Immediate Annuities

[oldman]

I am 74 and retireing in about 6 months. Thought I'd look in to a small immediate annuity for some of the fixed income part. Anyone out there have one they are happy with? I realize they cannot be left in your estate for the kids. Is that still the case?Other than that, what are other downsides? My wife is 71, so our remaining time is probobly less than 20 years. We think more like 10-15. Are there other ideas I should investigate?

 

[Dawg52]

Need to be sure your getting one through a company that is financially sound. AIG is a pretty good example of what can go wrong.

 

[chinaco]

Take your time researching it and do your homework! If you are unfamiliar with annuities, I would suggest you get a book from the library and read it.... just so you have considered all of the issues. Since it will be a sizable purchase, the time spent will be well worth it.

If I were purchasing an annuity, I would purchase it with a fairly conservative insurance company that is rated triple A with 3 of the rating agencies (Fitch, S&P, Moodys, AM BEST). I have not researched the company lately, but North Western Mutual was a strong company financially at one time... you will need to check. This MBS and CDS debacle has affected several insurance companies.

 

[ziggy29]

One problem with an SPIA now is that so many of them have payouts tied to the long term Treasury rates. With Treasuries so strong (and yields low) because of the flight to safety, the income stream would be lower than would be typical for any given size of investment. I'm not sure this is the best time for one of those.

 

[huskerblue]

I would consider spreading my risk out too, ie, if you have $300,000 you want to allocate in this way, find three solid companies and place $100,000 with each.

 

[Rich_by_the_Bay]

Another tip on SPIAs: inflation adjustment often raises the cost for a given payout by some 40%. Consider passing on that strategy, in favor of reassessing cumulative personal inflation every 4 or 5 years, and buying supplemental SPIAs to close the gap periodically. By waiting you also buy at more favorable actuarial level, cost-average the prevailing interest rates, and also are free to pass should you no longer need it, develop serious health problems, etc.

 

[oldman]

This was a list available from Weiss Ratings, just for info. I would certainly also get S+P and Moody's. Of course, who rates these services?

Strongest Annuity Insurers Data as of 09/03/2008Company NameStateWeiss
Safety
RatingTEACHERS INS & ANNUITY ASN OF AM NY

A+ STATE FARM LIFE INS CO IL

A+ COUNTRY LIFE INS CO IL

A+ AMERICAN FAMILY LIFE INS CO WI

A+ AMERICAN FIDELITY ASR CO OK

A+ STATE FARM LIFE & ACCIDENT ASR CO IL

A+ NORTHWESTERN MUTUAL LIFE INS CO WI

A NEW YORK LIFE INS CO NY

A MASSACHUSETTS MUTUAL LIFE INS CO MA

A PACIFIC LIFE INS CO NE

A NEW YORK LIFE INS & ANNUITY CORP DE

A GUARDIAN LIFE INS CO OF AMERICA NY

A FIDELITY INVESTMENTS LIFE INS CO UT

A USAA LIFE INS CO TX

A SOUTHERN FARM BUREAU LIFE INS CO MS

A JOHN HANCOCK LIFE INS CO OF NY NY

A SENTRY LIFE INS CO WI

A FORT DEARBORN LIFE INS CO IL

A AUTO-OWNERS LIFE INS CO MI

A UNITED FARM FAMILY LIFE INS CO IN

A

 

[FinanceDude]

Stick with a large mutual company like Northwester Mutual or New York Life. They may not have as "sweet a deal" as far as payout goes, but they CAN make their promises........

 

[brewer12345]

Oldman, I used to follow the credit quality of this industry for my day job (usually not that exciting, but there are times...). As such, I became very, very picky about who I would buy an insurance policy from, especially when there were potentially large dollar amounts at stake. Assuming that an immediate annuity is right for you (and you should look very carefully at all aspects of this decision before you seriously consider buying one), I would be choosy who you give your money to.

Let me state that the following is my opinion only and does not represent any entity whatsoever, nor does it mean I am right. Do your own due dilligence, consult your own advisor, and take your own risks. Again, this is my opinion, not advice.

I would most likely restrict myself to the following companies for an immediate annuity:

Northwestern Mutual
TIAA-CREF
New York Life
MassMutual
Berkshire Hathaway
Guardian
USAA

That's about it. There are others I could conceivably consider if one of the above did not have the particular policy I was looking for, but it would be a push. I consider the above companies to be the gold standard of the industry for safety and would not be eager to stray far outside when it came to large sums of money.

FWIW, I believe that NY Life is the largest writer of immediate annuities, and I believe they have a resonably diverse product line.

 

[chinaco]

Pulling this one back up.

There has been some analysis about using a SPIA in conjunction with a stock/bond portfolio. Here is some information... this info may have been posted before... if so, here it is again.

Some of the info comes from annuity companies to Caveat Emptor.

• Bob's Financial Website: Analysis of some what if scenarios - Immediate Annuities in Retirement
• Ibbotson,Milevsk: Lifetime Financial Advice (PDF file) - CFA Institute Publications: Research Foundation Publications - 2007(1):1 - Abstract
• CFA Institute document (broader discussion than annuities - Describes the Problem we face): The Future of Life-Cycle Saving and Investing - CFA Institute Publications: Research Foundation Publications - 2008(1):1 - Abstract
• Milevsky's Blog - - Why Not CPI Linked SPIA Products?
• TIAA paper on Breakeven for period certain annuities. - http://www.tiaa-cref.org/administrators/pdf/admin_library/C38430.pdf

 

[chinaco]

If you have not read this paper, I would recommend that you do so. It will provide some insight into how to think about preparing for retirement.



