Attitudes Toward Annuities Affected by How They Are Presented

[haha]

Why are you so scared of annuities? - By Tim Harford - Slate Magazine

The ubiquitous "framing" strikes again.

Ha

 

[CuppaJoe]

Are threads with "the A* word" in the title less likely to be shut down than those that veer into "the A* word"? So little time, so many experiments. Am I "the T* word"?

 

[2B]

Are threads with "the A* word" in the title less likely to be shut down than those that veer into "the A* word"? So little time, so many experiments. Am I "the T* word"?

I don't understand your "T* word" but it sounds like this subject is frequently shutdown. I'm a strong opponent of annuities in general except for the ones we are forced to take (company pensions, SS, etc). Even with these, I'd prefer a choice for a cash payout.

I will admit that when presented well annuities sound so wonderful. I wished the math would work out when I evaluated them. Unfortunately, the math always shows that a person could do better financially setting up their own investment grade laddered bonds to simulate an annuity. The annuity would only be a better value for the less than 10% of the people that dramatically outlive their mortality table lifespan. Even then, it wouldn't be much better with inflation factored in.

Both my father and FIL were big buyers of annuities. Both got into the worst of the annuity products -- the dreaded variable annuities. Both subjected themselves and their heirs to about 5% in annual fees. Both were swayed by the "can't lose money" clause. Their principle was as safe as the insurance company that sold it to them. What they lost was any growth potential except in the most dramatic up markets. Even then they got very little of the up movement.

I guess it's time to close this thread.

 

[W2R]

It would really surprise me if anyone at this forum changed their attitude towards annuities simply by thinking of how much extra they could spend per month for the rest of their lives.

The article had some interesting ideas, though. For example, why insure a cell phone, when losing it is hardly a life-shattering event? So true.

 

[donheff]

I still find annuities interesting as a safety net using a portion of your nest egg but this guy's final statement was ridiculous. He says, "The lesson: Don't focus on what rate of return an annuity produces. Just think about what you can spend if you buy one." Come on -- he Tee'd that up perfectly for 2B to whack him out of the park.

 

[Texas Proud]

I am sure I will get pounded for this.... but I am not 'against' annuities for most people...

Most people are not that good with investing (and some are downright bad)... so for THEM a fixed annuity (or one that accounts for inflation) MIGHT be the better way to go with a decent percent of their money...

But the pitfalls are still there... and in todays low interest environment it is an even worse investment, but it is NOT THE WORST THING YOU COULD DO...

However, what I would think is the 'better' to 'insure' some sort of income going forward.... not an investment vehicle to get there....

 

[rs0460a]

it is NOT THE WORST THING YOU COULD DO...

Of course not ...

I'll hold off on my comments and let a few more "negative ones" appear before I respond. I don't feel like playing "tennis" with every comment made/to be made on this subject.

I do have an Immediate Annuity (SPIA) for almost a year, and it worked out "in my situation". I would not consider a Variable Annuity, nor necessarily an SPIA unless a certain set of "conditions" were met (as in my case).

Let's wait for some more comments to be made...

- Ron

 

[Lazarus]

I'm a strong opponent of annuities in general except for the ones we are forced to take (company pensions, SS, etc). Even with these, I'd prefer a choice for a cash payout.

I have a choice of pension or cash payout at 55. Assuming I take it then and want the cash flow I don't see that I have much option but to take the "pension annuity", Rolling the cash payout into an IRA subjects it to the withdrawal rules pre 59 1/2 or a penalty.

 

[TromboneAl]

I consider that SS will be our annuity, so we don't need others.

 

[2B]

I am sure I will get pounded for this.... but I am not 'against' annuities for most people...

Most people are not that good with investing (and some are downright bad)... so for THEM a fixed annuity (or one that accounts for inflation) MIGHT be the better way to go with a decent percent of their money...

But the pitfalls are still there... and in todays low interest environment it is an even worse investment, but it is NOT THE WORST THING YOU COULD DO...

However, what I would think is the 'better' to 'insure' some sort of income going forward.... not an investment vehicle to get there....

I would agree with you except for my observation that the least financially skilled are most likely to be put into the highest fee, lowest return products. My father and FIL are prime examples.

If you accept the fact that we all should become financially literate, then the premise that all individuals should learn to manage a simple index, diversified portfolio seems reasonable to me. It would be far more difficult to fully educate someone about which annuity products are best for their situation than to teach them to manage a "couch potato" portfolio. Special needs individuals are a different case but I'd still recommend a family member trustee over depending on an insurance product.

There is so much money to be made in selling annuities that there is no shortage of "experts" writing articles on how good they are. Focusing on their "feel good" arguments for them really doesn't provide any value to me. I keep waiting for the math to work out which it never has unless you believe you will live longer than 95% of the population. As for the "old age insurance" aspect, the value of the annuity will provide little comfort when the inflation reduced cash flow starts hitting your bank account at age 95. The inflation adjusted annuities I've seen are so full of limitations and reduced benefits that I'd hate to put much faith in them. I think I'm much better off depending on SS which I also don't have too much faith in.

