Annuities..You need one..Really

[JPatrick]

many more Americans should be buying annuities, he says. Insurance companies structure annuities in a variety of ways; one common option is an annuity that pays out a regular income stream that ends when the recipient dies. For most Americans, especially healthy people who expect long lives, it makes sense to lock in an annuity at age 65 rather than later in retirement, Webb adds.many more Americans should be buying annuities, he says. Insurance companies structure annuities in a variety of ways; one common option is an annuity that pays out a regular income stream that ends when the recipient dies. For most Americans, especially healthy people who expect long lives, it makes sense to lock in an annuity at age 65 rather than later in retirement, Webb adds.


Read why here:


Retirement: Live Long and Don't Prosper - BusinessWeek

 

[GregLee]

For most Americans, especially healthy people who expect long lives, it makes sense to lock in an annuity at age 65 rather than later in retirement, Webb adds.many more Americans should be buying annuities, ...

The problem with that is that if you expect a long life, the insurance company will expect that also (they're no dummies), and will set their rates accordingly, so the amount you pay to "lock in" your annuity will pay them all that they expect to pay you during your long life, plus their administrative costs, plus a tidy profit to their shareholders, plus a tidy commission to their salesmen, and so on, and so on. Do you think you can outwit the insurance company to make a profit on your annuity?

 

[Marc1962]

According to a number of personal finance authors favored here and at Bogleheads Investing Advice and Info, single premium immediate annuities (SPIA) provide an inexpensive way to insure against longevity risk and thereby improve a portfolio's safe withdrawal rate. I think Jim Otar's analysis in Unveiling the Retirement Myth is particularly compelling. For a limited time, you can read it for yourself for free at http://www.retirementoptimizer.com/downloads/URMG/URMGreem.pdf.

 

[easysurfer]

With such low interest rate at present, if everthing else seems good, it's still very difficult to pull the trigger. Each check will be a reminder of how low rates are/were for the rest of my life. But on the otherhand, when the next market plunge happens, it would be good to know that a steady income stream rolls in each month like clockwork.

 

[Marc1962]

A recent discussion at Bogleheads covered SPIAs in great detail. This post - Bogleheads :: View topic - With interest rates so low, are annuities effectively dead? - addresses the impact of interest rates on SPIA payouts. The effect is surprisingly slight. The high returns on SPIAs come primarily from the money paid by people who wind up passing away prior to their expected average life spans.

 

[NW-Bound]

Yes, I think Otar got a point there about annuity may be good for some people.

For myself, I do not think I will ever buy an annuity. I do not expect to live long, and with my low SWR, it is OK that I do not spend all of it and leave some money behind to my children and charity.

PS. I observe that most people expect to live into their 90s. The truth is that not all will.

 

[East Texas]

I'm waiting to move a chunk of my portfolio into a USAA Single Premium Immediate Annuity so I'm closely monitoring interest rates. I hope they start going up before year-end. This annuity has joint and survivor life income with a 20 year guarantee. I wish I would have done this a few years ago; but, that's with woulda/shoulda/coulda hindsight.

Do any of you have any thoughts on when the Fed will start raising rates? I'm thinking the earliest will be 3Q2011.

 

[kumquat]

I hate to be critical, but aren't you repeating yourself a bit?

 

[East Texas]

I hate to be critical, but aren't you repeating yourself a bit?

Was that directed at me?

 

[audreyh1]

Yeah - I would only consider an annuity later in retirement (having already survived till then) when the annual payout can be a lot higher.

Audrey

 

[East Texas]

We're juggling starting the annuity and delaying social security or starting social security and delaying the annuity. There are strong pros and cons for each selection. It looks like, in all probability, the decision is going to be based on when the Fed starts raising interest rates to a decent level.

 

[chinaco]

I think SPIAs are great products in certain situations.... if properly selected and applied.


The problem is that most people do not understand the SPIA or their situation or how it might fit in and what problems it can solve.

The plain old SPIA is a complicated product and people's situations are complicated. This provides ample opportunity to make a poor decision.


Assuming the company is strong and one does not run into problems with default...
Problems arise when people make the wrong purchase decision for their situation. But even if it looks like the right purchase decision... the future could turn out otherwise.

But one has the same risk with investing... no one knows what the future holds! If I had the benefit of looking back and changing my past decisions.... there would be no problem to solve!

 

[Midpack]

Yeah - I would only consider an annuity later in retirement (having already survived till then) when the annual payout can be a lot higher.

