Anyone buy an annuity simply to avoid market downturns?

[TheWizard]

dont forget if you are spending down , you are reducing the treasury balance every year having less and less producing income...

What some folks fail to realize about guaranteed monthly income in retirement is: by annuitizing maybe 1/4 of your nest egg, depending, the remaining 3/4 of your nest egg is now LIBERATED from regular drawdowns.

But it's available for occasional large purchases and/or for your heirs.

And you can invest that remaining nest egg more aggressively if you choose since you now have a longer time horizon with it.

As usual, the devil is in the details...

 

[Crewer]

I get that annuities are very unpopular - for good reason - with many people here. DH and I each bought single premium deferred annuities 7-8 years ago with money that came from a former employer's pension plan (the employer had dissolved it and turned it into an IRA-type investment with employer-only contributions). These annuities pay double for up to two years in case of needing long term care and have a guaranteed payout so if we die before exhausting it our heirs get the remaining. We haven't turned them on yet because there was a sweetener that gives us extra $ for the first 10 years so we'll turn them on when that runs out. The amount of guaranteed payout is decreasing slowly to pay for the LTC rider but it's less than for equivalent LTC insurance, which DH doesn't qualify for anyway.

We're happy with the decision and the annuities make up most of the non-stock part of our portfolio. The payout will go toward RMDs. DH is a very nervous nelly when it comes to stock fluctuations so he is especially glad to know we can take those if we get to the point of not wanting to sell stocks in a down market for living expenses.

I think of them as another diversification.

 

[GravitySucks]

I bought a small deffered SPIA that kicked in when I turned 62.
Insurance in that the SPIA + early SS would cover essential expenses if I screwed up my investments.
My investments have been doing better than expected and the SPIA $ is now play money. Nice having it hit the checking account every month, but not needed for its original purpose. It's insurance and it has done its job.
I'll be looking at buying again when I'm 75 or so.

 

[TheWizard]

We're happy with the decision and the annuities make up most of the non-stock part of our portfolio. The payout will go toward RMDs...

You might want to check on that. The tax-deferred money that I annuitized pays me lifetime monthly ordinary income that the IRS is content with in lieu of what RMDs would have been on the annuitized amount.

But my remaining (unannuitized) tax-deferred funds are still subject to RMDs, which I take on a monthly basis...

 

[mathjak107]

The problem most have is forking the money over to an insurance company but in a way it is the reverse of how we spend which could be an advantage .

If you picture a 50/50 mix of equities and bonds/ cash over the last decade ;

As we spend our 4% inflation adjusted from the bond/ cash bucket we have less and less working for us and less and less of a balance over the years , eventually we would likely hit zero and refill from equities in a simple example .

If we used an spia then we would fork over that lump sum up front , then spend down …

In the early years to get our 4% inflation adjusted draw wouldn’t take the over 7% the insurer is handing us so we can reinvest that for a while .

However as time goes on that cash bond bucket has a floor and never goes to zero.

so the big benefit to an spia is we need to sell less equities to meet spending and refill

 

[Jerry1]

When I retired, I got the option of a pension or lump sum. I took the pension and view it as an annuity. I took the pension because it spread risk. My pension with SS will cover living expenses. That means my portfolio needs to cover inflation since the pension is not COLA. I’m very happy with my decision. It may be true that I could have done better with the lump sum, but I sleep better knowing there are some pieces to my financial house that behave differently. Between my pension, SS and my portfolio, it would take a really bad (catastrophic) set of circumstances for me to end up with no roof over my head or food on the table. I sleep well.

 

[VanWinkle]

dont forget if you are spending down , you are reducing the treasury balance every year having less and less producing income .

an immediate annuity never pays out less because you drew off it .

an spia can add a level of diversification we cant . dead bodies .

the dead pay for those who live and so spia payouts are higher then you can safely draw from a portfolio of fixed income .

because the spia never runs dry like a bond ladder will it also can require less spending of equities to refill spending buckets . .

work by milevsky , pfau and kitces show under most outcomes an spia can improve cash flow levels and reduce risk

how long would a bond ladder of 100k have supported a 4% inflation adjusted draw rate before hitting zero as opposed to a 100K in an spia ?

so an spia to replace some of the bond budget of a diversified portfolio can be more beneficial.

a 65 year old can get 7,344 a year on a 100k today . that is a 7.344% draw rate with no other fees .

