Not fond of annuities

[OrcasIslandBound]

Just out of the curiosity, I ran the "instantannuity" website calculator for $250k, male 58 and female 59 starting the annuity immediately. This is what it spit out. I can see the appeal for 3 reasons: it gets more money in your pocket sooner, it goes for life efficiently consuming the investment, and it does seem protected from market downturns. 5.15% seems like not quite enough, though.

Sent from my Nexus 4 using Early Retirement Forum mobile app

[nun]

Of course if you don't buy the annuity you could get at as much of the money as you wanted and the 5.15% payout rate implies an interest rate of 3% and you don't get any inflation indexing. Annuities are terrible investments and are eroded by inflation, but if you go in with your eyes open and have ways of solving those issues elsewhere in your portfolio they can be a useful diversifier.

[audreyh1]

Quote:

Originally Posted by Danmar Agree. It's all about "mortality credits". Too bad there isn't more competition in the sales of annuities.

The problem with mortality credits are the annuity buyers (as opposed to pension holders) are self-selected. Which means they expect to live long time or else they wouldn't buy the annuity. People who are ill or have reasons to expect to live shorter are out of the pool. So the "mortality benefit" is smaller than why you would expect from the general population. In other words, it turns out these self selectors are right about having longer longevity.

[Fermion]

Quote:

Originally Posted by nun Of course if you don't buy the annuity you could get at as much of the money as you wanted and the 5.15% payout rate implies an interest rate of 3% and you don't get any inflation indexing. Annuities are terrible investments and are eroded by inflation, but if you go in with your eyes open and have ways of solving those issues elsewhere in your portfolio they can be a useful diversifier.

Why would you buy an annuity then over a 30 year Treasury which pays near 3% as well?

[hurricane harry]

Quote:

Originally Posted by Fermion Why would you buy an annuity then over a 30 year Treasury which pays near 3% as well?

because you would have to wait for thirty years for the treasury to mature

[OrcasIslandBound]

Perhaps because the treasury will eventually be depleted when the annuity will not when consumed @the rate of 5.15%, assuming you live long enough.

Sent from my Nexus 4 using Early Retirement Forum mobile app

[nun]

Quote:

Originally Posted by hurricane harry because you would have to wait for thirty years for the treasury to mature

Yes, the treasury will give you 3% a year and if held for 30 years you get your principal back. The annuity will give you 5% a year for your life, but you have lost your principal.

[HadEnuff]

Quote:

Originally Posted by Danmar Agree. It's all about "mortality credits". Too bad there isn't more competition in the sales of annuities.

Typically, if there is a lot of "fat" profit to be made in a product, there will be competition. Could it be that at the current level of income;payout in the annuity game, that from the seller's point of view, there isn't enough "fat" to trim out to make it less expensive for the buyer?

Or, to put it another way, as consumers we are looking at the risk:reward one way, and they are looking at it from the other side, and by lowering the cost, or making the terms more favorable for the buyer, their risk:reward becomes unfavorable.

[hurricane harry]

Quote:

Originally Posted by nun Yes, the treasury will give you 3% a year and if held for 30 years you get your principal back. The annuity will give you 5% a year for your life, but you have lost your principal.

and if you die before the bond matures you get, well, nothing

Life with period certain — this pays regular payments for as long as you live. However, it also sets a specific period of time that payments will be made, and if you die before that time period is up, your beneficiaries receive the rest of the payments.

https://www.metlife.com/individual/i...ities.html#faq

[nun]

Quote:

Originally Posted by hurricane harry and if you die before the bond matures you get, well, nothing Life with period certain — this pays regular payments for as long as you live. However, it also sets a specific period of time that payments will be made, and if you die before that time period is up, your beneficiaries receive the rest of the payments. https://www.metlife.com/individual/i...ities.html#faq

If you own a treasury bond and die, your beneficiaries get it. They can be owned jointly as well.

