Why are annuities so controversial?

[LXEX55]

Have read all I could about annuities, especially immediate fixed, and have never in my life read so many opposing view points on one investment vehicle. I have of course taken into consideration the high fees the broker gets. Why ares people so passionate, for or against, about them?

 

[Walt34]

Mostly because they are sold to people even when it is clearly not in the buyer's best interest to buy one. They are appropriate for some people in some circumstances but the sellers (generally) just want the fees and commissions. That's why the resentment.

 

[gauss]

- Nontransparency.
- Potentially high embedded fees.
- Non-Fiduciary relationships between buyer and seller.

On the other hand, many on this board are analytical types who like to manage their own money and think they can beat the returns from the annuities in the long run. This may not be suitable for all retirees.

Personally, I prefer a diversity of income streams in retirement (self managed funds, medium pension, Social Security). This gets easier to implement when you are closer to a 2% WR (ie have more capital relative to expenses) and can afford the potentially lower returns from the non-market income streams.

I think Otar's book lays out a quantitative analysis of when annuities may be appropriate.

-gauss

 

[MRG]

Mostly because they are sold to people even when it is clearly not in the buyer's best interest to buy one. They are appropriate for some people in some circumstances but the sellers (generally) just want the fees and commissions. That's why the resentment.

+1
I was recently given a hard sale from my new Fidelity Privite Client rep. I suddenly needed to annuitze 40% of my retirement funds in a SPIA.

I told him, I'm 60 years old and my biggest concern was not to generate income for the next 5 years! Of course I could delay payments, but lock in a rate in a rising interest rate environment for life?

WTF, I'm not very smart but this is for a someone a whole lot smarter than I am.

An OK tool for the right person at the right time in life, beware the salesperson.

 

[pj.mask]

Because the average bogelhead can do better managing a stock/bond portfolio. Annuities are good for people who can’t manage lump sums. There is a place for it but typically I think stocks will pay out better long term if you have enough money.

 

[ejman]

My only experience with annuities was when I worked for a non profit college long ago. For some strange reason the 403(b) plan only included a variety of annuity investments. Although I have a reasonable layman's acquaintance with financial instruments I remember reading the telephone book (small print) prospectuses and thinking "some very smart lawyers and accountants spent a considerable amount of time and effort devising ways to screw me" Hence I'm reluctant to invest in instruments that require more expertise than I have at my command to understand.

 

[medved]

Annuities got a bad name largely because of some annuity products other than SPIAs and deferred fixed annuities. Some of these were complicated, sold without adequate disclosure, aggresively marketed to people for whom they were unsuitable, and larded with large, inadequately disclosed fees. Then, people put annuities all in one bucket. So they say they are all bad. I think SPIAs serve a very legitimate purpose, at least for some of us.

Beyond that, I guess in investments, everything is controversial. 100% equities? Too risky. Using a financial advisor? Wasting money when you can do it better yourself. LTC insurance? Better to self insure. Commodities? You can achieve sufficient diversification without them. Active management? You won't beat index funds. Index funds? You are giving up the opportunity to achieve alpha. Emerging markets? Too risk and unregulated. Investments are like politics -- lots of strongly held views, and very little consensus.

 

[USGrant1962]

Aside from the fees/commissions, current interest rates determine the payout on annuities and hence the returns are awful (even with mortality credits).

 

[REWahoo]

Annuities got a bad name largely because of ...

...greedy, unscrupulous salescritters.

 

[Souschef]

My wife has an annuity which was a reasonable choice when she bought it. When it was time to roll it over, there was one plan that offered her a 9% bonus. I went down into the find print, and found that the fees were higher.
I ran a spreadsheet and found that by year 5 and beyond she would be in the hole!
I presented it to the salesman and he su[supposedly was surprised. DW thanked me as she said she would have missed it.

 

[racy]

... I think Otar's book lays out a quantitative analysis of when annuities may be appropriate.

-gauss

Here's a quote & a link from an article about Jim Otar's book, "Unveiling the Retirement Myth" and his retirement income zones:
"Otar assigns all of his mature clients to one of three color-coded zones--the Green Zone, Gray Zone or Red Zone. Clients' zones aren't determined by their wealth, but by the amount of income their wealth has to produce each year in retirement. ... Otar says. Red Zoners--i.e., most boomers--won't have many options. They'll have to work longer, become more frugal and annuitize most of their savings. Or pray for luck."

http://www.thinkadvisor.com/2010/03/01/what-color-is-your-retirement-zone

 

[Independent]

Have read all I could about annuities, especially immediate fixed, and have never in my life read so many opposing view points on one investment vehicle. I have of course taken into consideration the high fees the broker gets. Why ares people so passionate, for or against, about them?