I agree with using a SPIA for income when other sources are limited. I was really talking about the"investment" annuities like the fixed indexed anuity.

As long as you know you are buying insurance against living too long for your resources, a Single Premium Immediate Annuity may make sense.

 

[pb4uski]

I was told by sincere people whose motives I trust that the best reason to purchase an annuity is to cover the gap between monthly income and monthly expedniture. I get it. But did anyone buy an annuity whose income coverd montly expense and they just were sick of market downturns every few years? They just wanted to take some of the risk out of their finances? In some ways an annuity is a transfer of risk. Any real world experiences you wish to share?

The biggest problem with the above strategy is that it doesn't provide for inflation.... your expenses increase with inflation and your annuity income does not.

I think if you want to avoid the stress of market downturns you would be better off to maintain a 10 year CD/UST/bond ladder with each rung being the annual gap between annual expenditures and annual income and then invest the rest consistent with your overall target AA. If you did this you could also build into the rungs a provision for inflation in expenditures and, if applicable, income.

So for example, let's say that your expenditures are currently $100k and you have $25k of fixed income from a SPIA and $30k of SS that will increase with inflation. If you assume 4% inflation, the first rung would be $48k ($104k - $25k - $31k) and the 10th rung would be $79k ($148k - $25k - $44k). The 10 year ladder would be total $624k.

If your plan had a 4% WR, then you would have $1.125m portfolio ($45k gap/4%) so that would result in a 45/55 AA.

As each rung of the ladder matures and you use the proceeds for spending you would add a 10th year rung from the stock part of the portfolio. If stocks are down, you could defer adding the replacement rung for a few years until stocks recover.

 

[MarieIG]

In the near future, any additional annunity would probably be a MYGA.

I like the "feeling" of a (an additional) guaranteed lifetime income stream, but it doesn't make sense right now, as I am working on Roth conversions, I don't need to push out taxable income higher. No, we don't need it, but no one here would bat an eye if I bought a round the world cruise, so maybe, just maybe a bit down the line there will be another J&S SPIA.

One of the benefits I see of picking up an additional annunity at a later age is some additional income hitting the checking account when (if) I am no longer able to handle finances. If I pass first, there is no way on this planet that DH is going to set up bond ladders. Postponing SS will assist with the COLA.

To answer OP's question, I had purchased an old Vanguard variable annunity years back, to place additional income after filling up other deferred income vehicles, but since it has underlying funds, it does not avoid market fluctuations. I am in no hurry to annunitize it, and will need to compare it to other products to see if I want to do a 1035 exchange . . .

 

[Chuckanut]

The only annuity I have is from Uncle Sam - taking SS at 70. And it's COLA'd.

Note that by delaying SS until 70 I can spend more each year as long as I don't worry much about the size of the estate I leave my heirs.

FWIW, I am giving my heirs their inheritance a little at a time now, when it can really do them some good (like helping them buy that first house, supporting continued higher education, etc.)

Thanks to taking SS at 70 and my COLA-lite pension, I don't think I have to worry much about running out of money.

My 2¢. Take what you wish and leave the rest.

 

[SnowballCamper]

The "safety" of an annuity as a means to offset market volatility comes with a certain cost.

The biggest problem with the above strategy is that it doesn't provide for inflation.... your expenses increase with inflation and your annuity income does not.

The annualized funds are certain to depreciate at the rate of inflation...unless you get the cola...which insurance companies aren't generally offering. So that's the trade off for the guaranteed income...you're guaranteed to loose whatever the inflation amount is. I understand that some people find it easier to sleep with the guaranteed loss... But if your expenses are covered, and you have the ability to avoid a forced sale on broad market index funds, I think the annuity is giving money away.

 

[24601NoMore]

It may be rare as a purple unicorn, but there ARE those of us (me included) who buy annuities (and similar products like CDs) to avoid market downturns. Not everyone is "shooting for the fences" just to get "more", and an approach that guarantees success over one's lifetime through predictable income IMHO can have a lot of merit.

A proper asset allocation can protect from market downturns...without surrendering 6%-8% to the person who sells you the annuity. Markets have tended to grow over the past 100 years...with a little wiggling along the way. The fixed income portion of your portfolio should help you even out the ride.

