are annuities worth it or too expensive?

[allanlevy]

I have got to admit annuities have got me confused and worried. I think I understand them, at least what I am told by the broker, but I cannot seem to get any comparison data (side by side) on the returns of one company's product vs another with all expenses accounted for and similar features (like income guarantee riders). I think I like variable annuities and am tempted to conver more of my savings into them. But I want a better one vs an avg or bad one and the side by side comparisons and/or consumer reports of products offered seems absent.

So my questions are: a) does anyone have a link to article(s) that do justice to the above concern? b) are variable annuities from a reputable (say A+) firm a good buy vs going it alone, managing my own portfolio? c) after expenses what should be my expected roi from a variable annuity (seems so gosh darn basic a question I can't seem to get handle on); d) would you/did you buy one and why and to what % of your portfolio? e) and finally do you have any warnings for me to watch out for?

-Allan

 

[Huston55]

I have got to admit annuities have got me confused and worried. I think I understand them, at least what I am told by the broker, but I cannot seem to get any comparison data (side by side) on the returns of one company's product vs another with all expenses accounted for and similar features (like income guarantee riders). I think I like variable annuities and am tempted to conver more of my savings into them. But I want a better one vs an avg or bad one and the side by side comparisons and/or consumer reports of products offered seems absent.

So my questions are: a) does anyone have a link to article(s) that do justice to the above concern? b) are variable annuities from a reputable (say A+) firm a good buy vs going it alone, managing my own portfolio? c) after expenses what should be my expected roi from a variable annuity (seems so gosh darn basic a question I can't seem to get handle on); d) would you/did you buy one and why and to what % of your portfolio? e) and finally do you have any warnings for me to watch out for?

-Allan

Allan-

There's a lot of info on this forum regarding annuities. Here's a link to start:

http://www.early-retirement.org/forums/f28/immediate-annuities-65576.html

You can find more by searching "annuities" in the forum search window.

My personal answers to your questions are:

A. See above plus go to Immediate Annuities - Income Annuity Quote Calculator - ImmediateAnnuities.com for comparative info.
B. based on recent threads I've read, I'd go to only A+ large companies for an annuity but, I don't think variable annuities are a good deal. The fees are very high and the rate of guaranteed return is low.
C. I recently priced a variable annuity just for comparison purposes, and the annual ROI based on guaranteed return was only 2.25%.
D. I would not buy a variable annuity. But, I would consider an immediate fixed annuity later in life (I'm not yet 60).
E. Beware of annuity salesmen. Do lots of homework before any purchase. This forum is a great place to start educating yourself. You'll find different views here and lots of good data to inform your own choice.

 

[Richard4444]

+1 Allan, There is always a lot of discussion here about all of the annuities, so you can search in the box at the top in the early-retirement.org site (the other choice is google). I concur with Huston55 wholeheartedly. Rich

 

[pb4uski]

The main problem that I have with VAs are high fees. As you may know from mutual funds, expenses matter; and the same principal applies to VAs.

 

[Dawg52]

D. I would not buy a variable annuity. But, I would consider an immediate fixed annuity later in life (I'm not yet 60).
E. Beware of annuity salesmen. Do lots of homework before any purchase.

Agree. I would continue to manage your investments and roll some into an immediate annuity when you are ready for the distribution phase. And since interest rates are so low, I would delay buying an SPIA as long as possible. That's my plan fwiw.

 

[sheehs1]

Try this thread as well...

http://www.early-retirement.org/forums/f28/4000-a-month-net-income-possible-49987-2.html#post932029

 

[allanlevy]

variable annuities, positive view (is it correct?)

Allan-

There's a lot of info on this forum regarding annuities. Here's a link to start:

http://www.early-retirement.org/forums/f28/immediate-annuities-65576.html

You can find more by searching "annuities" in the forum search window.

My personal answers to your questions are:

A. See above plus go to Immediate Annuities - Income Annuity Quote Calculator - ImmediateAnnuities.com for comparative info.
B. based on recent threads I've read, I'd go to only A+ large companies for an annuity but, I don't think variable annuities are a good deal. The fees are very high and the rate of guaranteed return is low.
C. I recently priced a variable annuity just for comparison purposes, and the annual ROI based on guaranteed return was only 2.25%.
D. I would not buy a variable annuity. But, I would consider an immediate fixed annuity later in life (I'm not yet 60).
E. Beware of annuity salesmen. Do lots of homework before any purchase. This forum is a great place to start educating yourself. You'll find different views here and lots of good data to inform your own choice.

