Immediate Annuity

[kyounge1956]

I got all my SPIA information from USAA. As soon as rates go up I'll get one from them. Their agents are on salary so there's not any pressure for them to sell specific products for commission. I'm going to do a joint annuitant with 20 years guaranteed. I don't think you have to qualify for USAA membership in order to get one of these - you'll have to check.

https://www.usaa.com/inet/pages/insurance_annuities_single_premium_immediate

I agree with dgoldenz - the IRR is very low right now and it's just not a good time to get a SPIA.

The most important part of any financial instrument is the company's ratings. You don't want to sink your money into a fly-by-night and then come up broke a few years down the road.

OK, that's question #3, do you get a commission if I buy an annuity in my 457 plan?

I know the interest rates are low, but since I'll only be 57 at the time of purchase, wouldn't my annuity payment be quite low due to long life expectancy, even if interest rates were higher?

Also, I can't think of anywhere good to park the money in the interim. I could buy CD's now, which would be FDIC insured, but I suspect they would pay less in interest income than the annuity, and I'd need that income to make up for the reduction in pension benefit. There isn't a money market or 100% Treasury bond fund in the 457 plan, and I don't think I'd want to roll the lump sum to an outside IRA because I won't be 59-1/2 yet when I retire. I can take immediate distributions from the 457, but would have to pay the underage penalty if I took them from a rollover IRA. (Or is the penalty eliminated if the distribution is an annuity payment, as with a 72-t?) Or I could put the money into the Stable Value Fund in the 457 plan, but there's very little info available about it. It doesn't seem to have a ticker symbol or a prospectus. It's a black box that pays 2-5% a year. But that would violate the "don't invest in anything you don't understand" rule.

 

[fritz]

NEVER, NEVER buy anything from someone who makes an unsolicited call. If you want an SPIA just buy one from someone like TIAA-CREF as they are reputable, very stable and have reasonable fees.

I think SPIAs can be useful as part of a portfolio. In the 1980s I put 25% of my retirement savings into a TIAA Traditional Annuity, the rest went into CREF funds. The Annuity has ticked along doing 5%ish a year until recently, but it's volatility is tiny. The CREF funds have obviously gained more, but it's been a bumpy ride. I keep the annuity as part of my fixed income portfolio and it reduces volatility. When I ER I'll start taking lifetime annuity payments as a foundation so I can invest my CREF funds more agressively

Just for the record, it wasn't necessarily an unsolicited call. I believe this 'agent' helped my relative with a Will and POA papers. In the process, the agent got to see IRA statements, etc.

I think the relationship existed prior.

JD.

I remember the old saying as "Never buy anything from anyone who comes to you". If you feel this (IA) is the right avenue for you/your relative - do your own homework and seek several avenues to make an informed decision (you both have to live with it). Remember, there's another old saying "No good deed goes unpunished".......

 

[East Texas]

I got tired of playing Russian Roulette with the 401ks. We parked our money into a USAA IRA (Flexible Retirement Savings Annuity) unti the rates on the USAA SPIA improve. We can roll the IRA into a SPIA without penalty. The retirement annuity is currently paying a 3% bonus with a guaranteed 3.55% interest rate.

Kyounge, the ERISA rules on private pensions are they must be fully funded. I don't know about if public pensions are given special treatment. Most (all?) plans have to provide you with documents on an annual basis to demonstrate the financial stability of the plan. if you ask for such a document, they must provide it. My company did it without cost.

 

[REWahoo]

A few days ago when one of those gosh-awful, repulsive JG Wentworth 'lump sum for structured settlements and annuities' commercials came on, I couldn't help giving them grudging credit. Their irritating tagline is THE reason I don't believe I could ever purchase an annuity:

"It's my money and, I [want unrestricted access to it in the event I] need it now!"

 

[kyounge1956]

I got tired of playing Russian Roulette with the 401ks. We parked our money into a USAA IRA (Flexible Retirement Savings Annuity) unti the rates on the USAA SPIA improve. We can roll the IRA into a SPIA without penalty. The retirement annuity is currently paying a 3% bonus with a guaranteed 3.55% interest rate.

Kyounge, the ERISA rules on private pensions are they must be fully funded. I don't know about if public pensions are given special treatment. Most (all?) plans have to provide you with documents on an annual basis to demonstrate the financial stability of the plan. if you ask for such a document, they must provide it. My company did it without cost.

The documents are available on the retirement system website. They haven't posted the 2010 annual report yet and I haven't read the 2009. The funding level is published in the minutes of the monthly Board meetings, that's how I know it is not recovering as I would prefer to see. The contribution rate from both employer and employees has increased one percentage point starting this past January, and will go up another point next year. That's as high as it can go under our current contract, but according to the actuaries' evaluation last summer it's well short of what is required to bring the funding level back to 100% in 30 years. And there are ominous noises coming from offstage.

