Are all Annuities BAD?

Rocky mtn high said:
They have asked for my opinion because I have known them for many years and was in banking finance for many years. But as someone pointed out, if I say no way and the market crashes there’s going to be someone very upset with me. Very fine line here!
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Its not like stocks and annuities are the only investments out there. They can reduce their stock exposure either in whole or in part... knowing that at least for now what they reinvest in will likely provide negligible return... but sometime return of capital is more inportant than return on capital.

If they haven't taken SS yet then they could use some of the proceeds from stock sales to delay SS... essentially using some of that money to buy a COLA adjusted annuity from the federal government.

The could even just park it in a CD ladder if they really want safe for a while.
 
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Rocky mtn high said:
They have asked for my opinion because I have known them for many years and was in banking finance for many years. But as someone pointed out, if I say no way and the market crashes there’s going to be someone very upset with me. Very fine line here!
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But I would not state it that way. That's setting yourself up to be the target.

Instead, show them what has happened to a conservative AA in past market crashes (you don't "lose it all"), and how you would draw from the fixed side for expenses and would not need to sell stocks at lows. And you would probably buy more stocks at those lows as you re-balance.

And then, those stocks would recover, and you'd be in very good shape because you bought low.

Then show them what happens to the buying power of an annuity if we get high inflation like the 80's. In 1990 their annuity could only buy ~ 60% of what it could 10 years earlier, that's like losing ~ 40%, which is probably more than a conservative AA portfolio dropped in the past few "crashes". And inflation hasn't turned into deflation, there was no 'recovery', so it just keeps getting worse.

At age 60, they could have several decades of inflation ahead of them.

If they still want to go with their FA and annuity, that's up to them. But you armed them with information rather than advice, and it's information they can independently verify, so you are not the target anymore.

-ERD50
 
Individual stocks can become worthless in a downturn. We had that happen in 1987, with some stock my husband had bought, through an "adviser," before he and I met. The affected company folded and the stock simply didn't exist any more. Fortunately, this was not retirement money, though it was a significant amount.

Chuckanut said:
I am always a bit astounded when I hear somebody say 10 years that after the 2008 crash or the 2001 tech bubble fiasco that they 'Lost all their retirement money'. They only lost if they sold at fire sale prices. .
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"Are ALL annuities bad?"

No. Especially if one puts only some limited portion of assets into one, and if one wants some guarantees (risk abatement) on some portion of one's assets.
 
I'd be curious whether the FA had given advice on SS claiming. If by chance, they had advised to claim SS early and now want to sell an annuity, that's a smoking gun for a shark IMO.
 
Midpack said:
I do check our annuitization hurdle quarterly https://www.financialplanningassoci...w Strategy for Managing Retirement Income.pdf
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That is from 2007, how can I never have heard of it before now?

But it does not talk about how fast a falling portfolio might accelerate.
If the portfolio fell 10% since the last check, and you are now only 10% above the Annuity Threshold -- should you annuitize now or wait to the next check (when it may have fallen 15% so you are screwed)? The advice to check more than once a year is not very helpful.

In practical use, you would have to set a rule that when your portfolio value falls to Annuity Threshold + X% Portfolio Value, you annuitize and take the X% higher income for life.

The X% would be based on your risk aversion, picking an historical Y% chance that the portfolio would not fall more than X% before the next check. Plus a time lag to sell out & make the purchase.

If you must pay capital gains taxes when cashing out to buy the annuity, your Threshold will be that much higher, and a bit painful to plug into a tax calculation.
Right now a 75 year old woman paying $500,000 will get $37,428 a year.

So maybe at some age, or when your portfolio drops to a critical low value above your Threshold, an amount equal to your Bare Survival Threshold amount, in your ROTH, needs to be re-allocated to cash.

Of course, "dynamic strategies" all require your money to be in tax-advantaged accounts so you can swap without paying taxes.
So I have to guess at a relatively fixed allocation.

Why does the board's dictionary software think that "annuitize" is the wrong spelling?
FWIW, it also rejects "annuitise."
 
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ERD50 said:
If they still want to go with their FA and annuity, that's up to them. But you armed them with information rather than advice, and it's information they can independently verify, so you are not the target anymore.
-ERD50
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Except that when people are upset they often shoot the messenger anyway.
 
In our overall plan is the possibility of adding a SPIA between age 80-85 or so depending on our overall health at the time and the state of our portfolio That would be the only type of annuity we would ever consider. And who knows, by then perhaps inflation indexed annuities will be available again.

https://www.bogleheads.org/wiki/Immediate_fixed_annuity
 
Rocky mtn high said:
They have asked for my opinion because I have known them for many years and was in banking finance for many years. But as someone pointed out, if I say no way and the market crashes there’s going to be someone very upset with me. Very fine line here!
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Their advisor is more salesman than advisor. The biggest interest is his payoff after talking your friends into the deal.

You're in a difficult position as you've mentioned. I think the best advice is to present them with links and other general advice, and try to inject calm as the FA injects FUD. Then it is their decision.
 
