Why are annuities so controversial?

[Ready]

Quote:

Originally Posted by LXEX55 Have read all I could about annuities, especially immediate fixed, and have never in my life read so many opposing view points on one investment vehicle. I have of course taken into consideration the high fees the broker gets. Why ares people so passionate, for or against, about them?

In your original post you referred to "high fees". Immediate annuities purchased from a reputable firm like Vanguard do have fees, but they are not what I would consider high. The high fees traditionally are associated with salesmen peddling fixed index annuities.

I think your reference to high fees is what attracted the initial responses. In any case, it sounds like you understand how an immediate annuity works and you are in the best position to determine if they might be a good fit in your investment portfolio.

The only negative reaction I see to immediate annuities bought from a reputable company are due to interest rates being so low right now. But this is no different than the argument of whether to buy into bond funds given the low rates and interest rate sensitivity of them. It doesn't mean they are bad investments, but just that they require an understanding of the pros and cons before jumping in.

[Gunny]

An annuity is part of my long term plan. I currently receive a pension that covers the vast majority of living expenses. I also have a hefty sum in my TSP which I recently moved into the L Income fund to preserve the current amount while still earning some gains. I may add more equities later if market valuations revert closer to the mean. If I die my pension dies with me, so my portfolio also serves as my life insurance. If I die before DW I've instructed HER to then buy an immediate annuity with the TSP funds as she has no clue about managing a portfolio and has no desire to learn. That along with SS/death benefit and our ROTHs should provide her a nice little monthly sum for her life time. If I outlast her, I'll be devistated but will have more than I need.

[Dawg52]

When my brother died in 2005 my SIL got hooked up with a financial planner with one of the big national firms. Of course he put her in an annuity right off the bat. Must be in a VA of some sort as it included an allocation to stocks within the portfolio. But it seems to be working ok for her as she takes a half a dozen nice trips per year. And her son who monitors her situation says she is in good shape. So even with high fees it works for many. I'm not planning on buying anything anytime soon. Perhaps if I'm lucky enough to reach my 80's then I might buy an SPIA just to put things more on cruise control. Will see......

[bingybear]

Quote:

Originally Posted by Gunny An annuity is part of my long term plan. I currently receive a pension that covers the vast majority of living expenses. I also have a hefty sum in my TSP which I recently moved into the L Income fund to preserve the current amount while still earning some gains. I may add more equities later if market valuations revert closer to the mean. If I die my pension dies with me, so my portfolio also serves as my life insurance. If I die before DW I've instructed HER to then buy an immediate annuity with the TSP funds as she has no clue about managing a portfolio and has no desire to learn. That along with SS/death benefit and our ROTHs should provide her a nice little monthly sum for her life time. If I outlast her, I'll be devistated but will have more than I need.

I'm not sure I understand how your portfolio serves as life insurance. Insurance is where you pay someone to take/mitigate risk. It sounds like you are assigning a good part of your portfolio to later in life use as you describe. The immediate annuity my be a good idea. This is paying someone to take risk (the annuity). The question is how should it be set up. Should it have inflation protection/increases. The annuity can be a good for someone who won't run budgets and investments.

[flintnational]

a low cost SPIA - In theory, an investment to consider. In the current low interest rate environment they do not make sense for most people. Most could do better investing the money and taking an annual withdrawal. (build your own annuity)

Variable, equity index annuities and other annuity products - Usually a bad idea for the reasons others have mentioned. They are sold not bought. High fees. Opaque policy terms. Often the sales person nor the purchaser understand the details. Actual returns do not match projected returns. Confusion around guaranteed annual withdrawal and annual return. And since you can't mention it enough, again high fees.

[Gunny]

Quote:

Originally Posted by bingybear I'm not sure I understand how your portfolio serves as life insurance. Insurance is where you pay someone to take/mitigate risk. It sounds like you are assigning a good part of your portfolio to later in life use as you describe. The immediate annuity my be a good idea. This is paying someone to take risk (the annuity). The question is how should it be set up. Should it have inflation protection/increases. The annuity can be a good for someone who won't run budgets and investments.

