Are all Annuities BAD?

[Super90]

I think part of the problem I have with this thread is the title - "Are all annuities bad". It's not about annuities. It's about helping people understand the risk/reward ratio and where they will be most comfortable with both the risk and the reward.

+1

 

[OldShooter]

Old Shooter, on the other side of the coin, the advisor is not necessarily being greedy if he/she has found a product that fits the clients needs and is appropriate for their needs. Just because he makes a commission doesn't mean he is "hawking inappropriate products." Since we don't know what he/she (advisor) holds we can't presume they have not tried it.

Fair enough. I hesitated before I typed that but I think the historical evidence is consistent with jumping to that conclusion. If the FA has truly tried to educate his clients and to steer them away from annuities to the extent possible I will retract the comment, apologize, and award him a white hat! It will be interesting to hear the outcome of this.

 

[pb4uski]

Old Shooter, on the other side of the coin, the advisor is not necessarily being greedy if he/she has found a product that fits the clients needs and is appropriate for their needs. Just because he makes a commission doesn't mean he is "hawking inappropriate products." Since we don't know what he/she (advisor) holds we can't presume they have not tried it.

Yes, given that the OP has gone AWOL, it's hard to say without knowing more specifics of what the FA has proposed (and perhaps other specificsf the OP's friend's situation) whether what the FA has proposed is sensible or not.

Also agree that FAs have to eat to so I don't begrudge them a commission, but I think it should be disclosed. They's say "it's paid for my the issuer" but at the same time the issuer prices it into the product in one way or another.

It could well be that the FA is a good guy and has made a prudent recommendation.

However, given that the multitude of horror stories on annuity misselling that we see here on a regular basis, skepticism is prudent.

Super90, do you sell annuities or work in the industry?

 

[ERD50]

Originally Posted by ERD50 View Post
If they still want to go with their FA and annuity, that's up to them. But you armed them with information rather than advice, and it's information they can independently verify, so you are not the target anymore.
-ERD50

Except that when people are upset they often shoot the messenger anyway.

I've noticed that!

So yes, if the OP doesn't want to even take a chance that he may be in that position, he should just bow out.

-ERD50

 

[RetireeRobert]

Keep in mind that one can easily set up a SPIA-like "annuity" by just plunking a bunch of money in Wellesley or some similar conservative balanced fund and setting up a SWR monthly automatic redemption that goes to your bank account just like a monthly annuity benefit would and don't ever look at it.

We did this for my BIL's elderly mother when she was 90 or so. She rarely looked at her account statement, but the automatic redemption showed up in her checking account every month like clockwork. When she was 97 and needed to go into a nursing home and they were going over her financial resources with the nursing home, her daughter erroneously referred to it as her Vanguard "annuity".

While it isn't guaranteed like an annuity is (subject to insurer and guaranty fund solvency) as long as the benefit amount is a safe withdrawal amount it is unlikely to ever fail. The benefit is that if the money is needed for some reason it can be accessed... can't do that with a SPIA. If Wellesley does well you can periodically "reset" the monthly redemption and increase it for inflation... you can't do that with a SPIA.

You make some good points on going the DIY route and investing in such as Wellesley.

You also make the caveat that delineates the important difference many if not most annuitiy buyers would be keen on between DIY and an annuity: "While it isn't guaranteed like an annuity is....".

And as they always say, historical returns are no guarantee of future performance. Who is to say Wellesley will do after you commit a chunk to it what it has demonstrated over the past x, y, or z period of years.

 

[ncbill]

In our overall plan is the possibility of adding a SPIA between age 80-85 or so depending on our overall health at the time and the state of our portfolio That would be the only type of annuity we would ever consider. And who knows, by then perhaps inflation indexed annuities will be available again.

https://www.bogleheads.org/wiki/Immediate_fixed_annuity

Ditto...the retirement calculates I've used (including paid) recommend annualizing whatever's left in tax-deferred, but not before age 80.

 

[RetireeRobert]

Yes, to an accountant, a dip in the market is a "loss." But as an investor I think of it simply as a time where I temporarily do not have access to some of my money. Every single dip, correction, panic (your choice of noun) in the equities market has been followed by a recovery and subsequent growth.

