Not fond of annuities

[OrcasIslandBound]

Perhaps because the treasury will eventually be depleted when the annuity will not when consumed @the rate of 5.15%, assuming you live long enough.

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[nun]

because you would have to wait for thirty years for the treasury to mature

Yes, the treasury will give you 3% a year and if held for 30 years you get your principal back. The annuity will give you 5% a year for your life, but you have lost your principal.

 

[HadEnuff]

Agree. It's all about "mortality credits". Too bad there isn't more competition in the sales of annuities.

Typically, if there is a lot of "fat" profit to be made in a product, there will be competition. Could it be that at the current level of income;payout in the annuity game, that from the seller's point of view, there isn't enough "fat" to trim out to make it less expensive for the buyer?

Or, to put it another way, as consumers we are looking at the risk:reward one way, and they are looking at it from the other side, and by lowering the cost, or making the terms more favorable for the buyer, their risk:reward becomes unfavorable.

 

[hurricane harry]

Yes, the treasury will give you 3% a year and if held for 30 years you get your principal back. The annuity will give you 5% a year for your life, but you have lost your principal.

and if you die before the bond matures you get, well, nothing

Life with period certain — this pays regular payments for as long as you live. However, it also sets a specific period of time that payments will be made, and if you die before that time period is up, your beneficiaries receive the rest of the payments.

https://www.metlife.com/individual/investment-products/annuities/fixed-annuities.html#faq

 

[nun]

and if you die before the bond matures you get, well, nothing

Life with period certain — this pays regular payments for as long as you live. However, it also sets a specific period of time that payments will be made, and if you die before that time period is up, your beneficiaries receive the rest of the payments.

https://www.metlife.com/individual/investment-products/annuities/fixed-annuities.html#faq

If you own a treasury bond and die, your beneficiaries get it. They can be owned jointly as well.

 

[Danmar]

The problem with mortality credits are the annuity buyers (as opposed to pension holders) are self-selected. Which means they expect to live long time or else they wouldn't buy the annuity. People who are ill or have reasons to expect to live shorter are out of the pool. So the "mortality benefit" is smaller than why you would expect from the general population. In other words, it turns out these self selectors are right about having longer longevity.

Right, not as big as you might expect, but nevertheless, still important.

 

[nun]

The only reason I see for buying an annuity is if you want to guaranteed a floor of income. If that helps you enjoy retirement more then they are worth while. If you believe that the markets will supply all you need through all the ups and downs and for as long as you live then you don't need an annuity.

 

[ESRwannabe]

I don't think annuities are all bad. I look at them as buying a pension. Granted with worse parameters than a normal pension.

 

[ESRwannabe]

Yes, COLA's are definitely noticeable in my pension check. Just 2% COLA's accumulating since 2010 retirement has lifted my pension 8k.


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My pension has a 3% COLA. Hopefully nothing changes 20 years from now when I can start collecting on it...

 

[Fermion]

How can pensions offer such large COLAs and annuites cannot? Do the pension plans invest better than the insurance companies?

 

[hnzw_rui]

How can pensions offer such large COLAs and annuites cannot? Do the pension plans invest better than the insurance companies?

Better is questionable. They might carry a higher risk portfolio, though (iirc, ours is 60-70% equities). Good back in the go-go days when returns were so high the govt could cut their share of pension contributions to $0 (or even borrow from the pension fund). Not so much during the dotcom bust or 2008/09.

Pension funds do have a slight edge over commercial annuities because they have a more diversified pool so mortality is more average rather than the self-selected bunch with long life expectancies who buy annuities. That said, state and local govt are trying to cut down on pension benefits and/or have increased employee pension contributions so the previous benefits were probably too generous particularly given longer lifespans.

Iirc, one of my co-workers attended a retirement seminar 10 years ago and statistics back then was average lifespan of pensioners was 70.

 

[DrRoy]

I agree that there are cases where an annuity is appropriate because of the risk issues discussed above, but I have never liked them. So much of your money is lost to fees and often to insurance that is also in the product. For many annuities, you also have nothing for your estate.

 

[UpAnchor]

I agree that there are cases where an annuity is appropriate because of the risk issues discussed above, but I have never liked them. So much of your money is lost to fees and often to insurance that is also in the product. For many annuities, you also have nothing for your estate.

All can be true. But for many of us who haven't taken future SPIAs completely off the table, it is the insurance aspect (longevity) that we'd be most interested in. Personally, I don't look at annuities as investments, other than perhaps as a fixed-income proxy and I'm still not sure how I feel about that.

And regarding our estate, one of the things DW and I wish to leave our heirs (or pre-heirs) is the assurance that they don't have to worry about either or both of us showing up at their door with our pillows.

 

[nun]

I agree that there are cases where an annuity is appropriate because of the risk issues discussed above, but I have never liked them. So much of your money is lost to fees and often to insurance that is also in the product. For many annuities, you also have nothing for your estate.

