Annuities

[RetiredHappy]

Not surprising that a FA with a brokerage company like ML would dissuade you from annuities while pushing complex equity strategies. When I switched to a fiduciary FA, I couldn’t even explain the convoluted equity strategy that ML advisor had invested my wife’s IRA funds in.
No reason to work with a one-sided advisor when there are reasonable Insurance issued products that might work for some individuals.

Glad it worked out for you RH.

We just moved all of our managed investments out of ML and we are still working on simplifying the whole portfolio. It is not easy, especially for taxable accounts as they will incur capital gains tax if we were to sell them.

 

[zaqxsw]

If you're still working and maxing out 401K and IRA contributions, an annuity might make sense for more tax deferred savings. A basic premise for you to do that, is that you will never annualize it. It gets passed on in your estate, and only the earnings are taxed to the beneficiaries. They choose how to take it.

I inherited an annuity in 2012 and it was absolutely perfect in filling the income gap from retiring at 57 to claiming Social Security next month, at 67 1/2 (timing complicated due to spousal benefits).

The only annuity I would consider to annualize would be my pension. I did that and it absolutely was the best deal 10 years ago to get a steady stream of income. That's on top of too much money that I really didn't want to invest, but did. I'm conservative.

You couldn't touch the return on it, and obviously not now, on it's lump sum value! Yea, inflation will eat into it down the road, but it's a great base income to count on. Nothing exists like it, so I'm happy.

Plus I'm in the category of "Blow That Dough". It's actually become an issue as my DW isn't as adventurous I am.

 

[almost there]

I did the same thing 5 yrs ago at 55. 280k paid $1520.00 per month for life. Wife gets 1/2 if I kick 1st. I believe this type is inured to $3500 a month. And this is well under that.
No regrets....... Have pulled over 91k out, and am now 60. But agree most are not so good... And am not up to speed on MYGA's.... So I can't add anything...

 

[mickeyd]

heavily skewed in favor of the party selling you the product.

Life insurance agents sell annuities to make money for the company and for the agent. Why is this difficult to understand?

 

[OldShooter]

Life insurance agents sell annuities to make money for the company and for the agent. Why is this difficult to understand?

Maybe this is a way to look at the situation:

There are efficient markets and inefficient markets. An efficient market is where goods are standardized and prices are well known both to buyers and to sellers. In an efficient market, prices tend to collapse to the point where only the most efficient sellers survive. The classical example is the cash grain market, though any grocery store has many examples. In an inefficient market, he who has the most information wins. In cash value insurance, especially in annuities, there a myriad of product variations and buyers do not know the market pricing. This allows sellers to charge much higher prices than they could if the market was efficient. MYGAs and term life tend towards being quite efficient, which is why you see web sites showing various companies' pricing. It's not perfect because despite AM Best's efforts and the various state guarantee funds, the financial condition of the insurors is not completely guaranteed. Hence the customer is taking a small risk without being able to understand it well.

So are annuity salespeople dishonest? Strictly speaking, I don't think so. But I do think there is an ethical question when the margins get really rapacious and the target market is ignorant people who think there really is a free steak dinner.

(I used to have a company that sold used large-ticket capital equipment all over the country. That was a good example of an inefficient market. It was not uncommon for us to double our money by buying a piece of equipment and reselling it, sometimes without even taking physical possession. I think the good 'ol boys dealing Hard Red Winter Wheat do not see those kind of margins. We worked very hard at being the company who had the most market information. That's why we successfully did what our sellers and buyers couldn't or didn't want to do for themselves. They understood and appreciated this.)

 

[Tracer]

For me, SPIA's offer me some peace of mind. I purchase two SPIA's from two separate companies 12 years ago with an inheritance. Those monthly payments, along with my SS, pretty much cover all my basic monthly expenses. In two years I'll have everything back that I bought them for. I will keep getting those payments for the rest of my life. The major part of those payouts are tax free because they were purchased with after tax money. I do not need my IRA's, Roth IRA or other investments I have to live on. I sleep pretty well at night.

