Why are annuities so controversial?

[gcgang]

I don't think annuities are controversial.

The bedazzling array of deferred annuities, laden with promises and hidden fees, are bad.

Immediate annuities are an excellent way of reducing (not eliminating) risk, converting assets with unknown future returns into dollar certain income streams.

IMHO, as so many people have no pension income other than Social Security, immediate annuities don't get used as much as they should. This is probably both because current rates appear low and market returns in the recent past have been high.

 

[Out of Steam]

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.

But, at 80% fixed income, the L-fund seems too conservative for a 2020 retiree with some 30 years of life ahead of them.

 

[jazz4cash]

But, at 80% fixed income, the L-fund seems too conservative for a 2020 retiree with some 30 years of life ahead of them.

I agree. I didn't see that GUNNY is a 2020 retiree. I think all the L funds are a tad conservative so I add some equities (C S I) in the mix.

 

[Bogie]

Since I just turned 62, I got curious as to what I would have to invest in a SPIA to match my social security payment that I can get now that I'm eligible for social security benefits. I also checked to see what that SPIA would yield if I delayed payments until I'm 66 and compared that to what I will qualify for in social security benefits at 66. I was surprised to see that delaying the SPIA would pay essentially the same as delaying social security. I quess I expected that delaying social security until 66 would be on a steeper curve up. I also tried delaying both to 70 and the SPIA outperformed social security. Other than a small COLA that you "might" get with social security, am I missing something here?

 

[OldShooter]

... Other than a small COLA that you "might" get with social security, am I missing something here?

Well, IIRC inflation over the last 30 years has been about 2.6%, so if that is predictive the "small COLA" of social security will in twenty years take the social security payment to 167% of where it started. Over the past 50 years IIRC the average is 4.5%. (going back only 30 years just misses the 70s/80s excitement). Again, if that is predictive, in 20 years the social security payment will grow to 240%.

I guess the answer to your question depends on what you consider to be "small."

Making the point another way, I think the concept of a "fixed" annuity is at best misleading. It certainly sounds good, though.

 

[pb4uski]

Since I just turned 62, I got curious as to what I would have to invest in a SPIA to match my social security payment that I can get now that I'm eligible for social security benefits. I also checked to see what that SPIA would yield if I delayed payments until I'm 66 and compared that to what I will qualify for in social security benefits at 66. I was surprised to see that delaying the SPIA would pay essentially the same as delaying social security. I quess I expected that delaying social security until 66 would be on a steeper curve up. I also tried delaying both to 70 and the SPIA outperformed social security. Other than a small COLA that you "might" get with social security, am I missing something here?

Just guessing that there might be an element of apples and oranges in that the SPIA pricing that you are using have a fixed benefit and SS benefits are COLAed.

If you were comparing COLAed SPIAs and SS then that would be apples-to-apples but it is hard to find COLAed SPIAs.

The last time that I looked, the first-year COLAed SPIA benefit was about 60% of a fixed SPIA benefit for the same premium.

 

[jazz4cash]

I suspect the SS spousal benefit might be better but that would be very situation specific.

 

[joeea]

Other than a small COLA that you "might" get with social security, am I missing something here?

The loss of liquidity you would incur by giving up your finds for an annuity, perhaps?

 

[friar1610]

I bought a Fidelity variable annuity years ago. It was a mistake and if I could walk that dog back I would. But, I have made it part of my plan for my wife in the likely event I predecease her. (I am almost 73; is 71). So, I look at it that, to some degree, I've made lemonade out of lemons.

- Fidelity was low-cost (for an annuity), no commission, no surrender fee, a pretty good range of funds to invest in.
- But when I became a Vanguard guy, I did a 1035 exchange of the annuity to VG and got slightly lower fund costs with other characteristics similar to Fido's. (I'm currently invested in 3 VG funds with the annuity. Fees are 40 - 45 basis points, depending on the particular fund. This includes both fund ERs and annuity charges. More than a straight VG index fund, I realize, but still very low by VA standards.)
- Funds have appreciated nicely over the years. The fees are admittedly a drag compared to the corresponding VG non-annuity counterparts but not horrendous.
- We don't need the income from the annuity now so no reason to annuitize at this point.
- But if I go first the survivor benefit on my military pension will be about 1/3 of what I'm getting now. Plus, her SS will go away and be replaced by the value of mine. So the total hit to regular, predictable income streams is significant. That's where the annuity comes in.
- The annuity becomes hers as she is my beneficiary, she annuitizes it and a good chunk (but not all) of the lost income is replaced. This may mean she won't have to tap the taxable portfolio for living expenses. If she does, so be it but since those assets will step up, they're the ones to leave to our kids.
- If she predeceases me, I'll use any gains for charitable contributions (that are provided for in our wills anyway) down to the point where only the original basis remains. I'll withdraw that tax-free and either invest it in taxable or spend it on wine, women and song.

