to the fixed income and cash categories tend to insulate you from market volatility.

Many seasoned investors here pick an AA, and as stocks or interest rates rise and fall and the relative fractions of each category deviate from their targets, they will shift money between the categories to restore the percentages to their targets. The rebalancing discipline guides us to selling assets that have risen in value and buying assets that have become cheaper.

 

[flintnational]

If your goal is "to hang on to the gains", you might just consider reducing your stock allocation and increasing your fixed income. You could even consider a CD ladder. As others have mentioned, I would only look at a SPIA and I don't like them currently with the low implied interest rates.

 

[capjak]

There are many kinds of annuities.

Generally for lifetime income a SPIA or deferred SPIA is thought of as a viable option as is a MYGA for a CD type investment. Others are not as well thought of and should be avoided by most.

While interest rates are low, it may still be viable using a laddered approach (i.e. buy some now and some in 5 years etc...)and they may be priced appropriately.

Interest rates are low but so is inflation, and the morbidity tables may not be accurate as well as some believe the market is over valued and therefore it make sense to take some cash (earning low interest rates) and purchase the first rung of the SPIA ladder.

Another option I have thought about is building a bond ladder for use in purchasing a SPIA in later years (perhaps TIPS) but this approach can be expensive also.

Bottom line is that longevity insurance is not cheap but it can be comforting for some.

I am not recommending anything just telling you how I think about it.

 

[samclem]

I'd hate for even December 2018 to happen again soon and bring us to our knees at this point!!!

Like others who have posted, I think you'd be better off to choose an asset allocation that let's you rest easy, and look into annuities at you leisure. If you've to buy an annuity you'll likely get a larger payout every month directly to higher interest rates and larger mortality credits.
SPIAs can make sense for folks who are a little short of having enough saved up to allow a reasonable safe withdrawal rate to meet their basic spending needs.

 

[SumDay]

I stumbled across this article about what happened to Vanguard's Wellington and Wellesley funds during the great recession:

https://seekingalpha.com/article/4207915-ride-next-market-storm-balanced-vanguard-funds

It's one of those annoying formats that forces you to click NEXT to see all 13 pages, but there are some really illuminating charts that show what happened to various portfolios during 07-09.

This one is page 8:

 

[gauss]

I certainly like the idea of them. We have some decent private sector pensions (non-Cola) and plan to delay SS until age 70.

Would consider buying additional DIA annuities (ie the ones that don't start to pay out for many years but 'annuitized' immediately) as another longevity hedge.

There is a longstanding annuity-paradox in economics that asks the question if they are such an efficient way to fund retirement, then why don't more folks purchase them.

-gauss

 

[Independent]

I am a little skeptical of the "Interest rates are low today -- I'll wait until they go up before I buying an SPIA" reasoning.

The question is, what am I going to sell when I buy that SPIA? If I'm selling bonds when interest rates have gone up, then I take a market value hit on the bonds I sell.

 

[Scrapr]

Have you thought of putting several years in cash or equivalents? Designate that as your SHTF money. You could live on that while the stock market recovers. Of course figure a stock-Bond allocation that lets you sleep at night

 

[RunningBum]

I am a little skeptical of the "Interest rates are low today -- I'll wait until they go up before I buying an SPIA" reasoning.

The question is, what am I going to sell when I buy that SPIA? If I'm selling bonds when interest rates have gone up, then I take a market value hit on the bonds I sell.

Then...maybe I sell stocks? Provided they aren't beaten down.

That would mess up my AA though, especially I count the annuity as non-equity. Some might just take it off the table since it's no longer a holding, but rather an income stream, but it really doesn't make sense to me. I would at least think about increase my AA equity % knowing I had more cash income coming in.

Anyway, back to your point, that's something to think about. Not only when is it best to buy SPIAs, but when it's best to free up the funds to buy them.

I've got plenty to learn.

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?

Thanks for triggering more thought on this.

 

[capjak]

Annuities seem like a reasonable way to do that, given that you get a guaranteed income in bad times and a little bit of a "raise" in good times (if I understand correctly).

