Why are annuities so controversial?

[ncbill]

No COLA is available at a price you want to pay.

So given our record low inflation returns on SPIAs are also at record lows.

[OldShooter]

Quote:

Originally Posted by ncbill No COLA is available at a price you want to pay. ...

and the flip side of that coin is that the risk of a fixed annuity losing significant buying power to inflation is high. If it were not, it would not be expensive to insure against the risk.

[Big_Hitter]

Quote:

Originally Posted by LXEX55 Why ares people so passionate, for or against, about them?

my theory is that most folks are very uncomfortable thinking about when they are going to die so it is much easier for them to kick the can down the road and do nothing

many give excuses about cola protection or high fees but it is difficult to beat a product that provides risk pooling and longevity protection

[nun]

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.

TIAA has always been about annuities.....it's right there in the name....but their products were really only sold to members of their retirement plans. Their classic retirement product is TIAA-Traditional which is a deferred annuity that for many people pays a minimum of 3% annual interest with bonuses depending on current interest rates....last time I looked I was getting 4.38% interest on my TIAA-traditional account. It can be turned into a lifetime annuity at retirement.

I think the problem people have is that comparing annuities to an investment portfolio is really comparing apples and oranges. An annuity is closer to an insurance product than an investment....or at least it should be. So any annuity that is sold as an investment or is contorted into one should be avoided. An SPIA is a way to insure against longevity and your money running out so it can be a useful compliment to a portfolio of equities and riskier bonds.

[FREE866]

I encourage anyone that has an annuity or is thinking about an annuity to ask what exactly are the Annual fees including sub account fees, M&E expenses, any riders. Also ask of there are surrender penalties

[Richard4444]

[QUOTE=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. [/QUOTE]

Looking at it another way, for 'safe' return, a 5 year CD returns about 2.5 % and the payout on a SPIA (the principal of which you'll never see) is currently ~ 7.3 % from Vanguard for a 68 year old. That's a lot of years of catching up.

Rich

[pb4uski]

You are confusing payout with return. The bulk of the 7.3% payout is simply a return of your own money.

You can get a notion of the return implicit in the SPIA by looking at long payout annuities without life contingencies.

According to immediateannuities.com a 68 yo male in FL would get a 7.1% payout rate on a life annuity. A 15 year period certain would pay out 8.2%, which has an implicit rate of return of 2.84%... somewhat lower than the return on 7-8 years CDs.

So if you think that a SPIA is significantly better than a CD because it has a higher payout rate you are not looking at it correctly.

[OldShooter]

Quote:

Originally Posted by FREE866 I encourage anyone that has an annuity or is thinking about an annuity to ask what exactly are the Annual fees including sub account fees, M&E expenses, any riders. Also ask of there are surrender penalties

Out of curiosity one time I was looking at the prospectus for a family o variable annuities. Over two hundred pages!

I found it very useful to do a PDF search for the word "fee." There were a lot of hits and some very interesting reading. One could probably do the same search for "surrender."

Two hundred pages is about 198 pages over my ability to understand an investment so there is no way I was planning to snap on that one!

[capjak]

My understanding only, I am not a FA in the Insurance Biz:

A single premium Immediate Annuity is easy to understand, you pay a premium and you get a payout for the rest of your life or joint and you can have it to return your premium if you pass before your money is used up. They are typically not pushed by sales people due to the low commissions on SPIAs vs all the other high fee annuities.

SPIAs have an advantage over the other annuities in that they are taxed such that the $$ you receive that is return of your premium is excluded over the estimated life of the annuity. Others are Last in First Out so that all the interest is paid and taxed in the early years of the annuity.

SPIAs are insurance that does what it is supposed to do pay an efficient (mortality credits) income stream until you pass, I know of no other products that do that, that are as simple as SPIAs.

Unfortunately that insurance comes at a cost and COLA only has 1 or 2 companies that provide "true COLA" SPIAs, others provide a % increase each year.

Therefore laddering purchases of SPIAs is often recommended in low interest rate environments. This has two advantages, you capture the potential changing (increasing interest rate SPIA) and as you get older the SPIA becomes less expensive due to mortality credits.