Thanks all for your responses. The responses seem uniformly negative re VAs. But I am actually surprised (am I totally naive?!). Here is why. I can get (did just buy) a VA with a GLB rider which a) doubles my income base in 10 years (ie., rolls up annually at 10% simple) and b) then pays out for life at 5.25%. (It also has a death benefit in case things go south so my sons "make out"), Further it is a joint annuity--if I die it keeps on paying out at 5.25% til my wife passes (and vice versa). And all this is inclusive of the approx 1.3% GLB rider and 1.4% mortality insurance component, which are transparent to the 5.25% payout for life.


Now what strikes me VERY positive about this is

a) your money doubles guaranteed in the next 10 years (where else can you get such an investment return?!, especially in the presence of a market at an all time high, so likely to experience a correction (and rebound?) withing next 10 years

b) compared to the "4%" safe WR rule, you (I) can pull out 5.25% for life safely --that's a huge increase in annual WR, and

c) you get longevity insurance-- if I and/or my wife live very long, this money keeps coming in; with probability 25% that 1 in a couple live past 95 that's pretty valuable. Further, with likely medical advances in the next decades that scenario could well extend the impact if longevity insurance even further. (if med community just gets a leverage into tumor control watch longevity jump another decade, likely (or at least I hope so) in our life time

In summary, I see the costs of the VA worth the benefits (a)-(c) provided above. I do not see the 2.25% return Huston55 mentions in his item (c) response above--I can't compute the return, but I see the doubling of income base and the a 5.25% withdrawal, with capital account value base protected as a death benefit in the scenario of early death. I wish I could compute an ROI, but I don't see/know how. I just "sense" the value. The doubling and the forever 5.25% lifetime draw down just seem way more than a 2.25% ROI.

Further, this product I am referring to is an equity product, the VA annuity is place in equities not interest bearing bonds, so seems not subject to the ravages of low interest rate environment plaguing IA now, or VA based on bond fund base.

Am I missing something here? Am I being naive?! The post response so far seem negative towards VAs. Your thoughts appreciated.

-Allan (age 60)

 

[brewer12345]

Allan, you seem to have discovered the most wonderful product on the planet, so I wish you well with it.

In the interest of hopefully dissuading others, VAs are a complex shell game designed to transfer your money to the pockets of the agent selling it and the insurer manufacturing it. Run away.

 

[youbet]

b) compared to the "4%" safe WR rule, you (I) can pull out 5.25% for life safely --that's a huge increase in annual WR, and

Unless the 5.25% is cola'd, it's NOT "a huge increase in annual WR."

c) you get longevity insurance-- if I and/or my wife live very long, this money keeps coming in; with probability 25% that 1 in a couple live past 95 that's pretty valuable. Further, with likely medical advances in the next decades that scenario could well extend the impact if longevity insurance even further. (if med community just gets a leverage into tumor control watch longevity jump another decade, likely (or at least I hope so) in our life time

Unless your annuity payouts are cola'd, it's NOT longevity insurance. Likely, a non-cola'd stream of periodic payments will have the buying power of less than half of today's value in only 2 - 3 decades. That's a long way from being "longevity insurance."

I'm assuming you understood exactly what you were buying and had run and compared the numbers before signing the dotted line. In that case, assuming the insurance company is able to make good on its promises and the assumptions you used in your calculations and comparisons turn out to be valid, then you should be a happy camper. If not, maybe not.

My assumptions and calculations tell me no to a variable annuity. A modest SPIA late in life might be on the table if rates improve significantly and assumptions about our personal situation bear out.

 

[Animorph]

+1 to COLA.

And 4% SWR most likely (with average investment returns) leaves you with a ton of money to give your sons. An annuity leaves them nothing if you live too long. Part of that 5.25% "return" is just your own payment coming back to you. It is not an investment return. Apples and oranges.

 

[pb4uski]

A couple things to consider. Doubling your money over 10 years is 7.2%, not 10%. Not sure what your age is but I assumed that you and DW were 60 and the annuity payments would start at 70. The payout rate for a couple 70 year olds buying a joint SPIA today would be about 6.0% per immediateannuities.com and if interest rates improve over the next 10 years, the 6.0% payout rate will likely be higher.

You could schedule out the worst case cash flows and calculate the IRRs assuming payments continue to dates in 5 year increments (ie; age 75, 80, 85, 90, 95, 100). Presumably they provided you with an illustration with some of those numbers.

