Not fond of annuities

[Chuckanut]

Here's an interesting article on why some annuities may be good for some people. It's an interview with the head of TIAA.

In a world where defined benefit plans are increasingly rare (pdf), we need better defined contribution alternatives. These need to solve two problems: low saving rates and forcing individuals to shoulder too much risk. To increase saving, Ferguson would like to see more of the standard solutions: easier access to plans, automatically enrolling people in them, mechanically increasing people’s saving rate as they earn more, expanding low-fee investment options, and promoting objective advice.

Annuities: The world's most reviled financial product may save your retirement — Quartz

 

[pb4uski]

From the article:

He wants retirees to annuitize a portion of their wealth, enough to cover basic life expenses like food, housing, and transport.

Wouldn't SS cover food, housing and transportation for most retirees? Our SS would cover almost 80% of our total budget.

The average monthly benefit for retired workers is $1,355/month or $16k a year.... so let's say $24k for a couple. My guess is that would cover a lot of food, housing and transportation for an average retired couple. If so, no need for an annuity or a modest need at worst.

 

[kcowan]

MetLife Inc., one of the best-known brands in life insurance, misled tens of thousands of customers about a product that retirees seek out for safety, according to regulators, who levied a near-record $25 million fine against the company.

I think in a nutshell, this is the problem. Nothing wrong with a properly structured annuity with reasonable overhead and no outrageous marketing costs and profit provisions. But the average buyer cannot determine that without a lot of work.

 

[OrcasIslandBound]

Annuities sound like a great tool to justify living life a little fuller now in the early part of one's retirement and having a little less 20 to 30 years down the road when inflation has taken down those fixed payments to something like 1/3 or 1/4th of their original value. For some people this actually is a good recipe, just not for my family.


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[samclem]

Annuities sound like a great tool to justify living life a little fuller now in the early part of one's retirement and having a little less 20 to 30 years down the road when inflation has taken down those fixed payments to something like 1/3 or 1/4th of their original value.

But it could be a >lot< less. It seems like a big roll of the dice to count on the inflation rate to coincidentally match our desired reduction in spending as we get older.
3% inflation for 30 years = 60% reduction
5% inflation for 30 years = 80% reduction

For a retiree concerned about a decades-long future, I don't know that exchanging equity market risk for inflation risk is such a great idea. If an annuity is for the long term and for "must have" monthly spending, then only an inflation-indexed product would seem to be useful.

 

[OrcasIslandBound]

Exactly!


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[LauAnn]

All I know is that my TIAA annuity enabled me to retire at 55 without penalties. And I am so grateful every day since then that I no longer have to w*rk. Once SS kicks in 4 years from now, my standard of living will be greater than during my working/saving years. Sure inflation will start eating in at some point, but by then I'll be much older and I don't expect to be spending anywhere near the discretionary funds I currently spend on travel, toys, etc. I guess I'm saying that i am one of the "for some people" for which the TIAA annuity is perfect -- particular given my level of risk tolerance and LBYM habits.

 

[nun]

As I have a state pension and will also get some SS I won't be buying any annuities from TIAA. I will just keep my TIAA-Traditional account as my fixed income allocation instead of bond funds as it is paying 4.85%.

 

[medved]

I just read this entire thread and found it interesting. I am considering, in the future, an approach that replaces a part of what would otherwise be the "fixed income" side of my asset allocation with a SPIA. (Actually, it would probably be multiple SPIAs, bought over time, in part to account for changes in the interest rate environment and in part of diversify among insurance companies and try to stay below the applicable state guaranty threshold, in an effort to mitigate counterparty insolvency/default risk).

Like many retirement issues, I find the psychological component as important, if not more important, than the financial one. That is, I will feel better knowing that I have, say, $100k - $150k a year income, for the rest of my life and my wife's life, "no matter what." That comfort has utility, as the economist would say. (The fact that you cannot precisely value, or sell, that utility, does not mean it is unimportant -- you also cannot precisely value or sell time with your grandchildren, but that doesn't mean its unimportant). For someone who is risk averse, like me, it may also make my spending more free...

