Annuities

[imoldernu]

If your'e familiar with annuities, you can skip this. Am just relating what I think I've learned about a small annuity that Jeanie received after the death of her mom, back in 1984. It was $8000 which at the time was growing in the double digit percents, but settled with a minimum of 4% after five years.

So... here's what I think I know...

Full payout of the annuity to death would pay out $65,900. A ten year payout (the only number of years choice possible) would be $59,900, and the Surrender value, if cashed in today, would be $55,800.

The interest on the account is set at the minimum of 4%... if we keep it. Not bad in these days.
..............................................................................................

I know that all annuities are not the same, so don't use this as a model.

We're deciding what to do...

1. If we take the lump sum, we'll pay taxes.

2 If we go with the 10 year, the annual amount won't affect our taxes very much.

3. If we leave it in, we'll continue to accrue interest @ the 4%. Good today, maybe not tomorrow.

All in all, no a big deal, as we don't need the extra $500/month now, but an interesting choice. We'll probably leave it and let it become a part of our estate, or possibly take the ten year option.

By the way... I assume y'all know this, but if the annuity is not fully paid out during the owners life, the balance goes to the one who is the designated inheritor, so if Jeanie dies before me,and collects for 5 years, the remainder would be paid to me, or to our estate.

This is what I understand after talking to the customer service person at the holder of the annuity. I could easily be wrong, and would certainly appreciate any correction to the above.

Aside... the guy at the provider seemed to think this was an old style policy, and didn't seem too familiar with it. If you can, recommend an easy to understand overview of annuities. The thirteen page agreement that accompanied Jeanies' annuity is way over my head.

 

[Spock]

Since they are all unique, you'll have to have a FA read it and explain it to you.


The one some shyster sold my dad is a rip off and what math I've done I don't see how they sell any of these things. They don't even pay back your principal in your life time much less any earnings. YMMV.

 

[pb4uski]

What do you mean by "Full payout of the annuity to death would pay out $65,900."?

I don't see the 10 year period certain as being attractive at all.... it is a 1.43% annual return assuming monthly payments given a $55,800 cash value today compared to 120 monthly payments of $499.13/month.

I have a similar situation with my whole life insurance... since it is an old policy the cash value increases by ~4%/year.... I keep it as a bond substitute.... 4% with no interest rate risk and negligible credit risk is pretty good.

Who is the insurer?

 

[Chuckanut]

IMHO, the main thing I don't like about most annuities is how difficult they are for most people to understand.

A friend has one and it is the source of 80% of the questions, delays and complications she has working out how to handle her assets in retirement. It may be the best thing since sliced bread, but understanding it is more than she (and I) can handle.

Everything else- mutual funds, CD's, savings accounts and bonds - are easy to understand, but these annuities are a pain.

 

[MRG]

Since they are all unique, you'll have to have a FA read it and explain it to you.


The one some shyster sold my dad is a rip off and what math I've done I don't see how they sell any of these things. They don't even pay back your principal in your life time much less any earnings. YMMV.

Depends. However.

My DF w*rked for Met and sold the things. Later in life I asked why he never owned one?

He replied carefully, but the gist was they were good for some folks who weren't financially aware. However there's an issue with who could a financially unaware person trust. He did tell me to never buy one. Oh what a funny man.

The Insurance company should be able to explain the details as well.

 

[OldShooter]

Nothing "the guy at the provider" told you can be relied upon, though you can put up a pretty good fight if you have a recording of the telecon.

I strongly suggest getting a PDF copy of the actual contract and reading through it in detail to check your understanding. While you're at it, do a text search for words like "fee," "exclusion," "surrender," etc.

 

[imoldernu]

Out of curiosity I checked what would have happened to $8,000 between 1984 and today.

Inflation would have come to $20,000
Stock market $274,400

The answer is what your investment would be worth at the end of the period you specified if your portfolio matched the All Ordinaries Accumulation Index which takes into account income and growth. This means income and growth are all reinvested.

Old German saying....

"wir wachsen zu früh alt und zu spät schlau"

"We grow too soon old and too late smart"

 

[pb4uski]

$8,000 in 1984 growing at 5.88% annually would be $55,800 in 2018.

 

[Independent]

I have a similar policy with similar numbers. Bought in early 1980's for $5,500, currently worth about $44,000, guaranteed interest rate of 4.5%.

I'm keeping it because 4.5%, with no surrender penalty, is a pretty good fixed rate in today's world. I'll surrender or move it when that is no longer true.

I'm surprised that yours has a current death benefit that's higher than the surrender value. Mine are identical.

If you look at the 13 page contract, you'll probably find you have other annuitization options. There are often tables of guaranteed monthly benefits.

Try looking at the table of contents. You may find that most of the sections aren't relevant to your current situation (eg "Premiums"). You should be able to focus in on surrender charges, death benefits, and payout options.

And, yes, hindsight is great. I can remember 1981, there was no way I was going to put money in the stock market then. (and, if I had been interested, I didn't have any idea that some crazy guy was offering something called an "index fund")

 

[imoldernu]

$8,000 in 1984 growing at 5.88% annually would be $55,800 in 2018.