It is probably not possible for the OP to switch the dialog towards discussing SORR, which is the real gremlin. An AA that is designed to cage this gremlin is really what the OP's friends need to understand and implement. .

You say a loss is only "a time I temporarily do not have access to some of my money", and seem to wave that off. "IF" only people were not so impatient and would wait for the (you imply) "inevitable" recovery.

That is I think the nub of why some people are attracted to annuities, for the "guarantee" aspect. And for the fear of "what if I don't have the time to wait for some recovery?

As you say, the real gremlin is SORR. And I believe many people who go the annuity route do so, either consciously or unknowingly, to deal with SORR.

 

[OldShooter]

... As you say, the real gremlim is SORR. And I believe many people who go the annuity route do so, either consciously or unkowingly, to deal with SORR.

I don't disagree with your points. The "problem" if there is one, is that the annuity buyers have no idea how much they are paying for what is really not all that secure a payment. From day 1 that "fixed" payment is declining in purchasing power. 20 years, 3.5% inflation and it is halved. Even at 2% it is cut by 1/3. This deterioration is in addition to the damage done by high fees and commissions, which lowers the initial value of the "fixed" payments.

Something also not generally discussed is the loss of flexibility. If the annuitant develops health problems necessitating home care, the money paid for the annuity is not available to help and, if the illness is fatal, the insurance company wins the actuarial game.

Nothing is certain, of course, but the home-made annuity approach suggested by @pb4 (and similar ones) is more likely to give the investor IMO a better result than most annuities. How many people will crunch all of these options and probabilities on the way to a decision? Not many.

 

[RetMD21]

Yes, given that the OP has gone AWOL, it's hard to say without knowing more specifics of what the FA has proposed (and perhaps other specificsf the OP's friend's situation) whether what the FA has proposed is sensible or not.

OTOH recommending that they get out of the market entirely seems like a red flag. Indexed annuities tend to pay 6-8% commissions. (link below) I think a FA can provide a valuable service for some folks but I am suspicious in this situation. I am currently unwinding deceased FILs collection of indexed annuities. The returns I am seeing look quite unimpressive.

https://www.annuity.org/annuities/f...text=The commission on a 10,of 2 to 4 percent.

 

[pb4uski]

I don't disagree with your points. The "problem" if there is one, is that the annuity buyers have no idea how much they are paying for what is really not all that secure a payment. From day 1 that "fixed" payment is declining in purchasing power. 20 years, 3.5% inflation and it is halved. Even at 2% it is cut by 1/3. This deterioration is in addition to the damage done by high fees and commissions, which lowers the initial value of the "fixed" payments. ...

You can mitigate that somewhat for at least for estimated inflation by buying a cascade of deferred payment annuities that provide additional monthly benefits to provide an increasing benefit. So if your 1 year payment is $1,000/month and you assume 3.5% annual inflation, then at the same time buy a deferred annuity that starts in 3 years that provides a $188 monthly benefit, and a deferred annuity that starts in 7 years that provides a $223 monthly benefit, etc. so your annuity benefit payments wlll be increasing over time.

 

[MRG]

Sadly there's many financially ignorant people in this world. They're ripe for an unscrupulous annuity "salesperson*" to sell them an inappropriate product.

* why do I need a salesperson if it's a decent product? I bought, along with others here, a MYGA or fixed term annuity. Few here seem to think that's a bad idea. Same for well informed people who choose to purchase a SPIA with part of their assets. I don't remember folks commenting negatively about folks who want to do that.

My issue, others too, is with the "salesperson" who spreads nonsense, "the market is ready to crash". They know this how, why? As others point out if people had such advanced knowledge they wouldn't be working selling annuities, especially the variable kind.

ETA: Seems like most annuity salespeople add the same value to the consumer as a car salesperson.

 

[GravitySucks]

I'll admit to being happy with my annuity.
Purchased a single payment annuity at 55 deffered payment to 62. It was insurance. If I made bad mistakes I could have started SS at 62 and with the annuity income I'd have enough to live on.
Of course the markets been great and it would have made more invested in stocks over that time, but so would have keeping a 90/10 or 100/0 AA.
Also bought a MYGA last year as it was paying better than BBB- corporates.