 

[JohnDoe]

Just got of the phone after a brief conversation.

This guy was offering a fixed annuity - not immediate, inside an IRA which invests in CD's and guaranteed a rate of 4% for the 1st year. This product wasn't for life and would return a portion upon death. I didn't get into any more details about it.

I asked him to send me a prospectus and he said FA don't have prospectus'. Should I have asked him for a contract instead?

Anyway, I told him I was only interested in a SPIA which I don't think made him happy.

He's going to call me back later with some numbers on a SPIA. I'm not buying anything from him.

What are some good questions to ask him?

Thanks.

JD

 

[Lisa99]

Can you suggest books or websites where I can learn more about how to choose a good SPIA?

Boglehead's Guide to Retirement Planning has a good section on SPIAs. I just finished reading the book and while I felt much of it was elementary, some of the chapter, like annuities, was new info for me.

My main takeaway from the chapter was they recommend an SPIA in some cases to cover the 'fixed' part of your budget. But obviously not everyone needs an annuity so they go into who should have one and why.

 

[Mulligan]

I will be retiring on a public employee pension. The pension fund lost about 27% of its assets in the 2008 crash, reducing its funding level below 60%. For reasons I don't understand, even though the stock market has recovered something like 2/3 of the way from its low to the high of 2007, the funding level has only risen to barely above 60%. This really has me nervous over the long-term stability of my pension and I am thinking of taking one of the options that combines a lump sum with a reduced benefit, and buying an annuity with the lump sum. I just recently found out that it's possible to buy an annuity within my 457 plan, and also that it would be possible to roll over the lump sum from the pension fund to the 457 tax free. I have an appointment with the on-site rep from the 457 plan on Monday and want to know what questions to ask to see if the annuities available in the plan are a good deal or not. So unlike the OP, nobody has made an unsolicited call and suggested I buy an annuity.

The plan custodian is Prudential. They were not even in the list in your link but I saw another list of insurance company ratings on an online annuity quote site and they were rated A+ by AM Best. There were many other companies rated A+. The only company on the list with higher ratings was New York Life at A++. I have no idea how current that list of ratings is but sounds like question #1 is to ask what their current rating is, how long they have held that rating and whether their most recent rating change was an upgrade or a downgrade.

I am single and childless, and in my circumstances I don't think a term-certain annuity is my best choice. Taking a lump sum from the retirement system would reduce my pension benefit, and I would make up as much of that reduction as I could with this annuity. If the online quotes I've gotten are any indication, it won't make up the whole difference and I may have to roll my own inflation protection. Question #2: do you offer annuities which adjust according to the CPI or with a fixed percentage annual increase?

KYounge- Your funding level of the pension fund may not be as bad as it looks. I was nervous about my pension funding dropping also even though it had great returns last year. I did a little research and found out a lot of pension funds use a 5 year "smoothing out process" to report their funding level. If the market just stays flat the next few years, it will drop off that horrendous 2008 and mediocre 2007 year thus causing the funding level to jump up.

 

[FinanceDude]

Just got of the phone after a brief conversation.

This guy was offering a fixed annuity - not immediate, inside an IRA which invests in CD's and guaranteed a rate of 4% for the 1st year. This product wasn't for life and would return a portion upon death. I didn't get into any more details about it.

Not a good deal at all..........

I asked him to send me a prospectus and he said FA don't have prospectus'. Should I have asked him for a contract instead?

The insurance company mentioned can't issue a contract until you agree to buy it through an application. However, he could send you a blank application, and that would a lot of the info you need to know..........

 

[brewer12345]

Kyounge, a stable value fund is Gawd's gift to conservative retirement investors and would be an ideal parking place for your money. What is in these things is a pile of what are known as GICs - guaranteed investment contracts. GICs are institutional-sized fixed annuities that look like CDs (straight maturity with a set interest rate). GICs are issued to stable value funds by life insurance companies. The people running these funds are held to a very high standard, so they generally will only buy GICs from 5 or 6 of the largest, strongest insurers with the very best ratings. In the event of problems, the GICs have policyholder status, so are ahead of insurer debt, equity and other claims, although the likelihood of credit issues is remote.

What is special about stable value funds is that you get yield equivalent to a medium term bond fund, but you can withdraw any time you like at par. These are like money market funds with turbocharged yields and very safe.

