Annuities Guide

[AtlasShrugged]

All,

I’m back with another one of my guides. This one is on annuities.

If you've ever wondered how annuities work or if you are currently considering one, you may be interested in this guide. Similar to my other stuff, I’ve tried to write about them as objectively as possible, which is a bit more challenging with annuities.

The guide is a little long at 17 pages because it describes the 5 major categories of annuities including:

1) Multi-Year Guaranteed Annuities (aka, MYGAs)
2) Single Premium Immediate Annuities (aka, SPIAs)
3) Deferred Income Annuities (aka, longevity insurance)
4) Variable Annuities
5) Equity-indexed Annuities (aka, indexed annuities)

If you don’t want to tackle the whole thing, perhaps check out the type of annuity that may be of interest to you. For example, some of you may be interested in learning more about the potentially “good” kind of annuity … Single Premium Immediate Annuities or SPIAs.

I hope you find this guide helpful. Here’s the link.

https://www.dropbox.com/s/g7sqh7ud7bwvypg/Annuities Guide.pdf?dl=0

Rick

 

[Bruno]

I have two MYGA annuities and would be the only type I would buy. I enjoyed this article very much. You made one statement that under the MYGA advantages : Taxes on MYGA interest income are deferred until final payout if held in taxable accounts.
I have a MYGA funded with cash and the yearly 10% free withdrawal. Its my understanding that the interest would come out first with every free withdrawal. I hope that is correct. Its my way of not being hit with all those taxes when it comes out after 5 years.

On my other MYGA I have annuitized it and only a portion of the taxes come out each month. Like said THANKS for the article, there is always questions about annuities.

 

[AtlasShrugged]

I have two MYGA annuities and would be the only type I would buy. I enjoyed this article very much. You made one statement that under the MYGA advantages : Taxes on MYGA interest income are deferred until final payout if held in taxable accounts.
I have a MYGA funded with cash and the yearly 10% free withdrawal. Its my understanding that the interest would come out first with every free withdrawal. I hope that is correct. Its my way of not being hit with all those taxes when it comes out after 5 years.

On my other MYGA I have annuitized it and only a portion of the taxes come out each month. Like said THANKS for the article, there is always questions about annuities.

I believe your understanding of MYGA taxation is correct.

The challenge in writing my stuff is where to draw the line in terms of level of detail. Unfortunately, the document would get even longer if I include everything.

 

[pb4uski]

I have two MYGA annuities and would be the only type I would buy. I enjoyed this article very much. You made one statement that under the MYGA advantages : Taxes on MYGA interest income are deferred until final payout if held in taxable accounts.
I have a MYGA funded with cash and the yearly 10% free withdrawal. Its my understanding that the interest would come out first with every free withdrawal. I hope that is correct. Its my way of not being hit with all those taxes when it comes out after 5 years.

On my other MYGA I have annuitized it and only a portion of the taxes come out each month. Like said THANKS for the article, there is always questions about annuities.

Yes Bruno, on deferred annuities like MYGA, withdrawals are interest first, and then principal. Taxation is different for life annuities... for life annuities a portion of each benefit payment is principal and a portion is interest that would be taxable outside of a tax-deferred or tax-free account.

 

[OldShooter]

... I’m back with another one of my guides. This one is on annuities. ...

I'll be first in line to buy the book compilation of your papers. Truthfully, this is the only one I have read but it is so good that I'm certain the others are good too.

 

[Dtail]

Nice write up. Knew all about MYGA's, but picked up good info on the other ones.

 

[finnski1]

Thank you again.
nice and concise and logically laid out.
I also recommend people use the website immediateannuities.com which has actual real time quotes and a good variety of these products as well as many questions answered.

 

[pb4uski]

Social Security benefits increase 8% per year for every year you defer from age 62 to age 70.

Rick,

As usual, a great paper... however a nit. The above isn't right. Benefits increase 8% per year from FRA to age 70... and that 8%/year is simple interest, not compounded. So if one's FRA is 67 and defers to 70 then they will receive 124% of their FRA benefit... or if one's FRA was 66 and they deferred to 70 then they would receive 132% of their FRA benefit.

