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Annuities - why bad? When good?
Old 12-27-2012, 08:28 AM   #1
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Annuities - why bad? When good?

Hi piggybacking off my other thread, the fido rep was really trying to get me to talk to an annuity specialist.

Everyone mostly bad mouths annuities. However, they must be doing well since all the brokerage firms have an annuity team.

I was curious, what is it that everyone dislikes about them? They must be beneficial for certain individuals when they plan for retirement. Can u share a situation or plan where an annuity is a good option?

I don't plan to invest in one. But am curious about them.
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Old 12-27-2012, 08:35 AM   #2
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fees and expenses can outweigh the guarantees and benefits.

there are many different types and you can not paint them all the same.

immeadiate annuities are the best bang for the buck.

the more conservative your other investments the greater the positive effects of introducing a pensionized income stream.

annuities offer something you can not do on your own. diversification into dead bodies.

those who die pay for those who live.

taking some of the market and interest rate risk off your shoulders and putting it on the shoulders of a third party can be another reason to add some annuities.
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Old 12-27-2012, 08:41 AM   #3
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I'll be buyng some SPIAs (immediate annuities, not variable) at age 65 or so to buy a base stream of a pension-like income. Then I'll use the AA technique for the rest. The advantage for me (very conservative with $) is that in addition to the lifelong payouts, I will be receiving some of the $ from those who pass (mortality credit that doesnt exist elsewise). Should I die too soon, I won't care about leaving that portion to an insurance company - and that's what it is - longevity insurance (which can be a different annuity product but not going there now)
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Old 12-27-2012, 09:04 AM   #4
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Though you're not asking about a lump sum, the considerations are mostly the same, it's just holding on to your $ assets (instead of lump sum) vs buying an annuity. Lifting from an earlier post, there's a market for annuities, but they're not for everyone. An annuity is part of my plan B, if all goes well I'll never have one...YMMV

Take It as a Lump SumSelect a Life Annuity
1) OverallYou can invest the moneyPlan sponsor manages
flexibilityany way you want, andthe money, but sends
spend more or less moneyyou a fixed monthly
over time.check, like a salary.
2) GuaranteesUnless you buy someIncome for the rest of you
and promisesprotection, you are at theand your spouse’s life
mercy of the market.that can’t be outlived.
 A form of insurance.
3) Legacy valueFunds can be bequeathedPossibly reduced income
or transferred, and arefor spouse upon death,
part of the retiree’s estate.nothing left for the next
 generation.
4) DecisionYou must manage theOnce the initial decision
complexitymoney for the rest ofis made, no further deci-
your life, or delegate thesions are required. Low
responsibility.complexity.
5) InflationDepends on how youSome employers provide
protectioninvest the money, and theincome adjusted annu-
type of investments youally for inflation, but most
select.do not.
6) Credit safetyAssuming the money isYou are at the mercy of
invested in conventionalthe pension plan spon-
funds, there is no greatsor, and their ultimate
risk.guarantor.
7) HealthIf the couple is in (very)Pension income partially
implicationspoor health, taking thedies with you, and com-
lump sum is a (much) bet-pletely dies with your
ter option.spouse. A gamble.

If you’re in poor health you might want to elect to take the lump sum. If you think you are healthier than everyone else, then go for the pension annuity. If you want to leave money to the kids and grandkids, go for the lump sum. But if you’re concerned about not having enough money to live on for the rest of your life, go for the annuity. If you are concerned about managing, investing and allocating your money well into your old age, take the pension annuity. But if you feel comfortable and competent enough to do your own investing, or you have a trusted advisor, go for the lump sum.
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Old 12-27-2012, 11:07 AM   #5
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One other important consideration re: annuities is that you are effectively lending money to an insurance company and they are NOT backed by the FDIC. If you have anything to do with these products (and tread carefully; Fido likes them because of the fat commissions), be very selective about which insurance company you deal with.
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Old 12-27-2012, 11:08 AM   #6
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I bought a 5 year fixed annuity with guaranteed 4% annual interest and 100% survivor payout and I waived all distribution rights for the 5 years. (Interest was 3.5% if I wanted an annual 10% distribution corridor.) I bought it almost 2 years ago when 4% was hard to find. There are 0.09% annual administrative fees, which are acceptable to me.

