Annuities, safe investments?

[RockOn]

Insurance annuities are discussed on many threads. Some hate them and some think they are ok which is fine. My question is, has anybody bought an insurance company annuity (or know someone who has) and not received the promised income? (I'm not talking about VA's where the money is in mutual fund subaccounts and the purchaser knows the income can vary.)

Does anybody know when they were first available?

Is an annuity sort of like a money market, where nobody wants to break the buck? That might be a safety factor in itself, insurance companies may not want the black eye unless the bottom falls out.

 

[rs0460a]

My question is, has anybody bought an insurance company annuity (or know someone who has) and not received the promised income?

Nope. I have an SPIA (started upon retirement, a year ago), with payments to either me or my wife for the next 28 years guaranteed (longer, if we live beyond that time).

Die early? Remainder payments (or a lump sum) payable to our estate for remainder of payments due.

Works for me (and my wife). Too many other things to worry about these days. Our SPIA is one of the few things I don't think about ...

- Ron

 

[brewer12345]

Auction rate securities were a great deal, too, and very safe. Until they weren't.

 

[Midpack]

My question is, has anybody bought an insurance company annuity (or know someone who has) and not received the promised income?

"Past performance does not guarantee future results"

If you'd asked the same question about social security, pensions and retiree health care a few decades ago you probably would have been told they were all bullet-proof. Not anymore...

 

[donheff]

Auction rate securities were a great deal, too, and very safe. Until they weren't.

"Past performance does not guarantee future results"

Of course, the same can be said for a diversified portfolio. There is no guarantee. I guess the question for the OP is - "is the risk of running out of $ in his lifetime higher for the annuity or the diversified portfolio?"

 

[Midpack]

Of course, the same can be said for a diversified portfolio. There is no guarantee. I guess the question for the OP is - "is the risk of running out of $ in his lifetime higher for the annuity or the diversified portfolio?"

Except the insurer could fail for reasons other than the portfolio itself unlike a diversified portfolio...

 

[cashflo2u2]

I have been considering a SPIA with (through) VG but they use AIG for their annuities. The recent financial events on AIG has led me to consider other higher rated insurers for the annuity. As far as an annuity crapping out you might try your state's insurance regulator to see if they have ever had to make good on something like that.

 

[brewer12345]

Of course, the same can be said for a diversified portfolio. There is no guarantee. I guess the question for the OP is - "is the risk of running out of $ in his lifetime higher for the annuity or the diversified portfolio?"

Yup, a portfolio might now work either. But you don't pay up a ton up front for the portfolio option.

 

[4th&Goal]

Auction rate securities were a great deal, too, and very safe. Until they weren't.

You see similarity with auction rate securities and SPIAs?

 

[cute fuzzy bunny]

I guess the question for the OP is - "is the risk of running out of $ in his lifetime higher for the annuity or the diversified portfolio?"

I think a better question is "is the risk of the monthly payout from the annuity losing too much real purchasing power over the persons lifetime greater than the ability of the individual investors diversified portfolio?"

A non COLA'd payout or CPI indexed payout for someone that has a personal inflation rate greater than the CPI will continuously lose purchasing power. The recipient can only control what they spend in this case.

The owner of a diversified portfolio can change their asset mix, can benefit from capital appreciation, and can also change what they spend.

 

[mathjak107]

annuties work best when matched to expenses that are fairly fixed like a mortgage or fixed life insurance payments.... lots of uses for life insurance in retirement..... both for passing assets and for dealing with 2nd marriages and kids......

 

[RockOn]

Auction rate securities were a great deal, too, and very safe. Until they weren't.

That is so true. Things can change. It sounds like everyone has been paid so far, that is a pretty good track record. I read that my State pays off $100k for an aunnuity in default. I don't know if they ever have paid.

Question, is that $100k per annuity contract? One could increase the $100k by buying several different ones, not that hard to do.

The biggest risk of an insurance company default to me is a serious stock market crash where the insurance companies probably have a lot of their money invested. Is there a bigger risk out there?

AIG seems to have been caught up in the credit crisis. I can see that as another large risk, I didn't think the insurance companies were heavily invested in LBO's, CDO's, etc. Maybe Buffet has them also.

