Looking for comparative info on annuities

[samclem]

OK, here's some more detail on the income strategy I was presented:
For first 6 years fund a Money Mkt with ~$215k to supplement income
For yrs 7-12, fund a fixed annuity with $120k to supplement income
For yrs 12 on, fund a Fixed Index Annuity with $264k to generate $22k
for life

1) Why does he recommend a money market fund for the first 6 years? A 1 year CD yields about 50% more interest, and a 3 year CD yields about 100% more interest. And they are safer. If you are worried about interest rates going up, build a 3 year ladder and buy a new 3 year CD with 1/2 of the money when the CD matures for the first 3 years.

If you buy in at these very low rates, there's a very good chance that you will lose real spending power every year going forward. You won't be making money at all.

If you instead invest in a CD ladder, if inflation goes up, then CD rates also generally go up and you'll be buying them at those higher rates every year. You won't get left (far) behind. Look at that chart again in post 11 and try to convince yourself that now is a good time to lock in an annuity rate for the next 12 years. It is not.

2) How does he know what the FIA will be paying out from year 12 on? Isn't the return based, at least in part, on the behavior of the index it uses?
Is it okay if your annual income at 20 years is $6,400 instead of $22k? Because inflation is going to happen, and if you'd started this plan in 1965, by 1985 your $22K per year would have had just $6,400 in buying power.

Ask your advisor to price out some inflation-indexed annuities. The price on those will be a lot higher, and that's because the insurance company (not you) is taking the very real inflation risk. That should tell you something.

3) Fixed Indexed Annuities (formerly known as Equity Indexed Annuities) are a costly investment product, somebody will make good money for selling it to you. If you want to have investment returns like this without paying a commission, here's how you can do it (thanks, brewer12345). But, that's not what I would do.

This advisor you are paying--is he offering to sell you these annuity products?

 

[pb4uski]

OK, here's some more detail on the income strategy I was presented:
For first 6 years fund a Money Mkt with ~$215k to supplement income
For yrs 7-12, fund a fixed annuity with $120k to supplement income
For yrs 12 on, fund a Fixed Index Annuity with $264k to generate $22k
for life

For the fixed annuity, IR is 2.6% and generates $146k total income over 10 yrs. On the other hand if I build a CD latter using FIDO tool, I would only build $136k over 10 yrs. I would have to invest $140k for the same ttl return. I know the CD ladder has the advantage of liquidity but the annuity is tax deferred. So how does the CD ladder Win? I do recognize we are in a low interest rate environment.

What is the return on the money market fund? MM returns are woefully low these days but on the other hand online savings accounts pay almost 1% (or some even a little more) and are FDIC insured and are totally liquid.

7 and 10 year CD's are 2.5% and 2.8%, respectively... so a CD ladder maturing in 7-12 years with the same benefits as the fixed annuity would provide slightly better than 2.6% returns, slightly better credit risk (FDIC insured) and most importantly... access to your money if for some reason you want or need it (at a small cost of early withdrawal penalties which would likely be much less than annuity surrender charges). If you put money into a 7 year deferred annuity the it will likely be hard to get out without a significant surrender charge and you can't access your money once payments start .

For years 12 onward... forget the fixed index annuity... it is likely full of gotchas... for long term money like that you would be better off with a conservative balanced fund like Wellesley. If you put $100k into the fixed index annuity and the market increases 15% over 2 years and you want out, how much would you get back? I'm guessing that after fees and expenses, you'll be lucky if it is more than you put in.

Today a 50 year old could buy a fixed annuity starting in 12 years that would pay $22k a year and the amount would be guaranteed according to immediateannuities.com, so I don't see the fixed indexed annuity, which is ot guaranteed, as being attractive.

 

[samclem]

Today a 50 year old could buy a fixed annuity starting in 12 years that would pay $22k a year and the amount would be guaranteed according to immediateannuities.com, so I don't see the fixed indexed annuity, which is ot guaranteed, as being attractive.

The annuity salesman will say that the FIA (aka EIA) has upside potential "linked to the market" (or whatever index it is associated with). Of course, that upside potential is severely capped, and comes at a high cost.

If TNBigfoot really >needs< an annuity, the best thing to do would be to get by with fixed investments for now and buy an immediate annuity later when 1) he is older and mortality credits will be higher and esp 2) interest rates have gone up. I'd probably buy them over several years, and from different, highly-rated companies. >If< an annuity makes sense at all.

 

[nun]

The annuity salesman will say that the FIA (aka EIA) has upside potential "linked to the market" (or whatever index it is associated with). Of course, that upside potential is severely capped, and comes at a high cost.

If TNBigfoot really >needs< an annuity, the best thing to do would be to get by with fixed investments for now and buy an immediate annuity later when 1) he is older and mortality credits will be higher and esp 2) interest rates have gone up. I'd probably buy them over several years, and from different, highly-rated companies. >If< an annuity makes sense at all.

Couldn't agree more, but I'd add that the annuity salesperson will also try to sell a fixed index annuity that protects from market down turns, but fail to mention the cost or dubious worth of that insurance. I think the guaranteed minimum return is what sells many people on these products because they don't really understand the true cost or the level of risk they are insuring against.

 

[pb4uski]

Agree with all that you have said on indexed annuities. Another gotcha is that the minimum guaranteed return is not on 100% of your money, but only a portion of your deposit... which seriously waters down the guarantee.... if it is 87.5% of your deposit and a 2% guaranteed interest rate it would take 7 years to get the minimum guaranteed value back to the deposit amount... and that is before surrender charges... a pretty useless guarantee IMO.

When EIAs were first sold in the mid-1990s, the guaranteed minimum return was typically 90 percent of the premium paid at a 3 percent annual interest rate. More recently, in part because of changes to state insurance laws, the guaranteed minimum return is typically at least 87.5 percent of the premium paid at 1 to 3 percent interest. However, if you surrender your EIA early, you may have to pay a significant surrender charge and a 10 percent tax penalty that will reduce or eliminate any return.

http://www.finra.org/investors/alerts/equity-indexed-annuities_a-complex-choice

 

[COcheesehead]

Agree with all that you have said on indexed annuities. Another gotcha is that the minimum guaranteed return is not on 100% of your money, but only a portion of your deposit... which seriously waters down the guarantee.... if it is 87.5% of your deposit and a 2% guaranteed interest rate it would take 7 years to get the minimum guaranteed value back to the deposit amount... and that is before surrender charges... a pretty useless guarantee IMO.



Equity-Indexed Annuities—A Complex Choice | FINRA.org

That's the agent's commission right there.

 

[pb4uski]

Yup, that's the way it works.