Anyone buy an annuity simply to avoid market downturns?

[FloridaJim57]

I was told by sincere people whose motives I trust that the best reason to purchase an annuity is to cover the gap between monthly income and monthly expedniture. I get it. But did anyone buy an annuity whose income coverd montly expense and they just were sick of market downturns every few years? They just wanted to take some of the risk out of their finances? In some ways an annuity is a transfer of risk. Any real world experiences you wish to share?

 

[jazz4cash]

Avoiding market downturns is the number 1 scare tactic used by the annuity sales radio shows that come on every Sunday morning. I’m sure they have many clients that succumb to this idea and maybe some that have “won the game”. My BIL is one who sought out an annuity for this reason but he got his from the bank he retired from. It is a fixed deferred lifetime annuity I think. I don’t know if he won the game but seems to be OK.

 

[levindb]

A proper asset allocation can protect from market downturns...without surrendering 6%-8% to the person who sells you the annuity. Markets have tended to grow over the past 100 years...with a little wiggling along the way. The fixed income portion of your portfolio should help you even out the ride.

 

[VanWinkle]

A portfolio of 10 year Treasuries over the last 10 years would have beat many annuities with less risk. If you want low risk, buy low risk products and be happy with the interest and selling small amounts of principle every year. That's like an annuity without losing the principle when you die.

 

[ShokWaveRider]

Annuities are Tax deferred, if kept till maturity, which is an asset to some, especially those trying to maximize ACA subsidies. Hose 2 reasons alone are enough for us, at least till DW reaches 65.

 

[COcheesehead]

Ladder fixed income instruments over the time frame you want income. Rates are in a good place to do it now. Maintain liquidity, no big commission to pay, preserve capital.

 

[Dash man]

Years ago we bought Flexible Retirement Annuities from USAA that deferred the taxes on interest and had no fees except surrender charges. We could take out 10%/year without penalty. It paid decent interest at the time and we decided to put some "safe" money in there that we weren't likely to need. I just recently closed one of four out and purchased treasuries and CDs.

 

[RunningBum]

But did anyone buy an annuity whose income coverd montly expense and they just were sick of market downturns every few years?

I can't quite parse this sentence. Are you asking about people using annuities to cover monthly expenses, or are you asking if people who already have monthly expenses covered are still buying annuities?

If it's the latter, I probably wouldn't do that, because I'd have excess income each month, and what would I do with the excess? I'd want to invest it, mostly for my heirs, so why don't I just keep it invested in the first place? Besides, my heirs have a longer horizon than I do to ride out the occasional downturn.

For the former, an SPIA makes sense to help cover monthly expenses, transfer risk to the insurer, and provide some longevity insurance. "Sick of market downturns" seems like an emotional response and I try my best to separate emotions from my finances.

 

[easysurfer]

I have a couple of lifetime annuities don't complain about them when the market goes south .

Wasn't thinking about market downturns when I got them. But a nice benefit of having some set income every month is at start of year when I go through the "sell investments to provide my own monthly paycheck", the annuities make the target a bit easier.

 

[arcyallen]

Annuities are insurance. And like much insurance, there's good and bad. Some people don't want to see any market fluctuation for some of their money, and every stock or bond investment is going to have that. I have had clients buy annuities when they absolutely, positively did not want to see the value go down on that part of their money. For them, it was that or hold cash.

 

[OldShooter]

... annuity ... to cover the gap between monthly income and monthly expedniture.

Sadly, except in the case of an inflation-adjusted annuity, this is a false premise over the long term.

In some ways an annuity is a transfer of risk.

Partially true. The usual annuities at least partially take over the risk of running out of money. But they do not do anything about inflation risk.

Any real world experiences ...

Well, we've had a real world lab experiment in the past year or so. Assume you bought your expenditure-covering annuity a year ago. Have your expenditures gone up? Probably. Would the annuity payment for this year have gone up? No. Even at just 2% inflation (the Tooth Fairy will be bringing that soon ), the buying power of a fixed annuity will cover only 2/3 of those expenditures 20 years out.

Here is a possible strategy, though I cheerfully admit that I have not put numbers to it: Buy TIPS to the point where the coupon rate times the current TIPS value covers those expenditures. Then, going forward, those payments will rise with inflation as the TIPS value increases. So there is your wannabe inflation adjusted annuity.

