Annuities - Opinions Yay or Nay?

[big-papa]

The only annuity I would ever consider would be a SPIA. And even then I wouldn't consider it until/if I'm around 80-85 or so, when they tend to be pretty cheap.

 

[big-papa]

A fairly technical paper on this subject from a few years ago with interest rates were lower but still an interesting read.
https://www.onefpa.org/journal/Page...Efficient Frontier for Retirement Income.aspx

 

[brett]

Annuities, like pensions, certainly have their place in retirement planning. I have been drawing a pension for the past six years. No COLA.

I may look at an annuity when I am in my early/mid seventies, five years from now, but only if mortality rates exceed interest rates at that time.

I read Milvesky's book Pensionize Your Nest Egg a few years ago. It was a very good read and it was a very easy read.

Over the past few years I have come to appreciate the positive psychological impact on our lifestyle from a spending/fear of spending perspective that our pensions have provided. We view it as one leg of our retirement plan.

 

[jollystomper]

Have you thought of putting several years in cash or equivalents? Designate that as your SHTF money. You could live on that while the stock market recovers. Of course figure a stock-Bond allocation that lets you sleep at night

+1

This is our strategy. I do receive a pension so I do not myself have a need for an annuity. We have a comfortable AA and cash position so that what happened this past December did not cause us to panic. The cash makes up the difference between my pension and our expenses, and can last until I choose to take SS so that we are never forced to sell equities.

 

[pb4uski]

I have read several books on annuities and let me just say its complicated, lots of trade offs, pros/cons, etc..

Short answer on inflation is you can purchase SPIAs that adjust for inflation but there is only 1 company that sells them (Prudential) and therefore they are quite expensive (e.g no inflation protection for a 57 year old payout is 5.6% with inflation payout is 3%) or you can purchase 1-5% annual increases which multiple companies sell so they are still expensive but perhaps more competitive than a true inflation protection.

Reasons to wait: Due to mortality credits they get cheaper as you age (i.e. insurance company knows the length of payout is shorter and for some purchasers/customers very short, they don't know which ones). Secondly if you wait you can decide at a later age if you really need one (e.g you spent less than you thought or the markets were good to you or you lived less than you thought) and finally if you wait till say 80 YO inflation becomes less of a risk due to number of years left.

I like the idea of having an income flow to meet basic needs. Pensions and Social Security are similar but priced better than SPIAs but you can't purchase them at those rates. So having a SPIA that meets basic needs frees up your other investments for discretionary wants and maybe you can pass on some to your heirs earlier while you are around to see them enjoy it if you are more secure financially through having different income streams for life.

You can buy an inflation adjusted life (or joint life) deferred annuity that has a much better payout rate than 3% by delaying SS.

 

[ncbill]

SPIAs have a place if you're:

1. older so mortality credits are juicing the return

2. in danger of running out of money

 

[bw5972]

Nay

 

[Chuckanut]

You can buy an inflation adjusted life (or joint life) deferred annuity that has a much better payout rate than 3% by delaying SS.

+1

Precisely.

 

[capjak]

You can buy an inflation adjusted life (or joint life) deferred annuity that has a much better payout rate than 3% by delaying SS.

Of course, for now anyway, you can spend out of pocket (if expense>income) and delay SS and to get an increased benefit (8% more per year I believe minus Fed/State taxes). Not sure what the cost is or even how to price it other than compare to taking it earlier and expected life expectancy.

Guess you would need to take the amount you paid into SS adjust for inflation and lost investment opportunity over the XXX number of years.

I think rather than purchasing a open market deferred annuity (not SS), I would put the money I was allocating to the deferred annuity in an account that may include inflation adjustment (TIPS or Bonds) and once matured purchase an immediate annuity at that time.

 

[joeea]

I used to listen to Clark Howard on the radio all the time. I always remember that he said to NEVER buy annuities, because they're too much of a ripoff. That has stuck with me.

HOWEVER--now that I'm so close to retiring, and the stock market has been flying so high, I fear/expect another big crash. I'd really like to hang onto the gains I've made over the last few years (wouldn't we all).

Annuities seem like a reasonable way to do that, given that you get a guaranteed income in bad times and a little bit of a "raise" in good times (if I understand correctly).

The guarantee isn't free. It comes at a (usually hefty) cost.

What do y'all think about annuities as a way to preserve present wealth?

I think they tend to be a poor way to preserve wealth, except in specific unusual circumstances. There are far less expensive ways.

(Btw, I'd like to retire in 1.5 years at the MOST, and right now my hubby and I combined have $770K in our IRAs/401k's.) I'd hate for even December 2018 to happen again soon and bring us to our knees at this point!!!

If December 2018 would bring you to your knees, then you aren't yet at a point where you can safely retire. There will almost certainly be more December 2018s in our future.