First, there is a lot of confusion about "annuity".

Some people see "annuity" and jump to deferred, indexed, (or variable), and complain about all the associated fees.

A fixed, single premium, immediate annuity is much simpler and easier to shop.
That means more effective competition.

Deferring SS is financially similar to buying an immediate annuity. But, with today's interest rates, the SS factors are consistently more attractive.

 

[YVRRocketSurgery]

Personally, I'd rather manage my nest egg to produce a stream of income in retirement.

However, I've been reading reviews of a new book on decumulation strategies. One of the options suggested is annuitizing a portion of retirement savings at age 65. The author talks about anxiety in retirement stemming from unpredictability of one's income stream. Some retirees may value a stable and predictable income stream that they know they cannot outlive more than eking out as much growth and yield from their nest egg.

 

[joeea]

Why ares people so passionate, for or against, about them?

This is a site full of people passionate about early retirement and full of people who passionately want to believe that whatever they are doing is right.

In that latter factor, they are not much different than any other forum, I think.

And the "annuity" passion is dwarfed by the "when to claim Social Security benefits" passion and the "pay off the mortgage or invest your money" passion.

It wouldn't be much fun here if people didn't care much either way about everything...

 

[joeea]

Deferring SS is financially similar to buying an immediate annuity. But, with today's interest rates, the SS factors are consistently more attractive.

And yet people are still passionate about their choice regarding when they should claim SS benefits!

 

[pb4uski]

Have read all I could about annuities, especially immediate fixed, and have never in my life read so many opposing view points on one investment vehicle. I have of course taken into consideration the high fees the broker gets. Why ares people so passionate, for or against, about them?

In part, because even simple annuities pay poorly. According to immediateannuities.com a 5 year period certain annuity will pay $1,720/month for 60 months with a $100,000 deposit. That is about 1.25%/year and you have your money tied up for 5 years.

OTOH, an online savings account pays close to or the same rate of return, is FDIC insured and you can get your money anytime that you want.

So if you had a choice between tying up $100,000 with an annuity company and getting $1,720/month for 5 years or getting the same return but having access to what is left of your $100,000 at any time you wish, what would you do?

If you buy payments for life, the same low rate of return is embedded in the monthly payments that you get, it is just harder to see.

 

[MRG]

You sure ask a lot of questions about annuities and people's behavior.

T-Al tells us when he's writing a book.

 

[Ronstar]

I remember asking our company accountant for some safe investment ideas 20 some years ago. Surprise - he recommended an annuity. I bought the annuity from him and sat on it for years of very little growth. I was disappointed in the returns, so I converted it into a 10 year payout last year.

 

[Souschef]

One of my brokers suggested a QLAC annuity to minimize my RMD. I did some research and found I would be lucky to get my original investment back at age 85!

 

[easysurfer]

Only kind of annuity I'd consider is an Immediate as others seem like smoke and mirrors to confuse and add fees.

As for why they are controversial, my take is because when immediate annuities thought of as an investment they are frowned upon. But when thought of as a security blanket, lifetime income stream, studies have shown that those with a steady stream worry less.

 

[haha]

Deferring SS is financially similar to buying an immediate annuity. But, with today's interest rates, the SS factors are consistently more attractive.

This should be blindingly obvious absent special circumstances. Yet there is considerable controversy about this SS decision, here on our board.

As far as purchasing an immediate annuity now, like others have said, it is in some ways similar to buying a longer term bond. I am not able to be sure what will happen with rates, but with an annuity anyone other than a very old person might consider that prudence would suggest to avoid this sort of commitment now.

Ha

 

[Perryinva]

Pb4uski: was that a missing zero? I think you meant a $1,000,000 annuity not a $100,000 annuity for $1720/mo. If you know of a $1,720/mo annuity for $100k....

