Annuity planning questions

[DrgLrd]

Unless you Kark it then your heirs lose it.

That's what death riders are for, same as a pension.

 

[DrgLrd]

We are considering some laddered MYGAs with a 10% rider that you can take out annually.

How to 'take out annually' if they're all 10 year products?

 

[levindb]

As you think through the need for guaranteed income, it would be helpful to know annual inflation rates and the date that you will be gone.

These are important, as most annuities provide a fixed payment and that payment will gradually degrade in value based on the inflation rate. If your assumptions are not correct, it can be very difficult to get out of the annuity arrangement from a financial perspective. You are making a 30-40 year commitment. Think through your assumptions carefully.

That is one reason there are many suggestions to the alternatives to annuities. There is value in having flexibility to make adjustments to your plan. If emotions might cause bad financial choices along the way, and the fear of running out of money can impact sleep, then the use of a financial planner may be helpful. Asset allocation is often used to provide protection, and 75% fixed income with 25% equity exposure seems similar to the 75% annuity solution.

Annuities are structured based on numbers, but the insurance companies have a large quantity (thousands or millions) of clients to help balance their numbers. Some people live long while others die young. By having 1 or maybe a few annuities, the chance of making an error are more significant.

Personally, I plan to run out of money at age 105. I probably will not live that long, but I also have SSA benefits to provide a cushion, and they are inflation protected...DW has longevity in her family (98 and 101) so that is why we have been using age 105. If one only plans till age 85, then what happens if life is 5 years longer. Will fresh diapers be provided daily?

Think very carefully about locking into a lifetime contract with 3/4's of a nest egg...

 

[DrgLrd]

75% fixed income with 25% equity exposure seems similar to the 75% annuity solution.

What's the difference between fixed income and annuity? If it's that the annuity pays out gradually, and the fixed income (CD, MYGA) only pays out on maturity date, I'll need the annuity.

 

[pb4uski]

I know I need guaranteed income, if you can help with that it'd be appreciated.

Guaranteed income is easy... just buy UST.

But what I think you really want is guaranteed, inflation-adjusted, life-time income sufficient to provide your target spending of $2,000 to $2,500 in 2022 dollars. That is hard.

Annuities don't do it because there are not any available annuities with a COLA. You can buy or cobble together annuities that will provide you an x% annual increase in benefits, but if inflation is consistently much higher than x% then your buying power declines.

You could take $637k of your $1m stash and buy a life annuity that will pay you the high end of your spending of $2,500/month. Then take the remaining $363k and put it in a US large value stock mutual fund that, based on history, would provide for inflation.

According to FIRECalc, that would result in 100% success rate.

I wouldn't do that because if the day after you buy the $637k SPIA you get run over by a beer truck then your $637k goes "poof" into the pocket of the insurer.

 

[levindb]

What's the difference between fixed income and annuity? If it's that the annuity pays out gradually, and the fixed income (CD, MYGA) only pays out on maturity date, I'll need the annuity.

I would recommend you look into Corporate Bonds, Bond Funds, and Bond ETF's. They provide regular interest payments, not just at maturity. It is not difficult to create a fixed income stream of payments to meet, but you may want to stay away from Junk Bonds...which may provide a higher interest rate but will have more risk.

I do not want to seem negative, but CD's also pay interest monthly...but CD's are pretty weak right now, with low interest rates. The idea that CD's only pay interest at maturity sounds like a phrase said by an annuity salesperson. Again, I am not trying to offend, but I have been to a few annuity presentations, and not all of the presentation was factual.

 

[ShokWaveRider]

How to 'take out annually' if they're all 10 year products?

You can take 10% Per Year. You can choose your annuity length. Call "The Annuity Man" he can explain everything to you.

https://www.stantheannuityman.com/myga-rates

 

[DrgLrd]

1078 *12 + 1078(1.03) x 12 + 1078(1.03^2)*12+... all the way out to 27 years. Minus a tiny amount for fees or when interest is posted etc.

That Berkshire annuity is deferred for 3 years? Meaning if you buy it next year, it will start in 2026?

 

[DrgLrd]

I You could take $637k of your $1m stash and buy a life annuity that will pay you the high end of your spending of $2,500/month. Then take the remaining $363k and put it in a US large value stock mutual fund that, based on history, would provide for inflation.

That's the idea, more or less. The question is which annuity, what kind of annuity or annuities. Deferred or immediate or both, layered or consecutive, etc.



I'm trying to collect very specific plans so that when I contact a pro FA, I will at least have my plans to compare to the plans the FA gives me.