 

[Sunset]

For me, SPIA's offer me some peace of mind. I purchase two SPIA's from two separate companies 12 years ago with an inheritance. Those monthly payments, along with my SS, pretty much cover all my basic monthly expenses. In two years I'll have everything back that I bought them for. I will keep getting those payments for the rest of my life. The major part of those payouts are tax free because they were purchased with after tax money. I do not need my IRA's, Roth IRA or other investments I have to live on. I sleep pretty well at night.

Key here, is that it was 12 years ago, when interest rates were comparatively speaking to now quite heavenly, so the payout is much better.

 

[Dot57]

Variable Annuity help!

I purchased a variable annuity from my FA about 20 years ago as a tax shelter. It is now nearly 1/3 of my portfolio at $800k. The cost basis is $360k. I switched FAs and they moved the annuity into a Vanguard product to minimize expenses. The FA advised that I also change the allocations in the annuity to 100% bonds to reduce the growth rate as much as possible. His logic was that I should begin selling off portions each year and reinvest so it would be all ‘converted’ when I reach 70 1/2 and need to begin taking withdrawals from my IRA. I did not heed that advice and have instead been rolling over IRA money each year into a Roth. Last year I left the FA and am self managing my portfolio via Index funds. Vanguard sold off the annuity to TransUnion and I’m unclear what my strategy should be with this annuity. I turn 65 next year and am still earning income and don’t anticipate needing the money in that annuity. I’m considering leaving it in there for my kids to deal with after I’m gone. What are some other recommendations?

 

[ychuck46]

Spot on

You're not missing anything

Annuities are designed to enrich only the provider of the annuities. Stay far away from them and their high fees and surrender costs, etc. Structure your own annuity if you want that with a good index fund or two coupled with a ladder of CDs. There; I just set up your annuity for you and you don't have to pay ridiculous fees for doing so, rather you keep 100% of your money for yourself.

 

[almost there]

Annuities are designed to enrich only the provider of the annuities. Stay far away from them and their high fees and surrender costs, etc. Structure your own annuity if you want that with a good index fund or two coupled with a ladder of CDs. There; I just set up your annuity for you and you don't have to pay ridiculous fees for doing so, rather you keep 100% of your money for yourself.

Agree, most are terrible. But to say all are "bad" isn't the case.
Timing is also key. Now, it not a good time at all.
Am not aware of any off the shelf annuities now that are even worth looking at.

 

[pb4uski]

Agree, most are terrible. But to say all are "bad" isn't the case.
Timing is also key. Now, it not a good time at all.
Am not aware of any off the shelf annuities now that are even worth looking at.

Agree other than perhaps MYGAs as a CD substitute.

 

[almost there]

Am just learning about "MYGA's"... 100% new to me...
Am ignorant over here, as the money compounds.
Is not distributed monthly or annually. Huge penalty for withdrawals.
How is this considered an annuity? If you are not getting any of the $$$ for 5-7-10 years? Am sure I am missing something with these. Fixed rate, but % returns offered are based on the stock market?
A little help please. LOL LOL

 

[RetiredHappy]

Agree, most are terrible. But to say all are "bad" isn't the case.
Timing is also key. Now, it not a good time at all.
Am not aware of any off the shelf annuities now that are even worth looking at.

See my earlier posts. I would buy twice as much if given the opportunity again. These were off-the-shelf products but LF does not pay as well on the same policies anymore.

 

[almost there]

I look at those (MYGA) as more of an uninsured CD type of investment. Rather than an actual annuity.
As the $$$ can't be touched without a huge penalty. For the full term. 3-5-7-10 years.
How is this lumped into the annuity category? Just curious...

The annuity I took at 55, 5yrs ago is insured. $280k pays $1520 a month for life / 1/2 that for the wife if I kick 1st.
Works out to what? 5%? Would also double up given the chance today. But nothing out there comes close.

 

[Tracer]

Key here, is that it was 12 years ago, when interest rates were comparatively speaking to now quite heavenly, so the payout is much better.

You are correct. I was fortunate enough to purchase these annuities during a favorable interest environment. When considering what your payments will be throughout the rest of your life, I would not advise anyone to consider a SPIA at this time.

 

[Tracer]

I look at those (MYGA) as more of an uninsured CD type of investment. Rather than an actual annuity.
As the $$$ can't be touched without a huge penalty. For the full term. 3-5-7-10 years.
How is this lumped into the annuity category? Just curious...

