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

Tree-dweller

Tree-dweller

Recycles dryer sheets
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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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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.
 
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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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.
 
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.
 
W2R said:
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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+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...
 
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.

Ha
 
haha said:
Almost the entire investing history of people investing today has been spent with falling interest rates and low inflation.
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Something we can all probably benefit from keeping in mind (and being reminded), self included to be sure...
 
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.
 
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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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

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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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.
 
I don't have a dog in this fight, but found this after Googling "Pacific Life bankruptcy":

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.
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Information for the Policyholders of Pacific Standard Life Insurance Company
 
daveriocafe said:
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
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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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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.
 
MikeTN said:
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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First thank you Mike TN for your kind words. I will try to briefly address your issues.

I certainly agree with most of what you say, as you have presented it. In the abstract, all the things you mention are fixed income investments, or contracts in the case of annuities. If there is any difference between annuities and long term bonds, it might be in how long they might go on, and the ease or difficulty to impossibility of getting out of the position.

IMO, CDs are different from annuities regarding inflation, in that they are usually relatively easy to exit at low cost. Bank accounts and money market funds are different because they essentially have floating interest rates. Lately these rates are being suppressed below inflation, but this is not the usual case, at least in the past.

Bonds are different because we are not forced to purchase long term bonds. We can give up some interest rate in return for shorter duration. We can also make other discriminations based on our perception of credit worthiness, and we can change positions relatively cheaply (at least relative to annuities).

Something not related to inflation but IMO a disadvantage of annuities is that relative to other fixed income investments, it is hard to achieve true diversification.

The features you mention positive for annuities are certainly positive. I cannot say how the inflation risk stacks up against these advantages. But I can say that in the late 70s or early 80s, it was very hard to sell annuities with payouts much greater than todays! These conditions may never return again, but it is not a bet I would be willing to make.

My major intention with this post was as a reminder that in stressed circumstances, emotions are very strong, and things can look quite different than they looked in earlier, less volatile times. I think this is especially true, when as today an entire generation of investors has seen only one thing-in this case overall falling interest rates.

I believe this trumps other considerations, because if it breaks bad the loss can be very large. But there are surely other equally valid ways of framing this.

I do own a small number of ten year treasuries, bought at 2.7x% ytm. I doubt I will hold them until maturity, but we'll see. :)

Ha
 
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haha said:
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.

Ha
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+1

I'm always amazed when I hear folks pooh-poohing the impact of moderate inflation on the purchasing power of non-cola'd income streams over time.

I agree, I wouldn't touch a non-cola'd annuity with a stick. And a cola'd annuity only if the rates were extremely attractive.
 
FIRE'd@51 said:
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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Yes but it is the extra $1,400 in interest payments per year that you get to spend that makes the difference. True there is not a bond balance for your heirs but for spending I fail to see how an annuity does not add in increased spending in a retirement.

For instance assume a retiree with 300K in funds at age 65 planning for 30 years. One strategy obviously could be just to use the 4% withdrawl and adjusting as most on the board here would.
Many non Early Retirement retirees though would have an "emergency" and consume more than should be consumed and ultimately end up with only SS as 31% of retirees do.

A strategy of 1/3 in long bonds paying 4.8% 1/3 in shortterm bonds (amortize over 30 years) and 1/3 in dividend stocks paying an average of 2.75%.

this would produce the following income:
$4,800 Bonds
$3,333 ST BONDS
$2,750 Stocks

Total = $10,883 or 3.62% This income would have protection from inflation on the stock dividends and the ST bonds.

If then the bonds were split 50/50 between annuity and bonds you would have $3,100 and $2,400 for LT interest or $5,500 which increases the annual spending to $11,583 or 3.86%. If inflation were to become an issue the performance of ST Bonds and dividend increases at greater than inflation would be needed to maintain a steady increase in spending for the 30 years, but I think the retiree receives an additional 6.4% portfolio income with very little increase in risk. For retirees with smaller portfolio's I feel this is a worthy improvement.
 
Can you even buy a cola'd annuity today? I thought they are rare at best and extinct at worst.
 
Running_Man said:
Yes but it is the extra $1,400 in interest payments per year that you get to spend that makes the difference. True there is not a bond balance for your heirs but for spending I fail to see how an annuity does not add in increased spending in a retirement.

For instance assume a retiree with 300K in funds at age 65 planning for 30 years. One strategy obviously could be just to use the 4% withdrawl and adjusting as most on the board here would.
Many non Early Retirement retirees though would have an "emergency" and consume more than should be consumed and ultimately end up with only SS as 31% of retirees do.

A strategy of 1/3 in long bonds paying 4.8% 1/3 in shortterm bonds (amortize over 30 years) and 1/3 in dividend stocks paying an average of 2.75%.

this would produce the following income:
$4,800 Bonds
$3,333 ST BONDS
$2,750 Stocks

Total = $10,883 or 3.62% This income would have protection from inflation on the stock dividends and the ST bonds.

If then the bonds were split 50/50 between annuity and bonds you would have $3,100 and $2,400 for LT interest or $5,500 which increases the annual spending to $11,583 or 3.86%. If inflation were to become an issue the performance of ST Bonds and dividend increases at greater than inflation would be needed to maintain a steady increase in spending for the 30 years, but I think the retiree receives an additional 6.4% portfolio income with very little increase in risk. For retirees with smaller portfolio's I feel this is a worthy improvement.
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I think that is a very good analysis. The $11,583 is certainly close to the $12K for the traditional 4% SWR. I think it would result in far less sleepless nights than we've seen in the 21st century. You still have $200K for an emergency fund.

I am personally thinking about purchasing a deferred annuity to kick in my 80s. However with rates artificially low I don't think it make sense now.
 
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