Immediate Annuities

[jazz4cash]

Sounds like you are doing just fine. I had originally planned to get a TSP immediate fixed annuity, but decided for several reasons not to do so. One of those reasons is the low interest right now. Instead, I plan to withdraw my TSP as equal monthly payments (the amount of which can be changed once a year).

Do you have the option to start a TSP annuity at a later date (like in a yr or two if the rate increases), or is there some time limit for purchase tied to your retirement date?

 

[W2R]

Do you have the option to start a TSP annuity at a later date (like in a yr or two if the rate increases), or is there some time limit for purchase tied to your retirement date?

Maybe, maybe not, depending on factors such as your age. The rules for withdrawals are pretty specific, especially for partial withdrawals.

I would strongly recommend checking the publications at www.tsp.gov (go to "Forms and Publications" towards the bottom of the page, then "Publications", "Booklets", and there is a booklet called "Withdrawing your TSP Account After Leaving Federal Service") before making any decisions rather than relying on me or anyone else on the message board. A quote from page 1 of this booklet is,

Withdrawal Deadlines.

​

​

You are required to withdraw your account balance in a single payment, begin receiving monthly payments, or begin receiving annuity payments by April 1 of the later of:​

the year following the year you become age 70 ½, or​

the year following the year you separate from Federal service or the uniformed services.​

If you do not withdraw (or begin withdrawing) your account by the required withdrawal deadline, your account balance will be forfeited to the TSP. You can reclaim your account; however, you will
not receive earnings on your account from the time the account was forfeited.​

 

[donheff]

Do you have the option to start a TSP annuity at a later date (like in a yr or two if the rate increases), or is there some time limit for purchase tied to your retirement date?

You can leave your TSP money sitting in the funds (I do) and move some to an annuity when and if you choose.

 

[Manji]

Learn first & Book.

May be try learn upfront with Due Diligence DD .

Read New Book "The Only guide to Alternative Investment"
By Larry Swedroe & J Kizer..Annuitity chapter first.

Immediate Annuities - Instant Annuity Quote Calculator.
www.Fidelity.com.

Just kick it around for 6 months to 1 year to become familiar yourself.
If in doubt...don't commit anything $wise.

Go Slow!
Manji

 

[easysurfer]

Was curious, so if one has a SPIA (no beneficiaries), how does the insurance company know that someone has died to stop making payments.

Do the insurance companies have their own "death panels" (that was a joke).

Seriously...How do they find out?

 

[73ss454]

I'm sure the government has some sort of list of SS# of people who have died. They have someone checking these #'s all the time, no doubt.

 

[Bikerdude]

Was curious, so if one has a SPIA (no beneficiaries), how does the insurance company know that someone has died to stop making payments.

Do the insurance companies have their own "death panels" (that was a joke).

Seriously...How do they find out?

Are you thinking of running a scam by dying and not telling them? Let me know how you make out.

 

[TeeRuh]

I think the insurance companies just watch for the check to come back "return to sender".

t.r.

 

[TeeRuh]

Are you thinking of running a scam by dying and not telling them? Let me know how you make out.

By the way, who all are you supposed to tell when you die? (Don't want to get into trouble after I pass ...)
t.r.

 

[mathjak107]

i was just explaining to a co-worker how immeadiate annuties work. all he knew was anytime you hear the word annuity run. so i said to him picture this.

you want to guarantee your payments for life to cover certain things , you can buy a 30 year treasury and get 4-1/2 % for life . thats 4500.00 a year on on 100,000 ....... but suppose you need more to live on, well then you would have to sell some of your bonds to supplement your interest and now you will have even less interest coming in from less bonds

but suppose i said give me 100,000 and ill give you back 6700.00 a year from the money you just gave me... i wont reduce the amount either as you get more and more of your principal back.. you can just spend the whole thing and know next year you will get exactley the same amount.
and heres a kicker, once i give you back all your money that you gave me your entire 100,000; ill still continue to pay you on my dime and give you that 6700 bucks a yeear no matter how long you live.

one hitch if you die i keep the money i didnt give you back yet.

i said what do you think? he said its a great deal.. i said well thats an immeadiate annuity.... now hes looking into it.