[Danmar]

Quote:

Originally Posted by audreyh1 The problem with mortality credits are the annuity buyers (as opposed to pension holders) are self-selected. Which means they expect to live long time or else they wouldn't buy the annuity. People who are ill or have reasons to expect to live shorter are out of the pool. So the "mortality benefit" is smaller than why you would expect from the general population. In other words, it turns out these self selectors are right about having longer longevity.

Right, not as big as you might expect, but nevertheless, still important.

[nun]

The only reason I see for buying an annuity is if you want to guaranteed a floor of income. If that helps you enjoy retirement more then they are worth while. If you believe that the markets will supply all you need through all the ups and downs and for as long as you live then you don't need an annuity.

[ESRwannabe]

I don't think annuities are all bad. I look at them as buying a pension. Granted with worse parameters than a normal pension.

[ESRwannabe]

Quote:

Originally Posted by Mulligan Yes, COLA's are definitely noticeable in my pension check. Just 2% COLA's accumulating since 2010 retirement has lifted my pension 8k. Sent from my iPad using Tapatalk

My pension has a 3% COLA. Hopefully nothing changes 20 years from now when I can start collecting on it...

[Fermion]

How can pensions offer such large COLAs and annuites cannot? Do the pension plans invest better than the insurance companies?

[hnzw_rui]

Quote:

Originally Posted by Fermion How can pensions offer such large COLAs and annuites cannot? Do the pension plans invest better than the insurance companies?

Better is questionable. They might carry a higher risk portfolio, though (iirc, ours is 60-70% equities). Good back in the go-go days when returns were so high the govt could cut their share of pension contributions to $0 (or even borrow from the pension fund). Not so much during the dotcom bust or 2008/09.

Pension funds do have a slight edge over commercial annuities because they have a more diversified pool so mortality is more average rather than the self-selected bunch with long life expectancies who buy annuities. That said, state and local govt are trying to cut down on pension benefits and/or have increased employee pension contributions so the previous benefits were probably too generous particularly given longer lifespans.

Iirc, one of my co-workers attended a retirement seminar 10 years ago and statistics back then was average lifespan of pensioners was 70.

[DrRoy]

I agree that there are cases where an annuity is appropriate because of the risk issues discussed above, but I have never liked them. So much of your money is lost to fees and often to insurance that is also in the product. For many annuities, you also have nothing for your estate.

[UpAnchor]

Quote:

Originally Posted by DrRoy I agree that there are cases where an annuity is appropriate because of the risk issues discussed above, but I have never liked them. So much of your money is lost to fees and often to insurance that is also in the product. For many annuities, you also have nothing for your estate.

All can be true. But for many of us who haven't taken future SPIAs completely off the table, it is the insurance aspect (longevity) that we'd be most interested in. Personally, I don't look at annuities as investments, other than perhaps as a fixed-income proxy and I'm still not sure how I feel about that.

And regarding our estate, one of the things DW and I wish to leave our heirs (or pre-heirs) is the assurance that they don't have to worry about either or both of us showing up at their door with our pillows.

[nun]

Quote:

Originally Posted by DrRoy I agree that there are cases where an annuity is appropriate because of the risk issues discussed above, but I have never liked them. So much of your money is lost to fees and often to insurance that is also in the product. For many annuities, you also have nothing for your estate.

Insurance should be the only reason to buy an annuity. I believe you are thinking about annuities other than the most simple ones with fixed interest rates and those are the only ones you should ever consider because they ensure a baseline income and insure against longevity risk. The idea of taking any risk with variable returns in an annuity seems completely counter intuitive to me. Variable annuities with income riders are complex and expensive and you don't need the investment side at all....just the insurance side with some fixed interest rate.

Never mix insurance and investment

[Danmar]

Quote:

Originally Posted by nun The only reason I see for buying an annuity is if you want to guaranteed a floor of income. If that helps you enjoy retirement more then they are worth while. If you believe that the markets will supply all you need through all the ups and downs and for as long as you live then you don't need an annuity.

Sure, but the key point is your belief might be wrong. This "risk" prevents you from spending as much as you might otherwise be able to. Having some steady income to cover some or all of you base expenses in retirement is a very good thing. Issue is, at what cost. The simple annuity product is a very powerful one the issue is cost.