 

[RockOn]

I think a better question is "is the risk of the monthly payout from the annuity losing too much real purchasing power over the persons lifetime greater than the ability of the individual investors diversified portfolio?"

A non COLA'd payout or CPI indexed payout for someone that has a personal inflation rate greater than the CPI will continuously lose purchasing power. The recipient can only control what they spend in this case.

The owner of a diversified portfolio can change their asset mix, can benefit from capital appreciation, and can also change what they spend.

On your take, which is a very good point, let's say the odds are 50/50 or 25/75 to your question. Then 50/50 or 25/75 in each makes sense?

I would prefer COLA'd annuities, or maybe what Rich suggested recently. As far as the CPI-P exceeding the CPI-U. I think that happens wherever you are invested. There is no protection from that in TIPS for instance.

On the last point, it is correct you could make more changes in the portfolio (sounds to me like reacting to market changes though...market timing?) but a person with an annuity can also change what they spend. Just because the check comes, it doesn't mean it has to be all spent.

The real kicker is the guarantee (if true) with annuities, to me it makes sense to value that very highly in retirement. If a SWR was really 6% from the portfolio, there would be little doubt, but at only 4% (or as some think, maybe even less) annuities look like a reasonable option to me.

 

[Independent]

That is so true. Things can change. It sounds like everyone has been paid so far, that is a pretty good track record. I read that my State pays off $100k for an aunnuity in default. I don't know if they ever have paid.

Question, is that $100k per annuity contract? One could increase the $100k by buying several different ones, not that hard to do.

The biggest risk of an insurance company default to me is a serious stock market crash where the insurance companies probably have a lot of their money invested. Is there a bigger risk out there?

AIG seems to have been caught up in the credit crisis. I can see that as another large risk, I didn't think the insurance companies were heavily invested in LBO's, CDO's, etc. Maybe Buffet has them also.

I figure that buying an annuity is like buying a single, very long-term bond (not a bond fund). You look at the issuer ratings, then you diversify as much as you can.

Like bonds, in case of a default, you probably get something more than zero. Unlike bonds, I don't know how you would sell to a "salvage specialist", though I suppose something like that might arise if there were more insurance company failures.

So, one of the drawbacks of annuities is that you can't diversify as broadly or as easily as you can with bonds.

Life insurance companies are not heavily into stocks. In total, only 5% of "general account" assets are stocks. See table 2.1 at: http://www.acli.com/NR/rdonlyres/A85A882F-F871-431D-976E-3316884C63EB/11354/FB_0207_Assets1.pdf

 

[unclemick]

Heh heh heh - if you like to stay up late at night and worry - worry big.

Google up Bernstein's 'pal' Angus Maddison and analyize the rise and fall of national markets.

The Brit engineer's in the 70's I worked with pooh poohed pounds, $, and giggled at French francs.

Swiss annuities - that was the ticket.

Index the world, keep your passport up to date, and don't be on the last train leaving Berlin. Why struggle to make real the myth of certainty when you can be entertained with life in ER.

heh heh heh -

 

[RockOn]

Life insurance companies are not heavily into stocks. In total, only 5% of "general account" assets are stocks. See table 2.1 at: http://www.acli.com/NR/rdonlyres/A85A882F-F871-431D-976E-3316884C63EB/11354/FB_0207_Assets1.pdf

Thanks for that link, I would not have thought that. That risk factor is less, now a bond market crash, rising interest rates, looks like the biggest risk to their investments to me.

 

[RockOn]

Heh heh heh - if you like to stay up late at night and worry - worry big.

Index the world, keep your passport up to date, and don't be on the last train leaving Berlin. Why struggle to make real the myth of certainty when you can be entertained with life in ER.

heh heh heh -

It must be nice to not worry when it comes to investing. It's not my personality. When it comes to investing, it seems to me that things go very wrong quite frequently. Maybe that is not the correct way to think.

My feeling is that if you index to everything, that becomes a fully hedged position which may not turn out all that well. If there is little risk, there might be little return. That is just me though, good luck with it, it is the more sane way to go.

 

[Rich_by_the_Bay]

It must be nice to not worry when it comes to investing. It's not my personality. When it comes to investing, it seems to me that things go very wrong quite frequently. Maybe that is not the correct way to think.

