Downside of fixed income annuity

[rmorris50]

My perspective from going through a similar mental calculus: Income annuities are not investments or at least poor investments. They are insurance products. They insure against running out of income should you live "too long". A SPIA is very much just an inverse term life insurance policy.

Like all insurance, you only need to cover risks you can't or don't want to bear yourself. In my case, I want my annual budget past age 70 covered by guaranteed income sources. But I don't want to spend anymore on the insurance of an annuity beyond that - because annuities are insurance, but poor investments. In my case, my age 70 SS and annuitizing my employer cash balance plan combined will cover my income needs. Those are insuring longevity risks I'd rather not take. Especially in my case since my family history is to live a long time, but loose quite a bit of cognition over the time span.

From what you've said, it looks like you have your necessary income guaranteed by SS and pension, although you didn't include your proposed ongoing retirement budget. Just from that assumption, I would say you are not a candidate for purchasing any more annuity, even a simple common sense one like a SPIA. Simple investment portfolios like a 60/40 indexed portfolio or a indexed target date fund and likely to be much better investments for your portfolio.

A consequence of self insuring longevity risk is you can be too conservative in your spending and leave a lot to heirs when you could have spent more of it and enjoyed life a little more. Thus a SPIA can levelize your income over your retirement years and give you the ability to enjoy more of your money, or even come closer to dieing broke if that’s your goal.

Just another angle on how SPIAs insure against longevity risk.

 

[firemediceric]

I once had an employee who was going to retire early, moving from HI to TX for a lower cost of living. He was dead-set on buying an annuity, as during a recent market downturn, he had panicked and sold, making his losses permanent, and losing more than half of his 401(k).

For those prone to do this, an annuity (the 'right' type) MAY be an okay idea. For most, not.

Your experience with your former employee makes me look at this even another way in a negative light. I’d be taking the money that’s in my Roth IRA and my 457 to purchase the annuity. Those accounts have taken big hits during the recent downturn. By cashing those accounts out to buy the annuity, I would be locking in those losses rather than waiting for the markets to recover.

 

[ERD50]

Your experience with your former employee makes me look at this even another way in a negative light. I’d be taking the money that’s in my Roth IRA and my 457 to purchase the annuity. Those accounts have taken big hits during the recent downturn. By cashing those accounts out to buy the annuity, I would be locking in those losses rather than waiting for the markets to recover.

You are correct. You're learning!


-ERD50

 

[Dreamer]

Run. This is a variable annuity. They are god-awfully complex and have high fees.

I am talking from experience. I have a variable annuity from my last employer. It was the only way to participate in the 401k. I thought long and hard about it, since many people here said not to get a variable annuity. I am not the smartest financial person (far from it), but I still don't understand it. The person from Northwestern was always vague about how it worked. I left the employer in 5/2015 and it had an 8 yr surrender fee. I am getting close to getting out of the 401k and then withdrawing the money from Northwestern Mutual and putting it in Tbills. If I do, then my DH's SSA would be taxed by our state, since we would be over the amount of income for the state. We might be over anyways, I need to look at our income better. If I don't this year, then I will next year for sure, since DH will need to do RMDs, which will put us over. I wish that I had a spouse that was interested in finances and could help me figure these type of things out.

Good luck on what you decide, but I would never recommend a variable annuity to anyone.