Interesting comments on annuities

Financial illiteracy. We has it. Some folks profit from it.

The actual paper is $5 for a PDF, but here's an online summary of one interesting bit:
http://www.forbes.com/2010/01/12/cf...ards-opinions-columnists-thomas-f-cooley.html

How bad is it? Two economists, Annamaria Lusardi and Olivia Mitchell, have been studying financial literacy and the effectiveness of efforts to promote it for many years. The results are not at all encouraging. To take just a few of their examples, they asked the following questions of a representative sample of Americans over the age of fifty:

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102?

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year would you be able to buy more than, exactly the same as or less than today with the money in this account?

3. Do you think that the following statement is true or false? "Buying a single company stock usually provides a safer return than a stock mutual fund."

Only 50% of respondents were able to answer the first two questions correctly and less than a third were able to answer all three. In a related study less than 18% of people surveyed were able to answer a simple two-period compound interest problem. This is pretty discouraging. Not surprisingly the extent of financial illiteracy differs with education, gender, race and age. Most efforts to improve financial literacy are not effective.


The depressing original and abstract:
http://papers.nber.org/papers/w17103

Americans' Financial Capability
Annamaria Lusardi
NBER Working Paper No. 17103
Issued in June 2011
NBER Program(s): AG

This paper examines Americans’ financial capability, using data from a new survey. Financial capability is measured in terms of how well people make ends meet, plan ahead, choose and manage financial products, and possess the skills and knowledge to make financial decisions. The findings reported in this work paint a troubling picture of the state of financial capability in the United States. The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks. To understand financial capability, it is important to look not only at assets but also at debt and debt management, as an increasingly large portion of the population carry debt. In managing debt, Americans engage in behaviors that can generate large expenses, such as sizable interest payments and fees. Moreover, more than one in five Americans has used alternative (and often costly) borrowing methods (payday loans, advances on tax refunds, pawn shops, etc.) in the past five years. The most worrisome finding is that many people do not seem well informed and knowledgeable about their terms of borrowing; a sizeable group does not know the terms of their mortgages or the interest rates they pay on their loans. Finally, the majority of Americans lack basic numeracy and knowledge of fundamental economic principles such as the workings of inflation, risk diversification, and the relationship between asset prices and interest rates.
 
KRobby said:
A Gallup poll shows 76% of annuity owners are happy with their purchase.

Another survey showed 'nearly seven in 10 Financial Advisors had at least one client request for an annuity in the last 12 months.'

Over 9 in 10 opted to pay the additional fee to have the opportunity for the guaranteed lifetime benefit rider.

I doubt these thank you's leave advisors feeling an empty soul.

Cheers

Robby
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I am sure 99% of all dope addicts want more of their substance of choice, too. So what? Your stats simply suggest that there are a lot of unfortunates out there who bought the sales pitch hook, line and sinker and have not figured out they were had yet. Tell us about the litigation surrounding these products and related sales practices, why don't you?
 
brewer12345 said:
I am sure 99% of all dope addicts want more of their substance of choice, too. So what? Your stats simply suggest that there are a lot of unfortunates out there who bought the sales pitch hook, line and sinker and have not figured out they were had yet. Tell us about the litigation surrounding these products and related sales practices, why don't you?
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I have to agree with this. Most people only want to know 2 things. Yield and is it guaranteed. Many don't ask questions beyond that. If they did, the answers would give them reason to pause. As a salesman who was trying to sell me one said to my husband , "Gee usually all I have to do is tell customers about the 5% bump for the next 5 years and it's over. I don't have to up sell them anymore".

Once in and once they don't function as originally thought...there are some unhappy campers.

However those that know the charges and risks going in....are probably satisfied with what they are getting ...as long as they stayed below their states level of insurance for these products.

I suppose what I don't like is the sales pitch that does NOT even begin to tell you how these things function (in down markets, in catastrophic markets, if the insurer goes belly up...etc.)
 
I better get over to Costo before they close , and get more microwave popcorn. This Movie is a lot longer than I thought it would run. The Annuity salesmen usually leave in a huff and end the show much sooner.
 
brewer12345 said:
I am sure 99% of all dope addicts want more of their substance of choice, too. So what?
Click to expand...

Yes, dope addicts is good analogy to someone that wants the peace of mind of a guaranteed income stream. You're a smart almost actuary.


brewer12345 said:
Your stats simply suggest that there are a lot of unfortunates out there who bought the sales pitch hook, line and sinker and have not figured out they were had yet. Tell us about the litigation surrounding these products and related sales practices, why don't you?
Click to expand...

