Why are annuities so controversial?

[NW-Bound]

This is a site full of people passionate about early retirement and full of people who passionately want to believe that whatever they are doing is right.

In that latter factor, they are not much different than any other forum, I think.

And the "annuity" passion is dwarfed by the "when to claim Social Security benefits" passion and the "pay off the mortgage or invest your money" passion.

It wouldn't be much fun here if people didn't care much either way about everything...

Yes, we are a bunch of passionate people.

And count me among those who will [-]never[/-] not get an annuity. I like to keep control of my money and I accept the risk that comes with managing it myself.

 

[medved]

Yeah, plus your income is only a promise guaranteed by the financial stability of the insurance company behind the annuity. Hope for the best.

One approach to mitigate this concern (aside from buying from very highly rated companies) is to stay within the applicable state guaranty limit. Depending on how much annuity you want to buy, that may require buying a number of different annuities from different insurance companies. But that might be a good idea anyway.

 

[ShokWaveRider]

The first give away regarding annuities is they are managed by INSURANCE Companies, who's entire mantra is to take as much from you as they can giving the least back in return. They get other people to sell them, and pay them with YOUR money to do it. This does not apply just to annuities either. Health, Car, you pick it.

 

[pb4uski]

Yeah, plus your income is only a promise guaranteed by the financial stability of the insurance company behind the annuity. Hope for the best.

In pre IRA/401-k, Roth days, annuities were a big deal due to the tax deferral. No longer as appealing since there are more choices.

Agree on the second part but not on the first. Between regulatory oversight, required capital and rating agency requirements, highly rated insurers are extremely safe... IMO equal to a AAA bond. During the financial crisis some insurers were strained but none broke... very unlike banks, many of which failed big time.

And before you mention AIG.... its problems were at its Financial Products division that was not part of its insurance operations... its insurance operations were its salvation as it was later able to sell some of them and used the proceeds from those sales to pay back the U.S. government in full plus $23 billion of positive return.

 

[Independent]

And yet people are still passionate about their choice regarding when they should claim SS benefits!

That makes sense. We can argue at length about trading lower returns for the security of a reliable, lifetime income. That's a priorities trade off.

But, if I know that I value the lifetime income enough to be serious about a private, immediate annuity, then I think the comparison between SS and the private annuity is just math.

 

[pb4uski]

+1 and an important thing to factor in in making any comparisons is that SS annuity benefits are COLAed and most commercially available annuities are not and that makes a huge difference.

 

[Ready]

What happened to the OP? I hope he's not too distracted by the annuity salesman to read all of these responses, which I agree completely with.

 

[LXEX55]

Fixed immediate

First, there is a lot of confusion about "annuity".

Some people see "annuity" and jump to deferred, indexed, (or variable), and complain about all the associated fees.

A fixed, single premium, immediate annuity is much simpler and easier to shop.
That means more effective competition.

Deferring SS is financially similar to buying an immediate annuity. But, with today's interest rates, the SS factors are consistently more attractive.

Yes, in my original post, I mentioned an immediate fixed annuity. I think that type is the easiest to compare. The others are a hopless tangle of fine print, weasil wording, and sales talk.

 

[pb4uski]

And within immediate fixed annuities there are period certain and life contingent, with period certain being the simplist because it is just a return of premium with interest.... life contingent brings mortality/survivorship into the calculations.

 

[GTFan]

Because the average bogelhead can do better managing a stock/bond portfolio. Annuities are good for people who can’t manage lump sums. There is a place for it but typically I think stocks will pay out better long term if you have enough money.

Exactly.

 

[ShokWaveRider]

Just for grins I calculated that $500,000 @ 3% return, will give you $2000pm for 22 years with a 2% annual increase. ($2040pm in second year etc...) With 0% Annual Increases it will last 30 years. If Managed yourself. It will last 26 years at $1700pm in the first year (2% per year inc.). Seems like most annuities are based on a 20 year payout period. That pm payout amount number goes down for Joint Life etc.

 

[medved]

I think the psychological benefit of an “assured” lifetime income stream has value, especially for those of us without a pension, as does the longevity insurance aspect. But as with every investment product, to each her or his own.

