Deferred annuity strategy

[capjak]

In regards to the OP, SPIA or deferred SPIA are IMO reasonable products with lower costs to solve for certain risks. A FIA is not an investment vehicle it is there to compete/compare to CD rates not Market Rates and can be appropriate for a small percentage willing to accept lower returns for non market correlated insurance. It is for your low risk $$. I am not a financial planner just a DIY so may not be best advice for your situation. I think using an annuity paired with Systematic Withdrawal strategy has been seen as a reasonable strategy by some retirement researchers https://www.kitces.com/blog/income-...n-annuities-versus-safe-withdrawal-rates-swr/

From the blog:
"Which means an annuity is really an alternative floor approach to safe withdrawal rates – one that provides a stronger guarantee while producing a similar amount of income, but results in a dramatic loss of liquidity, upside, and legacy. Does the common client preference towards safe withdrawal rates and away from annuities indicate that in the end, most clients just don’t find the guarantee trade-off worthwhile for the certainty it provides?"

 

[ERD50]

The point was made but deserves reinforcement - are any of these annuity numbers inflation adjusted?

That $2,500 per month in today's $ will buy far less 20 years from now when you are 70. And with one of you very possibly living to 90, another 20 years of inflation will eat that annuity payment.

https://personal.vanguard.com/us/insights/retirement/plan-for-a-long-retirement-tool

A 42% that one of a 50 YO couple will reach 90. And 5% that one will reach 100.

-ERD50

 

[OldShooter]

A useful way to think about this, IMO, is in terms of risk:

You are facing a risk of outliving your money. You can pay someone to assume that risk for you or you can have an investment strategy that reduces the risk to near zero.

What will you have to pay someone to take the risk vs how aggressive would the investment strategy have to be to handle it yourself? If an investment yield of 2% is enough to mitigate the risk, it's a no-brainer: Just buy government bonds. As the needed yield rises, a hard look at what you are paying someone else becomes more necessary. But, in the end, paying someone else always involves more costs than accepting the risk yourself. I heard a really nice synopsis one time: "Do you want to eat well or do you want to sleep well?"

Also, don't forget that your annuity only works if the issuing company is around to pay its obligations. The near-death of AIG during the last excitement ought to be a cautionary lesson for us all. So there is still risk for you; minimal maybe, or maybe not.

 

[Big_Hitter]

https://phys.org/news/2016-03-death-related-thoughts-discourage-consumers-annuities.html

IMO it's mortality salience that shies retirees away from annuities

"Thinking about death isn't doing the annuity industry any favors, but it could be the missing piece of a puzzle that has vexed economists for decades. That's according to a new study by two Boston College marketing professors who say "mortality salience" is one reason why consumers shy away from buying annuities."

 

[Running_Man]

A useful way to think about this, IMO, is in terms of risk:

You are facing a risk of outliving your money. You can pay someone to assume that risk for you or you can have an investment strategy that reduces the risk to near zero.

What will you have to pay someone to take the risk vs how aggressive would the investment strategy have to be to handle it yourself? If an investment yield of 2% is enough to mitigate the risk, it's a no-brainer: Just buy government bonds. As the needed yield rises, a hard look at what you are paying someone else becomes more necessary. But, in the end, paying someone else always involves more costs than accepting the risk yourself. I heard a really nice synopsis one time: "Do you want to eat well or do you want to sleep well?"

Also, don't forget that your annuity only works if the issuing company is around to pay its obligations. The near-death of AIG during the last excitement ought to be a cautionary lesson for us all. So there is still risk for you; minimal maybe, or maybe not.

This is a misinformation on AIG, any annuity would be covered by a state's guarantee program and the assets that AIG held for the annuities are not touchable in a bankruptcy. While there may have been some issue with AIG had they gone under the risk of loss on annuities was not that high.
It is far more common for 80 and 90 year olds to be scammed out of all their money than an insurance company to cease paying on annuities.

