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Why Don't Retirees Buy Annuities? They Get Something Most Economists Don't
Old 08-14-2013, 08:15 AM   #1
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Why Don't Retirees Buy Annuities? They Get Something Most Economists Don't

That's Forbes' headline, not mine. A discussion starter, fer sher. I have no annuities myself, having decided it wasn't right for my situation (2 DB pensions in my lucky-a** household). But I know others find they work for their situations. Presented here is just another pundit's opinion:

Why Don't Retirees Buy Annuities? They Get Something Most Economists Don't - Forbes

Forbes' summary:

"But a new study suggests there might be no annuity puzzle to solve after all. Congressional Budget Office economist Felix Reichling and Kent Smetters of the University of Pennsylvania’s Wharton School calculate that even if no one wants to leave money to their ungrateful kids and you disregard “transaction costs” (that is, insurance company fees), only 37% of households should convert any of their wealth into annuities. How about if you do consider fees and the fact that some people want to transfer wealth to their kids at death or even during life, say, by paying for the grandkids’ college? In that case, just 10% of households should annuitize any of their wealth, the two economists calculate."
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Old 08-14-2013, 09:10 AM   #2
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This is a continuing subject for discussion here. I do not have any annuities other than SS and a handful of small non-COLA pensions. I can't see giving my money to an insurance company in the off chance I live 5 years beyond the IRS mortality tables which is what I think I'd need to do to compete with a very conservative investment portfolio.

Some people need the illusion of a steady income stream but I've seen what decades of inflation did to my FIL's DB pension. He had a really good pension when he retire in the early 1980's but it was laughable when he finally passed away 30 years later.
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Old 08-14-2013, 10:17 AM   #3
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Annuities don't pay what they once did, that's for sure. Apparently not many retirees are buying them. Still, I think they have a limited usefulness in certain specific situations.

Personally I am thinking of buying a small SPIA if/when I reach age 80-85. It should be cheaper then than it would be at an earlier age. Inflation would not be as much of a concern at that age as it would be for a younger person. The point of the annuity would be to provide steady income that I could rely upon (along with SS and my tiny pension) for basic expenses, in case I turn out to be one of the few who survive until extreme old age.
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Old 08-14-2013, 10:25 AM   #4
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I haven't read the article.

But the advantageous way to use a (single payment immediate annuity) is to cover your basic living expenses with the annuity (along with Social Security). And then the remaining nestegg can be more aggresively depleted. Pick an age (perhaps 85 or 90 ?) and systematically deplete the remaining nestegg to nothing by that time. The annuity and SS will cover you after that should you live longer.

An approach like this will propably give you more spendable income while you are alive than the hold-back cause I might live to 200 approach.

Caveots for late stage healthcare and desired offspring inheritances.
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Old 08-14-2013, 10:32 AM   #5
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I'll admit to being curious as to what criterion they used in deciding whether or not a household should buy an annuity.

I have three annuities, but none on line at this time. SS (I'll take at 70), a non-cola DB pension (I'll take between 60-65) and a non-cola annuity option on my prior employer's non-contributory DC plan (undecided if/when I'll take).

When they are all online (when I turn 70 in the case of SS) they will provide ~100% of our living expenses but that percentage will decay over time due to inflation.

In our case, just SS will provide ~75% of our modest living expenses, so even if I didn't have the DB pension of the DC annuity option my interest in an annuity would be low.
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Old 08-14-2013, 11:21 AM   #6
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Quote:
Originally Posted by W2R View Post
Personally I am thinking of buying a small SPIA if/when I reach age 80-85. It should be cheaper then than it would be at an earlier age. Inflation would not be as much of a concern at that age as it would be for a younger person. The point of the annuity would be to provide steady income that I could rely upon (along with SS and my tiny pension) for basic expenses, in case I turn out to be one of the few who survive until extreme old age.
+1, part of my plan B as well, as described by W2R. Unfortunately (from a financial standpoint), my family history would suggest I'll make it into my 90's at least, but it doesn't look like much fun...
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Old 08-14-2013, 12:10 PM   #7
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Almost the entire investing history of people investing today has been spent with falling interest rates and low inflation.

This makes it more or less impossible for us to really imagine the ravages of moderate to high inflation. Annuities are an extremely poor long term bet. I would not touch one with a stick, other than the inflation indexed one that we all will get some of.

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Old 08-14-2013, 12:19 PM   #8
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Almost the entire investing history of people investing today has been spent with falling interest rates and low inflation.
Something we can all probably benefit from keeping in mind (and being reminded), self included to be sure...
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Old 08-14-2013, 12:51 PM   #9
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Annuities provide a sense of security. It may be a false sense of security, but that's important to many. Many just want the "easy" stream of income, and don't want to take the time to learn how to turn their portfolio into a steady stream of income.

Some years ago when I foolishly was letting Smith Barney control my portfolio, I was convinced an annuity would be a good addition to my portfolio. Remember Pacific Life, the one with the Whale jumping out of the water? In case you didn't know, they went bankrupt, and anyone with a fixed Annuity, lost their money. Fortunately, I was more of a risk taker, and I had a variable Annuity. Since my Annuity was in stocks, I had no loss. The people take the "safe" easy way lost.

The only real benefactors in Annuities are the insurance company, and the salesperson who sold you the Annuity.

