Annuities

[CSdot]

What am I missing in my understanding of the annuities mentioned in this CNBC article? Here is the example from the article:

If a 65-year-old male were to use $100,000 to purchase a fixed annuity to start paying out immediately, he would get about $487 per month for the rest of his life, or $5,844 per year, according to Schwab’s annuity calculator.

However, the article says in an earlier paragraph that a man reaching age 65 today can expect to live, on average, until age 84, according to the Social Security Administration.

That is 19 years x $5,844 per year = $111,036.

So over 19 years you will only be paid a $11,036 premium over your initial $100,000 investment. Plus, don't annuities expire when you die, meaning your heirs get $0.

Unless I am missing something, or unless you are that one French lady who lived to be 122 years old, this product seems heavily skewed in favor of the party selling you the product.

https://www.cnbc.com/2021/10/15/annuities-might-be-coming-to-your-401k-plan-heres-what-to-know.html

 

[finnski1]

You're not missing anything

 

[REWahoo]

Unless I am missing something, or unless you are that one French lady who lived to be 122 years old, this product seems heavily skewed in favor of the party selling you the product.

Congratulations, you have illustrated the reason so many folks on this forum aren't interested in purchasing an annuity.

 

[Magus]

Yeah, I think if you expect to live to 95-100 maybe, but yes that is not a very good deal.

 

[CSdot]

Sad thing is CNBC writes an article entitled: "Annuities might be coming to your 401(k) plan. Here’s what you need to know," yet tells you nothing you need to know. It almost looks like an advertisement for the product.

 

[all4j]

Well, as you noted, it is a 'product' & companies that produce products tend to expect to make a profit...so yea, skewed. To be transparent, I'm not planning on buying one. But I do see how some might find it of use.

Trying to objectively look at what annuity provides...basically longevity insurance. How do they do that? Partially by pooling risks. In case someone doesn't understand what "average" means, it means half will die sooner than average (that is, get back even less than your math) & half will die later (get more).

Most folks on this forum are probably above average in their understanding & comfort level with finances. Consider someone who doesn't want to fool with it & likes the steady income. Perhaps no kids or financially healthy kids. Depending on how it is set up, it doesn't have to be for full pot of money in retirement (& of course may not have cola, etc).

Some will want the dependability of the annuity payment regardless of what happens in stock market. If they should become incapacitated or have slight cognitive decline, payments keep coming. Unexpected health care cost early on eat away at assets? checks keep coming

I would suggest this product is more for those needing/wanting a sleep well at night effect than a high rate of return

 

[Bruno]

Just remember there are MANY types of annuities ... To be honest MOST of them are BAD!!
I do have a MYGA that i LOVE paying me 3.92% for 5 years.

 

[CardsFan]

Sad thing is CNBC writes an article entitled: "Annuities might be coming to your 401(k) plan. Here’s what you need to know," yet tells you nothing you need to know. It almost looks like an advertisement for the product.

And that surprises you?

 

[MikeTN]

I have about 30% of my retirement funds in annuities. This, together with Social Security gives me a stable lifetime income that covers my basic expenses. A bond ladder would beat this if I didn't live into my 90s, but I'm in good health, and may live to 100, as did two of my male family members. If I die early my heirs will get plenty from the other 70%. If I live a long time they will still get a fair amount from the other 70% (which is invested aggressively).
I'm not sorry I have annuitized part of my savings. However, I think waiting to age 70 or so makes more sense than doing it at 65, the rates are a lot better.

 

[OldShooter]

... a stable lifetime income that covers my basic expenses. ...

Not picking on you, sir, but the issue with a fixed annuity is that inflation eats the buying power that the salesperson claims is preserved by its "fixed" nature. IIRC the long term US average inflation is 4.11%. Just 20 years at this rate this would reduce the buying power of a fixed dollar annuity by well over half. (To 43 cents on the dollar if my calculator is correct.)

Just observing this doesn't make he inflation problem disappear, of course, but it illustrates why the SS COLA is so wonderful.

 

[pb4uski]

What am I missing in my understanding of the annuities mentioned in this CNBC article? Here is the example from the article:

If a 65-year-old male were to use $100,000 to purchase a fixed annuity to start paying out immediately, he would get about $487 per month for the rest of his life, or $5,844 per year, according to Schwab’s annuity calculator.

However, the article says in an earlier paragraph that a man reaching age 65 today can expect to live, on average, until age 84, according to the Social Security Administration.

That is 19 years x $5,844 per year = $111,036.

So over 19 years you will only be paid a $11,036 premium over your initial $100,000 investment. Plus, don't annuities expire when you die, meaning your heirs get $0.

Unless I am missing something, or unless you are that one French lady who lived to be 122 years old, this product seems heavily skewed in favor of the party selling you the product.

https://www.cnbc.com/2021/10/15/annuities-might-be-coming-to-your-401k-plan-heres-what-to-know.html

If you paid $100,000 and received $487/month for 19 years (84-65) that's an IRR of 1.12%.

A 10 year period certain has an IRR of ~1.48% so that sounds about right.