Myself I would never purchase a deferral annuity in the present situation because of the present low interest rates you are basically locking in a 50 year term at a historic low, but the payout of 3.5% to 4.5% is not that bad when you consider the guarantees and the fact US 30 year treasuries are under 3% interest and many foreign governments have under 2% interest for the long term --- insurance companies are given great responsibilities for having money available and very low interest rates right now.

10-15 % of a portfolio to an annuity as a replacement of fixed income is not that bad of an investment at the present time if it replaces fixed income that is paying 2-3 percent. On the other hand if you are 100% stocks and stocks go up 7-10 percent forever then it is not a relatively wise investment in comparison.

 

[Big_Hitter]

This is a misinformation on AIG, any annuity would be covered by a state's guarantee program and the assets that AIG held for the annuities are not touchable in a bankruptcy. While there may have been some issue with AIG had they gone under the risk of loss on annuities was not that high.
It is far more common for 80 and 90 year olds to be scammed out of all their money than an insurance company to cease paying on annuities.

.

great points

 

[OldShooter]

... the risk of loss on annuities was not that high. ...

Agreed; my point was that it is not zero. People tend not to remember that they are simply buying a product from a business.

But as long as we're making the discussion more complex, a state agency covering the obligations of a failed insurance company will not happen instantly as it takes time for the wheels of bureaucracy to turn. Also, depending on the situation, the coverage may not be 100%. I went through this with a GIC quite a few years ago and IIRC it took a couple of years to get paid and the payment (no interest on the 2 years of course) was only partial.

 

[pb4uski]

This is a misinformation on AIG, any annuity would be covered by a state's guarantee program and the assets that AIG held for the annuities are not touchable in a bankruptcy. While there may have been some issue with AIG had they gone under the risk of loss on annuities was not that high. ....

Actually the comment on AIG was worse than misinformation... it ignores the cause of AIG's financial woes. AIG's financial woes had absolutely, positively nothing to do with AIG's insurance operations... it had to do with a bunch of wing-nuts at AIG corporate in NYC who thought that they were the smartest guys in the room and were writing credit default swaps that they didn't understand the true risks of like they were candy.... that never would have happened if idiot Elliot Spitzer hadn't railroaded Hank Greenberg out of AIG. The insurance companies were all well funded and were ultimately AIG's salvation... AIG ultimately sold a number of them for big bucks and used the proceeds to pay off the feds in full.

 

[OldShooter]

Actually the comment on AIG was worse than misinformation... it ignores the cause of AIG's financial woes. AIG's financial woes had absolutely, positively nothing to do with AIG's insurance operations... it had to do with a bunch of wing-nuts at AIG corporate in NYC who thought that they were the smartest guys in the room and were writing credit default swaps that they didn't understand the true risks of like they were candy.... that never would have happened if idiot Elliot Spitzer hadn't railroaded Hank Greenberg out of AIG. The insurance companies were all well funded and were ultimately AIG's salvation... AIG ultimately sold a number of them for big bucks and used the proceeds to pay off the feds in full.

Wow. I certainly did not intend to divert this thread so far OT. Apologies to the OP. I used AIG as a convenient example because of its well-known brush with death. The cause of its near-death is maybe a little less dramatic and a bit more complex than @pb4uski's rhetoric but, more importantly, a failed company is a failed company regardless of cause. Pick some other example if you like or, if you believe it, argue that no annuity payments will ever be jeopardized, delayed, or reduced by a vendor failure. I really don't care.

The main point of my post was to observe that buying an annuity is basically a way of paying someone else to assume a risk that the purchaser doesn't want to retain. So just evaluate the cost of laying off the risk versus the cost of retaining it, just like any other insurance.

 

[bmcgonig]

Wow. I certainly did not intend to divert this thread so far OT. Apologies to the OP. I used AIG as a convenient example because of its well-known brush with death. The cause of its near-death is maybe a little less dramatic and a bit more complex than @pb4uski's rhetoric but, more importantly, a failed company is a failed company regardless of cause. Pick some other example if you like or, if you believe it, argue that no annuity payments will ever be jeopardized, delayed, or reduced by a vendor failure. I really don't care.

The main point of my post was to observe that buying an annuity is basically a way of paying someone else to assume a risk that the purchaser doesn't want to retain. So just evaluate the cost of laying off the risk versus the cost of retaining it, just like any other insurance.