 

[clifp]

By the way, who all are you supposed to tell when you die? (Don't want to get into trouble after I pass ...)
t.r.

One of the jobs of the executor or your state, is to notify insurance companies when you pass. I believe (and hopefully somebody like Martha will correct me if I am wrong) that if you don't have an executor the state probate courts will do the job.

Still it raises an interesting question in world with automatic deposit how long could the insurance companies and SS keep sending the checks before somebody figured out that the you are gone?

 

[freebird5825]

One of the jobs of the executor or your state, is to notify insurance companies when you pass. I believe (and hopefully somebody like Martha will correct me if I am wrong) that if you don't have an executor the state probate courts will do the job.

Still it raises an interest question in world with automatic deposit how long could the insurance companies and SS keep sending the checks before somebody figured out that the you are gone?

I recall a story (posted here?) about a guy who did exactly that - kept collecting his mom's SS checks for years after she had passed.
If the death is not at home (i.e. hospital, NH, incident in which LE or rescue is involved), I believe the county coroner will then notify certain agencies, but not sure which ones.

 

[clifp]

Back in 1972 I started an annuity with TIAA, and up until a few months ago kept adding to it (along with some CREF stocks and CREF bonds). I was not aware of the general distaste of some/many to an annuity all these years until recently, and if I had, I probably would have NOT invested that way. I'm beginnng to think it's fortunate I did not read all the negative reviews of annuities, because then I would have never had the "peace of mind" I do now knowing I will receive a lifetime income. Just to play it safe though, I've decided to live off the annuity interest (thereby keeping the principal intact), and will only annuitize as I get closer to 70. Even so, the interest gives my about $2,500/month take-home, which is still alright

I'm single, have no heirs, and am a healthy guy of 62. I still like to work, but prefer not to be concerned with money. My annuity has allowed me to foster my love of animals by working at an animal shelter (at minimum wage) for fun. In August I will go off to the Meditteranean to teach physics, and while the money is alright, i'm doing it for fun. Using the annuity the way I am gives me the freedom to work or not to work and not care about salaries.

Cheers,
Rob

Rob I am glad that the annuity is working out for you so far.
For the new people I think is important to understand the objections the forum regulars have to annuities.

In general buying an SPIA makes sense for many people. Especially for folks who don't have heirs, and don't have a regular traditional pension payment. The 3 legs of the retirement stool are retirement savings, pensions, and SS. Annuities can provide a replacement for the pension.
Piece of mind is certainly a significant benefit of an annuity, as is using dead peoples money as others have said.

The issues that many of us have with annuity is not with the concept but with the products and the way they are sold and marketing. Most annuities in this country are sold rather than being bought. Generally, an insurance salesman, or financial "helper", invites you for a free financial consulting. At the end of that session, you are told that your best option is to purchase an annuity. More often than not this annuity isn't a straightforward SPIA, but some fancy product with a name like Variable Annuity, or Equity Indexed annuity.

The salesman who sells you that product collects a hefty commission in the range of 5-8% plus additional money each year. The insurance company takes another 2-3% each year via a bewildering assortment of account fees, expense ratios, morbidity fee etc. You are left with 200+ page document which explains your annuity in deliberately hard legalese.
Time passes and for whatever reason you need the money, you than find out that the only way to get your money is to pay a hefty surrender fee. It has been my experience from reading financial forums and helping friends and relatives that more often than not folks who have bought annuities end up cashing out of their annuities and losing a good chunk of money.

Now I don't know much about TIAA-CREF other than it is one of the largest mutual insurance companies around and it specializes in teachers. I also know that teacher's 403Bs are notorious for having some of the highest expenses. But I don't know if there is a cause and effect.

So yes annuities have a bad reputation on this forum. In particular, EIAs and Variable annuities are almost always considered to be a bad investment. Immediate annuities are generally ok especially if you go out and shop for them like you would a big ticket item like a car rather than buy them from a salesman.

Still there are risks associated with buying any annuity which are generally glossed over by the salesman.
1. It is expensive to change your mind. The surrender penalties are typical several times the cost of withdrawing money early from a CD.
2. Inflation can severely reduce the value of your annuity payment.
3. Insurance companies can and do go broke (e.g. AIG). The good news is that for the most part if your insurance company goes broke you will still get paid. The bad news is state insurance funds that protect your annuity are only sufficient to pay for a few failures a year from medium size firms if a megafirm collapses like AIG, or TIAA-CREF there isn't enough money to pay all the policy holders without government intervention.