Lots of potential problems with this and I'm sure others here will jump in to discuss them. First, federal taxes on the coupon payments and the value increases. Second, if you buy with a negative YTM then the TIPS become a wasting asset. How negative, for how long? And finally, the most important weakness is future inflation. If it is the 1.5% or so of recent decades, then it is not such a consideration. If the current 8.5% is somewhat sticky and the promised ride to 2% is slow, that is another matter entirely.

Don't pay much attention to TIPS YTM. Those numbers are implicitly based on zero inflation and IMO a comparison to other YTM numbers is apples/oranges.

 

[easysurfer]

Annuities are insurance. And like much insurance, there's good and bad. Some people don't want to see any market fluctuation for some of their money, and every stock or bond investment is going to have that. I have had clients buy annuities when they absolutely, positively did not want to see the value go down on that part of their money. For them, it was that or hold cash.

My take is some folks like the idea of annuities in a similar way folks like getting a tax refund.

Yes, a "realist" might say you don't want a big refund at tax time. But tell that to the ones with a refund who are celebrating . Psychologically, people like a tax refund and security when markets tank.

 

[Chuckanut]

Avoiding market downturns is the number 1 scare tactic used by the annuity sales radio shows that come on every Sunday morning. I’m sure they have many clients that succumb to this idea and maybe some that have “won the game”. My BIL is one who sought out an annuity for this reason but he got his from the bank he retired from. It is a fixed deferred lifetime annuity I think. I don’t know if he won the game but seems to be OK.

I can't help but think that near double digit inflation may take some of the gloss off of fixed annuities. Don't even bring up variable annuities. The ones I looked at were painful.

The only annuity I have is from Uncle Sam - taking SS at 70. And it's COLA'd.

 

[aja8888]

The part about annuities I can't get past is paying someone to take a big lump of your money and trickling your money back to you in small chunks over a period of time. In some cases, the lump is totally gone (can't get it back) and all you get is small chunks back with severe restrictions.

 

[easysurfer]

The part about annuities I can't get past is paying someone to take a big lump of your money and trickling your money back to you in small chunks over a period of time. In some cases, the lump is totally gone (can't get it back) and all you get is small chunks back with severe restrictions.

Yes, if you have a straight SPIA lifetime annuity where you get nothing back, if you get run over and kick the bucket the day after, you get nothing back.

I've been tracking my oldest SPIA. I've had this a little more than 14 years ago. As for just small chunk money back, after all these months, I've gotten back about $10K less than I put in. (I'm not factoring in well, if I put that in the market and it gained so much, etc. Also, not factoring it if I put in the market and it lost so much).

Since I'm still a live and knock on wood that I'll still be around, pretty soon will feel like I'm playing with house money with small chunks exceeded how much cash I put in.

 

[aja8888]

Yes, if you have a straight SPIA lifetime annuity where you get nothing back, if you get run over and kick the bucket the day after, you get nothing back.

I've been tracking my oldest SPIA. I've had this a little more than 14 years ago. As for just small chunk money back, after all these months, I've gotten back about $10K less than I put in. (I'm not factoring in well, if I put that in the market and it gained so much, etc. Also, not factoring it if I put in the market and it lost so much).

Since I'm still a live and knock on wood that I'll still be around, pretty soon will feel like I'm playing with house money with small chunks exceeded how much cash I put in.

If all (or even a high percentage of) annuity contracts were as successful as your appears to be heading, the insurance companies would not offer them at all.

 

[RunningBum]

... with severe restrictions.

Severe restrictions!! OMG! That sounds horrible! Care to elaborate?

I bought a small SPIA last month. It has a clear contract of what it will pay me every month, and that I can't get my investment back nor is there a death benefit. If I wanted those I could have, with the tradeoff being lower monthly payments. I'm not aware of any severe restrictions.

My tentative plan is to consider buying maybe 3 more, about 5 years apart unless we hit what seems like higher rates than normal in the interim. I will wait if rates seem very low at the 5 year mark. This gives me somewhat of an inflation hedge, that I'm not locking in the full amount I'd like to annuitize with perhaps 30 or more years left. I'm also holding I-bonds, TIPS and stock funds to help with inflation.