 

[Chuckanut]

I don't disagree with your points. The "problem" if there is one, is that the annuity buyers have no idea how much they are paying for what is really not all that secure a payment. From day 1 that "fixed" payment is declining in purchasing power. 20 years, 3.5% inflation and it is halved. Even at 2% it is cut by 1/3. This deterioration is in addition to the damage done by high fees and commissions, which lowers the initial value of the "fixed" payments.

+1

There lies the risk that annuity buyers don't' realize they are taking.

Unlike a stock market loss which is easily identifiable and often the source of many dramatic news stories, the constant reduction in purchasing power is not mentioned at all. We've all heard of the Tech Bubble and the Housing Crash and, of course, 1929. How may people remember the inflation of the 1970's after the oil embargo? If you had a fixed annuity at that time you got clobbered. There is still a place for an annuity as part of a plan even it it's just peace of mind. But, even that comes with some risk.

Then there is these advertisements from 1950, 1954 and 1961 that tell a story most of us have ignored or forgot:

 

[RetireeRobert]

You can mitigate that somewhat for at least for estimated inflation by buying a cascade of deferred payment annuities that provide additional monthly benefits to provide an increasing benefit. So if your 1 year payment is $1,000/month and you assume 3.5% annual inflation, then at the same time buy a deferred annuity that starts in 3 years that provides a $188 monthly benefit, and a deferred annuity that starts in 7 years that provides a $223 monthly benefit, etc. so your annuity benefit payments wlll be increasing over time.

You are just full of ingenious solutions, and alternative solutions, using available tools. You must have been some kind of numbers man in your prior, pre-early-retirement, life.

Not sure how well this solution of buying a whole array of annuities will go over with those inclined against them because of the costs embedded in most sold annuities, and because of the somewhat complexity and inflexibility of the product to begin with.

The question occurs to me, I wonder what/how many no load or low load annuity products may exist out there, and who are the providers of such?

I can see annuities as a viable solution for some people, for some "portion" of their assets who are wanting some guarantees on some "portion" of their income. To the extent annuities might be obtained with no or low loads and with lower costs, the more viable they become for being part of some peoples' solutions.

 

[RetireeRobert]

I'll admit to being happy with my annuity.
Purchased a single payment annuity at 55 deffered payment to 62. It was insurance. If I made bad mistakes I could have started SS at 62 and with the annuity income I'd have enough to live on.
Of course the markets been great and it would have made more invested in stocks over that time, but so would have keeping a 90/10 or 100/0 AA.
Also bought a MYGA last year as it was paying better than BBB- corporates.

Yes, your statement "It was insurance" on (I assume) just a portion of your assets is likely why the average annuity purchaser buys an annuity.

A valid financial product solving some peoples' problem. Nothing wrong with that, not at all.

 

[OldShooter]

... You must have been some kind of numbers man in your prior, pre-early-retirement, life. ...

 

[RetireeRobert]

As to no load or low load annuities, I did find an independent resource that evaluates all annuities, both those "sold" (with sales commissions) as well as no load and low load variety.

The site allows user to compare various products. It does also mention no loads annuities quite often come with other lower expenses such as administrative fees or mortality fees etc.
https://www.annuityfyi.com/no-load-annuities/what-is-no-load/

 

[retired1]

Since I don't have pension from work, I am putting some funds into Annuities to turn into an income stream after 60. More of a peace of mind than anything else.

 

[Super90]

Yes, given that the OP has gone AWOL, it's hard to say without knowing more specifics of what the FA has proposed (and perhaps other specificsf the OP's friend's situation) whether what the FA has proposed is sensible or not.

Also agree that FAs have to eat to so I don't begrudge them a commission, but I think it should be disclosed. They's say "it's paid for my the issuer" but at the same time the issuer prices it into the product in one way or another.

It could well be that the FA is a good guy and has made a prudent recommendation.

However, given that the multitude of horror stories on annuity misselling that we see here on a regular basis, skepticism is prudent.

