Anyone buy an annuity simply to avoid market downturns?

FloridaJim57 - We took our pensions as annuities and they are partially offset with a fixed rate mortgage, as a part of a matching strategy. The annuity payments won't go up but they are matched with a fixed rate mortgage which also will not go up. I would be hesitant to have a fixed annuity offset with expenses subject to inflation. How would your retirement planning go if you had a fixed annuity for income but your expenses subject to inflation went up by 15% or more a year?

I don't have a high equity allocation either but I do have a high allocation to TIPS, which are inflation adjusted. TIPS are up to .99% + CPI inflation as of this writing. At 1.33% real yield they provide a safe withdrawal rate of 4% over 30 years. In the past they've been over 2% and I'm hoping we'll see those kind of rates again this year or next.
 
Also, immediateannuities.com is a great resource; I often see it recommended by trusted sources. No hard sell whatsoever, just lots of information.
 
Dash man said:
Does anyone have experience with Fixed Index Annuities? What are your thoughts on them?
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My experience with them is over 20 years old from the side of the issuer and at the time they were referred to as equity indexed annuities.

The minimum guaranteed values were 90% of premium that grew at 3% annually.

The contract value was typically premium accreted for a percentage of the index (referred to as the participation rate... commonly the S&P 500 index) subject to an annual cap. The participation rate and cap rate are declared annually at the beginning of the policy year and would be based on the cost of options used by the insurer to hedge the index risk.

Pretty complicated product with lots of levers for the insurer to use to make their returns. Personally, I would avoid them.
 
Dash man said:
Does anyone have experience with Fixed Index Annuities? What are your thoughts on them?
Click to expand...

My Mom got put into an annuity by her "advisor". The one she was in a more traditional (read "awful") annuity and then the guy ws proposing to roll her into a fixed index annuity that had "zero" costs and a few other bells and whistles.

If I recall correctly, there were three big questions:

1) Do you get the dividends coming off the underlying index fund or does it go to the insurer ... dividends represent a significant portion of the total return on an index and one of the hidden gotchas is that the insurer captures that benefit rather than you.

2) The 3% guaranteed return (or whatever it was) is not calculated annually but rather compounded from the beginning of the contract. So its not like you get the market upside one year and some downside protection the next, you're basically get a guarantee that the long term performance of the stock market won't be worse than 3% in nominal dollars.

3) Part of the bells and whistles was an annual allowable withdrawal and some provision for nursing home costs...but I shuddered to think about the paperwork and hoops required to access the money, particularly in a time of duress.

Net: A long term, diversified bond structure with a yield above 3% probably wouldn't but much different than this and with a lot less brain damage in terms of accessing the money.

Note: I'm not an all-purpose annuity hater. Under the right circumstances and with the right AA approach, it seems to me that a SPIA or Deferred income annuity may be sensible. I don't have one myself (yet) but these "do it yourself pensions" may make sense, albeit with all of the inflation issues that folks have mentioned. My exposure to the more complicated vehicles has me firmly in the camp that complicated = bad.

YMMV
 
Dash man said:
That sounds like a generalization of annuities without any real information to answer my question.
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they end up being more like complex money markets on steroids .

for one thing they include no dividends which right off the bat account for 25-30% of the markets gains .

they tend to sound great but are very complex and usually involve a phantom account .


here is a fixed income index annuity that promises a 5.50% guaranteed return or what the bond index in this case it is linked to does .

sounds great , right ?


well it sure does until you look under the hood .


for starters you are not likely to beat the guaranteed 5.50% since out of the index comes the 2-3% in annuity expenses .

the guarantee includes expenses , but that balance from the guarantee is not yours to take .

it is a phantom account only good for annuitizing .


so lets see what the insurer will never show you .

so we see if we give them 100k at age 55 and let it grow for 10 years that with a 2.50% expense , there is no way the bond index will beat the guarantee of 5.50% which includes expenses .
so basically the index is for show .


we see below if we give them 100k at age 55 and defer to 65 to start , we have the 100k compounding to 180,209 .
you really did get 5.50% . but now watch how that goes away .

you cant take that 180k nor can heirs get it . it sits in a virtual account not your account and it is used only as a base for your annuity draw .

so you gave them 100k at age 55 , you start drawing money at 65 .

it takes until age 76 to get your own money back out . that is 20 years at zero return .

you see the first penny of their money at 77 . your return for 21 years is now .44% .
even if you lived to 90 you saw less than 4%

so because they control how much of the virtual account you actually see they can guaranttee you anything and it does not matter .