Audrey

+1, my plan too. I plan to track my annuitization hurdle, especially with low interest rates right now. My conclusions are based on Otar's work and this http://spwfe.fpanet.org:10005/public/Unclassified%20Records/FPA%20Journal%20August%202007-%20Modern%20Portfolio%20Decumulation_%20A%20New%20Strategy%20for%20Managing%20Ret.pdf (a 12 page version of Otar)...YMMV

 

[Danmar]

Annuities are an under appreciated vehicle and if you don't have a DB pension are probably beneficial. Longevity risk can be much greater than investment risk. Another good read is "Pensionize Your Nestegg" by MIlevski and 'McQueen.

 

[Danmar]

+1, my plan too. I plan to track my annuitization hurdle, especially with low interest rates right now. My conclusions are based on Otar's work and this http://spwfe.fpanet.org:10005/public/Unclassified%20Records/FPA%20Journal%20August%202007-%20Modern%20Portfolio%20Decumulation_%20A%20New%20Strategy%20for%20Managing%20Ret.pdf (a 12 page version of Otar)...YMMV

Interesting article. Thanks for linking.

 

[FinanceDude]

Annuities are an under appreciated vehicle and if you don't have a DB pension are probably beneficial. Longevity risk can be much greater than investment risk. Another good read is "Pensionize Your Nestegg" by MIlevski and 'McQueen.

Not everyone has a guaranteed COLA pension.......

 

[Danmar]

Not everyone has a guaranteed COLA pension.......

Yes. That's why annuities are worthy of consideration for many people.

 

[rescueme]

We're juggling starting the annuity and delaying social security or starting social security and delaying the annuity.

We purchased our first SPIA at age 59 (when I retired) and it is "replacing" SS for me and allowing me to delay till age 70 (primarily for the benefit of my DW).

As to rates? One could argue that you could wait forever, but what are you going to live on while you wait till the rates go in your favor? For the few dollars that we may had have as an increase in a monthly check, we have not had to fund (my) ER from my portfolio.

Almost four years after the SPIA was purchased, we have no regrets. It has (and continues) to fill the need for "gap income" from age 59 till age 70. Additionally, it doesen't even address the advantage of me filing for spousal SS (at 50% of my DW's FRA rate) at age 66 and provide me with a bit of SS income for 3.5 years.

For us, it's working out well. Everybody needs to examine their own situation and not only look at the SPIA income, but also how other income sources (such as SS) can be adjusted to your advantage...

 

[chinaco]

...

As to rates? One could argue that you could wait forever, but what are you going to live on while you wait till the rates go in your favor? For the few dollars that we may had have as an increase in a monthly check, we have not had to fund (my) ER from my portfolio.

.....

In normal times, one could argue that current rates reflect (to some degree) long-term expectations about inflation.

But I am not sure we are in a normal situation right now since the Fed is manipulating rates.

Some people use a ladder to try to capture the increased payout (if rates move up).

 

[Gone4Good]

Yup, an annuity will be a good thing to consider . . . in 2035.

 

[rescueme]

Some people use a ladder to try to capture the increased payout (if rates move up).

Great point, and what we will probably do as we age (and don't want to manage our investments, as we do today).

Again, it comes back to the question of an SPIA and if it fits your specific needs. Not everybody should get (or need) one; it all depends on your specific situation...

 

[73ss454]

Not everyone has a guaranteed COLA pension.......

Heh, spoken like a true.......

 

[chinaco]

Heh, spoken like a true.......

Findude... Hope that's not an indication of the quality of the..... I would hate to risk my future on an incomplete....

 

[JPatrick]

Interesting thread.
Years ago when I first signed on to this forum, the mention of an annuity would have created an internet riot and probable stoning. These days there seems to be quite a lot of support and interest.
If the daily headlines regarding the plight of many baby boomers retirement challenges are to be believed, I suspect annuities are going to play an important role as will products like reverse mortgages.
Trouble is, none of these products are cut from a single bolt of cloth and the most needy of such a plan are no doubt the most vulnerable.
Here's a snipet from a recent incident here in MO.

A Springfield investment adviser who has hosted seminars in Branson has requested a hearing with Missouri Secretary of State Robin Carnahan’s office to contest a cease and desist order that was issued against him last week.
Tracy Wayne Mitchell was named in a Jan. 11 order released by Carnahan’s office that alleged he had used free lunch seminars to encourage seniors to purchase restrictive insurance annuities without disclosing the downside of such products or the large commissions he stood to gain on their sale. In doing so, Carnahan said Mitchell, a registered investment advisor with Guidepost Financial LLC, put his own interests before those of his clients, breaking a requirement of his license.

While this case is still to be decided, the allegation is that 31 of 32 (at one such event) attendees were sold inappropriate products. Some apparently even had to sell their existing annuities to buy his. A feeappalooza.

Regardless of how you feel about the product, your best buy is probably not going to be found at a free steak supper..IMO

 

[73ss454]

I'm shocked that this would happen! The nerve of this guy. I get 3 or 4 of those invites each week, do you guys think they might try and do something like that down here in Florida?