donheff said:
I don't see that you have supported your argument that fixed income investments beat annuities. As mathjack shows (below) you can take out a perpetual income stream of about 2% if today's rates continue as is leaving the principle (un-inflated) intact for heirs. No inflation protection on the income stream and not much help if you need a 4% stream. Over at Vanguard a mid/late 50s couple can pick up a joint annuity that pays out about 4%, inflation protected (to 10%) and give up the pass-on to the heirs.
I don't know what you pro-annuity people are smoking but it must be real good stuff......
If you look at the actual interest rate used to calculate fixed annuities you will find it is 3% or less. The insurance company then throws in a longevity hedge since they are pretty sure people with terminal cancer don't buy lifetime annuities which lowers this. If you buy an inflation indexed annuity, that is hedged too in the form of a lower starting interest rate. The annuity is then calculated to payout over a recipient's actuarial lifetime. Since you rocket scientists all assume you will live forever, it looks like a great deal. You get all excited about a 7% payout and don't bother to consider that you are getting a bunch of your principal back and, on average, you'll be dead in your 80's.
If you start with CD's, you can get over 5%. These are also insured by FDIC so it's really likely you'll get your principal back should the financial institution collapse which is a whole lot better than if its the insurance company that sold you your annuity. They have been known to go under. That's a technical financial term that means they stop paying.
You can get CD's out 10 years and probably longer. There are US bonds that go out as long as 30 years if you are really focused on doing it once and forgetting about it. Personally, we are in the midst of historically low interest rates so I don't think that now is the time to go real long.
You can actually take principal out of your laddered CD's!!! What a concept!!!!! You can get the same wonderful 7% withdrawl rate the annuity offerred!!!!!!
If you run the numbers, which I have, you will find that you will need to live about 15 years past your normal, predicted life expectancy to break even! That is if your insurance company doesn't go broke paying their management their big bonus they all deserve.
Annuities have high fees and commissions to support the sales staff. Annuities invest in the same financial instruments available to us mere mortals. You aren't going to "game the system" and get free money.
I am still cleaning up the annuity mess my FIL got into. He put most of his available cash into annuities (fixed and variable) about the same time I saw his Alzheimer's symptoms appear. When he talks about his "investments," he is adament about the great returns he's getting. They were 2.7% last year.
If you people have bought annuities and are trying to defend your mistake, get over it. If you haven't bought them yet, don't. The longer you wait the more the payout will be for your "investment." Do like my FIL did and wait until Alzheimer's sets in. Then you'll have an excuse.