Annuities - Thoughts?

[msrhoda]

Hi Everyone,

Requesting thoughts on annuities. I know there is a lot of controversial info out there. Would like some advice about using them to preserve wealth vs. hoping we don't have another 2008 where investments can take a huge hit. Many thanks.

 

[braumeister]

Spend an hour using the search function here and you'll get an incredible education on annuities.

 

[CaliKid]

I like annuities in some situations however, above all else, the key to me is diversification in all assets. Definitely research if annuities make sense for your situation. Looking for stable income, little risk, just for your lifetime? Then maybe they make sense. A lot of people will tell you annuities are the worst thing in the world. I tend to disagree with the herd mentality and look at the actual situation before saying whether it makes sense or not.

 

[Gearhead Jim]

For any given purchase price, annuity payouts are just awful right now due to the low interest rates of bonds that annuity issuers purchase to fund the future.


When I was 60, I got some immediate annuity quotes. Now 10 years later at age 70 and a lot less future ahead of me, the monthly payout for a given purchase price is actually lower than the previous quotes at age 60.


OTOH, other fixed income investments that might substitute for an annuity (bonds, CD's, etc) are also paying very poor rates, so a comparison between them and an annuity hasn't changed much.

 

[pb4uski]

Most annuities other than SPIAs have high costs, fees and expenses... especially variable annuities.

SPIAs have a place in retirement funding, but I don't see them as a good value in this interest rate environment.

 

[panacea]

+1 on low interest rates.

And for most, they're a terrible idea. Generally they are products that are sold, not bought.

I would first figure out how much risk you'd have to take in your portfolio to make your retirement plan work. In other words, if you only need an average annual real rate of return (return after inflation) of 2%, you can maintain a conservative allocation and avoid major volatility. Volatility is usually the argument for buying an annuity. So if you are at 95% with Firecalc using conservative assumptions and no annuity, you're good. If your results are worse, you could try it with a portion in an annuity to see what happens. But if the results are poor, maybe not financially secure yet anyway?

Whatever you do, don't lock up too much of your assets in an annuity... keep a balanced mix. I've seen people put 1/2 of their assets or more in annuities... always purchased from advisors with slits in their suit jackets to make room for their fins.

 

[harley]

I like annuities in some situations however, above all else, the key to me is diversification in all assets. Definitely research if annuities make sense for your situation. Looking for stable income, little risk, just for your lifetime? Then maybe they make sense. A lot of people will tell you annuities are the worst thing in the world. I tend to disagree with the herd mentality and look at the actual situation before saying whether it makes sense or not.

I think many people here will say that variable annuities are the worst thing in the world. SPIAs tend to get a better review. But don't forget to take the lack of inflation protection into account when considering the supposed "stable" income. If you are looking at more than a decade or so your stable income is likely to be cut by 50% or so. That sounds pretty risky to me.

 

[blenhardt]

i recently put some cash in an annuity. I think annuities have changed for the better in regard to the high fees. There were no fees. The value started out with the amount that I put in and never dropped below that. The interest rate for the first year is 3.25% and guaranteed 2% there after. I purchased it in April of this year and it is up 1.45% to date. Better than .5 % in a money market fund. Yes, it has a surrender penalty for 4 years. As other have said I would not put a large part of a portfolio in annuities, just a part of your cash allocation.

 

[REWahoo]

There were no fees.

 

[mathjak107]

i would only consider low cost spia's . nothing else . they are to complex , never the deal you think you are getting on the guaranteed growth rates and to expensive for what you get .

most people have no idea the guarantee's they are promised are on virtual accounts used for basing an annuity income on and is never their money to take or pass to heirs . in fact they would have to live to 100 most of the time just to actually hit the guaranteed roi and that assumes they are single and it does not pass to a spouse .

if it does it would take even longer to hit the guaranteed roi level of return .

 

[mathjak107]

you will never see a spread sheet like this from your annuity provider . THIS IS THE REAL DEAL . basically all variable annuity's with guaranteed minimum growth rates work the same .

they would never let you see the bottom line growth rate you get on their guaranteed minimums and bonus bucks they give you .

here is an example of how these guaranteed minimums work and why what you think you are getting is not what you get .

this is actually not a bad products and as a proxy for cash it is actually pretty good.

it is called prudentials variable fixed income deferred annuity . it gives you a guaranteed 5-1/2% increases a year minimum or whatever your bond index that is linked got as a high water mark , which ever is higher .

in reality there is no way a bond index today with more then 2-1/2 % in fees being charged is going to beat 5-1/2% so your guarantee is going to be your deal .


you will never see spread sheets like this from the annuity issuer . this is your real deal once the curtain is pulled back .

so here is a deferred annuity for a single , you start at age 55 putting money in and delay until age 65 when you annuitize your money .

the fees are 2.55% and you are linked to the ast bond index , similiar to AGG .

the guaranteed min of 5.50% includes the fees , the bond index does not , so right off the bat you know the link to the index is there because it sounds good but it will not beat the min with those fees .

so below you see the yearly compounding of the promised 5.50% . that is taking part in a sub account which you can never take out or pass to heirs . the balance is only used to compute your draw when you annuitize . your actual account value is the one linked to the bond index with all the fees .

that is what you get if you want your money or pass to heirs .

so you see if you give them 100k and take the annuity after year 1 ,you get 4% of 105k or 4200.00 bucks.

for every year you delay your balance grows by 5.50% and your draw if you annuitize goes up 1/10% so finally 10 years later you get 5% of 180k or 9k .

that is a nice jump in income so it isn't a bad product but if you thought that 180k was yours to take you were wrong . your actual balance is what is linked to the bond index net of all those fees .

you can see it takes until age 75 before you get all your money back and see dollar 1 on their dime .