What I mean by life insurance is that my TSP will be used only by my wife in case of my death. I'm self insured, in other words.

[OldShooter]

Quote:

Originally Posted by Gunny An annuity is part of my long term plan. I currently receive a pension that covers the vast majority of living expenses. I also have a hefty sum in my TSP which I recently moved into the L Income fund to preserve the current amount while still earning some gains. I may add more equities later if market valuations revert closer to the mean. If I die my pension dies with me, so my portfolio also serves as my life insurance. If I die before DW I've instructed HER to then buy an immediate annuity with the TSP funds as she has no clue about managing a portfolio and has no desire to learn. That along with SS/death benefit and our ROTHs should provide her a nice little monthly sum for her life time. If I outlast her, I'll be devistated but will have more than I need.

In Olden Times virtually all annuities were ripoffs. More recently I have read that ethical firms like Vanguard and TIAA have entered the market. (As already mentioned.) Given your strategy, I would suggest teeing up the specific annuity that your wife will buy via a fiduciary FA or just via instructing her specifically what to buy and from whom. You are much better equipped to keep her from getting ripped off than she is.

[Gunny]

Quote:

Originally Posted by OldShooter In Olden Times virtually all annuities were ripoffs. More recently I have read that ethical firms like Vanguard and TIAA have entered the market. (As already mentioned.) Given your strategy, I would suggest teeing up the specific annuity that your wife will buy via a fiduciary FA or just via instructing her specifically what to buy and from whom. You are much better equipped to keep her from getting ripped off than she is.

I've already done the home work and written out exactly what to do. Hopefully we will pass away together holding hands in the nursing home at the age of 95 and all my planning will be for naught.

[jazz4cash]

GUNNY
That TSP "L Income" fund is way underutilized IMO. People rave about the G fund a lot, but I think L-income is special too.
My impression is that the MetLife SPIA that is available for purchase directly via TSP is pretty good. It may be an option for DW's TSP at some point. Is that one you considered or did you find something better?

[Gunny]

Agree with your assessment of the L Income fund. It's so over weighted with the G Fund that it should hardly ever lose money. It was down only 5% in '08. And the inclusion of some of the equity funds adds some reasonable growth. The fund has averaged a little over 4% over the years? I've looked around and one might eek out a few more dollars a month going elsewhere, but the simplicity of using the METLife SPIA inside the TSP makes it a more attractive option. Plus there are some Fed and State assurances should METLife ever go belly up. Makes it easy on DW if the need should arise.

[gcgang]

I don't think annuities are controversial.

The bedazzling array of deferred annuities, laden with promises and hidden fees, are bad.

Immediate annuities are an excellent way of reducing (not eliminating) risk, converting assets with unknown future returns into dollar certain income streams.

IMHO, as so many people have no pension income other than Social Security, immediate annuities don't get used as much as they should. This is probably both because current rates appear low and market returns in the recent past have been high.

[Out of Steam]

Quote:

Originally Posted by jazz4cash GUNNY That TSP "L Income" fund is way underutilized IMO. People rave about the G fund a lot, but I think L-income is special too.

But, at 80% fixed income, the L-fund seems too conservative for a 2020 retiree with some 30 years of life ahead of them.

[jazz4cash]

Quote:

Originally Posted by Out of Steam But, at 80% fixed income, the L-fund seems too conservative for a 2020 retiree with some 30 years of life ahead of them.

I agree. I didn't see that GUNNY is a 2020 retiree. I think all the L funds are a tad conservative so I add some equities (C S I) in the mix.

[Bogie]

Since I just turned 62, I got curious as to what I would have to invest in a SPIA to match my social security payment that I can get now that I'm eligible for social security benefits. I also checked to see what that SPIA would yield if I delayed payments until I'm 66 and compared that to what I will qualify for in social security benefits at 66. I was surprised to see that delaying the SPIA would pay essentially the same as delaying social security. I quess I expected that delaying social security until 66 would be on a steeper curve up. I also tried delaying both to 70 and the SPIA outperformed social security. Other than a small COLA that you "might" get with social security, am I missing something here?

[OldShooter]

Quote:

Originally Posted by Bogie ... Other than a small COLA that you "might" get with social security, am I missing something here?