 

[capjak]

Here is a link to a strategy for guaranteed income.

"More importantly, you need to evaluate his financial capacity. Before you can talk about your client’s dreams, before you can talk about the wisdom of asset allocation, before you can talk about investing large cap or small cap, before you can talk about investing in Canada or in China, you must first determine if your client has the means to finance his retirement. If he does not have the financial capacity, no amount of emotional capacity and risk tolerance will improve the outcome.

When it comes to retirement income, there are three significant risk factors for the retiree: The longevity risk –living too long-, the market risk –the portfolio running out of money prematurely-, and the inflation risk – the inability to maintain purchasing power-. A retirement plan must meet all these three criteria to be considered a well-designed plan."

http://retirementoptimizer.com/articles/Article105.pdf

 

[bada bing]

I have a cash balance pension at work that is an indicator of how expensive
commercial SPIA offerings are. For a $400K current cash balance:
Pension annuity today: $2470/month
ImmediateAnnuity quote: $2044/month

My pension annuity isn't a sweetheart deal, it is straight from current interest
rate segments and mortality tables.

In my case, the best commercial annuity quote is about 20% more expensive than
what my pension would annuitize at. I may or may not choose to annuitize my
pension, but that decision doesn't have to be made until I reach 71. I'm not a
customer for a commercial annuity in any case. Commercial annuities are an
attractive concept but the insurance companies take too much profit IMO.

 

[YVRRocketSurgery]

Situational dependent of course.
I wasn't a big fan of annuities until I read a few books explaining where they might fit in one's plan, especially if one doesn't have a DB pension like me.
Personally, I'll probably look to annuitize part of my retirement savings when I hit 70-75 and count it against the fixed income part of my AA.

 

[corn18]

I have a COLA pension from the military and plan to collect SS at age 70. Once both are coming in, we have enough to cover expenses. What to do between FIRE (hopefully age 55) and SS @ 70? At least once I week, I run the numbers for a 15 year period certain SPIA that pays out what I will get for SS (at age 70) starting at age 55. We would have $1M left over after we buy the SPIA. So we could just blow that on anything we want until we die or the kids get it. There is just something about having a guaranteed income stream that covers all expenses for the rest of our lives.

Then I look at the returns on the SPIA (2%) and the lack of inflation protection, and leave it in my 60/40 portfolio.

 

[copyright1997reloaded]

Someone on ER-org posted this useful calculator in estimating "fair" pricing for a SPIA given current rates:

https://www.aacalc.com/calculators/spia

For a 60 year old male, inflation adjusted $1M policy, the fair payout would be $3,497.35/month = 4.197% of investment on initial year.

For non-inflation adjusted but US Treasuries (i.e. safe from default), the maount would be 4,539.27/month = 5.447% of investment on initial year (fixed).

 

[Sunset]

I used to listen to Clark Howard on the radio all the time. I always remember that he said to NEVER buy annuities, because they're too much of a ripoff. That has stuck with me.

HOWEVER--now that I'm so close to retiring, and the stock market has been flying so high, I fear/expect another big crash. I'd really like to hang onto the gains I've made over the last few years (wouldn't we all).

Annuities seem like a reasonable way to do that, given that you get a guaranteed income in bad times and a little bit of a "raise" in good times (if I understand correctly).

What do y'all think about annuities as a way to preserve present wealth?

(Btw, I'd like to retire in 1.5 years at the MOST, and right now my hubby and I combined have $770K in our IRAs/401k's.) I'd hate for even December 2018 to happen again soon and bring us to our knees at this point!!!

Retirement is about when you can do it, not when you want to do it.

If your total savings is the $770K, then that does sound like much..

Any pensions ?

Running various calculators will help you.

As for annuities, they are mostly a ripoff, unless you are a vampire.

 

[Chuckanut]

IMHO, the main benefit of a having a SPIA in a mix with stocks is psychological. If the assured income keeps a person from panicking in a down market and selling low, then it has done it's job.

 

[pb4uski]

Of course, for now anyway, you can spend out of pocket (if expense>income) and delay SS and to get an increased benefit (8% more per year I believe minus Fed/State taxes). Not sure what the cost is or even how to price it other than compare to taking it earlier and expected life expectancy. ...

The math is pretty simple. Let's say you can collect $1,000/month at FRA of 66, or you can collect $750/month at 62 or $1,320/month at 70.

If you defer from 62 to 70, you are giving up collecting $750/month for 8 years... or $72,000... let's say that with interest that is $85,000. Then you collect an additional $570/month or $6,840/year... or an 8% payout rate...and benefits increase for inflation!

 

[ziggy29]

IMHO, the main benefit of a having a SPIA in a mix with stocks is psychological. If the assured income keeps a person from panicking in a down market and selling low, then it has done it's job.