NO ONE will ever look out for your money like you do.
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Old 08-14-2013, 12:56 PM   #10
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Deceriocafe,

Check your facts before you disparage a fine company and propagate falesehoods. Pacific Life is alive and well - rated A or better by all the major insurance rating agencies.

Besides which, even if an insurance company goes bankrupt (actually they go into receivership, not bankruptcy) the annuity holders would be protected by both the company's assets and the state guaranty funds. To the best of my knowledge, between these two sources, no policyholder has ever lost a dime of principal and all annuity benefits have been satisfied. Fixed annuity holders would not lose their money as you claim. There have however, been instances where interest crediting rates on annuities in accumulation phase have been reduced.

You may be thinking of Executive Life, which did fail and went into receivership in the late 1980s or early 1990s IIRC as a result of poor junk bond investments but even in that case the guaranty funds did their job.
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Old 08-14-2013, 01:06 PM   #11
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Pacific Life filed for chapter 11 in 1989. I have my facts straight.
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Old 08-14-2013, 01:11 PM   #12
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No. You're totally wrong, again! It was the parent company of Executive Life that filed for Chapter 11. It had NOTHING to do with Pacific Life.

It's Chapter 11 For Executive Life - Businessweek

Quote:
IT'S CHAPTER 11 FOR EXECUTIVE LIFE

Beleaguered insurance giant First Executive bowed to the inevitable on May 13 and filed for Chapter 11 bankruptcy protection in federal court in Los Angeles. The junk-bond-laden company, built by Chairman Fred Carr into a behemoth with $13 billion in assets, has been on the ropes since California regulators seized its Executive Life Insurance unit on Apr. 11. New York regulators soon followed suit with the company's subsidiary there. Starved of payments from the subsidiaries, First Executive quickly ran short of cash.

Because regulators have taken over the insurance units, they are shielded from the bankruptcy action. California insurance commissioner John Garamend said on May 14 that he's planning to sell the California insurer as a "true fixer-upper." French investors led by Altus Finance are offering to commit $3 billion.
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Old 08-14-2013, 01:17 PM   #13
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No. You're totally wrong, again! It was the parent company of Executive Life.

It's Chapter 11 For Executive Life - Businessweek
I owned a Pacific Life Annuity at the time. I was informed of this by my broker. I'm not imagining it.
http://www.nolhga.com/companies/publ...NAICCode=72842
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Old 08-14-2013, 01:18 PM   #14
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I have the greatest respect for Ha, his comments are insightful and he obviously has finincial knowledge...but.. in this case I don't get his point.
Sure inflation could decimate an annuity that is not inflation-protected. But the same is true of the portion of our portfolio that is in non-inflation-protected bonds or other fixed income instruments such as CDs.
So should a person with these fixed income assets annuitize a portion of them. The paper under discussion says it depends largely on your level of wealth. Their model suggests that not everyone should buy annuities (largely because you need a lot of cash when entering LTC) but those who will benefit are those with wealth levels at age 65 that are at least 10-15 times the average wage per figure 9 (I assume they mean annual wage).
My guess is that most of the people on this forum are at this wealth level or higher.

Of course, the reason for an annuity is to safely allow higher spending in retirement. Many of our forum members have been LBYM for a long time and seem content to continue to do so.
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Old 08-14-2013, 01:21 PM   #15
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I don't have a dog in this fight, but found this after Googling "Pacific Life bankruptcy":

Quote:
Pacific Standard Life Insurance Company, domiciled in California, was a subsidiary of Southmark Corporation, a publicly held real estate based financial services company. In July 1989, Southmark filed for reorganization under Chapter 11 of the U.S. Bankruptcy code. None of the insurance subsidies were included in the filing. However, on December 11, 1989, Pacific Standard Life was placed under conservation by the California Insurance Department. A liquidation order was issued in May 1994.
Information for the Policyholders of Pacific Standard Life Insurance Company
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Old 08-14-2013, 01:23 PM   #16
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I received the registered letter from them. I'm not imagining it.
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Old 08-14-2013, 01:26 PM   #17
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I don't have a dog in this fight, but found this after Googling "Pacific Life bankruptcy":

Information for the Policyholders of Pacific Standard Life Insurance Company
However, Pacific Standard Life Insurance Company was no relation to Pacific Life Insurance Company (the company with the whale).

That one little word makes a world of difference.

But I now understand daveriocafe's confusion better.
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Old 08-14-2013, 01:38 PM   #18
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I owned a Pacific Life Annuity at the time. I was informed of this by my broker. I'm not imagining it.
Information for the Policyholders of Pacific Standard Life Insurance Company
Pacific Standard Life and Pacific Life are totally different companies. They were never related in any way other than similarity of their names.

But I now understand your confusion.

You should have received all or a good portion of your money back depending on what elections you made as a policyholder.

Also, the dissolution of Pacific Standard Life Insurance Company would not have been Chapter 11 - that is part of what made me think that perhaps you were thinking of Executive Life.
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Old 08-14-2013, 02:01 PM   #19
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A typical payout rate on a SPIA for a 65 year-old male is about 6.2%. The Vanguard LT Investment Grade Fund (VWETX) currently has a yield of 4.8%. In order for the annuity to achieve a 4.8% IRR, the annuitant would have to live until age 97.
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Old 08-14-2013, 02:10 PM   #20
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Math works. PV of $6.20/year for 32 years (97-62) discounted at 4.8% ~ $100.
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