Super90, do you sell annuities or work in the industry?

I do not sell annuities and I am not in the industry. After listening and learning about how an index annuity could benefit my specific need I purchased one. I purchased one in 2007 knowing I wanted to have a specific amount in about 10 years that would provide my DW with a house payment or rental payment that would last our lifetimes should we/she need it in the future. I wanted these funds to be separate from our regular portfolio. Yes, we could have separated some funds from our regular portfolio and utlilized low equity exposure type of fund but I wanted a sure thing. Low and behold when the 2008 downturn occurred our annuity did not lose value. Even though it increased in value since then, not quite as much as the market, it still increased to a point similar to a balanced fund without the volatility. I hope this explains my like of these products.

 

[RetireeRobert]

.... knowing I wanted to have a specific amount in about 10 years that would provide my DW with a house payment or rental payment that would last our lifetimes should we/she need it.............. but I wanted a sure thing.

In other words, another satisfied annuity buyer whose main need/desire was "guarantee" on a portion of his assets.

I believe that basic need/desire---income guarantee---is the main advantage of annuities, and what drives most annuity buyers. They have a problem they want solved, this product solves it for them.

Nothing wrong with that.

 

[Bongleur]

Would you please provide us with a summary of these links so members know what to expect or look for without having to click on them?

https://www.kitces.com/blog/the-asy...cial-security-benefits-as-the-ultimate-hedge/

>
The Asymmetric Value of Delaying Social Security Benefits As The Ultimate Hedge

Executive Summary

Despite a growing body of research suggesting that most retirees would benefit by delaying the onset of Social Security payments, the majority who are eligible still elect to begin receiving them as early as possible. In no small part, this appears to be attributable to a "take the money and run" mentality from retirees, who simply don't see the value of delaying as being worth the risk of foregoing benefits. And without a doubt, there is a material risk that the retiree will not live to the so-called "breakeven point" where the delay in benefits is worthwhile.

However, what most retirees fail to recognize is that while there is a risk to delaying benefits and never fully recovering them, the upside for living past the breakeven point isn't just that the money is made back; it's that the retiree can make exponentially more. And in fact, these asymmetric results - where the retiree only risks a little by delaying, but stands to gain far more in the long run - are further magnified in situations where the client lives dramatically past life expectancy, experiences high inflation, and/or gets unfavorable portfolio returns - which are, in fact, three of the greatest risks to almost every retiree.

As a result, the reality is that delaying Social Security benefits may actually be one of the best triple-hedges available to any retiree - simultaneously protecting against poor returns, high inflation, and longevity!

>

 

[Bongleur]

You can mitigate that somewhat for at least for estimated inflation by buying a cascade of deferred payment annuities that provide additional monthly benefits to provide an increasing benefit.

So if your 1 year payment is $1,000/month and you assume 3.5% annual inflation, then at the same time buy a deferred annuity that starts in 3 years that provides a $188 monthly benefit,

and a deferred annuity that starts in 7 years that provides a $223 monthly benefit,

etc. so your annuity benefit payments wlll be increasing over time.

What's the math behind that?
I don't understand your pattern of 3 then 7 then
Generally, you suffer inflation for a few years & then "catch up" with a fresh annuity coming online?

In practical terms, how many years can you defer - do they offer unlimited choice in delaying the start?

I suppose you could also keep buying an immediate annuity every X years using a ladder of TIPS maturing to give a real return that pays for them. But that does not satisfy the usual desire to buy an annuity so you are done with such financial rigamorole.

I've seen a couple abbreviations that I don't quite recall - What's a "MYGA?" etc?

 

[RetireeRobert]

What's a "MYGA?"

Multi-Year Guaranteed Annuity----MYGA

 

[Bongleur]

+1

Then there is these advertisements from 1950, 1954 and 1961 that tell a story most of us have ignored or forgot:

What is the story? The image quality is illegible. Inflation requiring more money to retire? Or good markets yielding better returns?

 

[MRG]

What is the story? The image quality is illegible. Inflation requiring more money to retire? Or good markets yielding better returns?

Look at the percentage increases!