Keep in mind that one can easily set up a SPIA-like "annuity" by just plunking a bunch of money in Wellesley or some similar conservative balanced fund and setting up a SWR monthly automatic redemption that goes to your bank account just like a monthly annuity benefit would and don't ever look at it.

We did this for my BIL's elderly mother when she was 90 or so. She rarely looked at her account statement, but the automatic redemption showed up in her checking account every month like clockwork. When she was 97 and needed to go into a nursing home and they were going over her financial resources with the nursing home, her daughter erroneously referred to it as her Vanguard "annuity".

While it isn't guaranteed like an annuity is (subject to insurer and guaranty fund solvency) as long as the benefit amount is a safe withdrawal amount it is unlikely to ever fail. The benefit is that if the money is needed for some reason it can be accessed... can't do that with a SPIA. If Wellesley does well you can periodically "reset" the monthly redemption and increase it for inflation... you can't do that with a SPIA.
 
Chuckanut said:
I am not a fan of annuities overall. But, there is a psycohogical aspect to investing that can't be overlooked. Annuities provide an income floor that can be very comforting when the financial markets are negative or very volatile.

I am always a bit astounded when I hear somebody say 10 years that after the 2008 crash or the 2001 tech bubble fiasco that they 'Lost all their retirement money'. They only lost if they sold at fire sale prices. An annuity income floor may keep some people from doing that. IMHO, that is their main benefit for many people.
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If the goal is to accumulate money, most of the comments made in this thread are likely right about annuities. If a person feels their life would be better by investing in a stream of income however that is a wise investment.

I do believe that most of the comments suggesting against annuities/pensions are based upon a real concern that the purchaser is not schooled enough to evaluate the alternatives. This is an important and legitimate suggestion. But as pointed out by Chuckanut, there can be more to the decision than simply investment return. Piece of mind has a value too.

I have wondered from time to time if some of the posters that speak against annuities/pensions turned down a higher paying job during their career, concerned it would not work out. Or elected to rebalance their portfolio moving away from stocks?

We all have a comfort zone, I believe.
 
Well, we don't know what the OP's FA is proposing.... but I'm betting that it is NOT a SPIA.

If the FA is good it might be a MYGA/SPDA as a CD substitute.

But it would not be at all surprising if it was a VA.
 
It seems that when the question of annuities is brought up the majority of posters seem to think they are a bad idea, they cost too much or have too many fees or the advisor makes a commission from the product. I believe there is a place for annuities in a PORTION of your portfolio. No one seems to accept that a fixed indexed annuity can be used in several ways. 1. As a bond replacement as many fixed indexed annuities are returning 5-8% with regularity over the past 10 or more years. 2. Since they do not lose money they are a part of your portfolio that can be counted on for stability.

If a retiree or older investor would like to not lose money or at the very least keep what they have they are a great option.

Many seem to think that when annuities are mentioned they presume ALL of the investors money will go there. I feel no more than 1/3 should be used for a portfolio in the accumulation phase and up to 50% for older investors to keep the majority of their nested intact. Just my two cents.
 
My wife will receive a pension when she retires. The state retirement system also offers an option to "purchase service credits". It is basically an annuity where we would pay a lump sum up front to increase the amount of her monthly pension payments, guaranteed for life with cost of living adjustments.

I ran the numbers a couple years ago and it didn't offer any benefit over just investing the money in stocks and bonds. However, I recently revisited the service credit option, and it is looking like it would be beneficial to purchase 30K-50K or so to boost benefits. More service credits, means more monthly income, means we spend down less of our savings each year. I'm not sure why it works out now when it didn't a couple years ago, but can't argue with the numbers.

I wouldn't invest our entire savings into an annuity (they have a 75K limit anyway), as I still want a lump sum of money in case of unexpected expenses, and perhaps to leave some inheritance behind for our daughter.
 
Super90 said:
It seems that when the question of annuities is brought up the majority of posters seem to think they are a bad idea, they cost too much or have too many fees or the advisor makes a commission from the product. I believe there is a place for annuities in a PORTION of your portfolio. No one seems to accept that a fixed indexed annuity can be used in several ways. 1. As a bond replacement as many fixed indexed annuities are returning 5-8% with regularity over the past 10 or more years. 2. Since they do not lose money they are a part of your portfolio that can be counted on for stability.

If a retiree or older investor would like to not lose money or at the very least keep what they have they are a great option.

Many seem to think that when annuities are mentioned they presume ALL of the investors money will go there. I feel no more than 1/3 should be used for a portfolio in the accumulation phase and up to 50% for older investors to keep the majority of their nested intact. Just my two cents.
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First post, congratulations. You generalize about the majority of posters...
:flowers:

I was just looking at flexible annuities purchased by M-I-L in 1999 or so. Compared to Wellesley Income she left a lot on the table. It's water over the bridge, as some say.
:cool:
 
Super90 said:
... If a retiree or older investor would like to not lose money or at the very least keep what they have ...
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Not to pick on @Super90 particularly, but I think there is an incredibly tenacious false premise that underlies this and many similar threads.

