Immediate Annuity

[JohnDoe]

I had an agent call me the other day offering a guaranteed IA at 4 or 5 percent. The call didn't get much further than that so I didn't get any details.

In the meantime, I did some research on IA since I was not that familiar with them - including the thread on here from 2008.

I used an instant quote calculator with 100k and selected single life. The monthly payment was $667 (8k annually). Does that mean the IA is considered to have an 8% payout?

Thanks.
JD

 

[Animorph]

Somebody should have a better answer for you, but for now no, that's not 8%. Some of that $667 is return of principal over your expected lifetime. The rate of return required to maintain that payout over your expected lifetime will be less.

 

[zinger1457]

The interest rate assigned to a SPIA is just an index and one's age and gender is also used to determine the actual payout. You may get an 8% annual payout put it's only guaranteed for as long as you're alive. Was this an unsolicited call from an agent? If it was I would be somewhat skeptical of what he is trying to sell you, agents typically push variable annuities because of the big commissions they get. Need to be careful and do some research before going with that type of annuity.

 

[dgoldenz]

Sounds like there's some info missing here. IRR on immediate annuities right now is not even close to 4-5%. It's more like 1-1.5%.

 

[Danmar]

This highlights why annuities sometimes make sense. The payout is a blend of interest and principal but in most cases will be higher than a SWR on the lump sum purchase price of the annuity. This is guaranteed for life. Obviously no residual. This will allow some people to spend more risk free. Works better the older you are.

 

[JohnDoe]

This highlights why annuities sometimes make sense. The payout is a blend of interest and principal but in most cases will be higher than a SWR on the lump sum purchase price of the annuity. This is guaranteed for life. Obviously no residual. This will allow some people to spend more risk free. Works better the older you are.

Right. This is what I am looking into(for a relative).

Their w/d rate is about 4.25%. They could take about 1/2 of their portfolio and plunk it down on a SPIA and generate the equivalent of that 4.25%. That will leave the other half to grow in a portfolio and be available for any emergencies, etc.

 

[Independent]

Recognize that the SPIA payment (probably) isn't inflation adjusted. But it looks like you've got a good handle on how someone might use it.

 

[chinaco]

Sounds like there's some info missing here. IRR on immediate annuities right now is not even close to 4-5%. It's more like 1-1.5%.

The word "return" can be confusing... people often use it to describe or talk about different aspects of annuities.

Some people are describing percent of the premium returned in a year... (payout/premium paid which is part principle). This would be like drawing a fixed % of a portfolio of stocks and bonds each year.


Some are trying to describe the nominal rate of interest the payout equates to if one lives till life expectancy or some guaranteed period... earnings on the premium.

 

[afntrn56]

The word "return" can be confusing... people often use it to describe or talk about different aspects of annuities.

Some people are describing percent of the premium returned in a year... (payout/premium paid which is part principle). This would be like drawing a fixed % of a portfolio of stocks and bonds each year.


Some are trying to describe the nominal rate of interest the payout equates to if one lives till life expectancy or some guaranteed period... earnings on the premium.

+1 that pretty much sums it up. Hard to really make any comparisons to other options for that reason.

 

[JohnDoe]

Thanks for all the replies.

So as far as payout, the only thing that matters is the amount of the monthly distribution for life.

Other things to consider is the health of the insurance company and the local state default insurance coverage.

As a comparison, does anyone have an idea what the monthly payment was back in 2007 for a male 66 years old for 100k? Can these historical numbers be accurately found somewhere?

Thanks.
JD

 

[dgoldenz]

The word "return" can be confusing... people often use it to describe or talk about different aspects of annuities.

Some people are describing percent of the premium returned in a year... (payout/premium paid which is part principle). This would be like drawing a fixed % of a portfolio of stocks and bonds each year.

That's what it sounded like to me. Most annuities with income riders pay out 4-7% of the income account value annually depending on age. Like I said, there's some info missing here or else everyone would be rushing to sign up for the product.

 

[Danmar]

The thing to keep in mind with annuities is what you are mostly buying is longevity risk reduction-or the opposite of life insurance. Nobody worries about interest rates when they buy life insurance? Clearly they have an impact on annuity payouts but not as much as you may think. I think they play a role in allowing a more aggressive investment strategy than you would otherwise feel comfortable with. Especially if you don't have a DB pension.

