Interesting comments on annuities

[easysurfer]

Understandable to me. IN GENERAL (yes, there are many variations in life insurance and annuities) - Life insurance you pay a small amount of money over a long period of time that will yield a huge return if the unlikely happens. Life insurance is buying an estate in the event you die before you generate an estate yourself.

With an annuity you pay a huge amount all at once that you can never get back hoping the payout will match or exceed what you could do investing on your own, knowing that if pass early actuarially other annuitants you don't know will get the benefit of your funds. An annuity is future income, usually for an indefinite period.

Again, IN GENERAL...

I suppose another way to say it is that upfront for life insurance the money at risk is the company's but for an annuity upfront the money at risk is the annuity purchaser.

So psychologically, it seems putting smaller payments for life insurance is a more certain bet so the concern of an insurance company going belly up is probably dimished when purchasing life insurance (after all, initially, it's mostly playing with the insurance company's money and not your own).

 

[Midpack]

I suppose another way to say it is that upfront for life insurance the money at risk is the company's but for an annuity upfront the money at risk is the annuity purchaser.

So psychologically, it seems putting smaller payments for life insurance is a more certain bet so the concern of an insurance company going belly up is probably dimished when purchasing life insurance (after all, initially, it's mostly playing with the insurance company's money and not your own).

Frankly, you've said it better than I did...

 

[brewer12345]

Often you can go to the insurance companies web site to see their ratings from a number of ratings folks. And for sure you can ask the salestypes as well. If you want to go that far you can check the status of the company at the state insurance commission where the company is headquartered, (not the holding company but the actual insurance company, the big guys have a lot of subsidiaries so check carefully). But then did you do the same due dillegence when you bought a life insurance policy, where the bet is the exact opposite of an SPIA, i.e you bet you die soon, the insurance company bets you die later.

Yes, I did do as much due diligence on my life insurance policy provider. If I drop dead prematurely it will be critical that the face amount gets paid out.

 

[imoldernu]

Since the pay out of ANY kind of investment, including annuities, will depend on the economy (let's say 10 years hence), the question of safety comes down to trust, or an educated view of how the current world economic situation will be resolved.
Aren't annuities a commitment?
I recall the AIG settlement, and resolution by arbitrage. That has colored my thinking about safety.

 

[easysurfer]

You said it better than I did...

I took the easy route and did some paraphrasing of what you said .

 

[pb4uski]

Since the pay out of ANY kind of investment, including annuities, will depend on the economy (let's say 10 years hence), the question of safety comes down to trust, or an educated view of how the current world economic situation will be resolved.
Aren't annuities a commitment?
I recall the AIG settlement, and resolution by arbitrage. That has colored my thinking about safety.

Huh? Clear as mud.

 

[MasterBlaster]

Dope addicts and insurer credit quality aside...

The reason to purchase a SPIA (from a highly rated insurance company) with part of your nestegg is so that you are covered with high certainty into your old age.

For the self-funded crowd, you'll have to plan to an old age and slowly spend down the nestegg being careful never to let it get to zilch.

With a SPIA, those that die off early end up funding those that live longer. The longevity risk is covered allowing you to spend down that remaining nestegg while you can. And if you spend it all you are still covered by the SPAI (and perhaps Social Security).

The linked article suggests that you'll most certainly have more spendable income with this approach than doing it the self funded way.

For many people leaving a big unspent nestegg when you go is a bigger waste than paying some insurance fees.

 

[imoldernu]

Huh? Clear as mud.

When will rate increases occur? This is closely related to the question of how long it will take the economy to recover enough that we get back to a more "normal" level of interest rates. Both "known unknowns" and "unknown unknowns," to borrow the Rumsfeld expressions, will determine the eventual timing.
How much will SPIA pricing rates change? These are the interest rates that insurers use in their pricing, and they reflect the rates they can earn on the corporate bonds and commercial mortgages that support their fixed-income products. Changes in these rates will reflect the combination of changes in Treasury rates and the spread over Treasury bonds that insurers can earn for taking credit risk.
How much interest does "parked" money earn? If one decides to delay buying a SPIA, money will need to be set aside to purchase it at a later time. The higher the returns on these funds, the less will be the penalty for waiting. Exposing those funds to too much volatility, however, might result in losses.

Joe is thinking Hyperinflation or Meltdown.

 

[73ss454]

For many people leaving a big unspent nestegg when you go is a bigger waste than paying some insurance fees.

Maybe but I'd rather have my kids spend it and not the insurance company.

 

[REWahoo]

When will rate increases occur?

Let's start a pool...

 

[MasterBlaster]

Maybe but I'd rather have my kids spend it and not the insurance company.

I am sure you would rather leave it to the kids. But don't mislead yourself... Your lifestyle in retirement will be less than it could be if that's what you want.

