Immediate Annuity

[JohnDoe]

I had an agent call me the other day offering a guaranteed IA at 4 or 5 percent. The call didn't get much further than that so I didn't get any details.

In the meantime, I did some research on IA since I was not that familiar with them - including the thread on here from 2008.

I used an instant quote calculator with 100k and selected single life. The monthly payment was $667 (8k annually). Does that mean the IA is considered to have an 8% payout?

Thanks.
JD

[Animorph]

Somebody should have a better answer for you, but for now no, that's not 8%. Some of that $667 is return of principal over your expected lifetime. The rate of return required to maintain that payout over your expected lifetime will be less.

[zinger1457]

The interest rate assigned to a SPIA is just an index and one's age and gender is also used to determine the actual payout. You may get an 8% annual payout put it's only guaranteed for as long as you're alive. Was this an unsolicited call from an agent? If it was I would be somewhat skeptical of what he is trying to sell you, agents typically push variable annuities because of the big commissions they get. Need to be careful and do some research before going with that type of annuity.

[dgoldenz]

Sounds like there's some info missing here. IRR on immediate annuities right now is not even close to 4-5%. It's more like 1-1.5%.

[Danmar]

This highlights why annuities sometimes make sense. The payout is a blend of interest and principal but in most cases will be higher than a SWR on the lump sum purchase price of the annuity. This is guaranteed for life. Obviously no residual. This will allow some people to spend more risk free. Works better the older you are.

[JohnDoe]

Quote:

Originally Posted by Danmar This highlights why annuities sometimes make sense. The payout is a blend of interest and principal but in most cases will be higher than a SWR on the lump sum purchase price of the annuity. This is guaranteed for life. Obviously no residual. This will allow some people to spend more risk free. Works better the older you are.

Right. This is what I am looking into(for a relative).

Their w/d rate is about 4.25%. They could take about 1/2 of their portfolio and plunk it down on a SPIA and generate the equivalent of that 4.25%. That will leave the other half to grow in a portfolio and be available for any emergencies, etc.

[Independent]

Recognize that the SPIA payment (probably) isn't inflation adjusted. But it looks like you've got a good handle on how someone might use it.

[chinaco]

Quote:

Originally Posted by dgoldenz Sounds like there's some info missing here. IRR on immediate annuities right now is not even close to 4-5%. It's more like 1-1.5%.

The word "return" can be confusing... people often use it to describe or talk about different aspects of annuities.

Some people are describing percent of the premium returned in a year... (payout/premium paid which is part principle). This would be like drawing a fixed % of a portfolio of stocks and bonds each year.


Some are trying to describe the nominal rate of interest the payout equates to if one lives till life expectancy or some guaranteed period... earnings on the premium.

[afntrn56]

Quote:

Originally Posted by chinaco The word "return" can be confusing... people often use it to describe or talk about different aspects of annuities. Some people are describing percent of the premium returned in a year... (payout/premium paid which is part principle). This would be like drawing a fixed % of a portfolio of stocks and bonds each year. Some are trying to describe the nominal rate of interest the payout equates to if one lives till life expectancy or some guaranteed period... earnings on the premium.

+1 that pretty much sums it up. Hard to really make any comparisons to other options for that reason.

[JohnDoe]

Thanks for all the replies.

So as far as payout, the only thing that matters is the amount of the monthly distribution for life.

Other things to consider is the health of the insurance company and the local state default insurance coverage.

As a comparison, does anyone have an idea what the monthly payment was back in 2007 for a male 66 years old for 100k? Can these historical numbers be accurately found somewhere?

Thanks.
JD

[dgoldenz]

Quote:

Originally Posted by chinaco The word "return" can be confusing... people often use it to describe or talk about different aspects of annuities. Some people are describing percent of the premium returned in a year... (payout/premium paid which is part principle). This would be like drawing a fixed % of a portfolio of stocks and bonds each year.

That's what it sounded like to me. Most annuities with income riders pay out 4-7% of the income account value annually depending on age. Like I said, there's some info missing here or else everyone would be rushing to sign up for the product.

[Danmar]

The thing to keep in mind with annuities is what you are mostly buying is longevity risk reduction-or the opposite of life insurance. Nobody worries about interest rates when they buy life insurance? Clearly they have an impact on annuity payouts but not as much as you may think. I think they play a role in allowing a more aggressive investment strategy than you would otherwise feel comfortable with. Especially if you don't have a DB pension.