As I recall, the introductory rate was for a period of years, and somewhere around 12%.

 

[Souschef]

DW bought one from a "friend" who told her it would protect her late husband's life insurance proceeds from his business creditors,

After reading some posts here, I found that to be untrue. There is no point mentioning it to her now.

 

[CRLLS]

My recent experience with 40+ year old LI policy is that nobody on the front lines can explain the benefits of a policy. Even going 3 or 4 levels deep into their customer service system, I raised some questions that they didn't immediately know how to answer. It took some research on their part. I would read the policy very carefully and make sure that you understand the contract. Then make decision based on your current wants, not needs. If sounds like your needs are covered.

The numbers you quote to death are not absolute. You may live longer than the actuarial mean. then the payout would be more. is the 10 yr payout actually 10 yrs or is it life with 10 yr certain? Different numbers result.


When faced with a similar decision, we chose to take the surrender value and annuitize a LI policy (different from cashing out and buying an annuity). I didn't want to have to go thru 2 months of getting answers again. Chances are, in 10 or more years, there will be fewer people who know how to read and calculate the various payouts of the contract.

I like seeing the small dollars coming in every month and rationalize it as paying for a few nice dinners each month for the rest of my life. Well worth it IMO. We didn't need the money for our retirement expenses.

 

[Chuckanut]

He replied carefully, but the gist was they were good for some folks who weren't financially aware. However there's an issue with who could a financially unaware person trust.

I am going to play the Contrarian for a few minutes and agree with your father.

I know a number of people who if it were not for the hand holding of a professional Financial Advisor would end up in their mid 60's coming out of the SS office thinking "Is that all I have to live on for the rest of my life?!?!?!"

IOW, the money they spent on annuities and load funds would have been squandered on things like fancier cars, more restaurant meals, and investments such as 'beanie babys'. Instead they have something more than their SS check to live on.

Due to their views/fears on investing, these people would have done nothing otherwise. At least they have something more to live on than just their SS check.

 

[Red Badger]

I think annuities are mostly for people who suck at math, but don't know they suck at math. Somewhat akin to folks who buy lottery tickets.

I know I suck when it comes to math, so I refrain from buying annuities and lottery tickets.

 

[happy2bretired]

I am going to play the Contrarian for a few minutes and agree with your father.

I know a number of people who if it were not for the hand holding of a professional Financial Advisor would end up in their mid 60's coming out of the SS office thinking "Is that all I have to live on for the rest of my life?!?!?!"

IOW, the money they spent on annuities and load funds would have been squandered on things like fancier cars, more restaurant meals, and investments such as 'beanie babys'. Instead they have something more than their SS check to live on.

Due to their views/fears on investing, these people would have done nothing otherwise. At least they have something more to live on than just their SS check.

Well apparently I’m one of those uneducated people again. I do have an annuity and a financial advisor. It works for me.

I’m a widow and very unsure of myself in financial matters unlike most people here.

I just started taking funds a couple months ago from my annuity. My financial advisor did all paperwork. I don’t like messing with that kind of stuff. It involves phone calls that are very hard for me to accomplish and very stressful.

My financial advisor manages my annuity, they pick the investments. I have a guarantee of 6% for the next 5 years. I know! They have to make a profit and they charge me and I gladly pay it. Unfortunately I can no longer claim investment expenses.

I don’t need a fancier car and definitely no beanie babies.

 

[ncbill]

Immediate annuities can work for those who have been forced to retire but don't have sufficient assets to meet their projected income needs.

 

[Red Badger]

The two issues I have with SPIA's are:
1. Inflation - a couple of bad years can really hammer any fixed income.
2. Interest rates - are at present, very unattractive (but might rise in current environment)

 

[Rustward]

I am going to play the Contrarian for a few minutes and agree with your father.

I know a number of people who if it were not for the hand holding of a professional Financial Advisor would end up in their mid 60's coming out of the SS office thinking "Is that all I have to live on for the rest of my life?!?!?!"

IOW, the money they spent on annuities and load funds would have been squandered on things like fancier cars, more restaurant meals, and investments such as 'beanie babys'. Instead they have something more than their SS check to live on.

Due to their views/fears on investing, these people would have done nothing otherwise. At least they have something more to live on than just their SS check.

It is almost incredible to be reading this in these forums. Somebody "gets" it.

 

[pb4uski]

I am going to play the Contrarian for a few minutes and agree with your father.

I know a number of people who if it were not for the hand holding of a professional Financial Advisor would end up in their mid 60's coming out of the SS office thinking "Is that all I have to live on for the rest of my life?!?!?!"

IOW, the money they spent on annuities and load funds would have been squandered on things like fancier cars, more restaurant meals, and investments such as 'beanie babys'. Instead they have something more than their SS check to live on.

Due to their views/fears on investing, these people would have done nothing otherwise. At least they have something more to live on than just their SS check.