I can almost stomach someone buying a SPIA with a "small portion" of their assets but I have a hard time suggesting it for someone. I will say that once someone buys and annuity they will be routinely reapproached to buy more. If putting a "small portion" into an annuity is a good idea, why isn't putting all of it in an even better one?

 

[2B]

I'm a strong opponent of annuities in general except for the ones we are forced to take (company pensions, SS, etc). Even with these, I'd prefer a choice for a cash payout.

I have a choice of pension or cash payout at 55. Assuming I take it then and want the cash flow I don't see that I have much option but to take the "pension annuity", Rolling the cash payout into an IRA subjects it to the withdrawal rules pre 59 1/2 or a penalty.

If you are fortunate enough to have a choice, do the math. Some company cash outs are pretty good. Others make it obvious that you should take the annuitized payments. With payments, look into the stability of the company and how the payments would be impacted if the company defaulted and you depend on the federal "insurance" for your continued benefits. I'm sure a lot of airline pilots would rather have taken a lump sum rather than seeing their once lofty pensions decimated no matter what effective interest rate was used in the annuitization calculation.

 

[gryffindor]

I don't think this is as straightforward an answer as many people seem to think.

I manage my 75 year old mother's money. We had to make a decision on whether to get the annuity or roll over a cash payout 5 years ago. The payout of the annuity and her social security pays for 90% of her expenses and made her feel highly secure. So it really wasn't a major issue, since she felt pretty strongly about it and had some room for comfort. As a result, we could invest the rest of her Roth and IRA into a more aggressive portfolio as we didn't need to count on withdrawing from it on an ongoing basis.

I'll face a similar decision in the future as I'll get either a cash pay or a defined benefit plan from my employer that would pay a stable (non-inflation adjusted) monthly payout.

It seems like the appropriate variables are to not look at the total returns but to look at the volatility and payouts of a portfolio through a Monte Carlo simulator. I would like to see someone who has access to a simulator to show what would happen if you did have insured annuities as part of the portfolio. One that didn't have significant commission or fees ; e.g., a Vanguard product.

Perhaps thats been done as I'm new to the boards and someone can direct me to the appropriate thread or website.

Cheers

 

[mathjak107]

depends why you want one. i think for some immeadiate annuties are a good thing. my ex wife will need one . its the best way for her to get more money per year to live on and not out live her money

im considering some guaranteed floor annuties , it has an adjustable rate with a min floor. im also considering an index linked annuity with principal protect . why? not as a proxy for a stock investment for which they suck but as a safe way of increasing my safe money bucket. it looks like even after those high fees theres enough ooomph left over to raise my income bucket up an additional 1% to 1-1/2% a year with no principal risk and a min guarantee on the interest..

interest rates change yearly . if they drop then the index linked annuity should do better, the 2 work opposite usually

 

[cyclone6]

I don't see why they're hated so much. Looking at the Vanguard lifetime income annuity, an plugging some numbers in:

1.5 M - single life only = $5408/mo - $64897/yr - with inflation adjustments
- or 4.3% of the initial portfolio.
1.5 M - single life with a 50 year guaranteed period (just in case you croak early, then the beneficiaries still get some payout) = $4592/mo - $55104/yr - with inflation adjustments - or 3.7% of the initial portfolio.


I don't have an annuity - and would certainly like to leave a nice inheritance to my nephews when I go - but those numbers above - especially the single life only - look awfully tempting. The inflation protection could be worth its weight in gold. 65k per year is 5k better than a 4% withdrawal rate, and it has the inflation protection built in.

The scary part to me is always the "payers ability to pay" clause. Who knows how strong AIG will be next year, let alone in 50?

 

[CuppaJoe]

I don't understand your "T* word" but it sounds like this subject is frequently shutdown....

I sort of meant: is it troll behavior to mention that "the A* word" might incite a riot?

It may actually be a healthy thing to discuss this topic frequently in order to differentiate between good and bad "A*" products. e.g., having a nice pension: good; being sold a VA: bad.

Just yesterday I started an "A*" thread not realizing that a thread I had posted on had been switched into another "A*" fight.

In a few months I should have information on my annuity. I plan to post the exact numbers to illustrate a real life example of what happened to a defined benefit pension plan after it had been sold to an insurance company that went belly up, got restructured by the state of CA, and sold to another insurance company. So far, you could say that I've been told my policy has been made whole and the only downside I've had is 19 years of occasional anxiety about a small amount of money.

 

[jazz4cash]

I'm a strong opponent of annuities in general except for the ones we are forced to take (company pensions, SS, etc). Even with these, I'd prefer a choice for a cash payout.

I have a choice of pension or cash payout at 55. Assuming I take it then and want the cash flow I don't see that I have much option but to take the "pension annuity", Rolling the cash payout into an IRA subjects it to the withdrawal rules pre 59 1/2 or a penalty.

Would you consider a SEPP (aka 72t)?

resource:
Welcome to 72t on the Net

 

[haha]

I sort of meant: is it troll behavior to mention that "the A* word" might incite a riot?