I don't know if I would say it is skewed to the insurer.... it is just that interest rates are very low and they'll be investing your premium money mostly in bonds so you aren't going to get a lot of return.

 

[Chuckanut]

I suggest that 65 year old male by the COLA'd annuity sold by Uncle Sam. It's called taking SS at 70 years of age. IMHO, it's a much better deal.

He gives up 5 years worth of SS checks (the payment) and gets about 40% more money each month (the benefit). And it's indexed to inflation, not fixed.

 

[Dtail]

Just remember there are MANY types of annuities ... To be honest MOST of them are BAD!!
I do have a MYGA that i LOVE paying me 3.92% for 5 years.

I manage some MYGA's for my parents and it is the only type of annuity I would consider.

 

[GravitySucks]

There is an insurance component so there an insurance premium.

At 55 i put 10% of my nut into a deferred premium that started payout at 62. If I lost or blew 80% of the remaining between those times I'd still be able to survive. And in the head space I was in at the time could have happened. That also let me sleep at night 90% equity year 1, 80% yr. 70% most of year 3. Worked out great for me.

And, what if you live to the 90% age? Yeah inflation will eat 75% of it but still better than nothing.

 

[CSdot]

These two bullet points from the CNBC article say a lot:

*The Secure Act of 2019 aimed to reduce plan sponsors’ concerns over legal liability if an annuity provider were to fail.

*Here’s how BlackRock plans to get a guaranteed income option into 401(k) plans.

Anyone want to guess how many lobbying dollars went into changing the law to allow the sale of this product in 401(k)s?

 

[RetiredHappy]

For all you Mathematicians... these are 2 term deferred income annuities which I bought at the age of 53.5. I think the returns are pretty good but I don't have a calculator to get exact rate of return.

- $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.
- 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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[CSdot]

Of course the big question is how often do these annuity providers fail? At least with mutual funds you are spread across hundreds of individual companies' stocks, so if we have another 2000 (where many of the dot com stocks went to zero) or 2008 (where Lehman and others went to zero), you have plenty of other companies that hopefully weather the financial storm to cushion the loss and allow you to regrow your next egg during the bull that follows the bear.

However, if you pay $218K and $211K to ABC Insurance Company in 2020 hoping that they will support you from 2027 - 2037, and again from 2037 - 2052, then there is a lot riding on ABC Insurance Company making good financial decisions and remaining solvent for the next 32 years. At a minimum I would pick two different Insurance Companies to provide those annuity products to hedge the risks.

 

[RetiredHappy]

Of course the big question is how often do these annuity providers fail? At least with mutual funds you are spread across hundreds of individual companies' stocks, so if we have another 2000 (where many of the dot com stocks went to zero) or 2008 (where Lehman and others went to zero), you have plenty of others to cushion the loss.

However, if you pay $218K and $211K to ABC Insurance Company in 2020 hoping that they will support you from 2027 - 2037, and again from 2037 - 2052, then there is a lot riding on ABC Insurance Company making good financial decisions and remaining solvent for the next 32 years.

Hence you need to look at ratings of the insurance companies. There is also a state covered amount should any of the companies fail, although the limit is like $250K per person. I bought these annuities a while ago and the payout will start next year.

What these annuities have done is allow us to be more aggressive with our investments. The annuities form a very small percentage of our portfolio.

 

[jazz4cash]

I’m actually not opposed to an annuity-like offering within a 401k. This scheme seems COMPLICATED and it’s not clear to me how it benefits the annuitant vs. taking a portion of the 401k balance and choosing from the universe of annuity options. I even like the target date fund as a tool to implement acquiring the annuity. In the example I think it suggests that 30% allocation is the annuity.

 

[pb4uski]

For all you Mathematicians... these are 2 term deferred income annuities which I bought at the age of 53.5. I think the returns are pretty good but I don't have a calculator to get exact rate of return.

- $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.
- 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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What companies issued these annuities?

 

[RetiredHappy]

What companies issued these annuities?

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

 

[RetiredHappy]

Actually, I'm not an actuary... but those annuities do not seem credible.... an certainly not credible for guaranteed benefits.

Exactly my thoughts when I ran the numbers. I could not buy them fast enough...

 

[pb4uski]

Actually, I'm not an actuary. Based on the cash flows that you describe I get IRRs of ~9% and 20%... not credible and certainly not guaranteed. Lincoln did a lot of weird stuff but I'm pretty sure that issuing annuities with guaranteed terms as you describe was not among them.

 

[pb4uski]

Exactly my thoughts when I ran the numbers. I could not buy them fast enough...

I wonder if you are looking at illustration projections that tend to be rosy rather than guaranteed benefits.

It might credible that those numbers would be in a VA illustration.

 

[RetiredHappy]

I wonder if you are looking at illustration projections that tend to be rosy rather than guaranteed benefits.

It might credible that those numbers would be in a VA illustration.

Nope. Guaranteed. These are deferred fixed income annuities. Payouts do not change.

I figure enough people die before payout starts and they profit from the growth of the premium as only the premium is refunded.

All that I can tell you is that everything is documented in my policy binder.