If I were to retire at age 58 (my best guess right now, though who knows), I am not sure whether I would buy an immediate annuity or deferred. I can see it either way. One can say it is longevity insurance, so defer it. Or one can say if it makes you more free to aggressively allocate the rest of your portfolio, starting younger actually has a better projected outcome. I will seek some advice about that, at the time. My inclination is not to delay too long, if at all...

I find the conflating of SPIAs with other "investment annuity" products to be unhelpful. They really have very little in common, other than the word "annuity." The only such product I would consider is a SPIA.

A part of the decision for many people may be how much you care about leaving money to heirs. If I did not care at all about that, I guess I might take everything I have and buy annuities; I could live very nicely... I am surprised I have not seen more discussion about this issue as a driver of the decision to annuity or not. Maybe it is because the expected terminal values are not all that different, depending on what percent of your total assets you annuitize and how you allocate/invest the rest of your assets.

 

[jazz4cash]

I find the conflating of SPIAs with other "investment annuity" products to be unhelpful. They really have very little in common, other than the word "annuity." The only such product I would consider is a SPIA.

I agree wholeheartedly but would add that a simple deferred annuity (e.g. Multi year guaranteed annuity, aka MYGA) is also a good tool for low risk fixed income. I learned about these on this forum in another "annuities are bad" thread and will likely choose to substitute these for some rungs of my CD ladder.


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[pb4uski]

BIL's mom had a low performing VA that she had had for years. She wanted some income to supplement her SS and wanted to leave a legacy to her kids. We put her into Wellesley and put in place a monthly automatic redemption that goes straight to her bank account... problem solved... what ever is left will go to her kids unlike the annuity that her agent was pitching (to a 89 yo).

 

[travelover]

............ I will feel better knowing that I have, say, $100k - $150k a year income, for the rest of my life and my wife's life, "no matter what." ..........

If that "no matter what" included protection against runaway inflation, I'd agree.

I still recall my FIL convincing his uncle to take the cash out of the rafters and get it into CDs back in the late 70's. That moved made the difference between paying for his own nursing home care and Medicaid. It made a lasting impression.

 

[medved]

If that "no matter what" included protection against runaway inflation, I'd agree. .

You are correct, of course, that (at least absent a COLA provision) the immediate or deferred annuity does not protect against inflation. But then again, unless you have a pension with a COLA (which I don't), there is no investment I know of, with a guaranteed return, that does protect against inflation, other than TIPS -- and the annuity has some advantages over TIPS. And if the "certainty" associated with the annuity allows me to invest the remainder of my assets more aggressively, that may help protect against the impact of inflation too.

 

[samclem]

But then again, unless you have a pension with a COLA (which I don't), there is no investment I know of, with a guaranteed return, that does protect against inflation, other than TIPS -- and the annuity has some advantages over TIPS. And if the "certainty" associated with the annuity allows me to invest the remainder of my assets more aggressively, that may help protect against the impact of inflation too.

There are two "investments" you might add to your toolkit:
--Social Security benefits are also indexed to inflation. Deferring them (to age 70, or more) is the cheapest way to buy an inflation-indexed lifetime income stream. All provisos apply--we don't "own" our SS, the government could change the rules, etc.

-- Annuities: Inflation-indexed annuities are another "investment" you can consider to keep pace with inflation. Yes, they are expensive, but maybe that tells us something about the risk of inflation. Many people seem to be wishing that away. Recency bias?

 

[harley]

All I know is that my TIAA annuity enabled me to retire at 55 without penalties. And I am so grateful every day since then that I no longer have to w*rk. Once SS kicks in 4 years from now, my standard of living will be greater than during my working/saving years. Sure inflation will start eating in at some point, but by then I'll be much older and I don't expect to be spending anywhere near the discretionary funds I currently spend on travel, toys, etc. I guess I'm saying that i am one of the "for some people" for which the TIAA annuity is perfect -- particular given my level of risk tolerance and LBYM habits.

