Annuities? Have you been talking to someone who want to sell you something?

[Kimo]

Also a great way to look at it....Damn, I can't decide whether to sell or keep mine....

 

[pb4uski]

When I owned some, I saw it as a self-employed business. Might as well buy a laundromat or a self-serve car wash--less interpersonal drama, less potential legal hassles, no potential for a big rent check not coming in, and just one easily-accessible location to fret about. I don't know if DW would appreciate it if I bought her a laundromat, car wash, or rental unit in lieu of another, more "passive" source of income for her old-age.

+1 for my Dad's residential rental real estate - and he owned a self-service car wash as well so he knew the difference!! He quickly got tired of the drama and sold them but kept a piece of commercial real estate that is net leased to a long-term tenant that has been the cornerstone of his retirement and my Mom's retirement now that he is gone.

 

[aja8888]

When I owned some, I saw it as a self-employed business. Might as well buy a laundromat or a self-serve car wash--less interpersonal drama, less potential legal hassles, no potential for a big rent check not coming in, and just one easily-accessible location to fret about. I don't know if DW would appreciate it if I bought her a laundromat, car wash, or rental unit in lieu of another, more "passive" source of income for her old-age.

Hey Sam, a very good friend of mine retired and bought a laundromat in Pasadena, Ca. You have no idea the things that can go wrong in that kind of business. After 5 years and lots of money spent repairing machines, fighting with the city on water issues, and having a coin changer ripped off the wall with $5,000 in it, he sold it (at a loss) and went and bought a soft drink vending machine business. That was more work than the laundromat!

 

[ejman]

pb4uski, you explained it better than I did, thanks! Also, an additional benefit that I never want to use is should the annuity value fall to zero, I continue to receive my 4.5% payout but the .95% fee is eliminated because of the zero account value. (Like I said, I hope to never use this benefit)

The part I don't understand about this concept is this: If in fact the assets backing up Wellington fall to zero, that basically means that the whole US and perhaps world economies have totally collapsed since Wellington holds stocks and bonds from a good cross section of the US (and some world) economies. If this unthinkable happens, where and how would one insurance company be able to fund its obligations? Print money?

Although I think there are some worthwhile uses of annuities, insurance against US world and economic collapse is not one I believe this product would deliver.

 

[Kimo]

I agree with you...whenever I say that I usually say the same thing, something along the lines that if that ever happened we would have far more to worry about........just didn't say it this time

 

[nun]

I own a one bedroom rental apartment and it's easy to manage and has been continually occupied for 17 years. It has doubled in value and I get $1200 a month in rent. It's very little work to manage and I have a great tenant.

 

[Kimo]

"and I have a great tenant" ........That is SO much the key!

 

[pb4uski]

The part I don't understand about this concept is this: If in fact the assets backing up Wellington fall to zero, that basically means that the whole US and perhaps world economies have totally collapsed since Wellington holds stocks and bonds from a good cross section of the US (and some world) economies. If this unthinkable happens, where and how would one insurance company be able to fund its obligations? Print money?

Although I think there are some worthwhile uses of annuities, insurance against US world and economic collapse is not one I believe this product would deliver.

It might not be that Wellington's share value falls to zero, but much milder situations where it just doesn't grow enough to support the 4.5% withdrawal guarantee.

If there is some sort of extreme, cataclysmic event and Wellington went to zero (much worse than 2008 BTW) then insurers would be stressed as their assets decline in value and they might blow through their surplus and go into receivership. State guaranty funds would be a further backstop, but in that situation other insurers that provide funding for state guaranty funds would be stressed as well so the backstop might not be worth much.

In such a situation though, pensions and SS would be in peril as well so there is only so much you can do short of having a boatload of money in FDIC insured bank accounts in whcih case you would never be able to retire.

 

[Trooper]

Another decision that would have to be made, once the decision to purchase VG's variable annuity was made, would be the age at which to start withdrawals.

From 59-64 the maximum is 3.5%, at 65 it jumps to 4.5%. Is there a benefit in waiting?

 

[Kimo]

They have changed that from when I bought it. I purchased the annuities when I was 61 and had the payout start immediately which was 4.5%. Looking at what you just wrote, I would probably keep the money in other Vanguard funds and wait until 65 and then buy the annuity and have the payouts start at the same time. I just didn't see a reason to buy them until I wanted the guaranteed return. Of course, this is all my opinion and it worked out well for me.

 

[JoeWras]

Wasn't the 2009 bailout of the insurance companies part of this? Do I remember wrong? Didn't some insurance companies get a big float and break to avoid just this kind of thing -- annuity default?