My feeling is that if you index to everything, that becomes a fully hedged position which may not turn out all that well. If there is little risk, there might be little return. That is just me though, good luck with it, it is the more sane way to go.

It's a frame of mind. I want my fair share of the market. No more, no less. I index the whole stock market and the whole bond market, pluse a touch of tilt to small, value and REITs but that's just for fun.

I sleep fine. I will get my fair share. If you need to beat the market, you'll just have to take the angst that goes along with that.

 

[RockOn]

It's a frame of mind. I want my fair share of the market. No more, no less. I index the whole stock market and the whole bond market, pluse a touch of tilt to small, value and REITs but that's just for fun.

I sleep fine. I will get my fair share. If you need to beat the market, you'll just have to take the angst that goes along with that.

I don't need to beat the market, I just would prefer to avoid the major meltdowns that happen now and then. I see that as a different thing.

What if that "fair share" was a serious loss? If you lost 30% your portfolio, you could still sleep well? I couldn't. I'm not predicting it will happen. You could ride it out? I would sell. Because I couldn't handle it, I'm always looking for ways to minimize the risk. I don't have that frame of mind, I'm not an trusting optimist when it comes to financial security. It does add stress. Annuities might be a partial solution for me.

 

[REWahoo]

RockOn, some people are so risk averse they shouldn't be in the market. It seems pretty obvious from your posts that you fall in this category. That's just how you are wired, and that's unlikely to change - no reason to frustrate yourself by trying to fight it.

Might as well relax, buy yourself a couple of annuities and try to enjoy life. Oh yeah, and make some insurance salesman very happy...

 

[RockOn]

RockOn, some people are so risk averse they shouldn't be in the market. It seems pretty obvious from your posts that you fall in this category. That's just how you are wired, and that's unlikely to change - no reason to frustrate yourself by trying to fight it.

Might as well relax, buy yourself a couple of annuities and try to enjoy life. Oh yeah, and make some insurance salesman very happy...

I just might.

I should add that if investment grade bonds were paying 8% or stocks were selling at a PE of 10, I'd not worry about the risks. Will that happen anytime in my life, who knows, but it doesn't look like it.

 

[Rich_by_the_Bay]

If you lost 30% your portfolio, you could still sleep well? ...You could ride it out? I would sell.. Annuities might be a partial solution for me.

Yes, I could ride it out. I feel confident that there will be at least a couple of serious downturns during my retired life. Couldn't think of a worse time to sell, and with plenty in cash I am in no rush for the market to recover. Of course, historically it is up more than it is down, you just have to be patient.

RockOn, there are two books I recommend: Solin's Best Investment Book you'll ever read, and - even if you don't buy in to it completely - Lucia's Buckets of money. Maybe an annuity is right for you, but both show that there are alternatives to consider.

 

[REWahoo]

I should add that if investment grade bonds were paying 8% or stocks were selling at a PE of 10, I'd not worry about the risks. Will that happen anytime in my life, who knows, but it doesn't look like it.

Maybe a solution for you is a 95/5 portfolio: 95% annuities, 5% lottery tickets.

 

[cute fuzzy bunny]

Google up Bernstein's 'pal' Angus Maddison and analyize the rise and fall of national markets.

Indeed...I wonder often at what stage the US markets are at...clearly our emerging and developing stages are behind us. With history as our guide its all downhill from here. Which is one of the reasons why I'm slightly leery of holdings consisting primarily of US based stocks and bonds.

Index the world, keep your passport up to date, and don't be on the last train leaving Berlin. Why struggle to make real the myth of certainty when you can be entertained with life in ER.

Theres at least one new sig in there, more likely two.

As far as panicking and selling everything if my portfolio went down 30%...well...theres that crazy mindset that seems to only affect stocks and real estate. Prices go up and everyone wants to jump in and own them. Everything goes on sale at a deep discount and everyone wants to run away.

Nutty.

 

[donheff]

RockOn. We likely will see a 30% decline in equity markets in our retirement years. If that would panic you into selling you really should consider some annuities. Research your state guarantee and spread a few around if they will be covered that way. Insure your basic needs so you can stomach the falls when they come. I have a Federal pension that will keep me out of the dog food aisle in a crisis and that certainly takes the edge off the rise and fall of the portfolio.