+1 While much less efficient and suboptimal than investing in no-load, low-cost mutual funds, something is better than the nothing that they would likely have if left to their own devices.

 

[capjak]

The two issues I have with SPIA's are:
1. Inflation - a couple of bad years can really hammer any fixed income.
2. Interest rates - are at present, very unattractive (but might rise in current environment)

1. You can buy a SPIA with inflation adjustment or with COLA from 1% to 5%. (both result in significant lower payments)

2. You can ladder purchases just like a CD to try to market time interest rates, and the SPIA returns more as you get older due to life expectancy and mortality credits.

Just answering your issues, not recommending them.

 

[ncbill]

1. You can buy a SPIA with inflation adjustment or with COLA from 1% to 5%. (both result in significant lower payments)

2. You can ladder purchases just like a CD to try to market time interest rates, and the SPIA returns more as you get older due to life expectancy and mortality credits.

Just answering your issues, not recommending them.

Agree.

I wouldn't sign up for one unless I had to do so.

But there are plenty of non-salesperson FAs online who point out that some people have to just to meet their subsistence income needs.

 

[OldShooter]

Immediate annuities can work for those who have been forced to retire but don't have sufficient assets to meet their projected income needs.

... But there are plenty of non-salesperson FAs online who point out that some people have to just to meet their subsistence income needs.

I don't see the logic in these statements. Insufficient assets are not magically transformed into sufficient assets by transferring them to an insurance company.

Best case, what would happen is that the annuitant would outlive the actuarial expectations of the insurance company, which is sort of a lottery win. But you can bet that any annuity contract and its fees will be designed to make this a very, very, rare occurrence.

 

[capjak]

I don't see the logic in these statements. Insufficient assets are not magically transformed into sufficient assets by transferring them to an insurance company.

Best case, what would happen is that the annuitant would outlive the actuarial expectations of the insurance company, which is sort of a lottery win. But you can bet that any annuity contract and its fees will be designed to make this a very, very, rare occurrence.

John Otar's (Red (not enough)/Grey(Maybe enough)/Green Zone (more than needed)) parapharased explanation:
I believe the explanation is that (based on at least 90% success) there is no magic that can ensure the failure rate is greater than 90% if you have insufficient funds at the start of retirement (based on historical returns) so the best a FA can do is secure (>90%) the highest income rather than risk running out of funds. In either case with or without an annuity the person would have to cut costs or get "Luck" in the market (which for some would be a roller coaster not worth taking).
Lifelong retirement income: the zone strategy | Advisor.ca

 

[pb4uski]

.... But you can bet that any annuity contract and its fees will be designed to make this a very, very, rare occurrence.

Not really.... while it is true that annuity mortality assumptions differ from life insurance mortality assumptions that is due to risk of anti-selection... but people do outlive the annuity mortality. Mortality is quite predictable... in pricing the insurer builds in a spread that covers expenses, overhead and profit/return on required capital... IIRC it was about 200 bps back in the 1990s. In looking at differences between actual and expected profit, mortality variances are usually minor.

 

[OldShooter]

John Otar's (Red (not enough)/Grey(Maybe enough)/Green Zone (more than needed)) parapharased explanation:
I believe the explanation is that (based on at least 90% success) there is no magic that can ensure the failure rate is greater than 90% if you have insufficient funds at the start of retirement (based on historical returns) so the best a FA can do is secure (>90%) the highest income rather than risk running out of funds. In either case with or without an annuity the person would have to cut costs or get "Luck" in the market (which for some would be a roller coaster not worth taking).
Lifelong retirement income: the zone strategy | Advisor.ca

Interesting article. The basic theme, though, is that if the retiree doesn't have enough money he/she will have to cut back on his/her spending, annuity or no annuity. We already knew that.

The numbers he uses in annuity cost examples are in the range of this board's old favorite, the 4% withdrawal rate. In some cases the annuity seems to provide even more. If I understood his first example, a $1M portfolio would buy an annuity that paid $50K -- 5%. I don't know how to reconcile that with a 4% number except to question it. If true, certainly buying such an annuity should be attractive to all of us -- a 25% raise with running-out-of-money risk eliminated at no cost The article is from 2012 so interest rate differences probably don't explain it.

I didn't study the charts and graphs. If I make my own model then I can prove anything I want. Also, making statements like " ... the probability of running out of money by age 95 is 16%, not very high but still beyond the established comfort level of 10% ..." implies impossible prediction accuracy. So I discount all of his predictive numerology. Looks like he makes a lot of money from it though.

But it was an interesting read. Thanks for the link.

Not really.... while it is true that annuity mortality assumptions differ from life insurance mortality assumptions that is due to risk of anti-selection... but people do outlive the annuity mortality. Mortality is quite predictable... in pricing the insurer builds in a spread that covers expenses, overhead and profit/return on required capital... IIRC it was about 200 bps back in the 1990s. In looking at differences between actual and expected profit, mortality variances are usually minor.

Sounds like you were in the business. What percentage of annuitants live long enough to take the insuror's profit to zero? I'm still guessing not many.