Not always the case. MYGA commissions, for example, are paid by the insurance company to the broker (BluePrint Income, Stan the Annuity Man, Fido, etc). 100% of your principal is retained, and you pay zip, zero, notta in commissions yourself.

Re: the 100 year comment..sure..and there have been long periods where the market has returned negative. That'd be a painful time to pull from an equity heavy portfolio, so predictable income to pay the core bills can be a great alternative. (And I'm curious what type of AA protected from the 2022 market meltdown?)

I can't quite parse this sentence. Are you asking about people using annuities to cover monthly expenses, or are you asking if people who already have monthly expenses covered are still buying annuities?

If it's the latter, I probably wouldn't do that, because I'd have excess income each month, and what would I do with the excess? I'd want to invest it, mostly for my heirs, so why don't I just keep it invested in the first place? Besides, my heirs have a longer horizon than I do to ride out the occasional downturn.

For the former, an SPIA makes sense to help cover monthly expenses, transfer risk to the insurer, and provide some longevity insurance. "Sick of market downturns" seems like an emotional response and I try my best to separate emotions from my finances.

Some annuities (eg: MYGA, where dividends are only taxed at withdrawal) can be used for tax deferment. They're great choices for taxable accounts for this reason, as it allows one to control the amount of income they recognize in a given year.

Although I may be in the minority here, not everyone wants to take huge amount of market risk. I'm personally at ~25% equities and a 50% drop will wipe out 12.5% of my net worth and take 5-10 years (perhaps longer..see Japan and most International markets) to come back. At this age, that's not something I'm personally super comfortable with.

If you can model out an income stream (eg: with Annuities, CDs, SS, dividend paying stocks, bonds, etc) that pays your bills for the rest of your life, AND keep "a little" (in my case, 25% or so) in equities, AND you're not investing for heirs - I'd argue there is little reason to take "much" market risk, unless you're just in the pursuit of getting "more". Some of us are perfectly happy to have "enough" (to pay the bills, live comfortably, and do so without taking on lots of risk).

Just to play the Devil's Advocate, let me add this thought to the discussion about annuties.

There is a psychological factor to investing. If having an annuity helps one or one's spouse sleep better at night, that can be a big deal. If knowing that an annuity will keep paying enough money to put food on the table, etc. while the stock market plays mind games with us (like today for example), and that keeps a person from selling into a bear market, that's a good thing.

I've known people who bought an annuity to keep their less financially sophisticated spouse calm and open to the idea accepting stock market risk for the long run benefits. Having a floor under your financial feet can be a very good feeling in topsy turvy times.

Exactly! Pfau and others (Kitces, ...) all recommend some kind of "floor" from guaranteed income to pay the bills. Once you've covered the bills with certainty (which only fixed income and/or a large cash reserve) can provide, THEN take risk with equities..

All that said, I know many here plan to just sell from their portfolios during retirement, and don't focus on predictable / guaranteed income. I personally could never do that, and do think the risks of that not being as successful as it has in the past is increasing significantly, as we are not likely to see the equity returns we've seen the past 15+ years in the next 15..and bonds? Yikes. Sure wouldn't want to "have" to sell from a portfolio to pay the bills in a market environment like we've seen this year..

Lastly and FWIW, my neighbor (also retired) told me that he's funding his entire retirement with Annuities and is pretty much "entirely" out of equity and bond markets. (This came up earlier this year when I asked how he was feeling about the 2022 market meltdown..he was very happy to own "pretty much zero" stocks OR bonds). So there ARE a few of us "purple unicorns" out there

 

[youbet]

Although I may be in the minority here, not everyone wants to take huge amount of market risk.

I'm going to call BS on this one. Your statement implies that you know the majority here wants to take huge amount of market risk and, because you don't want to take a huge of amount of market risk, are in the minority. Based both on earlier polls (don't have time to look them up now) and on simply being an active participant on this board for many years, I disagree. While there are some folks here who have high beta, equity heavy or 100% equity allocations, they are the minority.

Your preference for a 25/75 allocation isn't that far from being common here. Lots of folks with sub-50% equity AA's. And folks in real estate and other non-traditional investments too.

