Are all Annuities BAD?

[Super90]

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.

[mountainsoft]

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.

[target2019]

Quote:

Originally Posted by Super90 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.

First post, congratulations. You generalize about the majority of posters...


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.

[OldShooter]

Quote:

Originally Posted by Super90 ... If a retiree or older investor would like to not lose money or at the very least keep what they have ...

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.

[timbervest]

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).

[Super90]

Quote:

Originally Posted by target2019 First post, congratulations. You generalize about the majority of posters... 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.

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.

[Chuckanut]

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.

[Super90]

Quote:

Originally Posted by timbervest Do they have permanent income (pension, SS)? How much of their spending needs does it cover currently? Can the shortfall be held in cash -- maybe a year or two in shortfall? Most "crash" periods are very short (less than a year) Previous crashes (1987, 1992, 2000, 2008, 2020) were short, sharp, and resulted in strong recoveries. Annuities are "forever" (until you suddenly die and then the money is gone).

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.

[OldShooter]

Quote:

Originally Posted by Super90 ... it just seems there are more anti-annuity responses than pro annuity responses. ...

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.

[Super90]

Quote:

Originally Posted by OldShooter 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.

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.

[Super90]

Quote:

Originally Posted by Chuckanut 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.

+1

[OldShooter]

Quote:

Originally Posted by Super90 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.

Fair enough. I hesitated before I typed that but I think the historical evidence is consistent with jumping to that conclusion. If the FA has truly tried to educate his clients and to steer them away from annuities to the extent possible I will retract the comment, apologize, and award him a white hat! It will be interesting to hear the outcome of this.

[pb4uski]

Quote:

Originally Posted by Super90 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.

Yes, given that the OP has gone AWOL, it's hard to say without knowing more specifics of what the FA has proposed (and perhaps other specificsf the OP's friend's situation) whether what the FA has proposed is sensible or not.

Also agree that FAs have to eat to so I don't begrudge them a commission, but I think it should be disclosed. They's say "it's paid for my the issuer" but at the same time the issuer prices it into the product in one way or another.

It could well be that the FA is a good guy and has made a prudent recommendation.

However, given that the multitude of horror stories on annuity misselling that we see here on a regular basis, skepticism is prudent.

Super90, do you sell annuities or work in the industry?

[ERD50]

Quote:

Originally Posted by Bongleur Quote: Originally Posted by ERD50 View Post 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 Except that when people are upset they often shoot the messenger anyway.

I've noticed that!

So yes, if the OP doesn't want to even take a chance that he may be in that position, he should just bow out.

-ERD50

[RetireeRobert]

Quote:

Originally Posted by pb4uski 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.

You make some good points on going the DIY route and investing in such as Wellesley.

You also make the caveat that delineates the important difference many if not most annuitiy buyers would be keen on between DIY and an annuity: "While it isn't guaranteed like an annuity is....".

And as they always say, historical returns are no guarantee of future performance. Who is to say Wellesley will do after you commit a chunk to it what it has demonstrated over the past x, y, or z period of years.

[ncbill]

Quote:

Originally Posted by big-papa 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

Ditto...the retirement calculates I've used (including paid) recommend annualizing whatever's left in tax-deferred, but not before age 80.

[RetireeRobert]

Quote:

Originally Posted by OldShooter 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. 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. .

You say a loss is only "a time I temporarily do not have access to some of my money", and seem to wave that off. "IF" only people were not so impatient and would wait for the (you imply) "inevitable" recovery.

That is I think the nub of why some people are attracted to annuities, for the "guarantee" aspect. And for the fear of "what if I don't have the time to wait for some recovery?

As you say, the real gremlin is SORR. And I believe many people who go the annuity route do so, either consciously or unknowingly, to deal with SORR.

[OldShooter]

Quote:

Originally Posted by RetireeRobert ... As you say, the real gremlim is SORR. And I believe many people who go the annuity route do so, either consciously or unkowingly, to deal with SORR.

I don't disagree with your points. The "problem" if there is one, is that the annuity buyers have no idea how much they are paying for what is really not all that secure a payment. From day 1 that "fixed" payment is declining in purchasing power. 20 years, 3.5% inflation and it is halved. Even at 2% it is cut by 1/3. This deterioration is in addition to the damage done by high fees and commissions, which lowers the initial value of the "fixed" payments.

Something also not generally discussed is the loss of flexibility. If the annuitant develops health problems necessitating home care, the money paid for the annuity is not available to help and, if the illness is fatal, the insurance company wins the actuarial game.

Nothing is certain, of course, but the home-made annuity approach suggested by @pb4 (and similar ones) is more likely to give the investor IMO a better result than most annuities. How many people will crunch all of these options and probabilities on the way to a decision? Not many.

[RetMD21]

Quote:

Originally Posted by pb4uski Yes, given that the OP has gone AWOL, it's hard to say without knowing more specifics of what the FA has proposed (and perhaps other specificsf the OP's friend's situation) whether what the FA has proposed is sensible or not.

OTOH recommending that they get out of the market entirely seems like a red flag. Indexed annuities tend to pay 6-8% commissions. (link below) I think a FA can provide a valuable service for some folks but I am suspicious in this situation. I am currently unwinding deceased FILs collection of indexed annuities. The returns I am seeing look quite unimpressive.

https://www.annuity.org/annuities/fe...%204%20percent.

[pb4uski]

Quote:

Originally Posted by OldShooter I don't disagree with your points. The "problem" if there is one, is that the annuity buyers have no idea how much they are paying for what is really not all that secure a payment. From day 1 that "fixed" payment is declining in purchasing power. 20 years, 3.5% inflation and it is halved. Even at 2% it is cut by 1/3. This deterioration is in addition to the damage done by high fees and commissions, which lowers the initial value of the "fixed" payments. ...

You can mitigate that somewhat for at least for estimated inflation by buying a cascade of deferred payment annuities that provide additional monthly benefits to provide an increasing benefit. So if your 1 year payment is $1,000/month and you assume 3.5% annual inflation, then at the same time buy a deferred annuity that starts in 3 years that provides a $188 monthly benefit, and a deferred annuity that starts in 7 years that provides a $223 monthly benefit, etc. so your annuity benefit payments wlll be increasing over time.