Insurance should be the only reason to buy an annuity. I believe you are thinking about annuities other than the most simple ones with fixed interest rates and those are the only ones you should ever consider because they ensure a baseline income and insure against longevity risk. The idea of taking any risk with variable returns in an annuity seems completely counter intuitive to me. Variable annuities with income riders are complex and expensive and you don't need the investment side at all....just the insurance side with some fixed interest rate.

Never mix insurance and investment

 

[Danmar]

The only reason I see for buying an annuity is if you want to guaranteed a floor of income. If that helps you enjoy retirement more then they are worth while. If you believe that the markets will supply all you need through all the ups and downs and for as long as you live then you don't need an annuity.

Sure, but the key point is your belief might be wrong. This "risk" prevents you from spending as much as you might otherwise be able to. Having some steady income to cover some or all of you base expenses in retirement is a very good thing. Issue is, at what cost. The simple annuity product is a very powerful one the issue is cost.

 

[nun]

Sure, but the key point is your belief might be wrong. This "risk" prevents you from spending as much as you might otherwise be able to. Having some steady income to cover some or all of you base expenses in retirement is a very good thing. Issue is, at what cost. The simple annuity product is a very powerful one the issue is cost.

That's really the crux of the argument. It all comes down to asset allocation, which is determined by your risk tolerance, faith in markets and estimation of return, volatility and how those interact with you generation of income. My attitude is I want a guaranteed floor of income and with rent, a pension and two SS checks I have that well covered and have inflation adjustment too. This allows me to take risk with the rest of my assets. There are other solutions ranging from 100% ETFs to 100% annuities, everyone is different. I'm using 18% of my portfolio to buy into my pension so I can take risks with the rest and sleep well at night.

 

[pb4uski]

How can pensions offer such large COLAs and annuites cannot? Do the pension plans invest better than the insurance companies?

Pensions typically invest 60% or so of their assets in equities and alternative investments. Insurers issuing annuities would typically invest little in equities (1-2%... in part because the capital requirements to invest in equities are high) and virtually none of those investments relate to payout annuities... they are all backed by bonds. IMO the difference is driven by the difference in the liabilities (COLAed vs not).

 

[Fermion]

Would that mean annuities are quite a bit safer than pensions?

 

[kcowan]

It depends on what pensions. Government pensions no problem. Private pensions always at risk.

 

[Danmar]

It depends on what pensions. Government pensions no problem. Private pensions always at risk.

And also who is paying the annuity.

 

[pb4uski]

Would that mean annuities are quite a bit safer than pensions?

It depends on the financial strength of the pension fund (and sponsor) and of the annuity issuer. Can vary from no concern to dreadful.

My only point was that the funding is a function of the obligation. Part of the reason that we don't see a lot of COLAed annuity products is because the market for adjustable rate bonds is thin so it is difficult to find assets that match the obligation on a large scale.

 

[youbet]

It depends on what pensions. Government pensions no problem. Private pensions always at risk.

Yes indeed. Just tell that to folks with State of Illinois pensions where the legislators who forgot to fund pensions for decades are now working tirelessly to reduce pensions already being paid to long retired employees as the solution.

 

[hurricane harry]

That's why you get both.

 

[Chuckanut]

It depends on what pensions. Government pensions no problem. Private pensions always at risk.

I think the Detroit city pensioners would disagree. And some of the folks in Illinois might be more worried than others.


The worst decisions are made when angry or impatient.

 

[mathjak107]

Yes, the treasury will give you 3% a year and if held for 30 years you get your principal back. The annuity will give you 5% a year for your life, but you have lost your principal.

in realty the immediate annuity gives you back your own money at a higher cash flow rate then you can take it from yourself .

an immediate annuity has no interest rate . it only has an implied fictitious rate of return the irs uses from a life expectancy chart for tax purposes .

so you give the annuity company 100k and they give you 6k a year . 16 years later you have all your own money back

now you go on their dime and get your first dollar of return .

so lets look at a portfolio of 200k consisting of 100k in an annuity and 100k in stock vs 100k in bonds and cash and 100k in stock .

trying to match that 6k cash flow from the annuity from bonds and cash will deplete them to zero and require refilling from equity's .

the 6k annuity will never end reducing the need to sell as much in equity's .

unless your own investing has the most favorable sequences odds are the annuity /equity's will give you more cash flow and depending on how long you or a spouse live more for heirs.

the annuity has no sequence risk which allows you to spend all of it keeping no powder dry for poor sequences .

on our own we have to keep a lot of powder dry because poor sequences can leave us with near zero left at the end of 30 years to more than 2x what we started with .

that money can't be spent up front since we don't know our final outcomes .

the annuity has no sequence risk like our portfolio's do so they provide a higher cash flow ..