CFA Institute document (broader discussion than annuities - Describes the Problem we face): The Future of Life-Cycle Saving and Investing - CFA Institute Publications: Research Foundation Publications - 2008(1):1 - Abstract

 

[2B]

Oldman,

How is your health? Do people in your family, especially males, tend to live into their 90's? If they don't, you are probably not going to get a "bargain" buying a SPIA.

The big attraction of the SPIA is "peace of mind." You know that there will be a check every month and it's "guaranteed" by a big insurance company. They work their economics on the payout so that you need to live about 5 to 10 years past your mortality table lifespan to break even. Also, once you give them your check it is gone. You're stuck and can't change your mind.

Look into the return you could get with laddered CDs. Unlike a SPIA, you can change your mind and do something else. They are also backed by the federal government. You could also reinvest at higher interest rates when they go up which they will.

 

[cashflo2u2]

Isn't AIG now owned by the US Govt? That would be the strongest would it not?

 

[chinaco]

Isn't AIG now owned by the US Govt? That would be the strongest would it not?

I would think their long-term future is in question. I expect it to be broken up and sold off... some immediately to raise cash... other parts when the economy stabilizes There may be some portion of it that survives.

Personally, I would not buy an annuity from it.

 

[ziggy29]

Look into the return you could get with laddered CDs. Unlike a SPIA, you can change your mind and do something else. They are also backed by the federal government. You could also reinvest at higher interest rates when they go up which they will.

This may be true. But for some I think the specific attraction of the SPIA are the certainty/stability of the income stream and the fact that you can't "outlive your money." So really the trick in trying to "roll your own" approximation of an SPIA is in finding appropriate financial vehicles and withdrawal strategies to most closely mimic these two aspects of an SPIA.

 

[chinaco]

This may be true. But for some I think the specific attraction of the SPIA are the certainty/stability of the income stream and the fact that you can't "outlive your money." So really the trick in trying to "roll your own" approximation of an SPIA is in finding appropriate financial vehicles and withdrawal strategies to most closely mimic these two aspects of an SPIA.

As an individual you cannot replicate the pooling of money which is used mitigate longevity risk... those who die early pay for those that live longer than expected.

 

[ziggy29]

As an individual you cannot replicate the pooling of money which is used mitigate longevity risk.

Of course you can't duplicate it exactly. But with appropriately structured and laddered products, primarily fixed income, you can come reasonably close. But again, those fall short on the "stable income" test because the income you can pull out year after year will vary based on prevailing interest rates.

 

[chinaco]

Of course you can't duplicate it exactly. But with appropriately structured and laddered products, primarily fixed income, you can come reasonably close. But again, those fall short on the "stable income" test because the income you can pull out year after year will vary based on prevailing interest rates.

Yes they are similar to a degree... but apples and oranges.

 

[2B]

I am 74 and retireing in about 6 months. Thought I'd look in to a small immediate annuity for some of the fixed income part. Anyone out there have one they are happy with? I realize they cannot be left in your estate for the kids. Is that still the case?Other than that, what are other downsides? My wife is 71, so our remaining time is probobly less than 20 years. We think more like 10-15. Are there other ideas I should investigate?

I went to immediateannuities.com and got a quote for a male 74 and female 71 for a joint life SPIA. I assumed you live in Texas since I don't know for sure where you live. This annuity would pay 100% of the benefit to either one of you after the other one dies.

For $100,000 you and your wife could get $697/month. If you bought laddered CDs with an average rate of 4%. You would break even if either one of you lived 16 more years. That would be 90 for you and 87 for your wife. There's no inflation increase so the value would be eroded by inflation.

I believe rates are currently artifically suppressed and will go up substantially in the next year or 2. Long term CDs are available at 5+%. You can also easily get 6+% in top quality corporates. Broad diversification would significantly reduce principle risk. Fedelity has any number of bond funds that easily beat 5%. Any increase in interest rate would further reduce the value of the SPIA.

I don't think annuities are ever a "good investment." If you want the illusion of a guaranteed income from an insurance company, an SPIA fits the bill and if the value is under $100,000 (in most states) it is covered by the state's guarantee. This guarantee fund is usually poorly funded and doesn't have the state's "full faith and credit" guarantee.

You indicated that you "time left" is 10-15 years so I don't think a SPIA is what you want. You already probably have the annuity all Americans have - social security.

 

[chinaco]

...
I don't think annuities are ever a "good investment." ...

Agreed.

IMO - It is about picking the right tool for the job. An annuity is not an investment. It more like a pension. The main advantage seems to be mitigation of longevity risk. There can be other advantages in certain special situations where insurance companies have lobbied for special treatment.

It is indeed complicated subject matter.

 

[ziggy29]

I don't think annuities are ever a "good investment." If you want the illusion of a guaranteed income from an insurance company, an SPIA fits the bill and if the value is under $100,000 (in most states) it is covered by the state's guarantee. This guarantee fund is usually poorly funded and doesn't have the state's "full faith and credit" guarantee.

I don't even think of them as an investment at all, even though the underlying assets are invested in one way or another.

Basically it's an insurance product like any other -- you are "buying" financial security, in this case insurance against running out of money. Actuarially they aren't a good deal for individuals, but if one is risk-averse enough, understands what they are buying and is willing to pay that "financial security premium" in order to ensure a lifetime income stream they can't outlive, more power to them.

Depending on circumstances in a couple decades, I'm keeping an open mind about something like an SPIA as a possibility for a portion of my retirement assets. (We have no children and thus less concern for leaving assets to heirs than many others would have.) I don't think I'd do it today, but it depends on our financial situation and the economic environment at the time.