 

[Chuckanut]

You buy a SPIA often because you want to off load some risk. Yes the insurance company will likely invest conservatively and the return to the purchaser is lower than what the normal investor might make. If your planning to live to 80 and end up living to 110, the annuity might be a good thing.

Annuities have their place for some people, especially if having an annuity keeps a person from panicking and selling low, Low, and LOWER when the market corrects (as recently demonstrated). How many times have we heard people complain that the '08 market 'wiped out my retirement account', and later found that they sold at or near the very bottom and missed this remarkable recovery?

There is a psychological aspect to investing that needs to be taken into account. And if having an annuity makes it easier for a person to handle the ups and down of the market and not do something stupid, then it can be a very wise investment for that person. My 2¢.

OTOH, If one plans to live to 80 and actually lives to 110, keep in mind that at a little over a 2% inflation rate, those last dollars have lost 50% of their value in those extra 30 years. Presumably, a well diversified portfolio will not.

 

[OldShooter]

... If your planning to live to 80 and end up living to 110, the annuity might be a good thing. ...

Well, maybe. One thing I don't see much in discussions of annuities is the effect of inflation on this supposedly "fixed" income.

To use @bingybear's example and the 4.1% inflation rate average over the past 50 years, suppose someone bought an annuity at age 65 that paid $3000/month. At age 80, that "fixed" annuity would have the buying power of $1601 "age-65-dollars." At age 110, it would have the buying power of $562. So, not so "fixed."

Even using the historically atypical inflation average of 2.8% (IIRC) in the last 30 years the numbers are still unpleasant: $1959 at age 80 and $963 at age 110.

 

[Independent]

Yes, in my original post, I mentioned an immediate fixed annuity. I think that type is the easiest to compare. The others are a hopless tangle of fine print, weasil wording, and sales talk.

I understand that. That's why I bolded that section of your post. I think a couple responses missed that fact.

The last section of my post is still relevant. If I'm thinking that a private SPIA may be a good trade off, then I certainly want to look at deferring SS.

 

[Ready]

Have read all I could about annuities, especially immediate fixed, and have never in my life read so many opposing view points on one investment vehicle. I have of course taken into consideration the high fees the broker gets. Why ares people so passionate, for or against, about them?

In your original post you referred to "high fees". Immediate annuities purchased from a reputable firm like Vanguard do have fees, but they are not what I would consider high. The high fees traditionally are associated with salesmen peddling fixed index annuities.

I think your reference to high fees is what attracted the initial responses. In any case, it sounds like you understand how an immediate annuity works and you are in the best position to determine if they might be a good fit in your investment portfolio.

The only negative reaction I see to immediate annuities bought from a reputable company are due to interest rates being so low right now. But this is no different than the argument of whether to buy into bond funds given the low rates and interest rate sensitivity of them. It doesn't mean they are bad investments, but just that they require an understanding of the pros and cons before jumping in.

 

[Gunny]

An annuity is part of my long term plan. I currently receive a pension that covers the vast majority of living expenses. I also have a hefty sum in my TSP which I recently moved into the L Income fund to preserve the current amount while still earning some gains. I may add more equities later if market valuations revert closer to the mean. If I die my pension dies with me, so my portfolio also serves as my life insurance. If I die before DW I've instructed HER to then buy an immediate annuity with the TSP funds as she has no clue about managing a portfolio and has no desire to learn. That along with SS/death benefit and our ROTHs should provide her a nice little monthly sum for her life time. If I outlast her, I'll be devistated but will have more than I need.

 

[Dawg52]

When my brother died in 2005 my SIL got hooked up with a financial planner with one of the big national firms. Of course he put her in an annuity right off the bat. Must be in a VA of some sort as it included an allocation to stocks within the portfolio. But it seems to be working ok for her as she takes a half a dozen nice trips per year. And her son who monitors her situation says she is in good shape. So even with high fees it works for many. I'm not planning on buying anything anytime soon. Perhaps if I'm lucky enough to reach my 80's then I might buy an SPIA just to put things more on cruise control. Will see......