 

[73ss454]

Great post Clifp.

 

[easysurfer]

One of the jobs of the executor or your state, is to notify insurance companies when you pass. I believe (and hopefully somebody like Martha will correct me if I am wrong) that if you don't have an executor the state probate courts will do the job.

Still it raises an interesting question in world with automatic deposit how long could the insurance companies and SS keep sending the checks before somebody figured out that the you are gone?

That's exactly what I was thinking about. If the deposits are on autopay, I wonder how many payments would be done before the insurance company would know the person had died.

 

[REWahoo]

Good response clifp, an excellent summary of why many of us shy away from annuities.

(FWIW, I'm not sure Rob will see it since his post was from back in April and he hasn't been on the forum for the past 6 weeks.)

 

[brewer12345]

Now I don't know much about TIAA-CREF other than it is one of the largest mutual insurance companies around and it specializes in teachers. I also know that teacher's 403Bs are notorious for having some of the highest expenses. But I don't know if there is a cause and effect.

So yes annuities have a bad reputation on this forum. In particular, EIAs and Variable annuities are almost always considered to be a bad investment. Immediate annuities are generally ok especially if you go out and shop for them like you would a big ticket item like a car rather than buy them from a salesman.

Still there are risks associated with buying any annuity which are generally glossed over by the salesman.
1. It is expensive to change your mind. The surrender penalties are typical several times the cost of withdrawing money early from a CD.
2. Inflation can severely reduce the value of your annuity payment.
3. Insurance companies can and do go broke (e.g. AIG). The good news is that for the most part if your insurance company goes broke you will still get paid. The bad news is state insurance funds that protect your annuity are only sufficient to pay for a few failures a year from medium size firms if a megafirm collapses like AIG, or TIAA-CREF there isn't enough money to pay all the policy holders without government intervention.

A few objections to what is a reasonable main argument:

- SPIAs are one of the simplest financial products in existence. Assuming you are using your brain when you buy one, its not real hard to tell who is giving you a better deal (hint: its the one with the higher monthly payment). The only tricky bit is making sure you are not taking too much carrier risk. Fortunately, sticking to large, highly rated mutuals is a safe bet.

- TIAA's VAs aren't as cheap as VG funds, but they are pretty cheap. Never a bad choice in 403B plans.

- While inflation risk is definately a big risk, laying off longevity risk is a non-trivial reduction in risk.

 

[clifp]

A few objections to what is a reasonable main argument:

- SPIAs are one of the simplest financial products in existence. Assuming you are using your brain when you buy one, its not real hard to tell who is giving you a better deal (hint: its the one with the higher monthly payment). The only tricky bit is making sure you are not taking too much carrier risk. Fortunately, sticking to large, highly rated mutuals is a safe bet.

- TIAA's VAs aren't as cheap as VG funds, but they are pretty cheap. Never a bad choice in 403B plans.

- While inflation risk is definately a big risk, laying off longevity risk is a non-trivial reduction in risk.

Good points.

I really was unsure about TIAA-CREF, it sounds like they are one of the "good" insurance companies. The few times I've looked at teacher 403B I've be disgusted by the performance and fees, but I think they were offered by a division of Amerprise so no surprise there.

 

[M Paquette]

That's exactly what I was thinking about. If the deposits are on autopay, I wonder how many payments would be done before the insurance company would know the person had died.

Deposits stop pretty quickly, within a month of death based on my experience. Withdrawals, on the other hand...

The deposits on my mother's account stopped before I had identified the annuity company and sent out notifications. I had notified Social Security and the pension provider within a couple days of her death. I suspect there's some sort of back-channel service that businesses use.

Withdrawals, on the other hand, don't seem to use such a service. It took about 5 months to get supplemental health insurance deductions from her checking account to stop. My dad had been 12 years dead, and the insurer was still hitting the account for 4 dollars a month for an Accidental Death and Dismemberment Policy. (Repeated mailings of certified letters with a chain of evidence and a formal complaint through the Office of the Comptroller of the Currency got them to stop. A retired obsessive-compulsive with fiduciary authority, a database, and a spreadsheet is probably an insurance company or bank's worst nightmare.)