I have used short-term annunities several times as the fixed part of my portfolio with good success.
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Old 12-27-2012, 12:37 PM   #7
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For in-laws, same as described by silver. They bought into a total of 3 annuities at rates of 5 to 6%. Never withdrew, and sometimes added money. Those rates are gone now, and I believe 3% is the interest now.
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Old 12-27-2012, 02:03 PM   #8
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I'll assume you did not do a search. If not, here's an interesting thread concerning the only annuity that I would ever recommend (an SPIA), which I/DW hold:

Stocks and SPIAs - the best way to go?

I'll only add that an annuity is only one tool in your retirement "toolbox". You have to have the need before you use the tool. And no, you don't use a screwdriver to pound in a nail ...
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Old 12-27-2012, 03:14 PM   #9
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Quote:
Originally Posted by floridanurse View Post

Everyone mostly bad mouths annuities. However, they must be doing well since all the brokerage firms have an annuity team.

I.
I suspect they are doing well, as the current environment makes them an easy (er) sell, and that is why they all have annuity teams. Same reason many brokers encourage excessive trading--$$$
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Old 12-27-2012, 06:59 PM   #10
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I was curious, what is it that everyone dislikes about them? They must be beneficial for certain individuals when they plan for retirement. Can u share a situation or plan where an annuity is a good option?
I don't plan to invest in one. But am curious about them.
Annuities are insurance policies against longevity.

They're pretty good if you happen to exceed your actuarial life expectancy. They're really bad (for you and your heirs) if you don't. Sort of the ultimate investment example of survivor's bias.

The problems start when brokers sell annuities as investments, not as insurance policies.

Moshe Milevsky writes extensively about them, especially the fact that they're overpriced and oversold. A readable example is his book "Are You A Stock Or A Bond?" The conventional wisdom is that everyone needs to annuitize a portion of their retirement income, but the amount varies. For some, Social Security is more than enough. For others, maybe as high as 40% of their income.
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Old 12-27-2012, 07:08 PM   #11
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One other important consideration re: annuities is that you are effectively lending money to an insurance company and they are NOT backed by the FDIC. If you have anything to do with these products (and tread carefully; Fido likes them because of the fat commissions), be very selective about which insurance company you deal with.
Agree with Brewer. We've seen some big name insurance companies run into problems. I'd be very careful about sinking a larger % of my net worth into an annuity. And yeah, the fat commissions make them very attractive for the sales sharks to push.
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Old 12-27-2012, 07:36 PM   #12
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My rule is that annuities are generally ok if you buy them, generally awful if somebody sells them to you.

So while their is nothing wrong with Fidelity, you absolutely should shop around and find the simplest annuity, with a strong insurance company. Plus I would think three times before sinking more money in to annuity than is covered by the state insurance company guaranty association.
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Old 12-27-2012, 08:56 PM   #13
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I think annuities have a bad rep because the people selling them are either intentionally deceitful or they don't understand the product. As a result people get them when they shouldn't. In addition they are very difficult to understand with alot of detail and different ways that each product works. Plan to spend alot of time studying them if you think they fit your plan.

However, that being said. I bought 4 of them from different companies in order to purchase a pension for myself. I spent about 20% of my assets and set up a pension that should cover my basic expenses in retirement. Frankly I'm a bit tired of managing my money. So I decided to spread out the task a bit. My experience with trying to hire advisers has been very poor. Or maybe I'm too much of a micro manager. But the end result is I need to make the decisions, right or wrong. The deferred annuity with the guaranteed income for life rider was the only product I could find that would guarantee me an income for life without me having to do squat in my old age.

If you do decide to investigate them, do not believe anything that any sales person tells you about them. Just nod, smile, and take the written info so you can study it for yourself. Only believe what you read written on paper from the annuity company. One tip I got while looking at them is that they define their own terms. Make sure you look up their definition for anything they capitalize, even if you think you know the definition of the word. Capitalization makes it a defined term so you need to know how they are defining it. The same term can be defined differently by different companies.

Never buy anything you don't understand. It is very easy to go wrong with an annuity - hence the bad rep. You will understand them better if you view them as an insurance product. For me I bought them to give myself a pension. I understand that the money is pretty much gone from my investment pool and that the fees eat the principal, likely before I will die. Hence no money from the annuities will likely be left for my estate. I'm OK with that as I'd rather have that, then worry if I'll ever run out of money in my old age.