Well, IIRC inflation over the last 30 years has been about 2.6%, so if that is predictive the "small COLA" of social security will in twenty years take the social security payment to 167% of where it started. Over the past 50 years IIRC the average is 4.5%. (going back only 30 years just misses the 70s/80s excitement). Again, if that is predictive, in 20 years the social security payment will grow to 240%.

I guess the answer to your question depends on what you consider to be "small."

Making the point another way, I think the concept of a "fixed" annuity is at best misleading. It certainly sounds good, though.

[pb4uski]

Quote:

Originally Posted by Bogie Since I just turned 62, I got curious as to what I would have to invest in a SPIA to match my social security payment that I can get now that I'm eligible for social security benefits. I also checked to see what that SPIA would yield if I delayed payments until I'm 66 and compared that to what I will qualify for in social security benefits at 66. I was surprised to see that delaying the SPIA would pay essentially the same as delaying social security. I quess I expected that delaying social security until 66 would be on a steeper curve up. I also tried delaying both to 70 and the SPIA outperformed social security. Other than a small COLA that you "might" get with social security, am I missing something here?

Just guessing that there might be an element of apples and oranges in that the SPIA pricing that you are using have a fixed benefit and SS benefits are COLAed.

If you were comparing COLAed SPIAs and SS then that would be apples-to-apples but it is hard to find COLAed SPIAs.

The last time that I looked, the first-year COLAed SPIA benefit was about 60% of a fixed SPIA benefit for the same premium.

[jazz4cash]

I suspect the SS spousal benefit might be better but that would be very situation specific.

[joeea]

Quote:

Originally Posted by Bogie Other than a small COLA that you "might" get with social security, am I missing something here?

The loss of liquidity you would incur by giving up your finds for an annuity, perhaps?

[friar1610]

I bought a Fidelity variable annuity years ago. It was a mistake and if I could walk that dog back I would. But, I have made it part of my plan for my wife in the likely event I predecease her. (I am almost 73; is 71). So, I look at it that, to some degree, I've made lemonade out of lemons.

- Fidelity was low-cost (for an annuity), no commission, no surrender fee, a pretty good range of funds to invest in.
- But when I became a Vanguard guy, I did a 1035 exchange of the annuity to VG and got slightly lower fund costs with other characteristics similar to Fido's. (I'm currently invested in 3 VG funds with the annuity. Fees are 40 - 45 basis points, depending on the particular fund. This includes both fund ERs and annuity charges. More than a straight VG index fund, I realize, but still very low by VA standards.)
- Funds have appreciated nicely over the years. The fees are admittedly a drag compared to the corresponding VG non-annuity counterparts but not horrendous.
- We don't need the income from the annuity now so no reason to annuitize at this point.
- But if I go first the survivor benefit on my military pension will be about 1/3 of what I'm getting now. Plus, her SS will go away and be replaced by the value of mine. So the total hit to regular, predictable income streams is significant. That's where the annuity comes in.
- The annuity becomes hers as she is my beneficiary, she annuitizes it and a good chunk (but not all) of the lost income is replaced. This may mean she won't have to tap the taxable portfolio for living expenses. If she does, so be it but since those assets will step up, they're the ones to leave to our kids.
- If she predeceases me, I'll use any gains for charitable contributions (that are provided for in our wills anyway) down to the point where only the original basis remains. I'll withdraw that tax-free and either invest it in taxable or spend it on wine, women and song.

As I indicated at the outset, if I were considering a variable annuity all over again with what I know now, I wouldnt buy one. But I think that I've come up with a good - but not perfect - plan which keeps me from being completely screwed on the deal. Not having bought the VA way back then (and leaving the money in taxable investments) would have been preferable and still would have provided the option of her buying a SPIA when/if needed. But I think it'll still turn out OK.

[pb4uski]

Quote:

Originally Posted by joeea The loss of liquidity you would incur by giving up your finds for an annuity, perhaps?

That's the big one for me, but you can sidestep that by buying one with guaranteed return of premium in exchange for a slightly lower monthly benefit (about a 6% lower benefit over life only for a 60 yo male).