Yes, it is basically like someone who has a defined benefit pension in their retirement mix, perhaps with less in their 401K and IRA plans. A SPIA is pretty much like “buying a pension” conceptually, so if someone has a lot of money in defined contribution plans and wants a stable base of income underlying the rest of their investments, in theory a SPIA might be appropriate but the income streams are very sensitive to prevailing interest rates at the time of the contract. So buying today would be better than, say, 8 years ago when rates were near zero but not as good as, say, 15-20 years ago.

 

[brett]

Our view is that our DB pension is part of our risk free portfolio. Should we buy an annuity in a few years we will treat it in the same manner...declining base of course because of age. We keep our percentage of equities the same. They far form the largest percentage of our assets.

 

[MarieIG]

I used to listen to Clark Howard on the radio all the time. I always remember that he said to NEVER buy annuities, because they're too much of a ripoff. That has stuck with me.

HOWEVER--now that I'm so close to retiring, and the stock market has been flying so high, I fear/expect another big crash. I'd really like to hang onto the gains I've made over the last few years (wouldn't we all).

Annuities seem like a reasonable way to do that, given that you get a guaranteed income in bad times and a little bit of a "raise" in good times (if I understand correctly).

What do y'all think about annuities as a way to preserve present wealth?

(Btw, I'd like to retire in 1.5 years at the MOST, and right now my hubby and I combined have $770K in our IRAs/401k's.) I'd hate for even December 2018 to happen again soon and bring us to our knees at this point!!!

I don't see annuities as a way to preserve wealth. I see them more as adding a base to your income stream. Typically it is not a great idea to put all monies in annuities, as it doesn't leave anything for those "lumpy" expenses.

Whether they are appropriate for you would depend upon a number of factors including why you are purchasing, your age, interest rates, inflation, the cost of the annuit(ies), the type of annunit(ies), SS amount, pensions, overall expenses, life expectancy, etc.

BTW, December 2018 - small potatoes.

 

[audreyh1]

When I’ve researched it, inflation adjusted annuities were way more expensive than expected. And there schemes were like 2% increase per year regardless of inflation, still way expensive.

So I’ve concluded it’s better to find a different way to handle inflation with annuities, either by setting aside some of the income, or purchasing additional annuities later, or some other scheme.

I hadn’t considered one until I’m past 70. I may look again then. I suppose the somewhat higher interest rates have improved payouts a bit.

 

[imoldernu]

Don't buy from Brighthouse/MetLife. Trust me.

 

[Toddtheformeraccountant]

"Mortality Credits"

OK, I'm just saying this off the top of my head without checking the actual $ tradeoff...several people mentioned that it's better to buy when older because of "retirement credits."

To me the annuity salesforce using the term "mortality credits" sounds like an annuity sales job.

There is no "credit" to it at all. It just reflects that you can get a higher annuity payment per $ of annuity purchased when you are older than when you are younger, simply because statistically you're not going to be around as long. So, I'm not sure it's necessarily a "better deal" when you're older because the aggregate statistical expected payout would be the same (fewer but larger payments, same aggregate). And that further corresponds with the fact that if you are older, your risk of outliving your nest egg, all things being equal, is lower.

All that being said, I do think there may be a place for an annuity for some people in some circumstances, but it would be the simplest one possible, the SPIA. More complexity means more administrative cost and risk pricing, all things being equal.

 

[Stormy Kromer]

I have a significant portion of my savings ( about 20%) in a variable annuity that I took out when I was 32 years old. I've been self employed all my life and envied the pensions that some occupations offered, mostly government employees or large corporations. My dad was recently retired and had nothing but his farm and social security. I wasn't going to let that happen, I was going to guaranty myself at least a basic standard of living when I reached age 62.


If I had it over, and knew what I know now, I wouldn't have taken out an annuity. I would have invested it in a Vanguard portfolio of 2 or 3 stock index funds and slowly rebalanced them more conservatively as I neared retirement. It would have outperformed the annuity.


It's too late now. But I can say this. Between the annuity and social security I'll have a guaranteed income of about $90k when I turn 62 in 8 years (well over living expense) That guarantee has allowed me to invest the rest of my assets 100% in equities and still sleep well during market dips. I don't feel the need for bonds in my Roth IRA or non-retirement funds. I consider the annuity my bond/fixed income position.


I wouldn't buy the annuity again if I had it over, but I'm not terribly sorry I have it. One observation I have is that everyone loves company sponsored pensions and social security. But very few like annuities (myself included) Maybe it's because we have some choice and control over the annuity while pensions & social security are forced on us and we don't see the overhead and costs involved with them. Either way we all like a guaranteed source of income.