...

I've said it before: "Friends don't let friends sell annuities." I have a friend who ER'd and then took a retirement job as an FA. I basically lost his friendship. He was obsessed with selling these things. Before his ER, he was a gentle, modest person. Once he got the taste of the annuity commission, he became a ruthless money grubbing jerk. Over wine one night, he admitted that his commissions are obscene. That's all I had to hear about ever wanting to buy an annuity.

Even so, I guess he blacked out and forgot he told me about the commissions because the next day he was trying to sell me an annuity again. I haven't seen him in over a year now. Sad.

 

[brewer12345]

Wasn't the 2009 bailout of the insurance companies part of this? Do I remember wrong? Didn't some insurance companies get a big float and break to avoid just this kind of thing -- annuity default?

With the notable exception of AIG, the insurance industry was actually left to sink or swim on its own while the banks got gubmint carte blanche. A few insurers hastily acquired tiny thrifts and applied for TARP to get some capital, but a number were rejected flat out (Genworth, most notably). As someone with a painfully close view of things at that time, I believe that the treatment of the insurers was due to A) the belief that they were in better shape than the banks and B) the nasty, catty attitude of the federal regulators dispensing ARP that the insurers are regulated by the states so let them deal with the problem.

 

[JoeWras]

Ah, I thought it was more than AIG. Although AIG is a pretty big piece of the pie.

Thanks for the insight.

 

[samclem]

Over wine one night, he admitted that his commissions are obscene. That's all I had to hear about ever wanting to buy an annuity.

Even so, I guess he blacked out and forgot he told me about the commissions because the next day he was trying to sell me an annuity again.

I've had wine like that.
Maybe he just never made (or thought you wouldn't make) the connection between the commissions and the possible final value of the product to [-]his marks[/-] consumers. Well, the wine is a more likely cause . . .

When I left the USAF, like many folks I was offered opportunities to sell services to the government--obviously, the idea is that you go back to your old buddies and push the products/services of a particular contractor. I'm no paragon of virtue, but there's not enough money in the world to convince me to do that (especially after having been the target of similar efforts).

 

[athena53]

When I left the USAF, like many folks I was offered opportunities to sell services to the government--obviously, the idea is that you go back to your old buddies and push the products/services of a particular contractor. I'm no paragon of virtue, but there's not enough money in the world to convince me to do that (especially after having been the target of similar efforts).

When I was at a business meeting in San Diego, I picked up a copy of Stars and Stripes and was saddened to see the ads- used cars, diamond engagement rings, etc. obviously aimed towards people who already had their housing and 3 squares a day covered so had some disposable income. An article on personal finance was included and it was written in VERY simple language. Apparently you can buy something on a payment plan that lets the merchant get their payment directly from your military pay and they cautioned against that. Sad that there's a large population of financially naïve people who are serving our country (some because it's the best way out of poverty) and the hustlers spring up around them like weeds.

So, yes, I could see where the military would be easy pickings and can also see why you avoided that business.

 

[Kimo]

Wasn't the 2009 bailout of the insurance companies part of this? Do I remember wrong? Didn't some insurance companies get a big float and break to avoid just this kind of thing -- annuity default?

...

I've said it before: "Friends don't let friends sell annuities." I have a friend who ER'd and then took a retirement job as an FA. I basically lost his friendship. He was obsessed with selling these things. Before his ER, he was a gentle, modest person. Once he got the taste of the annuity commission, he became a ruthless money grubbing jerk. Over wine one night, he admitted that his commissions are obscene. That's all I had to hear about ever wanting to buy an annuity.

Even so, I guess he blacked out and forgot he told me about the commissions because the next day he was trying to sell me an annuity again. I haven't seen him in over a year now. Sad.

But the difference is I am not buying an annuity through a salesperson, I never would. Every dime of my investment go's into the Wellington clone that I hold in my Vanguard account. The differences are so large they might as well not both be called annuities. The sales people give the ones I buy a very bad taste in your mouth.........

 

[brewer12345]

Ah, I thought it was more than AIG. Although AIG is a pretty big piece of the pie.

Thanks for the insight.

IMO, the only reason an exception was made for AIG is that the failure of AIG Financial Products (the holding company, not an insurance operating company) would have take down most or all of the baking system.

 

[JoeWras]

IMO, the only reason an exception was made for AIG is that the failure of AIG Financial Products (the holding company, not an insurance operating company) would have take down most or all of the baking system.

Oh no! No more bread, cake or pie! Hey, just having a laugh.