Read again, the survey was seven out of 10 Advisors had client requests.
Is a client request a sales pitch? If you're so interested in tactics and ideas on how to churn and burn, call your stock broker.

-Robby
 
audreyh1 said:
I have been expecting interest rates to stay low for a while, and it could be much longer according to this persuasive paper from Hoisington Management. http://www.hoisingtonmgt.com/pdf/HIM2012Q2NP.pdf

I only bring it up for folks who are counting on interest rates to rise before purchasing an annuity. What if they don't for another 15 years?
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Thank you Audrey for posting this paper. Explains a lot, all of it negative, since there is absolutely no chance that policies will be changed in the current intellectual and political environment.

Ha
 
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KRobby said:
Yes, dope addicts is good analogy to someone that wants the peace of mind of a guaranteed income stream. You're a smart almost actuary.




Read again, the survey was seven out of 10 Advisors had client requests.
Is a client request a sales pitch? If you're so interested in tactics and ideas on how to churn and burn, call your stock broker.

-Robby
Click to expand...

Stockbroker? Do they even exist any more? What planet do you live on?
 
Talk about a thread that took a wrong turn :facepalm: ...

How did EIA's get into the mix? They were not mentioned in the article the OP posted, or questioned:

"Economists have long been mystified as to why people do not make greater use of single-premium immediate annuities..."

There is a thread that is discussing EIA's (http://www.early-retirement.org/forums/f28/free-lunch-fia-61868.html) but it has nothing to do with the discussion of SPIA's, the subject of the paper referenced.

Golly gee :whistle:

Does anybody have anthing of substance to add to this thread (I've already contributed) pertaining to the subject material contained in the paper cited?
 
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braumeister said:
Maybe they got better rates in 1994 than are available today.

About Annuities: Saving for Retirement
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The reference is for non-qualified contracts (e.g. not funded by 401(k), TIRA, or retirement lump-sum contributions from an employer).

Being that general availabilty of IRA's for folks that did not have company pensions did not start until 1982 and a lot of companies did not offer 401(k) accounts till that time - or later, it would make sense that older folks would have only qualified money to put into an annuity (SPIA).

I wonder what the stats are for those who are newly retired (within the last 5-10 years) and had most of their retirement funds in qualified funds, especially those that received a generous lump sum rather than a pension, upon retirement.

Did they purchase an SPIA earlier in their retirement vs. the "general advice" to wait till later (e.g. late 70's, 80's, or beyond)?
 
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The article quoted in the OP is nothing but a sales pitch. The graph on p.2 makes it look like you’re a loser if you don’t buy an annuity.

In theory a SPIA is the best way to maximize lifetime spending and peace of mind. But real life is not theory, you are no longer investing, you are gambling with your money. Personally I don’t trust American insurance companies or their longevity. Remember, the largest insurance company, AIG went bankrupt a few years ago and was saved by taxpayers. Other bankruptcies included Bank of America, Citibank, General Motors, Ford, Chrysler, and a long list of banks. We’ve already spent trillions bailing out Wall St., do you still want to gamble?
 
Free_at_49 said:
(snip)...you are no longer investing, you are gambling with your money.
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I guess you don't equate investing with gambling?

Two points:
- Yes, the insurance company that underwrites your SPIA can go under (although history shows little evidence of this), but you are also protected by your state for various amounts, generally in the $100-300K range. Look upon it as a "shared risk". If you wish to invest more than the state limit with one policy (you can have multiple policies), that risk is up to you. BTW, I/DW are above our state limit (but only at 10% of our total retirement portfolio value at the time of purchase) so we did decide to take that risk. Funny, but our current joint TRP value is higher than at the time of my retirement (over 5 years ago), so the risk was apparently worth it.

- Secondly (and I've commented on this more than once), an SPIA is not an investment vehicle. It is an income vehicle. One that is outside the up/down variance of the equity/bond markets, and even CD's (if you wish to use that as an investment vehicle, which normally does not provide monthly income, as an SPIA does - including a return of principal). If you only want to invest, then an SPIA is not necessarily for you. However, if you need a base income (much like a pension - usually not COLA'ed) vehicle, an SPIA could be the answer. As I stated before, they are not for everybody, but should be considered as part of an overall retirement income plan.

BTW, DW/me can, and do have more in the equity market (we're both retired) since our income risk has actually been reduced with the SPIA. We have no pension or SS income at this time. The only thing we use as income is our joint portfolio withdrawls, along with our monthly SPIA income. We don't see ourselves ever changing our equity AA to less than 50-60% as it is now, even though we (at least me) have been retired a bit over five years. A lot of folks would have much less equity exposure at our age (mid-60's), but we feel with our current SPIA (along with our respective SS income in the future, along with two small DB's for DW) we can take that risk.
 