 

[finnski1]

That Berkshire annuity is deferred for 3 years? Meaning if you buy it next year, it will start in 2026?

Yes. Don't forget that these are one off products meaning thsre is literally only one of these and if someone buys it before you it is gone. This is not a product that is available for multiple people to purchase.
I didn't actually notice the deferred date initially. On the bright side it would carry you to 2052(age 80?)

By the way , I am by no means an expert on these. They are just something I peruse occasionally on the immediate annuities site.
Proper due diligence would be required on any product

 

[DrgLrd]

Yes. Don't forget that these are one off products meaning thsre is literally only one of these and if someone buys it before you it is gone. This is not a product that is available for multiple people to purchase.

I did not know that, that's pretty surprising, not sure why they wouldn't offer it to everyone, what's their downside? Strange.

By the way , I am by no means an expert on these. They are just something I peruse occasionally on the immediate annuities site.

Which stand out, those with the highest interest rate? That's helpful because I can compare those with what any FA suggests for me. Of course the highest rates with CoLA mean higher fees which aren't listed there.

 

[finnski1]

I did not know that, that's pretty surprising, not sure why they wouldn't offer it to everyone, what's their downside? Strange.


As I mentioned these are called secondary market annuities but they are technically called structured settlements. So if someone won a lottery or won a court case for example and instead of getting annual payments thy wanted to cash in early. An insurance company etc would offer to buy them out and then repackage them and sell them. That is pretty much what these are. You can read more about them on the immediate annuities site or others.



Which stand out, those with the highest interest rate? That's helpful because I can compare those with what any FA suggests for me. Of course the highest rates with CoLA mean higher fees which aren't listed there.

Well any annuity type product has fees and expenses. I have no clue what they are. Personally I expect these are not great deals in the current interest rate environment but on the surface they appear slightly better than SPIA's etc. Of course they also have a finite life which may expire before you do!

 

[all4j]

Well any annuity type product has fees and expenses. I have no clue what they are. Personally I expect these are not great deals in the current interest rate environment but on the surface they appear slightly better than SPIA's etc. Of course they also have a finite life which may expire before you do!

Good explanation on structured settlements. I've not actually bought one, but had a couple of thoughts. As I understand it, they are indeed 1 of a kind, whatever gets negotiated as it passes thru various hands. So, details matter hugely & deals can fall through at anytime. It is a contractual agreement, but guarantee is only as good as the company (that is, government doesn't provide fdic, etc).

I think from a buyer point of view the rates aren't as much driven by risk of default as an inefficient market & lack of liquidity. For example on this one, you could get a slightly lower rate on a 30 year ust. Which you can change later, take a cap loss/gain & rebalance, swap to a higher rate, etc. If settlement is bought, good luck selling it at a fair price!

 

[finnski1]

Good explanation on structured settlements. I've not actually bought one, but had a couple of thoughts. As I understand it, they are indeed 1 of a kind, whatever gets negotiated as it passes thru various hands. So, details matter hugely & deals can fall through at anytime. It is a contractual agreement, but guarantee is only as good as the company (that is, government doesn't provide fdic, etc).

I think from a buyer point of view the rates aren't as much driven by risk of default as an inefficient market & lack of liquidity. For example on this one, you could get a slightly lower rate on a 30 year ust. Which you can change later, take a cap loss/gain & rebalance, swap to a higher rate, etc. If settlement is bought, good luck selling it at a fair price!

Good points. I've never purchased either but like to look thru them fairly regularly

 

[TheWizard]

I wouldn't do that because if the day after you buy the $637k SPIA you get run over by a beer truck then your $637k goes "poof" into the pocket of the insurer.

That's not generally true, for two reasons:

1) I purchased my lifetime annuities with a ten year guarantee period; your estate gets the remainder of your 120 monthly payments if you pass before ten years are up.
I annuitized at age 63, so I didn't pay much additional compared to zero guarantee period.

2) when an annuitant does pass away, whether early or not so early, the conceptual remaining value of his/her account goes into the general pool to pay MORTALITY CREDITS to longer lived annuitants; the insurance company does not get an instant multi-hundred $K bonus...

 

[pb4uski]

That's not generally true, for two reasons:

1) I purchased my lifetime annuities with a ten year guarantee period; your estate gets the remainder of your 120 monthly payments if you pass before ten years are up.
I annuitized at age 63, so I didn't pay much additional compared to zero guarantee period.