 

[rescueme]

Maybe but I'd rather have my kids spend it and not the insurance company.

If you are not going to use it as current income, there is no need to purchase an SPIA. Keep your money in whatever vehicle you wish, for your children.

BTW, anything left due to your passing earlier than expected, if you have an SPIA? The insurance company does not get it, but rather your children, assuming you executed the contract with the proper option. That's been discussed more than once, in past discussions.

The only way an insurance would retain any "leftover" would be is if you opted for a single-life policy with no rider to distribute the remainder. This would be in the case for a single person who has no requirement/wish to distribute the remainder to a beneficiary, and would result in the highest monthly income than any other of the other stated options.

Again, an SPIA is for retirement income - not investment. There are other ways to accomplish that task.

 

[samclem]

I am sure you would rather leave it to the kids. But don't mislead yourself... Your lifestyle in retirement will be less than it could be if that's what you want.

But to make this work you have to either:
1) Buy the SPDA (now) and then start spending more of your remaining portfolio at a higher rate so it's gone/nearly gone when the annuity starts paying. After that point you're entirely dependant on the insurance company to keep their promise to pay for the rest of your lives. So we're accepting the risk of insurance company default/"changes", etc for maybe a couple of decades before the monthly checks start and a few decades after that.
2) Put aside an amount now for use in purchasing a SPIA later. Then you have the risk of insurance company non-payment during the payment period and also the risk that interest rates might be very low when you need to buy the annuity (as it is right now for those seeking to execute this option). You thought you'd have enough to buy a sufficient income stream, but it turns out you don't.

To those of us who have spent their lives diversifying their investments (and seeing the failures of friends who didn't) deciding to put all our eggs in the annuity basket, especially for a payout several decades in the future, is tough to swallow.

I would like a way to insure against longevity risk with a more diversified approach than depending on one company (industry/government oversight notwithstanding). I'd like Vanguard to sell a special diversified mutual fund to anyone exactly my age (51). The opportunity is open for one year and then the pool is closed (others could buy into the "age 52 during 2013" fund the next year). The money can't be withdrawn by anyone until the survivors hit 80 years old. Then the approx 50% of the original investors get sent a one-time lump-sum check from the pot. I'm not depending on Vanguard's ability to pay--it's all funded by the underlying assets (like any other MF). I could watch the value change, get a yearly report indicating my expected payout (would vary by portfolio return and mortality of the "pool"). And really hope I make it to 80 to get the jackpot. I think in a previous post Brewer indicated these types of pools are illegal now.

 

[rescueme]

(snip) ...I would like a way to insure against longevity risk with a more diversified approach than depending on one company (industry/government oversight notwithstanding).

Sure, I agree.

Nobody says you must put your retirement money with "one company" nor one product.

Heck, during the application process for our SPIA, we had to "certify" that this new SPIA (along with any other existing annuity products that we may have held) did not represent more than 50% of our current joint retirement assets.

In our case, it was only 10% of our then joint retirement assets (and it's even less today, since we have total retirement assets above the level of when the SPIA was initiated.

An SPIA/SPDA is only one of the tools that you may have in your retirement income "toolbox". It was never designed to be the only solution/tool.

 

[FinanceDude]

The risk to the annuity company is not very high on payouts, whether SPIA or VA, and here's why.

Most VA companies, if you want the "guarantees" will charge you close to 4% in expenses, to get a 5% withdrawal rate either now or in the future. Say you give them $100K. They charge you $4000 a year and give you $5000 a year in income. That's an easy deal to take, because they hedge with derivatives and reinsurance.

Most SPIAS have no internal interest credited, so it is little different that doing a DCA from a money market fund...........it is only the period certain part of the contract that is the risk to insurer.............if you outlive your actuarial chart, you "win". How many people do that?

 

[haha]

if you outlive your actuarial chart, you "win". How many people do that?

Roughly half of them.

 

[pb4uski]

Roughly half of them.

On average. That's what I was thinking too.

 

[MasterBlaster]

To those of us who have spent their lives diversifying their investments (and seeing the failures of friends who didn't) deciding to put all our eggs in the annuity basket, especially for a payout several decades in the future, is tough to swallow.

You misunderstand what I (and the linked article) suggested and then draw some unwarranted conclusions.

I suggested you put enough in a SPIA (not your whole lifetime savings) so that (along with SS) you have a baseline living standard. Then I suggested that you take a more aggressive role in depleting the remaining nestegg as your longevity risk is covered. Don't mistake here a more aggressive nestegg depletion approach with spending like a drunken sailor. They aren't the same.

That way you'll have more spendable income while you are alive. Or as the academics call it, the utility of your nestegg is more fully realized.

 

[NW-Bound]

Roughly half of them.