Yes, to an accountant, a dip in the market is a "loss." But as an investor I think of it simply as a time where I temporarily do not have access to some of my money. Every single dip, correction, panic (your choice of noun) in the equities market has been followed by a recovery and subsequent growth. Not most, not some, all. Dealing with this is simply a matter of patience and good AA planning.

It is probably not possible for the OP to switch the dialog towards discussing SORR, which is the real gremlin. An AA that is designed to cage this gremlin is really what the OP's friends need to understand and implement. The FA's greedy scenario omits the recovery that has always followed the dips, leaving the friends feeling a threat that is really not there.

The other thing, of course, is that if the FA had an accurate crystal ball he would not be out hustling clients and hawking inappropriate products. He would be by the pool on his yacht or in a comfortable beach chair on his private island. That fact may not be something the OP's friends have ever thought about. The mere fact that he is offering investment advice is prima facie evidence that he deems it to be worthless. Either he is afraid to eat his own dog food or he has tried it and found it wanting. Most likely, it is the former.
 
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  1. Do they have permanent income (pension, SS)?
  2. How much of their spending needs does it cover currently?
  3. Can the shortfall be held in cash -- maybe a year or two in shortfall?
  4. Most "crash" periods are very short (less than a year)
  5. Previous crashes (1987, 1992, 2000, 2008, 2020) were short, sharp, and resulted in strong recoveries.
  6. Annuities are "forever" (until you suddenly die and then the money is gone).
 
target2019 said:
First post, congratulations. You generalize about the majority of posters...
:flowers:

I was just looking at flexible annuities purchased by M-I-L in 1999 or so. Compared to Wellesley Income she left a lot on the table. It's water over the bridge, as some say.
:cool:
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Not here to be negative with generalizations. Maybe better put, tt just seems there are more anti-annuity responses than pro annuity responses.
Were the flexible annuities your MIL purchased the only asset she had or purchased? Yes, Wellesley would have done well and would have out performed an indexed annuity. As long as she is comfortable with any fluctuations she is good.
 
I think part of the problem I have with this thread is the title - "Are all annuities bad". It's not about annuities. It's about helping people understand the risk/reward ratio and where they will be most comfortable with both the risk and the reward.
 
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timbervest said:
  1. Do they have permanent income (pension, SS)?
  2. How much of their spending needs does it cover currently?
  3. Can the shortfall be held in cash -- maybe a year or two in shortfall?
  4. Most "crash" periods are very short (less than a year)
  5. Previous crashes (1987, 1992, 2000, 2008, 2020) were short, sharp, and resulted in strong recoveries.
  6. Annuities are "forever" (until you suddenly die and then the money is gone).
Click to expand...

Annuities are not "forever." They are only forever if you annuitize them. I would never annuitize an annuity because once you do the insurance company owns them. You always have the option for a 10% free withdrawal or periodic payments without annualizing or cashing out outside of the surrender period. If an investor learns how to use an annuity and it fits their needs they can be useful.
 
Super90 said:
... it just seems there are more anti-annuity responses than pro annuity responses. ...
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Welcome. Yes, your assessment is correct. This is a pretty sophisticated (and humble) crowd and the facts on the ground are that most annuities are a bad idea for the buyer and the more complicated they get the higher the likelihood that the buyer is getting thoroughly screwed.

Not all simple annuities are bad and "bad" depends somewhat on the buyer. It is also factual that most annuities are packed with fees. It is only in recent years that some white hats (VG, TIAA) are reported to have arrived on the playing field. But those are typically not the annuities that the FAs are pushing.

I think the posts in this thread have been quite good.
 
OldShooter said:
Not to pick on @Super90 particularly, but I think there is an incredibly tenacious false premise that underlies this and many similar threads.

Yes, to an accountant, a dip in the market is a "loss." But as an investor I think of it simply as a time where I temporarily do not have access to some of my money. Every single dip, correction, panic (your choice of noun) in the equities market has been followed by a recovery and subsequent growth. Not most, not some, all. Dealing with this is simply a matter of patience and good AA planning.

It is probably not possible for the OP to switch the dialog towards discussing SORR, which is the real gremlin. An AA that is designed to cage this gremlin is really what the OP's friends need to understand and implement. The FA's greedy scenario omits the recovery that has always followed the dips, leaving the friends feeling a threat that is really not there.

The other thing, of course, is that if the FA had an accurate crystal ball he would not be out hustling clients and hawking inappropriate products. He would be by the pool on his yacht or in a comfortable beach chair on his private island. That fact may not be something the OP's friends have ever thought about. The mere fact that he is offering investment advice is prima facie evidence that he deems it to be worthless. Either he is afraid to eat his own dog food or he has tried it and found it wanting. Most likely, it is the former.
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Old Shooter, on the other side of the coin, the advisor is not necessarily being greedy if he/she has found a product that fits the clients needs and is appropriate for their needs. Just because he makes a commission doesn't mean he is "hawking inappropriate products." Since we don't know what he/she (advisor) holds we can't presume they have not tried it.
 
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