But from 62 to FRA the annual increases are more complicated and vary from 6.67-8.38% annually depending on your birth year. https://www.ssa.gov/OACT/ProgData/ar_drc.html

I agree with the rest of the paragraph and it might be made more useful by providing an example.

 

[Bruno]

I believe your understanding of MYGA taxation is correct.

The challenge in writing my stuff is where to draw the line in terms of level of detail. Unfortunately, the document would get even longer if I include everything.

I understand and the article is Very Good.

 

[AtlasShrugged]

Rick,

As usual, a great paper... however a nit. The above isn't right. Benefits increase 8% per year from FRA to age 70... and that 8%/year is simple interest, not compounded. So if one's FRA is 67 and defers to 70 then they will receive 124% of their FRA benefit... or if one's FRA was 66 and they deferred to 70 then they would receive 132% of their FRA benefit.

But from 62 to FRA the annual increases are more complicated and vary from 6.67-8.38% annually depending on your birth year. https://www.ssa.gov/OACT/ProgData/ar_drc.html

I should have added the word "approximately" in front of 8%. I'll fix it in the next revision.

 

[pb4uski]

One interesting game that some VA buyers were playing for a while was that they would buy a VA with a GMWB rider but then invest their money in the most aggressive subaccounts available.... if those aggressive subaccounts did spectacularly then they were ahead big time but if they were losers then the GMWB kicked in and the insurer was on the hook. It didn't take long for the insurers to up and adjust their contracts to put limitations on how accounts with GMWBs could be invested.

VAs are held in "separate accounts" which are segregated from the insurer's other "general account" business and the separate account assets are held solely for the benefit of the separate account policyholders... and therefore have no real credit risk if the insurer failed... so they don't have any real insurer credit risk like general account products would.

I largely agree with what you wrote on EIAs... except, 1) technically they are not investment products.... the SEC wishes that they were because if they were then they could reguate them... they are very complex insurance products that credit interest based on the performance of an index (which is why they sidestep SEC regulation)... and 2) I'm skeptical that there are EIAs that offset minimum guaranteed returns with negative stock market returns... that would violate the non-forfeiture standards that allow them to be insurance contracts to begin with (but I have been out of the industry for over 20 years so perhaps it has changed but I don't think so).

 

[Bruno]

I have to admit it was my thinking that MYGA and SPIA were one in the same. After reading this article I am not sure they are even cousins.

 

[pb4uski]

There is a flavor of SPIA that also deserves mention as it is sort of in between a MYGA and a life-contingent SPIA and that is a period certain SPIA where the benefit payments are fixed for a defined period of time... you pay the insurer a single premium and they pay you $x per month for y years. The IRR usually isn't very attractive but it is available.

It is similar to the MYGA in that the benefit payments are a mix of principal and interest and are not dependent on your still being alive.

 

[AtlasShrugged]

I largely agree with what you wrote on EIAs... except, 1) technically they are not investment products.... the SEC wishes that they were because if they were then they could reguate them... they are very complex insurance products that credit interest based on the performance of an index (which is why they sidestep SEC regulation)... and 2) I'm skeptical that there are EIAs that offset minimum guaranteed returns with negative stock market returns... that would violate the non-forfeiture standards that allow them to be insurance contracts to begin with (but I have been out of the industry for over 20 years so perhaps it has changed but I don't think so).

I agree that technically EIAs are insurance products. But as a matter of substance they're sold as, and people buy them, as investment products. That's the better way to think of them if someone is thinking of buying one.

I added the negative stock market ding because I found it in an SEC warning on these products. I assumed there was some validity to the point given the source.

I think we both agree with the substance of what I wrote.... EIAs are toxic products that people should avoid.

 

[RetMD21]

Nice guide. I skimmed the parts on variable and indexed annuities (lol) and read the rest. I am interested in DIA or maybe SPIA. I haven't pulled the trigger yet. As you say the cost of inflation protection is high. The quotes I was able to get online showed a fixed annual inflation adjustment with a lower initial payout. Presumably this is calculated to come out about the same for the company as the higher initial payment w/o adjustment after allowing for mortality. It didn't look worthwhile to me. I like the point about deferred SS.