[chinaco]

Quote:

Originally Posted by Danmar The thing to keep in mind with annuities is what you are mostly buying is longevity risk reduction-or the opposite of life insurance. Nobody worries about interest rates when they buy life insurance? Clearly they have an impact on annuity payouts but not as much as you may think. I think they play a role in allowing a more aggressive investment strategy than you would otherwise feel comfortable with. Especially if you don't have a DB pension.

Many people here are DIY investors and compare the return... they believe they can beat the return offered by the insurance company by managing their own assets... or that they may die young and lose much of their money.

You are not going to convince many of them that an annuity is a good idea unless perhaps rates are way above historical norms... Even then, some of them would think they are going to beat it over the long haul or others would think that catastrophe is at hand and they should buy gold.

[Danmar]

Quote:

Originally Posted by chinaco Many people here are DIY investors and compare the return... they believe they can beat the return offered by the insurance company by managing their own assets... or that they may die young and lose much of their money. You are not going to convince many of them that an annuity is a good idea unless perhaps rates are way above historical norms... Even then, some of them would think they are going to beat it over the long haul or others would think that catastrophe is at hand and they should buy gold.

Yes I agree. But many people here buy life insurance so they should also be open minded when it comes to annuities. I am not saying they are for everyone but low rates shouldn't rule them out in all cases.

[JohnDoe]

Turns out this agent has been calling my relative a few times and wants to sit down with both of us to discuss options.

Now I am not sure if the agent was recommending a SPIA or something else.

Anyway, I told my relative to have him call me and I would get to the bottom of his intentions. I'm up to speed on the SPIA's but if he starts pitching a different fixed product, I might need some help here punching holes in the prospectus I would request.

I would only consider a SPIA, but probably not through this guy and I'm in no rush to pursue it. I'm just curious now as to why he is perhaps harassing my relative and maybe I can have a little fun with him.

JD

[easysurfer]

My thoughts...

1) I think either he sees that you are aren't interested in getting an annuity from him so he is trying to make a sale to your relative

or

2) He hopes that your relative can help convince you to get an annuity from him

Kinda of like going the a car dealer and the dealer tries to convice the person the buyer brings along instead of the buyer.

He'll probably sit you down and say, "let's see, which annuity did you want to purchase?" That's when you say, "I never said I was buying one from you."

[Koolau]

I could envision a scenario where one might want to purchase the longevity protection offered by a IA - but only if one were knowledgeable enough to choose a "safe" company with adequate state protections AND know how to shop for the best "return" (monthly payout/investment). Having a sales person call/visit/sit next to you on the bus would not be a good way to obtain an IA in my opinion. Of course, YMMV.

[kyounge1956]

Quote:

Originally Posted by Koolau I could envision a scenario where one might want to purchase the longevity protection offered by a IA - but only if one were knowledgeable enough to choose a "safe" company with adequate state protections AND know how to shop for the best "return" (monthly payout/investment). Having a sales person call/visit/sit next to you on the bus would not be a good way to obtain an IA in my opinion. Of course, YMMV.

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

[Koolau]

Quote:

Originally Posted by kyounge1956 Can you suggest books or websites where I can learn more about how to choose a good SPIA?

Sorry. I'm gonna punt on that one. I'm sure others can help. I don't have a SPIA (though I do own a couple of SPDAs). To me, SPIAs are still in the realm of "sounds like a good idea under the right circumstances". If the time comes that I need one, I'll check back with you to see what you found out.

I just know that you want a company that will stay in business for the full extent of your life, one that is backed up by a state "fund", and a company that pays the highest rate. These may be mutually exclusive. Good luck.

[missionfinder]

Annuities for Retirement: The Best, and the Rest - Personal Finance - Retirement - SmartMoney.com - for a list of the best companies so far as "soundness" goes for annuities.

Even though I would personally never get an annuity of any type, if you're going to get an immediate annuity make sure it has a period certain clause which guarantees payout for a 20 year period in the event of your death. Personally, I use a mix of different term bond funds as part of my portfolio spread rather than lining a sales person's pocket (though immediate annuities do tend to have much lower commissions than other types). YMMV, but anytime someone wants to sell me something the red flag goes up... they aren't selling for my benefit, they are selling for their benefit.