 

[jdw_fire]

Kyounge, a stable value fund is Gawd's gift to conservative retirement investors and would be an ideal parking place for your money. What is in these things is a pile of what are known as GICs - guaranteed investment contracts. GICs are institutional-sized fixed annuities that look like CDs (straight maturity with a set interest rate). GICs are issued to stable value funds by life insurance companies. The people running these funds are held to a very high standard, so they generally will only buy GICs from 5 or 6 of the largest, strongest insurers with the very best ratings. In the event of problems, the GICs have policyholder status, so are ahead of insurer debt, equity and other claims, although the likelihood of credit issues is remote.

What is special about stable value funds is that you get yield equivalent to a medium term bond fund, but you can withdraw any time you like at par. These are like money market funds with turbocharged yields and very safe.

are they only availible in certian 401K plans or are there any open to anyone? if so what are their names and symbols?

 

[brewer12345]

are they only availible in certian 401K plans or are there any open to anyone? if so what are their names and symbols?

Sorry, these are only available within qualified plans (401k, etc.). The rocket scientists running my 401k recently took our stable value fund away.

 

[chinaco]

DW has one available. We use it.

 

[kyounge1956]

Kyounge, a stable value fund is Gawd's gift to conservative retirement investors and would be an ideal parking place for your money. What is in these things is a pile of what are known as GICs - guaranteed investment contracts. GICs are institutional-sized fixed annuities that look like CDs (straight maturity with a set interest rate). GICs are issued to stable value funds by life insurance companies. The people running these funds are held to a very high standard, so they generally will only buy GICs from 5 or 6 of the largest, strongest insurers with the very best ratings. In the event of problems, the GICs have policyholder status, so are ahead of insurer debt, equity and other claims, although the likelihood of credit issues is remote.

What is special about stable value funds is that you get yield equivalent to a medium term bond fund, but you can withdraw any time you like at par. These are like money market funds with turbocharged yields and very safe.

I'm pulled both ways about Stable Value funds. I do have that option in my 457 plan at work, and have been thinking about changing the allocation of my new money (currently all going into Vanguard Target Retirement Income) and directing some of it to the SVF for a cash reserve, since I no longer expect to have any cash left over from my house after I retire. What's stopping me is that it's almost impossible to find out what's actually in the fund. I just downloaded the info sheet for it the other day. 72% of it is invested in "security based contracts", whatever those are. Even if I could find out more about the SVF, I wouldn't use it as a parking place waiting for annuities to be a better deal—it earned 2.6% last year and even at my age and current low interest rates I think an SPIA would pay more than that.

If anyone here wants to find out more about Stable Value Funds, there are several SVF-related threads running over at bogleheads.org at the moment.

 

[brewer12345]

I'm pulled both ways about Stable Value funds. I do have that option in my 457 plan at work, and have been thinking about changing the allocation of my new money (currently all going into Vanguard Target Retirement Income) and directing some of it to the SVF for a cash reserve, since I no longer expect to have any cash left over from my house after I retire. What's stopping me is that it's almost impossible to find out what's actually in the fund. I just downloaded the info sheet for it the other day. 72% of it is invested in "security based contracts", whatever those are. Even if I could find out more about the SVF, I wouldn't use it as a parking place waiting for annuities to be a better deal—it earned 2.6% last year and even at my age and current low interest rates I think an SPIA would pay more than that.

If anyone here wants to find out more about Stable Value Funds, there are several SVF-related threads running over at bogleheads.org at the moment.

The stable value option in most plans is just a less risky alternative to a bond fund/higher yield alternative to a money market fund. Plain as that. It is an extremely conservative choice with just about zero downside.

 

[Koolau]

The stable value option in most plans is just a less risky alternative to a bond fund/higher yield alternative to a money market fund. Plain as that. It is an extremely conservative choice with just about zero downside.

But that would violate the "don't invest in anything you don't understand" rule.

I agree with Brewer about SVF. Still, I've recently bumped into the issue that Kyounge mentions. Trying to figure out how your particular SFV black box works is difficult. It may come down to a matter of trust. Has the one you are able to invest in been around a good while? Is it pretty much "captive" to your employer? (Mine is totally captive - no one outside my Megacorp may invest in this particular fund.) Is it "BIG"? - Mine is well over a billion - I know that's not big as "funds" go, but for a "captive" fund like this, that's something like $25K for every man, woman, and child working or retired from my Megacorp. Do you trust your employer to make good choices in choosing such a fund for you? If you can tease out the "costs", are they reasonable? (e.g., mine is some ridiculously low number like .02% - Not sure that is the total cost as there must be some kind of "buried" costs, e.g., trading or whatever they do - see "black box" warning above.)