if you notice while you are deferring and growing out of the 5.50% each year you get they are only allowing you to see 1/10% more of it

i-npq9z3W-X3.jpg


by the way , what your heirs get is your actual account balance less all the money drawn out over the years , less the 2.50% expense each year .

after a number of years that is likely zero and you are running only on the virtual account balance no one can touch
 
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Dash man said:
That sounds like a generalization of annuities without any real information to answer my question.
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Sorry if that seemed generalized. I'm referring specifically to the types of annuity you asked about. Indexed annuities had some of the highest fees of any annuity I've seen. Indexed annuities were overly complicated, to the point where after looking hard at them decided they were engineered to market well and perform poorly in the long run.

Some generalities hold true to these specific kinds of annuities. A fixed annuity isn't complicated, hurdle cleared. An indexed annuity with varying expenses, returns, and guarantees is by nature complicated, hurdle not cleared. You know exactly what you'll pay in the future in fees for many annuities, hurdle cleared. You often don't know what the future expenses will be with indexed annuities, hurdle not cleared. It doesn't make them necessarily bad, it means you have to look harder at it to be fully informed.

My specific opinion is based on selling and analyzing (pretty thoroughly) annuities from 2006-2013. If anything has changed since then, ok.
 
Fixed Indexed Annuities(they changed the name to protect the guilty) can be one of the most expensive investments to realize a 2.65% gain from 2013 to 2021. They cap the upside of the index to 1% a month, but you get all of the downside to Zero. So the Market ends up 28% in a year, you end up with 0 and the expenses deducted from the 0 gain. No dividends received either. Just run away!!! First hand experience here.
 
Closet_Gamer said:
If I recall correctly, there were three big questions:

1) Do you get the dividends coming off the underlying index fund or does it go to the insurer ... dividends represent a significant portion of the total return on an index and one of the hidden gotchas is that the insurer captures that benefit rather than you.


YMMV
Click to expand...

This is a common misconception on FIAs (because the salespeople try to make you think you are getting "market returns"), they are CD/MYGA alternatives not stock alternatives. The insurer does not invest in the index directly they hold options on the index.

So the insurance company does not get dividends as they do not hold any equities. Since the insurance company does not get dividends nor would the purchaser.

That is why these should be marketed as alternatives to CDs and MYGAs not the stock market.

They can also be used as a base contract to house a rider for guaranteed income. Some people prefer the rider over a SPIA because you do not lose access to your premium and can have more flexible payouts.

They generally will yield a little better or worse than CDs and MYGAs.
 
capjak said:
This is a common misconception on FIAs (because the salespeople try to make you think you are getting "market returns"), they are CD/MYGA alternatives not stock alternatives. The insurer does not invest in the index directly they hold options on the index.

So the insurance company does not get dividends as they do not hold any equities. Since the insurance company does not get dividends nor would the purchaser.

That is why these should be marketed as alternatives to CDs and MYGAs not the stock market.

They can also be used as a base contract to house a rider for guaranteed income. Some people prefer the rider over a SPIA because you do not lose access to your premium and can have more flexible payouts.

They generally will yield a little better or worse than CDs and MYGAs.
Click to expand...

Exactly... they were initially marketed as equity-indexed annuities and at that time there was a concern that the SEC might consider them to be securities requiring an entirely different regulatory scheme... the SEC ultimately determined that they were not securities but for clarity the insurers then started calling them fixed indexed annuities.

But not much is fixed other than the minimum guaranteed value. The participation and cap rate and other factors can be adjusted annually by the insurer based on the cost of options to cover the index feature. This along with including only the change in the index and not including dividends significantly reduce the yields.

I'm not even sure that they will keep pace with CDs or MYGAs... but in any event they are way to complicated for most people and not worthwhile.
 
pb4uski said:
My experience with them is over 20 years old from the side of the issuer and at the time they were referred to as equity indexed annuities.

The minimum guaranteed values were 90% of premium that grew at 3% annually.

The contract value was typically premium accreted for a percentage of the index (referred to as the participation rate... commonly the S&P 500 index) subject to an annual cap. The participation rate and cap rate are declared annually at the beginning of the policy year and would be based on the cost of options used by the insurer to hedge the index risk.

Pretty complicated product with lots of levers for the insurer to use to make their returns. Personally, I would avoid them.
Click to expand...