NOTE , YOUR ACTUAL GROWTH RATE BY AGE 90 IS NOT THE 5.50% YOU THOUGHT , BUT ONLY 4.55%

not bad by todays standards but not what you expected .

 

[mathjak107]

here is what it looks like for a couple where when the first spouse dies , the 2nd gets the payments .

age 55 would give you a 3.50% draw right away and 10 years of deferring gets you to 4.50%

by age 95 you are getting 4.50% of 251k and if one of you lives to 95 you actually got a 4.31% return , not 5.50% as you thought .

 

[Danmar]

Volatility is usually the argument for buying an annuity. So if you are at 95% with Firecalc using conservative assumptions and no annuity, you're good.

I think annuities are really "longevity protection". Not so much dealing with the return part of the equation, but rather your life span risk (longevity risk). For those with little or no pension, an annuity to cover basic expenses might make good sense. Probably best to wait until your 70's to do this as the rate would be better and obviously longevity risk gets bigger the older you are. Worth considering, but certainly not great pricing at the moment.

 

[mathjak107]

i like spia's rather than these complex variable annuity products .

i do believe after delaying ss, an annuity like an spia could make sense .

i think it is not a good idea to take ss early and then buy an annuity . there is no annuity you can buy that can compare to what ss gives you for the dollars you give up delaying .

 

[Richard4444]

I see SPIAs as a longevity insurance product (pension) and not an investment. The internal rate of return is poor and there is no inflation adjustment. With that said, I am an SPIA owner for a portion of my funds, and am very comfortable with that.

Rich

 

[mathjak107]

that is correct , spia's are insurance . variable annuity's with an investment account and a guaranteed growth rate are hybrids and fail at both in my book more often than not .

as you see in the prudential annuity you neither benefit from the investment side nor achieve the guaranteed growth rate on anything but the virtual account which is not yours to take .

you do get the growth rate applied to the virtual account but can only access 1/10% a year more of that gain each year .

spia's are valuable when combined with your own investing . they allow higher cash flow than you can take it from the cash and bond portion of your portfolio yourself .

that delays the selling of equity's to refill early on which adds to success rate and usually a bigger balance .

 

[flyingaway]

With a little bit of portfolio management education, you do not need any annuity.

The annuity company has to invest your money in a safe way and will take a fee to do that. You can do similar things more conservatively by saving the fees. True, there may be another 2008, but that may also bankrupt the annuity company.

For people with certain size portfolios and without children (or similar legacy consideration), maybe annuity is an easier way for the peace of mind.

 

[Sunset]

With a little bit of portfolio management education, you do not need any annuity.

The annuity company has to invest your money in a safe way and will take a fee to do that. You can do similar things more conservatively by saving the fees. True, there may be another 2008, but that may also bankrupt the annuity company.

For people with certain size portfolios and without children (or similar legacy consideration), maybe annuity is an easier way for the peace of mind.

Annuities have the advantage of pooled resources, since some of the customers die early, you get a little slice of their pie, so the "return" can be better than a self portfolio management.

 

[REWahoo]

Annuities have the advantage of pooled resources, since some of the customers die early, you get a little slice of their pie, so the "return" can be better than a self portfolio management.

Doesn't the insurance company negate this by holding back some of the pie to pay those who die late? They are in the business to make a profit and don't provide a free lunch to anyone.

 

[mathjak107]

With a little bit of portfolio management education, you do not need any annuity.

The annuity company has to invest your money in a safe way and will take a fee to do that. You can do similar things more conservatively by saving the fees. True, there may be another 2008, but that may also bankrupt the annuity company.

For people with certain size portfolios and without children (or similar legacy consideration), maybe annuity is an easier way for the peace of mind.

you cannot duplicate the diversification and consistency of an spia on your own .

they have the diversification of investing in something we never can - dead body's .

those who die pay for those who live . ..besides market and interest rate risk they can have a totally unrelated asset class - the dead .

 

[meierlde]

you cannot duplicate the diversification and consistency of an spia on your own .

they have the diversification of investing in something we never can - dead body's .

those who die pay for those who live . ..besides market and interest rate risk they can have a totally unrelated asset class - the dead .

Of course if they offer life insurance they can also offset the annuity risk with the life insurance risk. One pays the customer more if they die early and one pays the customer more if they die later, but if done right it sort of takes the risk out of the equation for the company as it can lay one risk off against the other.

 

[mathjak107]

the insurers are in a pretty good position . they can tell us pretty much how many people will die in a year . they just can't tell us who .

that allows them to plan .

they actually pool all the money from the riders and options they sell and use that to mitigate risks in their products .

there is no way we can normally do what they do on our own .

spia's pay out far more cash flow than we can safely draw from ourselves unless we have only the best outcomes in our investments .

 

[nun]

Avoid variable annuities, only buy ones that have fixed interest rates.

Because rates are so low I would not even consider buying a lifetime annuity today.

 

[COcheesehead]

A DEFERRED annuity is a great tax shelter. Just don't ever annuitize the income from it.

 

[Cobra9777]

Hi Everyone,

Requesting thoughts on annuities. I know there is a lot of controversial info out there. Would like some advice about using them to preserve wealth vs. hoping we don't have another 2008 where investments can take a huge hit. Many thanks.

As others have commented, stay away from anything other than a SPIA. And even those are a poor value right now due to low interest rates. While I don't know your whole situation, in general, I think SPIA's are not a good fit for your stated purpose (bolded above). They are a good fit as longevity insurance in your 70s, especially for those in good health with no pension and possibly no SS. For pre-SS early retirees concerned about sequence risk, you might be better served by just holding a few year's cash in an online savings account. Use that cash to weather the storm and develop the discipline to avoid panic-selling.