Curious, innit?

 

[jdw_fire]

The issues that many of us have with annuity is not with the concept but with the products and the way they are sold and marketing. Most annuities in this country are sold rather than being bought. Generally, an insurance salesman, or financial "helper", invites you for a free financial consulting. At the end of that session, you are told that your best option is to purchase an annuity. More often than not this annuity isn't a straightforward SPIA, but some fancy product with a name like Variable Annuity, or Equity Indexed annuity.

The salesman who sells you that product collects a hefty commission in the range of 5-8% plus additional money each year. The insurance company takes another 2-3% each year via a bewildering assortment of account fees, expense ratios, morbidity fee etc. You are left with 200+ page document which explains your annuity in deliberately hard legalese.
Time passes and for whatever reason you need the money, you than find out that the only way to get your money is to pay a hefty surrender fee. It has been my experience from reading financial forums and helping friends and relatives that more often than not folks who have bought annuities end up cashing out of their annuities and losing a good chunk of money.


So yes annuities have a bad reputation on this forum. In particular, EIAs and Variable annuities are almost always considered to be a bad investment. Immediate annuities are generally ok especially if you go out and shop for them like you would a big ticket item like a car rather than buy them from a salesman.

the problem with your description is that it is not describing SPIAs which is the type of annuity that is actually very helpful to a retiree putting together a successful decumulation plan for his/her assets

Still there are risks associated with buying any annuity which are generally glossed over by the salesman.
1. It is expensive to change your mind. The surrender penalties are typical several times the cost of withdrawing money early from a CD.
2. Inflation can severely reduce the value of your annuity payment.
3. Insurance companies can and do go broke (e.g. AIG). The good news is that for the most part if your insurance company goes broke you will still get paid. The bad news is state insurance funds that protect your annuity are only sufficient to pay for a few failures a year from medium size firms if a megafirm collapses like AIG, or TIAA-CREF there isn't enough money to pay all the policy holders without government intervention.

1. with an SPIA you dont change your mind, you are buying a pension look alike
2. get an COLAed SPIA and then it keeps up with CPI
3. every thing i have heard states that NO ONE who had an insurance policy with AIG lost any money. what went "broke" with AIG was totally different company

SPIAs are different animals then other annuities, they are more akin to pensions and it is very easy to see what you are buying. the fees dont matter since you are buying an income stream, if it is good enough look for another company or wait till interest rates are higher

 

[clifp]

the problem with your description is that it is not describing SPIAs which is the type of annuity that is actually very helpful to a retiree putting together a successful decumulation plan for his/her assets

Actually I think I was pretty careful to say SPIA=immediate annuities are ok.

1. with an SPIA you dont change your mind, you are buying a pension look alike
2. get an COLAed SPIA and then it keeps up with CPI
3. every thing i have heard states that NO ONE who had an insurance policy with AIG lost any money. what went "broke" with AIG was totally different company

Generally you do have an option to redeem a SPIA although at a big penalties.

The rates of SPIAs are bad enough, what are the rates you can get for SPIA with a COLA?

Yes no AIG policy holders have lost money, but the parent received 180 billion in Federal bailout money. Lets imagine the AIG parent didn't get bailout.

AIG Financial Products (the problem unit) provided insurance policy on Mortgage Back Securities (typically by writing Credit Default Swaps CDSs) packaged and sold by investment banks. One of the main customers for mortgage backed securities was life insurance companies subsidiaries like AIG (California, Hawaii etc). Now what happens if these mortgage back securities start defaulting? AIG financial products can't make good on the insurance policies, which in turn affects the AIG insurance subsidiaries cash flow and assets. (Actually it would have effect lots of financial instutitions)

As an interesting exercise go find your states insurance commissioners report, scan through the billions of dollars worth of insurance company liabilities and note the small amount of capital. For example AIG Hawaii has 2.5 million in capital and $130 million in liabilities. Then look at the total insurance companies liabilities vs the state insurance fund. Note that most state only guarantee 100K on an SPIA per insurance company and 300K per person. Then tell me with a straight face that you are highly confident if we have a couple more years like 2008, and Uncle Sam chose not to intervene to bail out the financial institutions, that every person with an insurance contract will get paid fully.