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I question the "guaranteed" part of annuities.

Our situation is:

DW has a pension from the state of Illinois. She has received formal notice that this pension (which she has been collecting for 10+ years) will be cut with details forthcoming as the legislature works out the details.

I am due a pension from MegaCorp but have been informed the pension fund is seriously underfunded. I also note on a concurrent thread here on this board that the PBGC is not in good shape.

Few feel that SS will survive as-is and I'm expecting my benefit to be reduced either through additional taxes, means testing, straight out cut, whatever.

How can I find an annuity that is "guaranteed" more securely than our family's private and public pensions or SS have turned out to be? At this stage, might refraining from buying an annuity and continuing to manage the money myself (which I've been doing with fair success) add to my diversity and be the more prudent move? Before I'd buy an annuity I'd have to feel that the insurance company is more secure than either our state government, the at one time prestigeous MegaCorp I worked for or SS.
 
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Free_at_49 said:
Other bankruptcies included Bank of America, Citibank, General Motors, Ford, Chrysler, and a long list of banks. We’ve already spent trillions bailing out Wall St., do you still want to gamble?
Click to expand...

When did Ford and Bank of America declare bankruptcy?
I missed that.
 
youbet said:
I question the "guaranteed" part of annuities.

Our situation is:

DW has a pension from the state of Illinois. She has received formal notice that this pension (which she has been collecting for 10+ years) will be cut with details fothcoming as the legislature works out the details.

I am due a pension from MegaCorp but have been informed the pension fund is seriously underfunded. I also note on a concurrent thread here on this board that the PBGC is not in good shape.

Few feel that SS will survive as-is and I'm expecting my benefit to be reduced either through additional taxes, means testing, straight out cut, whatever.

How can I find an annuity that is "guaranteed" more securely than our family's private and public pensions or SS have turned out to be? At this stage, might refraining from buying an annuity and continuing to manage the money myself (which I've been doing with fair success) add to my diversity and be the more prudent move? Before I'd buy an annuity I'd have to feel that the insurance company is more secure than either our state government, the at one time prestigeous MegaCorp I worked for or SS.
Click to expand...

All insurers are not created equal. I think if you do some research you will find that the credit quality of the largest mutual companies has changed very sowly over time (decades). They don't have shareholders to please, they don't have a way to pay dividends or buy back stock and decapitalize the company, and they tend to think in terms of years or decades rather than the next quarter. Totally different animal from the stock companies.
 
brewer12345 said:
(snip) ...they tend to think in terms of years or decades rather than the next quarter. Totally different animal from the stock companies.
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Funny you mention that.

I retired from a global mega-corp which over time was "owned" by various global companies, including one that was French during the late 90's.

During our "global corporate culture" classes, which we were expected to participate, it was explained that they (French) looked at long term results much different than their U.S. counterparts.

The explaination was thus:

Think of two different sports (U.S. Football vs. Soccer - AKA "football" in most Euro countries).

In U.S. Football, you are trying to get to a goal, and each yard gained/lost is "measured" (much like quarterly reports, in the U.S.).

However, in Soccer, you had a goal (the same as in U.S. Football), however, the game can have the ball anywhere on the field. It was not measured where, or if any "gain/loss" on the field was currently shown.

What counted was that "the ball reached the goal", regardless of where it was at, at any time on the field.

U.S. companies measure the quarter (90 days); French companies measure results at a longer period - be it decades or even centuries.

Yes, I'm not keeping on the thread subject, but your comment brought back "memories".

Maybe insurance companies are the soccer players? :whistle:
 
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It should be noted that AIG's parent was the one in trouble. The insurance companies are state regulated and one of AIG's problems was that its AAA rating did no reflect that the company could not really get at the resources of the regulated insurance companies. My parents had an annuity with Conseco which went belly up, but the annuity paid out for its entire length.
 
meierlde said:
It should be noted that AIG's parent was the one in trouble. The insurance companies are state regulated and one of AIG's problems was that its AAA rating did no reflect that the company could not really get at the resources of the regulated insurance companies. My parents had an annuity with Conseco which went belly up, but the annuity paid out for its entire length.
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Thanks for reminding me. I thought there was no problem with AIG's "sub-company" annuties, but you validated that situation.
 
What's the actual likelihood that an insurance company that provides annuities would go belly up?

Would be nice if there was some site that kept track of such information so we can make a more concrete judgement instead of know that "a company going belly up is just a possiblility."

Then of course, such information would make things too easy :blush:.
 
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