 

[sheehs1]

Well...it might be worth it to get the guy that sold this to you to give you full illustrations of the draw down phase in ALL market conditions. As pointed out in the thread I referenced above and in my post on that thread, it was not until I had the sales rep do this that I discovered a couple of things.
1) they may charge fees when you take withdrawals or reserve the right to - hoping you read the fine print if it was made available to you.
2) I too had a guaranteed death benefit that I was being charged extra for. In down market conditions, that death benefit can go to zero. To clarify that means "no death benefit". You may still get your yearly percentage if the buckets go to zero but the death benefit will go away.
Yes you heard me correctly for the variable annuity product I was being quoted. It was a John Hancock product. I asked "You mean I am paying an extra charge for the guaranteed death benefit and it goes away under these conditions? Answer: Yes

Most salesmen only show you the up side during the accumulation phase and tell you what percentage that will pay you every year. Get him to show you the down side with 10%, 20% 30% market declines or during a market we just came thru or with conditions where all buckets go to zero....during the "withdrawal" phase.

Or you can read my post in the thread provided above.

 

[sheehs1]

+1 to COLA.

And 4% SWR most likely (with average investment returns) leaves you with a ton of money to give your sons. An annuity leaves them nothing if you live too long. Part of that 5.25% "return" is just your own payment coming back to you. It is not an investment return. Apples and oranges.

+1

They are paying you back with your own money. That is the bulk of what you are getting and you are getting it in dribbles.

 

[W2R]

Allan, you seem to have discovered the most wonderful product on the planet, so I wish you well with it.

In the interest of hopefully dissuading others, VAs are a complex shell game designed to transfer your money to the pockets of the agent selling it and the insurer manufacturing it. Run away.

+1 Personally I would not touch a variable annuity with a 10-foot pole. YMMV

 

[Kimo]

I bought a VA from Vanguard and liked it so much I bought 2 more.....

 

[allanlevy]

Well thanks--I appreciate your comments. BUT you have not provided any supporting analysis with your recommendation for "others to stay away". It would be nice if you had a mathematical or financial vs purely emotional/anecdotal foundation for your perspective. I, for one, think I am asking a fair and important question, substantiated by pretty detailed information, and apoplicable not only to me, but likely a host of others.

Care to respond in kind? Anyone?

I am sincerely looking for numerically solid supporting or rebutting information. Heck I would even take a solid analysis report reference from an expert objective third party group, like consumers reports, if I could find one.

Further, recognize there is an massive industry around this exceptionally important need (guaranteed lifetime with drawls with fair and reasonable expense). Surely not everyone in the industry are "bad actors" (granted many are, and its wise to know how to spot them). But a market demand so great (longevity insurance) will also draw at least a few players in the industry offering a good product at a fair cost/risk tradeoff. You really think such a huge market would go without the emergence of at least a few "fair" players? There is so much to gain for all parties.

So I ask again--provide numerical or substantial objective expert 3rd party support for your position. Else, I can't accept your generous but obvious disingenuous platitudes about my golden product find. Nor should anyone unilaterally stay away from such a product based on what information you did not provide.

With respect,
Allan

 

[allanlevy]

Yes you are correct--but ony to a point. That is where the insurance aspect of the product comes in--you are paying for the long tale. For example they might be paying you back with your own money for say 25 years, but if you live 35 years (one chance in 4 that a couple will have at least 1 survivor beyond age 95!), then they are paying you back with their money (insurance pool fund).

The other key point is if you don't "invest" is such a risk mitigation process (to protect the long tail of longevity) with an insurance product, then BY DEFAULT you are absorbing that risk yourself and self insuring for it. Hense you have to reduce your WR (with drawl rate) during your active years (eg say 65-85), and substantially so, to build up a pool just in case you (or your spouse) live past 95 (one in four chance). Do you want to decrease your WR to self insure? Do you think you can self insure in a manner that competes with the expertise and resources of the insurance industry? Do you blindly not want to manage/plan for/address the longevity risk? Do you want to self fund the management of that risk, vs amortizing the cost of that risk across a large pool of others each who have precisely the same risk? Some insurance products make sense, I believe.

Does anyone out there think I may not be insane? (Except for the respondent who said they liked the Vanguard product VA so much they bought 2 more--thanks, maybe I have one supporter in my ranting/raving views

-Allan

 

[pb4uski]

Go back to post #1. Asked and answered. Even though I am retired, I'm not about to do your due diligence for you. Are you a troll?

There are loads of articles on VAs out there. Google "variable annuity pitfalls" and look at the first page of articles.

VAs and longevity insurance are not one and the same as you seem to think.

 

[allanlevy]

Unless the 5.25% is cola'd, it's NOT "a huge increase in annual WR."