 

[chinaco]

The thing to keep in mind with annuities is what you are mostly buying is longevity risk reduction-or the opposite of life insurance. Nobody worries about interest rates when they buy life insurance? Clearly they have an impact on annuity payouts but not as much as you may think. I think they play a role in allowing a more aggressive investment strategy than you would otherwise feel comfortable with. Especially if you don't have a DB pension.

Many people here are DIY investors and compare the return... they believe they can beat the return offered by the insurance company by managing their own assets... or that they may die young and lose much of their money.

You are not going to convince many of them that an annuity is a good idea unless perhaps rates are way above historical norms... Even then, some of them would think they are going to beat it over the long haul or others would think that catastrophe is at hand and they should buy gold.

 

[Danmar]

Many people here are DIY investors and compare the return... they believe they can beat the return offered by the insurance company by managing their own assets... or that they may die young and lose much of their money.

You are not going to convince many of them that an annuity is a good idea unless perhaps rates are way above historical norms... Even then, some of them would think they are going to beat it over the long haul or others would think that catastrophe is at hand and they should buy gold.

Yes I agree. But many people here buy life insurance so they should also be open minded when it comes to annuities. I am not saying they are for everyone but low rates shouldn't rule them out in all cases.

 

[JohnDoe]

Turns out this agent has been calling my relative a few times and wants to sit down with both of us to discuss options.

Now I am not sure if the agent was recommending a SPIA or something else.

Anyway, I told my relative to have him call me and I would get to the bottom of his intentions. I'm up to speed on the SPIA's but if he starts pitching a different fixed product, I might need some help here punching holes in the prospectus I would request.

I would only consider a SPIA, but probably not through this guy and I'm in no rush to pursue it. I'm just curious now as to why he is perhaps harassing my relative and maybe I can have a little fun with him.

JD

 

[easysurfer]

My thoughts...

1) I think either he sees that you are aren't interested in getting an annuity from him so he is trying to make a sale to your relative

or

2) He hopes that your relative can help convince you to get an annuity from him

Kinda of like going the a car dealer and the dealer tries to convice the person the buyer brings along instead of the buyer.

He'll probably sit you down and say, "let's see, which annuity did you want to purchase?" That's when you say, "I never said I was buying one from you."

 

[Koolau]

I could envision a scenario where one might want to purchase the longevity protection offered by a IA - but only if one were knowledgeable enough to choose a "safe" company with adequate state protections AND know how to shop for the best "return" (monthly payout/investment). Having a sales person call/visit/sit next to you on the bus would not be a good way to obtain an IA in my opinion. Of course, YMMV.

 

[kyounge1956]

I could envision a scenario where one might want to purchase the longevity protection offered by a IA - but only if one were knowledgeable enough to choose a "safe" company with adequate state protections AND know how to shop for the best "return" (monthly payout/investment). Having a sales person call/visit/sit next to you on the bus would not be a good way to obtain an IA in my opinion. Of course, YMMV.

Can you suggest books or websites where I can learn more about how to choose a good SPIA?

 

[Koolau]

Can you suggest books or websites where I can learn more about how to choose a good SPIA?

Sorry. I'm gonna punt on that one. I'm sure others can help. I don't have a SPIA (though I do own a couple of SPDAs). To me, SPIAs are still in the realm of "sounds like a good idea under the right circumstances". If the time comes that I need one, I'll check back with you to see what you found out.

I just know that you want a company that will stay in business for the full extent of your life, one that is backed up by a state "fund", and a company that pays the highest rate. These may be mutually exclusive. Good luck.

 

[missionfinder]

Annuities for Retirement: The Best, and the Rest - Personal Finance - Retirement - SmartMoney.com - for a list of the best companies so far as "soundness" goes for annuities.

Even though I would personally never get an annuity of any type, if you're going to get an immediate annuity make sure it has a period certain clause which guarantees payout for a 20 year period in the event of your death. Personally, I use a mix of different term bond funds as part of my portfolio spread rather than lining a sales person's pocket (though immediate annuities do tend to have much lower commissions than other types). YMMV, but anytime someone wants to sell me something the red flag goes up... they aren't selling for my benefit, they are selling for their benefit.