 

[Bruno]

Not always the case. MYGA commissions, for example, are paid by the insurance company to the broker (BluePrint Income, Stan the Annuity Man, Fido, etc). 100% of your principal is retained, and you pay zip, zero, notta in commissions yourself.

24601NoMore the ONE thing that ER and BH have in COMMON is they BOTH have them OLE people who believe and will always beleive that ALL ANNUITYS are BAD!

 

[cyber888]

I was told by sincere people whose motives I trust that the best reason to purchase an annuity is to cover the gap between monthly income and monthly expedniture. I get it. But did anyone buy an annuity whose income coverd montly expense and they just were sick of market downturns every few years? They just wanted to take some of the risk out of their finances? In some ways an annuity is a transfer of risk. Any real world experiences you wish to share?

A small portion of my 401K allocation provides a traditional fix income of 4.4%+ per annum. I can withdraw it in 10 equal installments over a 10 year period. However, I also have the option to convert this to a Lifetime annuity, with a return of around 6.5% - 6.6% at age 61-62 (the ages I plan to do this). I pay no broker, since my 401K company issues the annuity themselves and there are no middle man. In short, I directly deal with the Investment company who are acting an an insurance company issuing the annuity.

For me, it would substitute as a pension, since I have none. When DW and I collect Social Security, plus this annuity, it will meet all our basic expenses include tax payments. The only thing not included would be vacations & travel which would be around a 1.5% - 2% withdrawal from the remaining part of my 401K. It will also allow my remaining 401k amount to grow faster with less withdrawal, since I don't need to draw more than 2.5%.

I think I'm getting the annuity for peace of mind that I can meet a generous amount of living expense every month, excluding International travels and vacations, which could be $10,000-$15,000 per year.

 

[OldShooter]

... MYGA commissions, for example, are paid by the insurance company to the broker (BluePrint Income, Stan the Annuity Man, Fido, etc). 100% of your principal is retained, and you pay zip, zero, notta in commissions yourself. ...

Not a huge point, but like any product, profitably selling an annuity involves the seller covering all of its costs plus charging an amount for profit. The fact that the "principal" isn't charged for the sales commission is really irrelevant. The fact is that the total return to the annuity customers has to be reduced by the amount of the commissions paid or the product will not be profitable. The fact that a comisson is not shown charged to "principal" is pure showmanship. The TANSTAAFL principle applies.

 

[24601NoMore]

I'm going to call BS on this one. Your statement implies that you know the majority here wants to take huge amount of market risk and, because you don't want to take a huge of amount of market risk, are in the minority. Based both on earlier polls (don't have time to look them up now) and on simply being an active participant on this board for many years, I disagree. While there are some folks here who have high beta, equity heavy or 100% equity allocations, they are the minority.

Your preference for a 25/75 allocation isn't that far from being common here. Lots of folks with sub-50% equity AA's. And folks in real estate and other non-traditional investments too.

Guess it comes down to perception. While you've been around longer than me, it does seem that ER "in general" is very go-go equities.

Every time I post about having lower equity allocation, I'm usually one of the lone voices in the wilderness. Go back and check my earlier posts..I've posted time and again how people like Rick Ferri say that the "Center of Gravity" for pre-retirees and retirees is 30/70. People respond less than positively most of the time when I mention that, almost like that low of an equity allocation is outright heresy.

Anyway..no desire to get into a debate here. My perception, rightly or wrongly.

 

[aja8888]

Not a huge point, but like any product, profitably selling an annuity involves the seller covering all of its costs plus charging an amount for profit. The fact that the "principal" isn't charged for the sales commission is really irrelevant. The fact is that the total return to the annuity customers has to be reduced by the amount of the commissions paid or the product will not be profitable. The fact that a comisson is not shown charged to "principal" is pure showmanship. The TANSTAAFL principle applies.

Yeah, it gets paid. I have a friend that has his stash with Ameriprise (poor guy). He says he pays no fees.....I just roll my eyes.

 

[24601NoMore]

Not a huge point, but like any product, profitably selling an annuity involves the seller covering all of its costs plus charging an amount for profit. The fact that the "principal" isn't charged for the sales commission is really irrelevant. The fact is that the total return to the annuity customers has to be reduced by the amount of the commissions paid or the product will not be profitable. The fact that a comisson is not shown charged to "principal" is pure showmanship. The TANSTAAFL principle applies.

