Not fond of annuities

[mickeyd]

Critical look at annuities is explored by Edelman. I see many points that I agree with him on.

When clients invest in a globally diversified portfolio consisting of low-cost ETFs and index funds, they maintain control over their money. They
can make investment changes anytime, and they can withdraw their money whenever they want. But when they put money into an annuity, they face higher costs and often severe restrictions, sometimes permanent ones.

No wonder the SEC, Finra and NASAA have issued so many investor alerts regarding the sales practices of annuity products.

http://www.fa-mag.com/news/7-reasons-i-m-not-fond--of-annuities-24007.html?section=47

 

[2017ish]

Most of his focus is on high-commission hybrid products, which I share his disdain for. His points regarding SPIAs (or plain vanilla deferreds) are inherent in their makeup, well known, and/or a product of the present interest rate environment. (Well, except for the possibility of such increases in life expectancy that insurers won't be able to meet their obligations.)

I'll still be considering this option for some of our funds in about 10 years or so.

 

[Chuckanut]

I am not a big fan of annuities for most people.

But, if an annuity keeps one from panicking during a down market (like this week's) and selling low, it may have some value.

 

[ejman]

The one value I can see for an annuity is to purchase one for a portion of the assets when one's marbles are not up to managing the portfolio. Of course, the problem is that once I reach that loose marbles stage how in the world do I make sure that I'm not getting super screwed by the annuity salesperson?

 

[2017ish]

The one value I can see for an annuity is to purchase one for a portion of the assets when one's marbles are not up to managing the portfolio. Of course, the problem is that once I reach that loose marbles stage how in the world do I make sure that I'm not getting super screwed by the annuity salesperson?

Yeah, that is a major reason I'm thinking that I'll closely examine SPIA or deferred options at 65/66--which hopefully will be before my marbles are much looser! Would provide a steady flow into the checking account for monthly bills without having to devote thought to it.

We'll see. An additional factor is that I may be more willing to count on social security by that time. Given that it is the best annuity structure available and that we are projected to have substantial payments from it, its availability would be a major criterion.

 

[Options]

Critical look at annuities is explored by Edelman. I see many points that I agree with him on.


http://www.fa-mag.com/news/7-reasons-i-m-not-fond--of-annuities-24007.html?section=47

A consensus will probably never be reached on annuities. Many others would disagree with Edelman (including Scott Burns and Lawrence Kotklikoff who posit in Spend Til the End that one can substantially raise one's retirement standard of living through the use of annuities). Did you see (one of) Wade Pfau's views on annuities in the same journal?

http://www.fa-mag.com/news/substituting-income-annuities-for-bond-funds-in-retirement-21923.html

Specifically:

My research article on the efficient frontier for retirement in the Journal of Financial Planning concluded that combinations of stocks and income annuities produce more efficient outcomes than combinations of stocks and bonds. Income annuities effectively serve as a replacement for the fixed-income allocation in a retirement portfolio. When retirees know what they will receive upon purchasing an income annuity, they are in good shape if they have enough saved to lock in their income objective.

 

[Danmar]

A pension is an annuity. I certainly like my pension. I think the biggest problem with annuities is the pricing. As a risk reduction tool for retirees the actual product is excellent.

 

[Fermion]

A pension is an annuity. I certainly like my pension. I think the biggest problem with annuities is the pricing. As a risk reduction tool for retirees the actual product is excellent.

The big difference between a pension and an annuity is no annuity exists which has a inflation indexed COLA (at least for a reasonable price). Probably why pensions are going away.

 

[Danmar]

The big difference between a pension and an annuity is no annuity exists which has a inflation indexed COLA (at least for a reasonable price). Probably why pensions are going away.

Most private pensions are non cola now as well.

 

[Mulligan]

The big difference between a pension and an annuity is no annuity exists which has a inflation indexed COLA (at least for a reasonable price). Probably why pensions are going away.

Yes, COLA's are definitely noticeable in my pension check. Just 2% COLA's accumulating since 2010 retirement has lifted my pension 8k.


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[Bikechuck]

Annuities are not evil

I have a fixed annuity (that I have not annuitized) with Zurich Life which I purchased as an IRA 35 years ago or so. It pays a guaranteed minimum 4.5% interest with no fees other than what they take before my guaranteed minimum 4.5% return.

Last year I called them and learned that I can add money to this IRA so I did. Zurich is now owned by Protective Ins Co who is highly rated. I figure this is a great bond alternative. Since I have not annuitized this and I am over 59.5 I can withdraw any or all of this without any penalties.

What's not to like?

 

[Closet_Gamer]

A pension is an annuity. I certainly like my pension. I think the biggest problem with annuities is the pricing. As a risk reduction tool for retirees the actual product is excellent.

I don't have a pension (and am years away from retiring) but I've often thought of this as well. Its seems that everyone who has a pension is pretty happy they have one.

I've received a higher fraction of my income over the years than someone who was having a pension done for them. If I take a portion of those higher retained earnings and use a SPIA to create a DIY pension, that doesn't seem to be a loony idea provided interest rates and fees are right sized at the time.

I understand that over the long term its probably not a component of the highest returning portfolio, but if I can cover my basic living costs from an annuity, a lot more flexibility comes to the remainder. As ever, the real question is how far you are LBYM.

Will be interesting to see what I think when I actually face the decisions!