 

[East Texas]

Can you suggest books or websites where I can learn more about how to choose a good SPIA?

I got all my SPIA information from USAA. As soon as rates go up I'll get one from them. Their agents are on salary so there's not any pressure for them to sell specific products for commission. I'm going to do a joint annuitant with 20 years guaranteed. I don't think you have to qualify for USAA membership in order to get one of these - you'll have to check.

https://www.usaa.com/inet/pages/insurance_annuities_single_premium_immediate

I agree with dgoldenz - the IRR is very low right now and it's just not a good time to get a SPIA.

The most important part of any financial instrument is the company's ratings. You don't want to sink your money into a fly-by-night and then come up broke a few years down the road.

 

[chinaco]

... The most important part of any financial instrument is the company's ratings. You don't want to sink your money into a fly-by-night and then come up broke a few years down the road.

Yep.... Triple A all the way!

 

[nun]

NEVER, NEVER buy anything from someone who makes an unsolicited call. If you want an SPIA just buy one from someone like TIAA-CREF as they are reputable, very stable and have reasonable fees.

I think SPIAs can be useful as part of a portfolio. In the 1980s I put 25% of my retirement savings into a TIAA Traditional Annuity, the rest went into CREF funds. The Annuity has ticked along doing 5%ish a year until recently, but it's volatility is tiny. The CREF funds have obviously gained more, but it's been a bumpy ride. I keep the annuity as part of my fixed income portfolio and it reduces volatility. When I ER I'll start taking lifetime annuity payments as a foundation so I can invest my CREF funds more agressively

 

[kyounge1956]

Annuities for Retirement: The Best, and the Rest - Personal Finance - Retirement - SmartMoney.com - for a list of the best companies so far as "soundness" goes for annuities.

Even though I would personally never get an annuity of any type, if you're going to get an immediate annuity make sure it has a period certain clause which guarantees payout for a 20 year period in the event of your death. Personally, I use a mix of different term bond funds as part of my portfolio spread rather than lining a sales person's pocket (though immediate annuities do tend to have much lower commissions than other types). YMMV, but anytime someone wants to sell me something the red flag goes up... they aren't selling for my benefit, they are selling for their benefit.

I will be retiring on a public employee pension. The pension fund lost about 27% of its assets in the 2008 crash, reducing its funding level below 60%. For reasons I don't understand, even though the stock market has recovered something like 2/3 of the way from its low to the high of 2007, the funding level has only risen to barely above 60%. This really has me nervous over the long-term stability of my pension and I am thinking of taking one of the options that combines a lump sum with a reduced benefit, and buying an annuity with the lump sum. I just recently found out that it's possible to buy an annuity within my 457 plan, and also that it would be possible to roll over the lump sum from the pension fund to the 457 tax free. I have an appointment with the on-site rep from the 457 plan on Monday and want to know what questions to ask to see if the annuities available in the plan are a good deal or not. So unlike the OP, nobody has made an unsolicited call and suggested I buy an annuity.

The plan custodian is Prudential. They were not even in the list in your link but I saw another list of insurance company ratings on an online annuity quote site and they were rated A+ by AM Best. There were many other companies rated A+. The only company on the list with higher ratings was New York Life at A++. I have no idea how current that list of ratings is but sounds like question #1 is to ask what their current rating is, how long they have held that rating and whether their most recent rating change was an upgrade or a downgrade.

I am single and childless, and in my circumstances I don't think a term-certain annuity is my best choice. Taking a lump sum from the retirement system would reduce my pension benefit, and I would make up as much of that reduction as I could with this annuity. If the online quotes I've gotten are any indication, it won't make up the whole difference and I may have to roll my own inflation protection. Question #2: do you offer annuities which adjust according to the CPI or with a fixed percentage annual increase?

 

[JohnDoe]

NEVER, NEVER buy anything from someone who makes an unsolicited call.

Just for the record, it wasn't necessarily an unsolicited call. I believe this 'agent' helped my relative with a Will and POA papers. In the process, the agent got to see IRA statements, etc.

I think the relationship existed prior.

JD.