I do not understand what you mean by a raise in good times. If you are referring to SPIAs they are very simple. You give the insurance company for example $100,000 and they promise to give you a certain amount for example $6,000 (so for the first 17 years you are getting your $100,000 back in this example until the insurance has to start paying above the original premium) annually the rest of your life regardless of what the market does.

You can add options like CPI increases or 1-5% annual increase add in survivor benefits etc... but all these come at a cost of lower income guarantees.

or are you referring to one of the other many insurance annuity products? https://www.immediateannuities.com

 

[imoldernu]

This won't help you today, but... DW has an annuity that began in 1984... the amount was $8400. The early days had interest rates 7% to 8% for several years after which it was a minimum of 4%. Today that is $65,000+, so as a 5 year payout we will get $1200/mo. I suppose not a big deal today but we're thankful... a good supplement to SS and a help to keep our capital intact.

 

[Chuckanut]

If you want to have a pension like income, then look at a SPIA indexed to inflation. These are expensive, though.

The problem with the inflation indexed SPIAs I looked at several years ago was that their payment amounts start very far behind, IMHO, the regular SPIA payments. IIRC, it took nearly a decade for the indexed payment to equal the non-indexed payment. That's a lot of extra cost to pay to get indexing.

IMHO, the best COLA'd annuity is taking SS at 70.

 

[pb4uski]

I do not understand what you mean by a raise in good times. .../QUOTE]

+2. What raise is the OP referring to? Can't be a SPIA.

 

[capjak]

Then...maybe I sell stocks? Provided they aren't beaten down.

That would mess up my AA though, especially I count the annuity as non-equity. Some might just take it off the table since it's no longer a holding, but rather an income stream, but it really doesn't make sense to me. I would at least think about increase my AA equity % knowing I had more cash income coming in.

Anyway, back to your point, that's something to think about. Not only when is it best to buy SPIAs, but when it's best to free up the funds to buy them.

I've got plenty to learn.

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?

Thanks for triggering more thought on this.

I have read several books on annuities and let me just say its complicated, lots of trade offs, pros/cons, etc..

Short answer on inflation is you can purchase SPIAs that adjust for inflation but there is only 1 company that sells them (Prudential) and therefore they are quite expensive (e.g no inflation protection for a 57 year old payout is 5.6% with inflation payout is 3%) or you can purchase 1-5% annual increases which multiple companies sell so they are still expensive but perhaps more competitive than a true inflation protection.

Reasons to wait: Due to mortality credits they get cheaper as you age (i.e. insurance company knows the length of payout is shorter and for some purchasers/customers very short, they don't know which ones). Secondly if you wait you can decide at a later age if you really need one (e.g you spent less than you thought or the markets were good to you or you lived less than you thought) and finally if you wait till say 80 YO inflation becomes less of a risk due to number of years left.

I like the idea of having an income flow to meet basic needs. Pensions and Social Security are similar but priced better than SPIAs but you can't purchase them at those rates. So having a SPIA that meets basic needs frees up your other investments for discretionary wants and maybe you can pass on some to your heirs earlier while you are around to see them enjoy it if you are more secure financially through having different income streams for life.

 

[audreyh1]

I figured that with an annuity I could simply buy an additional annuity every 5 to 10 years to make up for any loss due to inflation. Obviously only part of the nest egg would be annuitized initially. And additional annuities would be small compared to the initial outlay plus cheaper as I would be older.

 

[Bruno]

I read a lot about how bad Annuities are. I have had a couple of Fixed annuities and to me they are almost like CD. You are in a contract and if you want out its going to cost you. I have one coming due this year and must figure out what to do with it. I can renew it for another 5 years for 4%.

https://www.sslco.com/content/personal-choice

My other annuity i just annuitized it for 5 years at 2.73%. Not getting rich but it's SAFE money to me. Also the income is also spread out over the 5 years for income tax purposes.

 

[rk911]

we agree with Clark and Dave Ramsey...no to annuities.