Unless your annuity payouts are cola'd, it's NOT longevity insurance. Likely, a non-cola'd stream of periodic payments will have the buying power of less than half of today's value in only 2 - 3 decades. That's a long way from being "longevity insurance."

I'm assuming you understood exactly what you were buying and had run and compared the numbers before signing the dotted line. In that case, assuming the insurance company is able to make good on its promises and the assumptions you used in your calculations and comparisons turn out to be valid, then you should be a happy camper. If not, maybe not.

My assumptions and calculations tell me no to a variable annuity. A modest SPIA late in life might be on the table if rates improve significantly and assumptions about our personal situation bear out.

VA 5.25% are not cola (you make a great point!). You could buy a rider for that for additional cost. What the product does instead is guarantee a doubling of your money in the first 10 years . So you put in (say) $100K. Ten years later you have a guaranteed (no risk independent of what the market does) min of $200K and can start taking 5.25% a year for life (or let it ride (grow?) further to the whims of the market and then begin taking at any time after that).

One of the reasons I posted this thread. is so someone with more financial smarts than I might comment on the "ROI" aspects or risk/reward aspects of this product. It drives me a bit batty that I cannot find intelligent literature on this subject (pro or con) except from the sellers of such products who are obviously biased. If anyone can provide me a reference I would sure appreciate it.

Allan

 

[eytonxav]

Someone already mentioned the devil is in the details (fine print). Have you read and understood all the terms and conditions of this product? This is also why you will most likely not find any apples to apples comparisons with other VA products.

 

[ERD50]

Well thanks--I appreciate your comments. BUT you have not provided any supporting analysis with your recommendation for "others to stay away". It would be nice if you had a mathematical or financial vs purely emotional/anecdotal foundation for your perspective. I, for one, think I am asking a fair and important question, substantiated by pretty detailed information, and apoplicable not only to me, but likely a host of others.

Care to respond in kind? Anyone?

With respect,
Allan

Your respect is lacking, as several people pointed out that you compared 4% 'SWR' (which is COLA'd) to 5.25% non-COLA. Those are hard numbers.

b) compared to the "4%" safe WR rule, you (I) can pull out 5.25% for life safely --that's a huge increase in annual WR, and

No, it's not a "huge increase". From the FIRECALC runs I've done, a COLA'd income stream is worth about 2x a non-Cola one. So 4% 'SWR' is roughly equivalent to about 2.6% non-Cola'd. A DECREASE in annual WR, not a 'huge increase'.

...

Does anyone out there think I may not be insane? (Except for the respondent who said they liked the Vanguard product VA so much they bought 2 more--thanks, maybe I have one supporter in my ranting/raving views

-Allan

So anyone who disagrees with you needs to provide hard numbers, but if they agree with you - no questions asked? I see.

Like so many, you seem to be here for validation rather than education. With that attitude, you will get neither.

-ERD50

 

[sengsational]

I bought a VA from Vanguard and liked it so much I bought 2 more.....

The ones that Vanguard sells are very low fee, comparitively. Also, they don't have a bunch of goofy rules and crap, right? You simply are buying a fund that's a wrapper for an underlying Vanguard fund. The VG fund goes up, you make paper wealth, it goes down, you lose paper wealth. No funky rules to worry about (or salivate over, if you're of that ilk). Then, you have the choice at some point to conver the whole works to an immediate annuity? If that's all it is, and it's not lining the pockets of a salesman, then a VA might not be so bad. That's a long way to say that not all VA's are created equally.

 

[Bestwifeever]

.... It drives me a bit batty that I cannot find intelligent literature on this subject (pro or con) except from the sellers of such products who are obviously biased.....

That would be my first hint.

There are some really smart people posting here but in the end it is your decision of course, and you appear to already know what you want to do.

Here is a thread one of them started that might interest you:

http://www.early-retirement.org/forums/f28/how-to-replicate-an-equity-indexed-annuity-eia-34656.html

 

[pb4uski]

....One of the reasons I posted this thread. is so someone with more financial smarts than I might comment on the "ROI" aspects or risk/reward aspects of this product. It drives me a bit batty that I cannot find intelligent literature on this subject (pro or con) except from the sellers of such products who are obviously biased. If anyone can provide me a reference I would sure appreciate it....

If it were me, I would look at the prospective cash flows under a handful of reasonable scenarios after all fees, etc. IOW what you pay out and what you receive in as benefits under each scenario and then compute an IRR for each set of cash flows.

 

[brewer12345]

Hmmm, you don't understand what you are being sol;d, likely have not read the prospectus, are completely convinced that you found the holy grail? Well, it is your money. Enjoy the butt-raping.