 

[brewer12345]

Oh no! No more break, cake or pie! Hey, just having a laugh.

Yes, the N key on the piece of crap tablet I am using gets sticky sometimes.

 

[pb4uski]

Ah, I thought it was more than AIG. Although AIG is a pretty big piece of the pie.

Thanks for the insight.

It is important to note that AIG's insurance companies were its salvation rather than the problem. The problem was at a corporate division that thought they were the smartest guys in the room and issued derivatives that in retrospect they didn't really understand.

The insurers were the salvation because AIG was later able to sell many of them to other insurers and use the proceeds from those sales to pay back the assistance it received. According to this Forbes article the government provided $182.3 billion in assistance and ultimately received $205 billion.

 

[bmcgonig]

This is kind of interesting. Its a survey of something called corrodies in the 16th-18th C. They were annuity type contracts where one could pay for a retirement in a convent/monastery up front, and get room/board etc for life.

http://www.cgeh.nl/sites/default/files/WorkingPapers/cgehwp53_zuijderduijn.pdf

Apparently the 16th Century was THE cheapest time to retire

 

[meierlde]

It is important to note that AIG's insurance companies were its salvation rather than the problem. The problem was at a corporate division that thought they were the smartest guys in the room and issued derivatives that in retrospect they didn't really understand.

The insurers were the salvation because AIG was later able to sell many of them to other insurers and use the proceeds from those sales to pay back the assistance it received. According to this Forbes article the government provided $182.3 billion in assistance and ultimately received $205 billion.

Yes the us based insurance companies were solvent since they were state regulated. Just like in the case of Conseco where the parent went bk, but the insurance subsidiaries kept on keeping on. Agreed it was at the corporate level that was the problem, both in Financial Products and the securities lending business (they lent subsidiary's securities out, and invested the cash they got for the loan in more dicey home loans, reaching for max yield).

 

[Huston55]

Back to the OP Topic

This has been a balanced discussion about annuities (which I do not currently own but, which I've also not completely ruled out) and why/why not to own them.

I think this thread is just another version of the "safety first" (or not) discussion. Here are some good articles by Dirk Cotton on this subject that, in my view, focus the discussion well for one to consider which path to take.

The Retirement Cafe: When “Probably” Isn't Good Enough

The Retirement Cafe: The Chicken and the Pig

An excerpt that summarizes it well:

"Note that neither group says that you can't lose a whole lot of money. One side merely argues that you probably won't. The other side agrees but argues that “probably” isn't good enough when it comes to losing your standard of living in old age.

I lean toward the safety-first school. My tendency is to first take the unacceptable outcomes off the table and as I mentioned, I consider losing my home an unacceptable outcome."

 

[nun]

When Wade Pfau came up with is suggestion that an AA of SPIAs and stocks rather than bonds and stocks might be better in retirement I was not surprised.
Of course the payout rate and whether there's some COLA is vital. My non-rigorous approach has always been to secure my retirement income as much as possible and then I invest whatever's left without ever needing to depend on my investment returns. Right now I have the opportunity to use DC money to buy into my employer's COLA'ed DB plan. If I do that it will use 25% of my DC funds, but will generate a COLA'ed $21k/year starting at 55. Add in SS, a small company pension and rental income at 66 I should have $85k/year from guaranteed, or at least very, stable sources. Investment returns will be gravy.

 

[Kimo]

IMHO, annuities are going to be a product that some people are wired for and some aren't. I am referring to variable annuities because there seems to far less discussion on SPIA's.

I figured out what I needed as income and decided I wanted SS and annuities to be able to supply that for me regardless of what happened in all the markets. (House paid for, no debt, etc.) I also wanted to secure a COLA if possible and while it might be slight SS does have one and by using an annuity with a product like Wellington in my annuity I feel confident over time my monthly payments will rise which will also help. If it doesn't, oh well, I still have my two payments.

When I reach an age where I realize I have more money than life left I will cash out the annuities and just put them in the existing allocation I own.

The other side of the wired portion, IMHO, are the individuals who believe the 0.95% fee I pay is not worth it because they are confident they will be able to do exactly what I am doing without the fee. I truly wish I was in that camp but I am not, I need a guarantee that I have enough money and it can't go away and I don't mind paying the .95% for the feeling I get.

Again, IMHO, I don't see anything wrong with either opinion, like someone else posted, we fall into two camps on this. (If you have read the post I am referring to variable annuities sold by Vanguard and others like that that have no salespeople taking a commission and you are able to close the account with no cost to you at any time, whether it is a week after purchasing or 5 years, it doesn't matter, no cost to you.