2) when an annuitant does pass away, whether early or not so early, the conceptual remaining value of his/her account goes into the general pool to pay MORTALITY CREDITS to longer lived annuitants; the insurance company does not get an instant multi-hundred $K bonus...

Well, you got it half right. Yes, you can purchase a life SPIA with various refund options like 10 years of guaranteed payments or guaranteed return of premium... but the benefits are lower than the monthly benefit for a life SPIA without such guarantees... so there is no free lunch.

On the second part, you're wrong. The mortality credits are built into the pricing and are fixed at issue just like the benefits are fixed at issue... that is what the insurer is taking a risk on... that mortality will be as or better than assumed and for large groups of peope they are very, very good at estimating mortality. So if a bunch of insureds.. more than expected based on assumed mortality... die prematurely then that favorable mortality goes right to the insurer... in other words, if mortality differs from assumed mortality the remaining annuity owner's benefits don't change, so those early deaths don't ever benefit the remaining annuitants... if the remaining annuitants don't benefit then there is only one other party to the transaction and that is the insurer.

 

[OldShooter]

You guys do know that @pb4's career was in insurance companies and finance, right? He is not just SGOTI when this type of question comes up.

 

[Chuckanut]

Presumably, if the pool of insured people benefit from a newly discovered formula for a Long Life Tonic and Energy Enhancing Elixer, then the insurance company probably loses some money or makes less than anticipated. IIRC, that is sort of what happened with the people who bought the first LTC policies. Alas, I was not among them.

 

[pb4uski]

Presumably, if the pool of insured people benefit from a newly discovered formula for a Long Life Tonic and Energy Enhancing Elixer, then the insurance company probably loses some money or makes less than anticipated. IIRC, that is sort of what happened with the people who bought the first LTC policies. Alas, I was not among them.

That is possible, like I said, when it comes to mortality they are very, very good at predicting it. At least where I worked, periodic mortality gains or losses (differences between actual and expected mortality) were typically negligible.. we rarely talked about them because there was noting to really talk about.

OTOH, if a new elixir came about and extended lives, what they lost from the new elixir on annuities because of longer lives they would make up on the life insurance side as they would be collecting more life insurance premiums due to deferred deaths.

While we didn't issue LTC, being a new product and not having a lot of data on incidence, the insurers made educated guesses and in most cases guessed very poorly, lost a lot of money and then said enough of that and stopped writing new business and increased the premiums on any existing LTC contracts that they had to the extent that the contracts allowed.

 

[DrgLrd]

It is a contractual agreement, but guarantee is only as good as the company (that is, government doesn't provide fdic, etc).

States insure annuities, are you saying this wouldn't be insured at the state level?

For example on this one, you could get a slightly lower rate on a 30 year ust. Which you can change later, take a cap loss/gain & rebalance, swap to a higher rate, etc.

Do they payout monthly?

 

[pb4uski]

States insure annuities, are you saying this wouldn't be insured at the state level?...

I'm pretty sure that even annuities purchased on the secondary market would be eligible for state guaranty fund protection.

Each state has a guaranty fund that would step in in the case of insolvency. That said, after certain regulatory reforms put in place in the 1990s, insolvencies are very rare. Where they do occur quite often regulators can arrange to have the business trahsferred to a financially strong insurer. If not, then the regulators take over the company and use company assets and guaranty fund assets to make the annuity payments.

While I haven't been able to find it in writing anywhere, urban legend is that no annuitant that was receiving benefit payments (in payout phase) has ever not received benefit payments as a result of insovency. There may have been delays, but they did eventually get their benefit payments. Also, for holders of annuities in accumulation phase, they may have received a lower interest rate than in their contract but they received their principal.

Knowing all of these protections, I view SPIAs as similar to a AA or AAA bond in terms of credit risk.

 

[RetiredHappy]

One point to note that OP, DrgLrd lives outside of the US. In this case, his annuities may not receive any state guaranty fund protection.

 

[aja8888]

One point to note that OP, DrgLrd lives outside of the US. In this case, his annuities may not receive any state guaranty fund protection.

His profile shows New York.

 

[Chuckanut]

OTOH, if a new elixir came about and extended lives, what they lost from the new elixir on annuities because of longer lives they would make up on the life insurance side as they would be collecting more life insurance premiums due to deffered deaths.

+1

A good point I had not thought about. And it's another advantage of diversification.

 

[jazz4cash]

For clarification, which state guaranty fund provides protection? I am pretty sure it is the state where the annuitant lives and not the home state of the annuity provider. The instant quote services almost always ask where the annuitant lives.