This is most interesting to me, as the largest and perhaps the most confident group of ERs on this board are possessors of the mother of all inflation adjusted SPAs, governement and military pensions.

We all agree that these are wonderful.

Are private commercially purchased annuities so much worse that there is literally no way to compare these two?

BTW, I think a non-inflation adjusted annuity whether purchased or accepted from a company is a bad idea, if there are any alternatives.

Ha

 

[Lazarus]

A 72t is really the only option for the cash payout of a pension other than waiting till 59 1/2. Or creating another annuity with the cash.

It is probable the pension will pay more per month than I can take in a 72t at 55.

I can't really "do the math", untill I get closer to 55. The cash payout is based on the annuity. So if interest is low it takes a larger lump sum to produce the annuity. If interest rates are high the pension will look better if low the lump sum will look better.

 

[youbet]

This is most interesting to me, as the largest and perhaps the most confident group of ERs on this board are possessors of the mother of all inflation adjusted SPAs, governement and military pensions.

We all agree that these are wonderful.

Are private commercially purchased annuities so much worse that there is literally no way to compare these two?

Tough to compare since the "cost" of the gov pension annuity is never given in dollars. If the recipents were given dollars instead of the pension followed by the opportunity to buy the pension, their propensity to do so would be determined by the cost. But that's just hypothetical, since no dollar cost equivalent is ever provided that I know of.

BTW, I think a non-inflation adjusted annuity whether purchased or accepted from a company is a bad idea, if there are any alternatives.

Agreed. As an example of how large the impact of inflation adjusted vs not inflated adjusted is, go to FireCalc and run a trial with your pension each way. Big difference!

 

[W2R]

I think the difference is not the cost (that is weighed by each job applicant in comparing jobs with differing benefits). The difference is in the stability and reliability of the institution offering it... for example, the federal government vs an insurance company.

I'd think the federal government would be a better bet than any insurance company when it comes to reliability and maybe even trustworthiness (though I hate to use the latter word with reference to either).

 

[Nords]

Tough to compare since the "cost" of the gov pension annuity is never given in dollars. If the recipents were given dollars instead of the pension followed by the opportunity to buy the pension, their propensity to do so would be determined by the cost. But that's just hypothetical, since no dollar cost equivalent is ever provided that I know of.

I guess the closest estimate would be the companies who "buy" military pensions for lump sums.

When I think back on the military's mandatory three-day transition-assistance planning seminar that I attended in 2000, the financial management focus was on finding a job and qualifiying for veteran's benefits. I can't remember a single hour spent on real retirement planning, other than a warning that it'd take just over a month after retirement for the first check to arrive.

I think the govt is terrified of offering lump-sum pension payouts to financially-illiterate taxpayers. There's certainly no reassurance from recent experiences with the lump-sum death benefits paid to beneficiaries of veterans killed in action.

 

[chinaco]

I am considering purchasing a Joint Survivor fixed annuity at age 65. Still thinking it over. If we do purchase one, we would only use a small amount of the portfolio.

DW cares nothing about managing finances. She is conservative with money but does not have any interest in managing investments... therefore she would not.

I am thinking it may help as part of a risk mitigation strategy for building a basic income stream just in case and for DW if something happens to me. The main challenge seems to be inflation. I will also move some of our assets to MFs that do not require much maintenance or management around the same time.

The problem with SPIAs is inflation. Inflation adjusted annuities are even more expensive.

There will be a bunch of new annuity product lines to hit the market over the next few years for boomers. I will be interested in seeing what emerges.

 

[W2R]

I am considering purchasing a Joint Survivor fixed annuity at age 65. Still thinking it over. If we do purchase one, we would only use a small amount of the portfolio.

DW cares nothing about managing finances. She is conservative with money but does not have any interest in managing investments... therefore she would not.

I am thinking it may help as part of a risk mitigation strategy for building a basic income stream just in case and for DW if something happens to me. The main challenge seems to be inflation. I will also move some of our assets to MFs that do not require much maintenance or management around the same time.

The problem with SPIAs is inflation. Inflation adjusted annuities are even more expensive.

There will be a bunch of new annuity product lines to hit the market over the next few years for boomers. I will be interested in seeing what emerges.

If an inflation adjusted annuity is too expensive for your tastes, maybe one of the Target retirement type mutual funds would work for her. It wouldn't require much maintenance.

In investing in general, it seems like the lower the volatility, the less the earnings per invested dollar is, unfortunately. A fixed lifetime annuity with inflation adjustment would be about the lowest volatility investment (or purchase, actually) that I can imagine.

 

[haha]

The problem with SPIAs is inflation. Inflation adjusted annuities are even more expensive.

They are expensive largely because they are very hard to reserve for. If you are not a government that can rob the taxpayer, offering an inflation adjusted annuity is difficult task.

Ha

 

[FIREd]

You can sell anything if you package it right and put a pretty bow on top of it. It's called marketing. It has nothing to do with the worth of the package's content...