Try to identify what you want from an annuity and look for products that fit that goal. Remember that the annuity is not an end all/be all for every situation (even though the sales people try to sell them that way). You can't get something for nothing so for every perk there is something taken away. The key is to find the ones with the perks you want that take away the things you aren't concerned about. If you can't find such a product then an annuity is likely not a good tool for you.
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Old 12-27-2012, 10:05 PM   #14
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....We've seen some big name insurance companies run into problems. ....
Who specifically are you thinking of?
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Old 12-27-2012, 10:22 PM   #15
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If you are healthy, have good genes, and can expect to live into your 90s, then maybe an annuity is a good bet. If you're a big spender who cannot keep your hands off your retirement nest egg, then relying on someone else to hold onto it and give you an "allowance" might be a good idea. If you have a large retirement portfolio, it could be prudent to invest a portion of your savings in an annuity as a way to diversify your future income. But remember, in a sense, we all already have an annuity plan, in the form of Social Security. So do you really need another one? Not me. oldtrig
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Old 12-27-2012, 10:35 PM   #16
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If you are healthy, have good genes, and can expect to live into your 90s, then maybe an annuity is a good bet. If you're a big spender who cannot keep your hands off your retirement nest egg, then relying on someone else to hold onto it and give you an "allowance" might be a good idea. If you have a large retirement portfolio, it could be prudent to invest a portion of your savings in an annuity as a way to diversify your future income. But remember, in a sense, we all already have an annuity plan, in the form of Social Security. So do you really need another one? Not me. oldtrig
+1 Since SS and pensions will cover a substantial portion of my annual living expenses, I don't have any interest/need for more annuities.
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Old 12-28-2012, 12:29 AM   #17
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Be sure to understand the extent to which a non-cola'd annuity's purchasing power will erode over the years with even moderate inflation.
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Old 12-28-2012, 08:02 AM   #18
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+1 Since SS and pensions will cover a substantial portion of my annual living expenses, I don't have any interest/need for more annuities.
In your case, of course not.

However, for an indivudial that retires earlier than "normal" (whatever that is), has no pension (e.g. defined benefit), and desires to delay SS until FRA or later an annuity product (e.g. SPIA) may "fit" the requirement.

The above fits my situation. I don't have a pension and I'll be delaying SS for another five years until age 70 (primarily for the benefit of DW, assuming I pass first).

The idea of converting some of my TIRA funds to a joint life annuity (with a guaranteed term) fits my requirement. It acts as a pension (e.g. like a private pension, it does not have a COLA) but unlike a private company pension, it does not have a "SS offset" at age 62, but continues to pay at a constant rate. In my case, I won't have any personal external income for the 11 year period from my retirement at age 59, until my SS starts at age 70 other than the SPIA (and my 50% spousal claim against DW when she files for SS at her FRA age of 66).

It also takes some of my TIRA out of the RMD calculation, since any life annuity is deemed to fulfill that requirement of the funds used.

Again, it may be a solution to part of the retirement income puzzle, but not for every person, nor every situation.
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Old 12-28-2012, 08:17 AM   #19
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....It also takes some of my TIRA out of the RMD calculation, since any life annuity is deemed to fulfill that requirement of the funds used......
Now that's interesting. I may need to consider that when the time comes.
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Old 12-28-2012, 08:28 AM   #20
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Now that's interesting. I may need to consider that when the time comes.
Just remember that it only applies to SPIA's under a life contract. You can have a guaranteed term (as we have), but that's just an option to the contract to insure that you don't pay for the contract and you die the next day (including your spouse on a joint contract).

In that case, the remainder would go back to the insurance company (another complaint about annuities). In our case, any remaining payments (beyond our calculated life) go to our estate. BTW, if either/both live longer than the guarantee period? Monthly payments/income continue at 100% (and also increases the overall return rate, as measured against an IRR against the original contract payments).

Your monthly benefit is reduced with the term guarantee, but if you get "insurance on insurance" (if you have fears related to longivity), it's an easy way out, and will reduce your monthly payment by a small amount.
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