 

[Stormy Kromer]

One interesting game that some VA buyers were playing for a while was that they would buy a VA with a GMWB rider but then invest their money in the most aggressive subaccounts available.... if those aggressive subaccounts did spectacularly then they were ahead big time but if they were losers then the GMWB kicked in and the insurer was on the hook. It didn't take long for the insurers to up and adjust their contracts to put limitations on how accounts with GMWBs could be invested.

VAs are held in "separate accounts" which are segregated from the insurer's other "general account" business and the separate account assets are held solely for the benefit of the separate account policyholders... and therefore have no real credit risk if the insurer failed... so they don't have any real insurer credit risk like general account products would.

I largely agree with what you wrote on EIAs... except, 1) technically they are not investment products.... the SEC wishes that they were because if they were then they could reguate them... they are very complex insurance products that credit interest based on the performance of an index (which is why they sidestep SEC regulation)... and 2) I'm skeptical that there are EIAs that offset minimum guaranteed returns with negative stock market returns... that would violate the non-forfeiture standards that allow them to be insurance contracts to begin with (but I have been out of the industry for over 20 years so perhaps it has changed but I don't think so).

I took the bait. I bought one about 20 years ago from a trusted FA who sold me on the fact I couldn't lose. At worst I'd get the GMWB. After fees the annuity has an annual return of 1.5% This is being invested in their most aggressive funds during a bull market. I still ge the GMWB, but my heirs are out of luck....I actually would have been better off keeping the money in a passbook savings account, by far. Sadder yet, this annuity was also my SEP retirement account.

I'm a chump. Don't let it happen to you. If you hear the word annuity please run away.

Next I'll tell you about VUL, but that's another thread....

 

[Closet_Gamer]

All,

I’m back with another one of my guides. This one is on annuities.

If you've ever wondered how annuities work or if you are currently considering one, you may be interested in this guide. Similar to my other stuff, I’ve tried to write about them as objectively as possible, which is a bit more challenging with annuities.

The guide is a little long at 17 pages because it describes the 5 major categories of annuities including:

1) Multi-Year Guaranteed Annuities (aka, MYGAs)
2) Single Premium Immediate Annuities (aka, SPIAs)
3) Deferred Income Annuities (aka, longevity insurance)
4) Variable Annuities
5) Equity-indexed Annuities (aka, indexed annuities)

If you don’t want to tackle the whole thing, perhaps check out the type of annuity that may be of interest to you. For example, some of you may be interested in learning more about the potentially “good” kind of annuity … Single Premium Immediate Annuities or SPIAs.

I hope you find this guide helpful. Here’s the link.

https://www.dropbox.com/s/g7sqh7ud7bwvypg/Annuities Guide.pdf?dl=0

Rick

That is fantastic. Well done!

 

[Dash man]

Good job! One thing about my MGYA is I can continue to add funds to it at any time. The interest rate for adding new funds varies from the interest rate when the contract first started. Mine has a minimum 1% which is what it is now. The overall interest rate for mine is currently 2.75%, but each chunk of money I added is actually paid at different rates based on what the rates were when the money was added.

 

[donheff]

Excellent guide.

 

[audreyh1]

Maybe the moderators can create a sticky thread with links to all your papers. Very valuable resource.

 

[ShokWaveRider]

Thanks, I read through the whole document. Great writing, and I agree with your comments of suitability on the last 2 products.

 

[JRon]

Well Done!

 

[Go-NoGo]

Maybe the moderators can create a sticky thread with links to all your papers. Very valuable resource.

+1

These are great resources for those not familiar with the terms and pros/cons of these financial instruments.

Nice work!

 

[sengsational]

Maybe the moderators can create a sticky thread with links to all your papers. Very valuable resource.

Several other of Rick's papers are in the FAQ forum, so I added this one as well.


https://www.early-retirement.org/forums/f47/useful-annuities-information-106645.html#post2518630

 

[38Chevy454]

Thanks for this guide. I really have no desire to ever buy or hold an annuity, but this is good information to help anyone. It just confirms my choice to stay away from them.