Not to belabor this but as far as I know no annuity company has ever missed a payment, even in 2008. Maybe I'm wrong but I can't find one. If you're worried spread the money around to 3-4 different companies. If they all go bust then I'm sure the stock market is also bust.

Also the trope that annuities are expensive with hidden fees etc doesn't apply to the kind of annuity that the OP is talking about assuming it's a deferred version of an immediate annuity.The deferred annuity is merely a longevity version of a SPIA. Fees are simple in that at Vanguard for example there's a 1-2% load and that's it. After that you know what the payout is and can judge it very simply. There are no hidden fees or weird payouts or strange calculations.

The big problem with the longevity SPIAs is that they are not inflation adjusted either in the years up to the start date or thereafter. But again you know that in advance and can assign a probable inflation rate. Not perfect by any means but not useless.

If you're someone that is trying to build a floor of guaranteed income then either the immediate or deferred versions are useful. If you don't think you need the floor then not so much.

 

[Onward]

I had a small deferred annuity with MetLife but cashed it out recently. Two things I didn't like:

1. The annuity contract was impossible to understand. Not just difficult. Impossible.

2. MetLife customer service was basically non-existent. It was an enormous chore just to get the right person on the phone, let alone get them to do what you wanted. Really horrible.

I believe MetLife's annuity arm has changed it's name to Brighthouse. I say beware.

 

[pb4uski]

Not to belabor this but as far as I know no annuity company has ever missed a payment, even in 2008. Maybe I'm wrong but I can't find one. If you're worried spread the money around to 3-4 different companies. If they all go bust then I'm sure the stock market is also bust.

Also the trope that annuities are expensive with hidden fees etc doesn't apply to the kind of annuity that the OP is talking about assuming it's a deferred version of an immediate annuity.The deferred annuity is merely a longevity version of a SPIA. Fees are simple in that at Vanguard for example there's a 1-2% load and that's it. After that you know what the payout is and can judge it very simply. There are no hidden fees or weird payouts or strange calculations.

The big problem with the longevity SPIAs is that they are not inflation adjusted either in the years up to the start date or thereafter. But again you know that in advance and can assign a probable inflation rate. Not perfect by any means but not useless.

If you're someone that is trying to build a floor of guaranteed income then either the immediate or deferred versions are useful. If you don't think you need the floor then not so much.

+1 The worst cases that I am aware of are some separate account contracts with the Mutual Benefit Life insolvency where contractholders did not receive the interest rate promised in the contract... however, the contract interest rate was much higher than market and the contractholders did receive interest on the low end of market... other than that I am not aware of any insolvency where the outcome was less than the contractual terms... but in many cases contractholders did have to wait to get their money.

On the last part to me the question is how much of a floor do you need? 100%, 75%, 50%?

 

[bmcgonig]

+1 .

On the last part to me the question is how much of a floor do you need? 100%, 75%, 50%?

Personally my preferred floor would be enough to cover all necessary expenses. No discretionary. That would be covered by risk assets like stocks.

I could envision a portfolio with necessities covered by SS and a SPIA, and discretionary covered by an 80/20 stocks/bonds, or even 100/0

 

[mickeyd]

Because of several sweet pensions, as well as SS maxed out, an annuity does not work for us as we have enough retirement investments/cash to carry us 100+ years. I realize that they look attractive to some folks, but if they are encouraged by a FA...beware.

 

[mickeyd]

I believe MetLife's annuity arm has changed it's name to Brighthouse. I say beware.


Seems like I recall that Brighthouse was for sale.

 

[jazz4cash]

I believe MetLife's annuity arm has changed it's name to Brighthouse. I say beware.


Seems like I recall that Brighthouse was for sale.

Not exactly. MetLife spun off their US retail insurance and annuity business as a public company (BHF). The stock performance has been weak. This was supposed to b a case of "the whole is less than the sum of its parts". I got a few shares since I held some MetLife stock for the 4% dividend. When I ER'd we got a term policy for DW from Met and it has transferred to BHF.