Perhaps the following is why most people do not like annuities, myself included. Some of the doggone lucky people get to live a long life, and they also get to spend the money of the unlucky ones, meaning us. How fair is that? Most of us when polled about whether we have won anything in our lives said that we were never lucky enough to win anything substantial.

Never mind that some of us do not have children to worry about leaving money to. Never mind that we cannot "take it with us". We just do not want to lose double: our life and our money too.

Does that make sense to anybody? Do you feel lucky?

 

[MasterBlaster]

We just do not want to lose double: our life and our money too.

Does that make sense to anybody? Do you feel lucky?

Yeah, Isn't it bad enough to just have to die.

And if someone else would get your money, well that would just kill me.

 

[NW-Bound]

I am glad that you feel the same way I do. That makes at least two of us.

I have more. Again, most people do not think that they are lucky, else they would go to Vegas and put it all on red. So, you would think that they want to buy annuities, being risk-averse? Nope. Buying annuities implies that they think that they will win, that they belong in that lucky group of people who will win double, life and money too. Talk about pushing your luck!

So, not wanting to offend Fortuna, the goddess of luck, I will not buy an annuity. If I die young, I die rich (my children will be rich too!). If I live a long life, I will be happy to be living poor although FIRECalc says there's a chance I may, just may, get also lucky there (I have been trying to live right, like not picking on other people's grammar and stuff, not even picking on the grammar pickers, etc...).

I am asking for only 1 out of 2, and not pushing my luck at all.

 

[MasterBlaster]

I am glad that you feel the same way I do. That makes at least two of us.

I have more. Again, most people do not think that they are lucky, else they would go to Vegas and put it all on red. So, you would think that they want to buy annuities, being risk-averse? Nope. Buying annuities implies that they think that they will win, that they belong in that lucky group of people who will win double, life and money too. Talk about pushing your luck!

So, not wanting to offend Fortuna, the goddess of luck, I will not buy an annuity. If I die young, I die rich (my children will be rich too!). If I live a long life, I will be happy to be living poor although FIRECalc says there's a chance I may, just may, get also lucky there (I have been trying to live right, like not picking on other people's grammar and stuff, not even picking on the grammar pickers, etc...).

I am asking for only 1 out of 2, and not pushing my luck at all.

If you feel that you wil die young, then you need a method to optimize your nestegg utility. I claim that oft-quoted SWR methods are suboptimal in your situation. people like you could really benefit from such a (SPIA-enhanced) approach.

 

[rescueme]

(snip)...Buying annuities implies that they think that they will win....

Not at all. Buying our SPIA just ensures us that we won't lose.

Remember, it is insurance to cover the possible need/shortfall (as is life insurance); it's not a wager on trying to beat any longivity odds. There's a big difference from your opinion of what you think the product is used for.

Hey, if you don't like the idea or think you can cover your retirement income on your own with your own investments, or you're a person who has enough income from SS, pensions, and other sources, then you don't need to consider such a product.

We purchased our first policy in order to delay our respective SS claims, and to keep the majority of our joint retirement portfolio allocated to equities quite high (in relation to other retirees) for future needs 20-30+ years down the road. That "risk" required us to also take out some "insurance" to make sure our early retirement income needs were met, not only counting on our joint portfolio and investment expertise, and also addressing the 11-year gap from retirement until all our income sources come on-line.

We had the need, so we purchased the product. Five+ years since purchase, it has been shown to be one of our better decisions in life, especially with the continuing low-interest period we are in.

But no, I'm not saying everybody (or anybody), should follow our lead. I'm just trying to show a situation where the product is actually used, not just part of a study or personal opinion by folks without any "skin" in the game. What you do is up to you.

 

[NW-Bound]

We just came back from a grocery run.

I was just joking, as I usually am.

I am not saying one should buy annuity or not. It has some advantages, and I may use one to augment my SS, which I still have yet to figure out what to do about as I still have a few years to go till 62.

The main reason for me not to get an annuity, and I am talking about just myself here, is that I love my money and do not want to lose control over it. When I said that I might be related to Scrooge, I was only half-joking. I am trying to live on 3.5%WR, which is about what I am spending now. If I die young, I would be too sad to worry about leaving money behind. And if I live long and get rich (not spending enough), or long but poor (spending too much), it is all OK. In my own analysis, money does not matter that much then, except that I just like to have it.

Peace. No more joke from me. Not on this thread anyway.

PS. I forgot the 4th case. That is to die young and broke. That would truly suck, but I would still feel more sadness because of the young rather than the poor part. However, at 3.5%WR, it should last me a while, right? Of course if the sky falls, all bets are off. However, we would be all on the same boat, so I would not feel left out. It's still OK then.

 

[haha]

The best argument against anuities is that reasonably priced inflation adjusted annuities are not available, and without this, inflation will kill the value of annuities.

I know this is not mainstream thinking, but bookmark this post and check back in 15 years.

Ha