This is why I like my immediate annuities from TIAA.
My TIAA Traditional annuity is similar to an SPIA except that TIAA makes unscheduled increases to annuitant's payouts based on reserves. We got a 5% increase for this year, the largest ever.

And TIAA's immediate variable annuities are easy to understand. No guaranteed payout amount and no cap.
I have VAs based both on the broad stock market and on commercial real estate. My monthly payouts are based on a simple formula which depends on how the underlying investment (QCSTIX or QREARX) has done over the past month or year.

Too bad other insurance companies don't offer simplicity like this...
 
Dash man said:
Does anyone have experience with Fixed Index Annuities? What are your thoughts on them?
Click to expand...
Passing experience. I have downloaded a couple of prospectuses (prospecti ?). One from Thrivent ran to 208 pages of fine print. Right away that was a reject because of my ironclad rule to never buy anything I don’t understand. But for grins I did text searches for "fee" and similar words. Amazing! Fees to put money in. Fees to take money out. Annual fees.

@Dash man, if you find an FIA that you can honestly tell yourself you understand completely, and a thorough search for "fee" yields acceptable results, then take a look at the "index" and see if it is the total return of the index or only the nominal return sans dividends. If total return and you really understand the product and you have not yet died of old age while searching for such a product, then maybe it's something to consider
 
Thank you everyone for your information and perspective on Fixed Index Annuities. I’ll keep doing what I’m doing, which is moving my individual stocks into four index ETFs and bond/cd ladders.

ETA: Getting older is scary, and I’m looking for more simplicity in my investments for me, and especially for DW should she be left with them.
 
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pb4uski said:
Exactly... they were initially marketed as equity-indexed annuities and at that time there was a concern that the SEC might consider them to be securities requiring an entirely different regulatory scheme... the SEC ultimately determined that they were not securities but for clarity the insurers then started calling them fixed indexed annuities.

But not much is fixed other than the minimum guaranteed value. The participation and cap rate and other factors can be adjusted annually by the insurer based on the cost of options to cover the index feature. This along with including only the change in the index and not including dividends significantly reduce the yields.

I'm not even sure that they will keep pace with CDs or MYGAs... but in any event they are way to complicated for most people and not worthwhile.
Click to expand...

That's interesting. Makes the marketing of them even worse.
 
TheWizard said:
This is why I like my immediate annuities from TIAA.
My TIAA Traditional annuity is similar to an SPIA except that TIAA makes unscheduled increases to annuitant's payouts based on reserves. We got a 5% increase for this year, the largest ever.

And TIAA's immediate variable annuities are easy to understand. No guaranteed payout amount and no cap.
I have VAs based both on the broad stock market and on commercial real estate. My monthly payouts are based on a simple formula which depends on how the underlying investment (QCSTIX or QREARX) has done over the past month or year.

Too bad other insurance companies don't offer simplicity like this...
Click to expand...

5% increase? really, so for every $1000, $50 bucks? That's pretty good. I'm planning to get a TIAA annuity when I retire. If you don't mind me asking, at what age did you start out your annuity income. Thanks.
 
Trying to "avoid market downturns" is a surefire way to also not participate in market upturns which happen most of the time and compounded can allow you to significantly grow your money.
 
Most annuities, not all, but most are complicated insurance products masqueraded as investment products.
Avoid.
 
FREE866 said:
Trying to "avoid market downturns" is a surefire way to also not participate in market upturns which happen most of the time and compounded can allow you to significantly grow your money.
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I totally agree!!!
 
I have about 8% of my Net Worth in SPIAs. It is insurance and if I die early and lose, I won't care. No regrets buying them, and I am still glad that I did. That's likely my limit. YMMV

Rich
 
FloridaJim57 said:
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?
Click to expand...

It transfers the risk of winning as much as it transfers the risk of losing. For some, that is just fine.
 
Bought a SPIA (Single Premium Immediate Annuity) with around 12% of my savings earlier this year. I get about a 7.6% annual payout. Considering I'm trying to stay under the so-called "4% Rule" (I'd be what's considered a "marginal retiree"), it seems a win. My draw from my portfolio has dropped noticeably, down to (if the remaining months' draws pan out) about 3.5%-ish. More importantly, my worry level has dropped too (and that was the point). I've got another smallish bag of money in a cash account earning 3.5%, that I may deploy into another SPIA (from a different insurance company) sometime after I turn 70 or 72-ish. Probably won't if inflation remains high, the move then is a stock fund I suppose.

But for now, most of my most basic bills are paid by S.S. and the SPIA.

I like it!
 
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