 

[jazz4cash]

Annuities are Tax deferred, if kept till maturity, which is an asset to some, especially those trying to maximize ACA subsidies. Hose 2 reasons alone are enough for us, at least till DW reaches 65.

But not all annuities have date certain maturity. There’s an inherent problem whenever the term annuity is used without a specific description.

 

[ShokWaveRider]

But not all annuities have date certain maturity. There’s an inherent problem whenever the term annuity is used without a specific description.

I was referring to Fixed Annuities like MYGAa as I always do in my posts about annuities.

 

[OldShooter]

... Since I'm still a live and knock on wood that I'll still be around, pretty soon will feel like I'm playing with house money with small chunks exceeded how much cash I put in.

Good for you. But your statement made me smile a little.

Nassim Taleb uses a term "silent evidence" to characterize situations like this where we hear from the winners but not from the losers. In this case, those who bought simple annuities and then died early are silent because, well, they are dead. But you can be sure that the insurance companies came out just fine on the balance between the winners like @easysurfer and the losers who died early.

 

[easysurfer]

If all (or even a high percentage of) annuity contracts were as successful as your appears to be heading, the insurance companies would not offer them at all.

The LBYM mentality in me has me treating my job as to stay healthy and alive and milk out as many payment chunks as possible .

 

[mathjak107]

A portfolio of 10 year Treasuries over the last 10 years would have beat many annuities with less risk. If you want low risk, buy low risk products and be happy with the interest and selling small amounts of principle every year. That's like an annuity without losing the principle when you die.

dont forget if you are spending down , you are reducing the treasury balance every year having less and less producing income .

an immediate annuity never pays out less because you drew off it .

an spia can add a level of diversification we cant . dead bodies .

the dead pay for those who live and so spia payouts are higher then you can safely draw from a portfolio of fixed income .

because the spia never runs dry like a bond ladder will it also can require less spending of equities to refill spending buckets . .

work by milevsky , pfau and kitces show under most outcomes an spia can improve cash flow levels and reduce risk

how long would a bond ladder of 100k have supported a 4% inflation adjusted draw rate before hitting zero as opposed to a 100K in an spia ?

so an spia to replace some of the bond budget of a diversified portfolio can be more beneficial.

a 65 year old can get 7,344 a year on a 100k today . that is a 7.344% draw rate with no other fees .

 

[SnowballCamper]

But did anyone buy an annuity whose income coverd montly expense and they just were sick of market downturns every few years? They just wanted to take some of the risk out of their finances? In some ways an annuity is a transfer of risk. Any real world experiences you wish to share?

If monthly income (for me, a cola pension--the best annuity) covers expenses, then much of the risk is already taken out of the finances IMHO. I'm not interested in more annuitization of our assets. That would eliminate any upside potential that the market could provide (beyond longevity protection from an annuity).

As for the risk in finances. It's good to think about the difference between asset price volatility, and the prospect of being forced to sell an asset at a depressed price. The volatility is just noise, but a forced sale is the real risk (as in must sell in order to pay for essentials like housing, food, medical).

 

[ShokWaveRider]

If monthly income (for me, a cola pension--the best annuity) covers expenses, then much of the risk is already taken out of the finances IMHO. I'm not interested in more annuitization of our assets. That would eliminate any upside potential that the market could provide (beyond longevity protection from an annuity).

If one is aging, and one has enough to comfortably (based on their own personal evaluation) live the life they desire, is the upside of the market a priority? For us the risk of a significant downturn is more of an issue, especially as it would disturb our sleep patterns.

 

[Chuckanut]

Just to play the Devil's Advocate, let me add this thought to the discussion about annuties.

There is a psychological factor to investing. If having an annuity helps one or one's spouse sleep better at night, that can be a big deal. If knowing that an annuity will keep paying enough money to put food on the table, etc. while the stock market plays mind games with us (like today for example), and that keeps a person from selling into a bear market, that's a good thing.

I've known people who bought an annuity to keep their less financially sophisticated spouse calm and open to the idea accepting stock market risk for the long run benefits. Having a floor under your financial feet can be a very good feeling in topsy turvy times.