Doesn't matter whether the commission is "bundled in/hidden" or not (at least to me).

When you buy a MYGA, and invest $X, $X is your starting balance that interest is earned on. And you know ahead of time whether the Yield on that investment is an acceptable return (to you) to make a purchase or not. "Could/Would" you get a higher Yield if the salesperson wasn't getting paid? Possibly and likely. But what I was trying to say is that there ARE annuity products out there, like MYGAs, where you don't immediately sacrifice 5, 6, 7, 8 or even more percent from your starting balance to purchase (like many "older" style Annuities) - and that you're not immediately in a hole on day one in terms of amount invested vs. current balance.

Another thing I find puzzling about Annuity dislike/hatred is that Annuities can return a GUARANTEED income stream. Many investors take pretty significant amount of risk to be able to withdraw 3-4% SWR from their Portfolios on an annual basis, and that is of course not guaranteed - to the point the Portfolio may drop 30-50+% at any time. Many MYGAs pay 4+% fixed income today with ZERO risk (and precisely zero MARKET risk) aside from the Insurance company going out of business. If you stick with large, blue chip Insurers - that's pretty unlikely. And even if they did go out of business, there's the State Guarantee Associations to back your investment to a published $$ amount. (Whether they really "can" back all Annuities that an insolvent Insurer had or not in a given state is a different question, much like FDIC or NCUA Insurance. But just like when Banks or CUs go under, if an Insurer were to fail, the likelihood that another Insurer would buy up their assets - including policies - is pretty high. That's at least happened in most every case I can think of with Bank and CU failures. And if you stick with large blue chip Insurers and do decent due diligence on their financials, Comdex, AM Best, etc ratings, the risk of failure should be pretty minimal to near non-existent).

 

[24601NoMore]

Just to add..I'd rather buy an Annuity with a "bundled/hidden" commission (that never affects my balance) than a comparable duration CD with no bundled/hidden commission at an interest rate that's anywhere from 50 - 100 bps lower..and that's roughly the yield spread today on 5 year MYGAs vs. CDs..

If you invest $100K today in either, your investment balance is $100K when opened. I get that we're all "fee adverse", but if you're getting a higher yield and bundled fee vs lower yield and no fee, the higher yield/bundled fee wins every time, IMHO.

 

[Dash man]

Does anyone have experience with Fixed Index Annuities? What are your thoughts on them?

 

[arcyallen]

Does anyone have experience with Fixed Index Annuities? What are your thoughts on them?

The more complicated the annuity, the worse I find they are. Almost every one I've seen has been overly complicated with large fees but sound just fantastic. Check on what the MAXIMUM fees are - many start low and then ratchet up over time.

As a rule of thumb with annuities: if you don't fully understand it, walk away. I had a hard time understanding some of them, and I passed the Series 7!

 

[Dash man]

The more complicated the annuity, the worse I find they are. Almost every one I've seen has been overly complicated with large fees but sound just fantastic. Check on what the MAXIMUM fees are - many start low and then ratchet up over time.



As a rule of thumb with annuities: if you don't fully understand it, walk away. I had a hard time understanding some of them, and I passed the Series 7!

That sounds like a generalization of annuities without any real information to answer my question.

 

[youbet]

Guess it comes down to perception.

By any chance is your "perception" affected by a professional relationship with the annuity industry?

Every time I post about having lower equity allocation, I'm usually one of the lone voices in the wilderness.

Actually this is a situation where your "perception" fails to recognize what contributors are finding most beneficial for their personal situations. And is it '"every time" or is it "usually?" You can't have it both ways.

Anyway..no desire to get into a debate here. My perception, rightly or wrongly.

Yep, I wouldn't think for a minute of limiting you personal "perception." Just glad to have a chance to point out to all who care that it's your "perception" and not necessarily the actual situation.

 

[youbet]

Does anyone have experience with Fixed Index Annuities? What are your thoughts on them?

No direct experience here. But, after reading your post I Googled "fixed index annuities" and quickly found lots of information. Clearly, your personal situation would be the key determinant as to whether one of these products would be a good fit for you.

Clearly, you're asking a lot for forum members to comment without knowing what you're trying to accomplish in your consideration of fixed index annuities.