A lot of the SS passion centers around the opinion of the soundness of the government not reducing benefits for the higher income retirees. I have always found it a bit amusing that people assume the chances that the government will reneg on its payments is more likely than a for profit insurance company will screw you over. The passion invariably is tied to the same belief as the annuity argument; there is more to be made investing. Personally, I also agree that at todays rates SS IS an attractive annuity for a married couple.

IMHO, a couple with $60k/yr of SS and $60k/yr of pensions has little need to convert their portfolio to more annuities, assuming that they live within their means and aren’t saddled with consumer debt. They can decide how low they want their portfolio to go as they age.

Many here want to max their portfolio to death and beyond. Others here realize there’s way more to life than that and beyond a certain dollar amount, it makes less sense. As others said, everyone has a different opinion based on their priorities and desires.

 

[bingybear]

I was recently given a hard sale from my new Fidelity Privite Client rep.

You need to train that rep. My FPC rep doesn't push much at me anymore. I do have a Fidelity variable annuity. I was sold a very expensive annuity in my 20's by the same broker who churned my investment account (full service broker. Not wanting to pay taxes, I exchanged the expensive annuity for a much cheaper fido variable annuity. It has grown nicely since.

An OK tool for the right person at the right time in life, beware the salesperson.

+1
From what I understand the PC reps don't make a big commission from selling annuities. Fido itself may make more. While I get some good advice from my fido rep, one does have to keep in mind that they are partially sales people. I think retention is a bigger part of the job.

Because the average bogelhead can do better managing a stock/bond portfolio. Annuities are good for people who can’t manage lump sums. There is a place for it but typically I think stocks will pay out better long term if you have enough money.

Usually when I hear about bogelheads it is more about using index mutual funds and ETF. This is a far cry from managing a diversified portfolio of individual stocks and bonds.

You don't buy an annuity have someone invest your assets, there are financial advisors, MF and ETF for that type of stuff. And many can manage their own until they can't (some of us will have more trouble as we age)

You buy a SPIA often because you want to off load some risk. Yes the insurance company will likely invest conservatively and the return to the purchaser is lower than what the normal investor might make. If your planning to live to 80 and end up living to 110, the annuity might be a good thing.
Don't get me wrong, for most people the annuity is expensive. But you are shifting risk.

Variable annuities are more about tax planning or maybe retirement planning. Or in my case just trying to make my expensive mistake a bit less expensive. There are some people who use annuities to defer taxes during part of retirement (moving some after tax assets to tax deferred). I'm not sure this is always a good plan as this may just delay and make a bigger problem.

and some VA are just sold to those suckers like me.

 

[brucethebroker]

In part, because even simple annuities pay poorly. According to immediateannuities.com a 5 year period certain annuity will pay $1,720/month for 60 months with a $100,000 deposit. That is about 1.25%/year and you have your money tied up for 5 years.

OTOH, an online savings account pays close to or the same rate of return, is FDIC insured and you can get your money anytime that you want.

So if you had a choice between tying up $100,000 with an annuity company and getting $1,720/month for 5 years or getting the same return but having access to what is left of your $100,000 at any time you wish, what would you do?

If you buy payments for life, the same low rate of return is embedded in the monthly payments that you get, it is just harder to see.

Yeah, plus your income is only a promise guaranteed by the financial stability of the insurance company behind the annuity. Hope for the best.

In pre IRA/401-k, Roth days, annuities were a big deal due to the tax deferral. No longer as appealing since there are more choices.

 

[alaska55]

Pb4uski: was that a missing zero? I think you meant a $1,000,000 annuity not a $100,000 annuity for $1720/mo. If you know of a $1,720/mo annuity for $100k....

A lot of the SS passion centers around the opinion of the soundness of the government not reducing benefits for the higher income retirees. I have always found it a bit amusing that people assume the chances that the government will reneg on its payments is more likely than a for profit insurance company will screw you over. The passion invariably is tied to the same belief as the annuity argument; there is more to be made investing. Personally, I also agree that at todays rates SS IS an attractive annuity for a married couple.

IMHO, a couple with $60k/yr of SS and $60k/yr of pensions has little need to convert their portfolio to more annuities, assuming that they live within their means and aren’t saddled with consumer debt. They can decide how low they want their portfolio to go as they age.

Many here want to max their portfolio to death and beyond. Others here realize there’s way more to life than that and beyond a certain dollar amount, it makes less sense. As others said, everyone has a different opinion based on their priorities and desires.

Read his post again it was for a 5 year period certain annuity not for life