MYGA's are essentially CD's issued by an insurance company rather than a bank. Because they are an insurance product, for tax purposes, they are considered annuities. At maturity you have the option to either cash out or annuitize them giving you a monthly payout that you can't outlive. Unlike a CD, all taxes are deferred until you either cash out or annuitize the contract and start taking monthly payments.

10 years ago I purchased a 5 year 3% deferred annuity. When it matured 5 years ago, I was given a third option to keep the contract at the same 3% return with the ability to withdraw anytime without penalty. I continue to hold it to this day as there is no bank the pays 3% in a totally liquid account that I'm aware of. The best high yield money market accounts are around 0.5%.
It has the added benefit that taxes on interest continue to defer until I withdraw.

 

[Dot57]

I am trying to decide what to do now that i have lots of growth in the annuity. I already have a significant amount of money in a rollover IRA that i’m working to move to Roth each year. Any advice is welcome.

 

[pb4uski]

Am just learning about "MYGA's"... 100% new to me...
Am ignorant over here, as the money compounds.
Is not distributed monthly or annually. Huge penalty for withdrawals.
How is this considered an annuity? If you are not getting any of the $$$ for 5-7-10 years? Am sure I am missing something with these. Fixed rate, but % returns offered are based on the stock market?
A little help please. LOL LOL

You're close. Think of it as similar to a bank CD but issued by an insurance company. Fixed term like a CD. Usually a fixed rate of interest like a CD. No FDIC insurance, but state guarantee fund coverage. Negligible credit risk of default vs theoretically risk-free for an FDIC insured CD.

While there are other flavors of annuities that the return is based on the stock market, MYGAs are fixed interest and not based on the stock market.

CD early withdrawal penalties are typically a year or less of interest... so say 2-3% at most these days whereas MYGA surrender penalties are often severe... commonly starting at 10% and grading down over the term of the MYGA. However, most MYGAs allow the holder to withdraw up to 10% penalty free... ususally for a short window of time once a year.

The reason it is an annuity is because the contract contains an annuitization option at the end, but it is usually so unappealing that nobody annuitizes, but because the contract includes that option it is an annuity and therefore qualifies for tax-deferred treatment if it is non-qualified (aka taxable account money).

 

[ShokWaveRider]

IMHO Interest rates are too low for MYGA investment at the moment. Would be good in a higher rate environment. Same for SPIAs although, I do not know if the initial rate changes on those if the FED rate does.

 

[pb4uski]

But if interest rates are too low for MYGAs, wouldn't that then in turn apply to bonds and CDs?

I hate to say it and haven't pulled the trigger yet, but from what I've seen for 1-7 year money MYGAs currently are the one of the best horses at the glue factory.

 

[Big_Hitter]

What companies issued these annuities?

aren't those just certain annuities - no mortality risk?

 

[Big_Hitter]

You are our actuary here on the forum and I am looking forward to your analysis.

 

[ShokWaveRider]

Does anyone have a list of D2C (Direct To Consumer) Annuity Insurance Companies?

Most annuity advertisers on the web are Agents. This indicates that they must get quite a kickback from the Insurance companies, that inevitably the consumer pays for. It may be beneficial to deal directly with the Insurance companies. If I were looking for an Annuity, (I am not ..... yet), and If you are like me and only want to deal with A+ or Better companies, I would prefer to see a list of companies, do some due diligence, then contact them directly for quotes.

 

[Big_Hitter]

- $218K lump sum payment to buy 10-year term annuity. $2820 per month, 120 monthly payments to start at age 60. If I die before it starts paying, the premium is returned to beneficiary. If I die after payment starts, the remainder of the monthly payments will be made to beneficiaries to the full term/duration. Total amount of payout at end of 10 years is $338,400.

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I get something around 3.75% - this annuity pays 120 payments certain and it was deferred 6.5 years - there are no life contingencies involved

 

[Big_Hitter]

- 211K lump sum payment to buy 15-year term annuity. $3786 per month, 180 monthly payments to start at age 70. Similarly, if I die before it starts paying, the premium is returned to the beneficiary. If I die after payment starts, the remainder of the monthly payments will be made to beneficiaries to the full term/duration. Total amount of payout at end of 15 years is $681,480.


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I get 5% for this one