 

[OrcasIslandBound]

Seems to me that the primary attraction of an annuity is the efficiency gained by spreading the risk of living longer amongst many annuity holders, some of whom will likely die sooner than you do. Thus every one in the group consumes their investments at death "efficiently". It would sure be nice if Vanguard come out with an "index" style annuity for the masses.

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[Danmar]

Seems to me that the primary attraction of an annuity is the efficiency gained by spreading the risk of living longer amongst many annuity holders, some of whom will likely die sooner than you do. Thus every one in the group consumes their investments at death "efficiently". It would sure be nice if Vanguard come out with an "index" style annuity for the masses.

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Agree. It's all about "mortality credits". Too bad there isn't more competition in the sales of annuities.

 

[mickeyd]

It would sure be nice if Vanguard come out with an "index" style annuity for
the masses.

...except Vanguard is not an insurance company.

 

[hurricane harry]

...except Vanguard is not an insurance company.

https://investor.vanguard.com/annuity/

http://www.vanguardinsurance.com/

 

[nun]

Annuities come in a vast range of flavors so we need to be specific. They become really complex, expensive and dangerous when they are turned into investments. So variable annuities linked to funds and the market performance are IMHO to always be avoided. These seem to be what the article is talking about and I agree that they are to be avoided and you are better off just investing in the stock and bond markets directly in 401ks, IRAs etc and taxable accounts. I never mix insurance and investment and I consider an annuity as insurance so all I would want from it is guaranteed income for life and a known interest.

So the only annuity I would ever buy would be an SPIA or a deferred longevity insurance annuity like a QLAC. To lump QLACs and SPIAs in with variable/hydrid annuities does them an enormous disservice.

The question as to whether an annuity if good value for money right now isn't really related to the possible performance of the stock market, but more to your desire for a guaranteed income for life, how you see risk, and how it fits in with your other investments.

For example I just got a quote from TIAA-CREF for an lifetime SPIA starting today (age 55) based on a 4% annual interest and 6% payout rate. That interest rate looks good when compared to savings accounts, CDs and a lot of bond funds, but do I want to lock it in when rates are going up and do I want to give up control of principal to get the mortality credits and will I even live that long? Someone might want some guaranteed income and be determined to live a long life to get the mortality credits and maybe that will allow them to take on more risk in the markets. They might also think about an annuity ladder and buy in over a number of years to get better rates.

Finally a QLAC offers a simple and inexpensive way of buying some longevity insurance with a deferred fixed interest rate annuity and you also get a tax break on RMDs too. Some people might like that.

 

[Aiming_4_55]

For example I just got a quote from TIAA-CREF for an lifetime SPIA starting today (age 55) based on a 4% annual interest and 6% payout rate. That interest rate looks good when compared to savings accounts, CDs and a lot of bond funds, but do I want to lock it in when rates are going up and do I want to give up control of principal to get the mortality credits and will I even live that long?

I was researching an annuity with a 10 Year Period Certain (55 - 65), just as a secured income "floor". I don't think I'll pull the trigger but it's worth consideration. Your 4% annual interest seem reasonable/good, but who can tell the future. Maybe, I'm just lazy and don't want to worry and adjust things.

 

[OrcasIslandBound]

I have to confess, I've not considered annuities so far because my impression is that you don't really get your money's worth. Too much money seems to end up in the hands of the brick and mortar insurance company.

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[nun]

I have to confess, I've not considered annuities so far because my impression is that you don't really get your money's worth. Too much money seems to end up in the hands of the brick and mortar insurance company.

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The utility of an annuity is not in how much it returns or costs compared to the potential returns or costs of things like mutual funds, but whether your attitude towards risk and your other investments makes one relevant. For people that like a liability matching approach or who don't have enough to survive a serious market down turn they should be in the mix along with CDs, TIPS and cash.

 

[OrcasIslandBound]

Just out of the curiosity, I ran the "instantannuity" website calculator for $250k, male 58 and female 59 starting the annuity immediately. This is what it spit out. I can see the appeal for 3 reasons: it gets more money in your pocket sooner, it goes for life efficiently consuming the investment, and it does seem protected from market downturns. 5.15% seems like not quite enough, though.

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[nun]

Of course if you don't buy the annuity you could get at as much of the money as you wanted and the 5.15% payout rate implies an interest rate of 3% and you don't get any inflation indexing. Annuities are terrible investments and are eroded by inflation, but if you go in with your eyes open and have ways of solving those issues elsewhere in your portfolio they can be a useful diversifier.

 

[audreyh1]

Agree. It's all about "mortality credits". Too bad there isn't more competition in the sales of annuities.

The problem with mortality credits are the annuity buyers (as opposed to pension holders) are self-selected. Which means they expect to live long time or else they wouldn't buy the annuity. People who are ill or have reasons to expect to live shorter are out of the pool. So the "mortality benefit" is smaller than why you would expect from the general population. In other words, it turns out these self selectors are right about having longer longevity.

 

[Fermion]

Of course if you don't buy the annuity you could get at as much of the money as you wanted and the 5.15% payout rate implies an interest rate of 3% and you don't get any inflation indexing. Annuities are terrible investments and are eroded by inflation, but if you go in with your eyes open and have ways of solving those issues elsewhere in your portfolio they can be a useful diversifier.

Why would you buy an annuity then over a 30 year Treasury which pays near 3% as well?

 

[hurricane harry]

Why would you buy an annuity then over a 30 year Treasury which pays near 3% as well?

because you would have to wait for thirty years for the treasury to mature