 

[bingybear]

An annuity is part of my long term plan. I currently receive a pension that covers the vast majority of living expenses. I also have a hefty sum in my TSP which I recently moved into the L Income fund to preserve the current amount while still earning some gains. I may add more equities later if market valuations revert closer to the mean. If I die my pension dies with me, so my portfolio also serves as my life insurance. If I die before DW I've instructed HER to then buy an immediate annuity with the TSP funds as she has no clue about managing a portfolio and has no desire to learn. That along with SS/death benefit and our ROTHs should provide her a nice little monthly sum for her life time. If I outlast her, I'll be devistated but will have more than I need.

I'm not sure I understand how your portfolio serves as life insurance. Insurance is where you pay someone to take/mitigate risk. It sounds like you are assigning a good part of your portfolio to later in life use as you describe. The immediate annuity my be a good idea. This is paying someone to take risk (the annuity). The question is how should it be set up. Should it have inflation protection/increases. The annuity can be a good for someone who won't run budgets and investments.

 

[flintnational]

a low cost SPIA - In theory, an investment to consider. In the current low interest rate environment they do not make sense for most people. Most could do better investing the money and taking an annual withdrawal. (build your own annuity)

Variable, equity index annuities and other annuity products - Usually a bad idea for the reasons others have mentioned. They are sold not bought. High fees. Opaque policy terms. Often the sales person nor the purchaser understand the details. Actual returns do not match projected returns. Confusion around guaranteed annual withdrawal and annual return. And since you can't mention it enough, again high fees.

 

[Gunny]

I'm not sure I understand how your portfolio serves as life insurance. Insurance is where you pay someone to take/mitigate risk. It sounds like you are assigning a good part of your portfolio to later in life use as you describe. The immediate annuity my be a good idea. This is paying someone to take risk (the annuity). The question is how should it be set up. Should it have inflation protection/increases. The annuity can be a good for someone who won't run budgets and investments.

What I mean by life insurance is that my TSP will be used only by my wife in case of my death. I'm self insured, in other words.

 

[OldShooter]

An annuity is part of my long term plan. I currently receive a pension that covers the vast majority of living expenses. I also have a hefty sum in my TSP which I recently moved into the L Income fund to preserve the current amount while still earning some gains. I may add more equities later if market valuations revert closer to the mean. If I die my pension dies with me, so my portfolio also serves as my life insurance. If I die before DW I've instructed HER to then buy an immediate annuity with the TSP funds as she has no clue about managing a portfolio and has no desire to learn. That along with SS/death benefit and our ROTHs should provide her a nice little monthly sum for her life time. If I outlast her, I'll be devistated but will have more than I need.

In Olden Times virtually all annuities were ripoffs. More recently I have read that ethical firms like Vanguard and TIAA have entered the market. (As already mentioned.) Given your strategy, I would suggest teeing up the specific annuity that your wife will buy via a fiduciary FA or just via instructing her specifically what to buy and from whom. You are much better equipped to keep her from getting ripped off than she is.

 

[Gunny]

In Olden Times virtually all annuities were ripoffs. More recently I have read that ethical firms like Vanguard and TIAA have entered the market. (As already mentioned.) Given your strategy, I would suggest teeing up the specific annuity that your wife will buy via a fiduciary FA or just via instructing her specifically what to buy and from whom. You are much better equipped to keep her from getting ripped off than she is.

I've already done the home work and written out exactly what to do. Hopefully we will pass away together holding hands in the nursing home at the age of 95 and all my planning will be for naught.

 

[jazz4cash]

GUNNY
That TSP "L Income" fund is way underutilized IMO. People rave about the G fund a lot, but I think L-income is special too.
My impression is that the MetLife SPIA that is available for purchase directly via TSP is pretty good. It may be an option for DW's TSP at some point. Is that one you considered or did you find something better?

 

[Gunny]

Agree with your assessment of the L Income fund. It's so over weighted with the G Fund that it should hardly ever lose money. It was down only 5% in '08. And the inclusion of some of the equity funds adds some reasonable growth. The fund has averaged a little over 4% over the years? I've looked around and one might eek out a few more dollars a month going elsewhere, but the simplicity of using the METLife SPIA inside the TSP makes it a more attractive option. Plus there are some Fed and State assurances should METLife ever go belly up. Makes it easy on DW if the need should arise.