Just curious, and not looking to cause concern, but would you still feel that way if you live to 90 and by 85 your annuity has lost 80% of it's spending power (based on SamClems 5% inflation chart above)? Not going to be an issue for me, unless they invent the immortality drug, but some people do live that long.

Unless, of course, your annuity is COLAd. Most aren't though. And I always figure my health care expense will increase as my travel and other discretionary costs decrease, so it will be a wash.

 

[harley]

You are correct, of course, that (at least absent a COLA provision) the immediate or deferred annuity does not protect against inflation. But then again, unless you have a pension with a COLA (which I don't), there is no investment I know of, with a guaranteed return, that does protect against inflation, other than TIPS -- and the annuity has some advantages over TIPS. And if the "certainty" associated with the annuity allows me to invest the remainder of my assets more aggressively, that may help protect against the impact of inflation too.

Personally I'd go with a CD ladder before an annuity. While it will lose against inflation, it will do so slowly. If inflation goes up, so do rates. I remember the late 70s/80s, with double digit inflation. An annuity would lose value really fast in a repeat of that environment. Our CDs, on the other hand, mostly kept up, especially the later years when inflation was dropping but we were locked in for 5 years.

Of course, with CDs you have to manage your own withdrawals, but I'd rather do that than not have the flexibility to mitigate inflation.

 

[UpAnchor]

Just curious, and not looking to cause concern, but would you still feel that way if you live to 90 and by 85 your annuity has lost 80% of it's spending power (based on SamClems 5% inflation chart above)? Not going to be an issue for me, unless they invent the immortality drug, but some people do live that long.

Unless, of course, your annuity is COLAd. Most aren't though. And I always figure my health care expense will increase as my travel and other discretionary costs decrease, so it will be a wash.

Of course there's still the option to ladder fixed SPIAs as mentioned earlier in this thread. One could "afford" to purchase a cola'd version but elect not to, with the idea that one or more additional-perhaps much smaller-SPIAs could be added later as desired. I'd think one advantage to this would be that one could tailor their laddering to their "personal" inflation-once experienced-rather than purchasing a more complex instrument upfront with no way to "dial it back" should the full amount of the cola not be required.

 

[lawman3966]

Insurance salesmen warn of the dangers of the stock market.

And now high-fee stock investment product salesmen warn about the dangers of insurance company annuities.

In other words, the stock salesman would prefer that you avoid paying high fees to an insurance company, so that you can instead pay high fees to the stock salesman. No surprise there.

Annuities are well worth researching and perhaps being wary of. However, I would take with a grain of salt any such warning coming from someone whose business is in direct competition with annuities. This is just marketing for high-fee, actively managed ETF portfiolios.

 

[jammes2014]

Calling Mr. Mathjak… Thanks for your help here.

... like all annuity's with guaranteed growth rates , you never own the additional money which you can take , it just sits in a separate account where it acts as a base amount for annuitizing.

I very much suspect that what I have is what you’re describing above. Which, alas, I didn’t realize when I acquired my choiceplus variable annuity. And yes, if you wouldn’t mind explaining this – “it just sits in a separate account where it acts as a base amount for annuitizing” – I’d certainly appreciate it. This, in turn, will help me decide if I keep or try to get rid of the thing in some way.

The annuity went from $100,000 (purchase price) to $117,000, when times were good. The amount appearing on the statement is now down to $105,000. But you’re saying that $5,000 or so will never be mine, right? And that even after the surrender period is up, anything above the purchase price only serves as the base amount when annuitizing. Am I reading you correctly?

Again, thanks for your help here.

PS: Input/tips from other knowledgeable sources more than welcome. j2014

 

[mickeyd]

https://investor.vanguard.com/annuity/

VanguardInsurance.com - Comparing Your Insurance Online

Quote from bottom of VG web page "
The Vanguard Variable Annuity is a flexible-premium variable annuity issued by Transamerica Premier Life Insurance Company, Cedar Rapids, Iowa". The other link is for a P&C company not associated with OUR VG.