When you buy an SPIA, the insurance company doesn't take your money, and stick in a mattress and each month give you a check. Rather they invest the money in assets: stocks, bonds, real estate etc, not much different than what an individual investor does. These assets can. as clearly demonstrated last year, drop quickly and dramatically. If assets of a number of insurance large firms exceeds the liabilities, there isn't much money set aside to pay the policy holders. This would be a largely a state problem not a federal one and states don't have a fed or treasury department to magically create money. I suspect that plenty of citizens would revolt about paying more taxes to make sure that you collect fully on your SPIA.

Now to be fair insurance companies are supposed to be run in financially prudent manner. They are supposed to make sure there is significantly more assets than liabilities. The are even regulated by folks to make sure they don't take excessive risks. Most importantly the scary scenario I outlined has not happened, yet. Still my confidence, that financial institutions are always being run in prudent fashion, that regulators are always highly competent, and rigorously look for financial shenanigans, or that states never borrow from special purpose funds, has been a just a wee bit shaken over the last 12 months.

As Brewer says. SPIA provide a significant decrease in longevity risk. This is very good thing, and not easily accomplished by other assets types. But as in ALL investments SPIA are not risk free and just because we haven't had people lose money in SPIA recently in this country doesn't mean it can't happen in the future.

 

[brewer12345]

Good points.

I really was unsure about TIAA-CREF, it sounds like they are one of the "good" insurance companies. The few times I've looked at teacher 403B I've be disgusted by the performance and fees, but I think they were offered by a division of Amerprise so no surprise there.

That is who my life insurance policies are with. Iwould not hesitate to buy a SPIA from them.

 

[jdw_fire]

Actually I think I was pretty careful to say SPIA=immediate annuities are ok.

yes you did but you spent alot of words talking about the downside of annuities which could be implied as applying to SPIAs

Generally you do have an option to redeem a SPIA although at a big penalties.

but if you are buying an SPIA for income it is unlikely you will be cashing it in.

The rates of SPIAs are bad enough, what are the rates you can get for SPIA with a COLA?

if it doesnt make financial sense, dont buy it.

As Brewer says. SPIA provide a significant decrease in longevity risk. This is very good thing, and not easily accomplished by other assets types. But as in ALL investments SPIA are not risk free and just because we haven't had people lose money in SPIA recently in this country doesn't mean it can't happen in the future.

the most probable risk with SPIAs is you dont get as big of a return as you MIGHT in the stock market, but unlike SPIAs recently people HAVE lost money investing in stocks. and i wouldnt be surprised if people lose money investing in stocks in the future before anyone loses money on an SPIA.

 

[youbet]

I hope all those interested in an SPIA make sure that the SPIA they are considering pays at least as well as the "equivalent annunity" you receive when you postpone SS.

I have two friends who are taking SS at 62 but also looking at SPIA's. They just don't get it that at today's annunity rates, they'd be better off delaying SS and living off the money they'd hand over to the insurance co for the SPIA until they're 66.

In my own case, I'm starting SS at 62. But, I'm not considering an annuity now. If I do consider an annuity later, I'll compare the insurance co rates with what I could recieve by paying the SS back and restarting SS at 66.

Edit: when comparing the value of buying additional SS by delaying to the value of an annunity, be sure to use the rates a cola'd annunity is paying.

 

[jdw_fire]

I hope all those interested in an SPIA make sure that the SPIA they are considering pays at least as well as the "equivalent annunity" you receive when you postpone SS.

I have two friends who are taking SS at 62 but also looking at SPIA's. They just don't get it that at today's annunity rates, they'd be better off delaying SS and living off the money they'd hand over to the insurance co for the SPIA until they're 66.

In my own case, I'm starting SS at 62. But, I'm not considering an annuity now. If I do consider an annuity later, I'll compare the insurance co rates with what I could recieve by paying the SS back and restarting SS at 66.

Edit: when comparing the value of buying additional SS by delaying to the value of an annunity, be sure to use the rates a cola'd annunity is paying.

i second your hope. delaying SS is a great annuity, especially considering todays interest rates