As I indicated at the outset, if I were considering a variable annuity all over again with what I know now, I wouldnt buy one. But I think that I've come up with a good - but not perfect - plan which keeps me from being completely screwed on the deal. Not having bought the VA way back then (and leaving the money in taxable investments) would have been preferable and still would have provided the option of her buying a SPIA when/if needed. But I think it'll still turn out OK.

 

[pb4uski]

The loss of liquidity you would incur by giving up your finds for an annuity, perhaps?

That's the big one for me, but you can sidestep that by buying one with guaranteed return of premium in exchange for a slightly lower monthly benefit (about a 6% lower benefit over life only for a 60 yo male).

 

[ncbill]

No COLA is available at a price you want to pay.

So given our record low inflation returns on SPIAs are also at record lows.

 

[OldShooter]

No COLA is available at a price you want to pay. ...

and the flip side of that coin is that the risk of a fixed annuity losing significant buying power to inflation is high. If it were not, it would not be expensive to insure against the risk.

 

[Big_Hitter]

Why ares people so passionate, for or against, about them?

my theory is that most folks are very uncomfortable thinking about when they are going to die so it is much easier for them to kick the can down the road and do nothing

many give excuses about cola protection or high fees but it is difficult to beat a product that provides risk pooling and longevity protection

 

[nun]

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.

TIAA has always been about annuities.....it's right there in the name....but their products were really only sold to members of their retirement plans. Their classic retirement product is TIAA-Traditional which is a deferred annuity that for many people pays a minimum of 3% annual interest with bonuses depending on current interest rates....last time I looked I was getting 4.38% interest on my TIAA-traditional account. It can be turned into a lifetime annuity at retirement.

I think the problem people have is that comparing annuities to an investment portfolio is really comparing apples and oranges. An annuity is closer to an insurance product than an investment....or at least it should be. So any annuity that is sold as an investment or is contorted into one should be avoided. An SPIA is a way to insure against longevity and your money running out so it can be a useful compliment to a portfolio of equities and riskier bonds.

 

[FREE866]

I encourage anyone that has an annuity or is thinking about an annuity to ask what exactly are the Annual fees including sub account fees, M&E expenses, any riders. Also ask of there are surrender penalties

 

[Richard4444]

Looking at it another way, for 'safe' return, a 5 year CD returns about 2.5 % and the payout on a SPIA (the principal of which you'll never see) is currently ~ 7.3 % from Vanguard for a 68 year old. That's a lot of years of catching up.

Rich

 

[pb4uski]

You are confusing payout with return. The bulk of the 7.3% payout is simply a return of your own money.

You can get a notion of the return implicit in the SPIA by looking at long payout annuities without life contingencies.

According to immediateannuities.com a 68 yo male in FL would get a 7.1% payout rate on a life annuity. A 15 year period certain would pay out 8.2%, which has an implicit rate of return of 2.84%... somewhat lower than the return on 7-8 years CDs.

So if you think that a SPIA is significantly better than a CD because it has a higher payout rate you are not looking at it correctly.

 

[OldShooter]

I encourage anyone that has an annuity or is thinking about an annuity to ask what exactly are the Annual fees including sub account fees, M&E expenses, any riders. Also ask of there are surrender penalties

Out of curiosity one time I was looking at the prospectus for a family o variable annuities. Over two hundred pages!

I found it very useful to do a PDF search for the word "fee." There were a lot of hits and some very interesting reading. One could probably do the same search for "surrender."

Two hundred pages is about 198 pages over my ability to understand an investment so there is no way I was planning to snap on that one!

 

[capjak]

My understanding only, I am not a FA in the Insurance Biz:

A single premium Immediate Annuity is easy to understand, you pay a premium and you get a payout for the rest of your life or joint and you can have it to return your premium if you pass before your money is used up. They are typically not pushed by sales people due to the low commissions on SPIAs vs all the other high fee annuities.

SPIAs have an advantage over the other annuities in that they are taxed such that the $$ you receive that is return of your premium is excluded over the estimated life of the annuity. Others are Last in First Out so that all the interest is paid and taxed in the early years of the annuity.

SPIAs are insurance that does what it is supposed to do pay an efficient (mortality credits) income stream until you pass, I know of no other products that do that, that are as simple as SPIAs.

Unfortunately that insurance comes at a cost and COLA only has 1 or 2 companies that provide "true COLA" SPIAs, others provide a % increase each year.

Therefore laddering purchases of SPIAs is often recommended in low interest rate environments. This has two advantages, you capture the potential changing (increasing interest rate SPIA) and as you get older the SPIA becomes less expensive due to mortality credits.