Back when I was too stupid to know about (or care about) looking inside the black box, I bought into my Megacorp's SFV. It did cost me a fair amount of growth potential (25+ year return has ranged from about 9% down to about 2+% now). I could have done better with that money in an index fund. But, as reported elsewhere, I got "lucky" and my Megacorp stock (one single, lousy stock) did the heavy lifting for me. I DO NOT recommend this! But, the SFV has been there in good times and bad and always just does one thing. It goes up. Maybe moderately fast or maybe dismally slowly, but it always goes up. I can check mine every single week day and it goes up from the day before. I folded nearly all of my appreciated Megacorp stock into it (near the top) and I credit my stupid moves and good luck with my ability to RE and live in Paradise too. Trust me, lucky is better than smart!

So, for a "holding area" for your money, I think you might be hard pressed to beat an SFV. Will it make you rich? Probably not. So, maybe the question should be "Are you feeling lucky? Well, are you?"

 

[kyounge1956]

I agree with Brewer about SVF. Still, I've recently bumped into the issue that Kyounge mentions. Trying to figure out how your particular SFV black box works is difficult. It may come down to a matter of trust. Has the one you are able to invest in been around a good while? Is it pretty much "captive" to your employer? (Mine is totally captive - no one outside my Megacorp may invest in this particular fund.) Is it "BIG"? - Mine is well over a billion - I know that's not big as "funds" go, but for a "captive" fund like this, that's something like $25K for every man, woman, and child working or retired from my Megacorp. Do you trust your employer to make good choices in choosing such a fund for you? If you can tease out the "costs", are they reasonable? (e.g., mine is some ridiculously low number like .02% - Not sure that is the total cost as there must be some kind of "buried" costs, e.g., trading or whatever they do - see "black box" warning above.)(snip)

The SVF available through my employee plan is the Wells Fargo fund. It has been around for a long time and has had the same manager since 1988. It's an immense fund—if I haven't misplaced my decimal point there are over twenty billion dollars in it. The expense ratio is 0.45%, and all of the holdings are rated A- or better. The fund info sheet says:

The Stable Value Fund is an actively managed diversified portfolio of assets issued by highly rated financial institutions and corporations as well as obligations of the U.S. Government or its agencies. Examples of assets include: traditional book value contracts such as guaranteed investment contracts (GICs), bank investment contracts (BICs), GIC alternatives, corporate bonds, U.S. Treasury/ Agency Securities (for enhanced liquidity), mortgage related securities and Asset Backed Securities.

(Those last few items concern me somewhat.) I've been rereading Larry Swedroe's guide to alternate investments, in which SFV's were included among "The Good", but in some of his more recent posts on bogleheads.org, he is now sounding a note of caution about them, because it's so hard to find out what's in the black box. Maybe the manager of each fund uses some kind of proprietary trading or selection formula, like the ingredients for Coke, and that's why they are so secretive.

So, for a "holding area" for your money, I think you might be hard pressed to beat an SFV. Will it make you rich? Probably not. So, maybe the question should be "Are you feeling lucky? Well, are you?"

I don't feel either lucky or unlucky about my finances, just cautious and risk-averse.

 

[brewer12345]

The SVF available through my employee plan is the Wells Fargo fund. It has been around for a long time and has had the same manager since 1988. It's an immense fund—if I haven't misplaced my decimal point there are over twenty billion dollars in it. The expense ratio is 0.45%, and all of the holdings are rated A- or better. The fund info sheet says: (Those last few items concern me somewhat.)

At this point I do not imagine you will ever put money into a stable value fund, but for the sake of completeness all the stuff in that fund that is not a GIC is either basically cash/short term bonds (all these funds need a buffer of cash) or some variant on a synthetic GIC. In a traditional GIC, the fund gives cash to the insurer which issues an IOU and invests the money. The fund gets a guaranteed bond with a known interest rate and the insurer gets to keep whatever it earns over the rate on the GIC it issued. In a synthetic GIC, the fund keeps the cash, invests it itself in a generally very conservative portfolio of fixed income, and the insurer provides (for a fee) a guarantee that the value of the assets will never dip below par. Economically, a synthetic GIC is identical to a raditional GIC with the exception of the assets being retained bythe fund in the event of a synthetic GIC (his means there is less credit exposure to the insurer).

None of this stuff is particularly exciting or risky.

As for your comment on structure paper, let us not for get that even Ginnie Maes are asset backed securities.

 

[smjsl]

Sorry, these are only available within qualified plans (401k, etc.).

Do you know by any chance why that is?

From your description it sounds like a lot of people (e.g. those investing in CDs) would be interested in them...

 

[brewer12345]

Do you know by any chance why that is?

From your description it sounds like a lot of people (e.g. those investing in CDs) would be interested in them...

Part of the reason these accounts work is that they do not attract hot money. If they did have a ton of hot money, the insurers would lose their shirts.

No doubt there is also some sort of historical legal reason as well.