54 ry old looking to ER and wondering about annuities

[Gill]

Did you notice how much the stock market has gone up recently? 35% in the last 2 years. 151% in the last 5 years. Did you ever ask yourself how the insurance company is able to make the offers they make? They stack the deck in their favor and then they invest the money. So for people who fell for the insurance salesman bait back in 2009 and went ahead and made the cardinal sin of "selling low" the annuity wasn't such a great idea after all. So far the insurance company has been laughing all the way to the bank even with a diversified bond / stock mix.

You still seem to be talking about equity indexed annuities and other insurance products - not SPIA's. In the meantime I'm quite happy with the guarantees from the insurance companies on my SPIA's along with the 35% equity position in my remaining portfolio.

As MichaelB, the moderator, said, let's move on and see if we can help the OP.
Bruce

 

[MasterBlaster]

Did you notice how much the stock market has gone up recently? 35% in the last 2 years. 151% in the last 5 years. Did you ever ask yourself how the insurance company is able to make the offers they make? They stack the deck in their favor and then they invest the money. So for people who fell for the insurance salesman bait back in 2009 and went ahead and made the cardinal sin of "selling low" the annuity wasn't such a great idea after all. So far the insurance company has been laughing all the way to the bank even with a diversified bond / stock mix.

Insurance companies are highly regulated and thus they are not allowed to do what you suggest. What they do is to match their obligations with (mostly) bonds that mature as the payments come due. They indeed make a profit but not nearly what you suggest.

 

[Palimpsest]

Consider that even with an immediate annuity, the day after you send in the check you have a -100% return on the money you spent as a premium. Even living years past your IRS expected mortality date doesnt get you close to 0% return on that money. Annuities are also not without risk.

 

[Gill]

Consider that even with an immediate annuity, the day after you send in the check you have a -100% return on the money you spent as a premium. Even living years past your IRS expected mortality date doesnt get you close to 0% return on that money. Annuities are also not without risk.

Could you elaborate. A SPIA is insurance against living too long, not an investment. Also, what do the IRA tables have to do with it? When you insure your house against fire do you hope it burns down to avoid the risk of spending the premium without an adequate return?
Bruce

 

[Palimpsest]

Could you elaborate. A SPIA is insurance against living too long, not an investment. Also, what do the IRA tables have to do with it? When you insure your house against fire do you hope it burns down to avoid the risk of spending the premium without an adequate return?
Bruce

The day after you buy an annuity you have a -100% return because the corpus is gone -- forever. All you are left with is a promise to pay, that may or may not be made good. The return gets marginally better but you would have to win the genetic lottery to ever really come out ahead on an annuity, even ignoring lost opportunity cost on the corpus. Call it an "investment" or "insurance" it doesn't matter -- it's a tool to generate income from a portfolio. The annuity is an expensive peddled product that does not give you complete protection from running out of money. Make your own annuity my living off of investments -- you dont have to surrender your corpus and you have more flexibility to alter course if a catastrophic event does occur.

 

[panacea]

Dr. Wade Pfau has done some interesting research on the value of including a SPIA in a retirement portfolio to cover all or a portion of your fixed expenses. The idea is to provide a buffer against a stock market crash so that you're not having to draw at a high rate when the portfolio drops. Not sure I'm too excited about the idea right now given the low interest rate environment but the logic and research is solid. Something I would definitely consider for a piece of my portfolio someday after I FIRE. If you are interested in hearing more about Pfau's research, you could google Wade Pfau SPIA and I think you'd come up with lots of info.

 

[MasterBlaster]

Palimp & MBMinor:

Perhaps you are looking at SPIA's in the wrong light. The real benefit of a SPIA is that those that die off early support those that live longer. In that manner nobody has to hold back large amounts of money - just in case they live too long.

It's not so much an risk-equity investment expected to grow and throw off returns. Think of it as a bond fund pooled between people to handle longevity risk.

 

[ETFs_Rule]

The idea is to provide a buffer against a stock market crash so that you're not having to draw at a high rate when the portfolio drops.

That's what bonds are for. When stocks go down people run to the safety of bonds. An annuity is also a long term financial product -- not short. Lets compare it to other options (ex- stock / bond portfolio) going 10, 15, 20 years out.

 

[Palimpsest]

Palimp & MBMinor:

Perhaps you are looking at SPIA's in the wrong light. The real benefit of a SPIA is that those that die off early support those that live longer. In that manner nobody has to hold back large amounts of money - just in case they live too long.

It's not so much an risk-equity investment expected to grow and throw off returns. Think of it as a bond fund pooled between people to handle longevity risk.

Those that die early and those that die late all support the entity that creates and markets the annuity. Annuities aren't evil and can be right for some, but it is undeniable that they are relatively expensive. Those who are more affluent could very well afford to lock in an income stream through an annuity product, but that isn't exactly the situation the OP was facing. With record low interest rates and the OP's relatively young age (many, many generators of mainstream annuities will not even sell one to someone younger than 60 or 61) my main concern would not be the chance that the OP might leave "money on the table" at his death. The analogy to home insurance is a false one. Immediate annuities are more like a reverse mortgage than a home insurance policy.

 

[Gill]

Think of it however you like. I like the idea that I have essentially bought a pension, and now have a fixed base of guaranteed income regardless of the performance of my portfolio. If I die before I've received an adequate return, so be it. I will have had the peace of mind during my lifetime that I won't run out of money no matter how long I live.
Bruce

 

[ETFs_Rule]

I will have had the peace of mind during my lifetime that I won't run out of money no matter how long I live.

But how realistic is it that over a long time period of 10 or more years an age appropriate bond / stock portfolio is going to under perform the true return of an annuity? Keep in mind that in the first X amount of years the annuity simply pays you back your original principal.
The False Promises of Annuities and Annuity Calculators - Forbes

 

[Gill]

But how realistic is it that over a long time period of 10 or more years an age appropriate bond / stock portfolio is going to under perform the true return of an annuity? Keep in mind that in the first X amount of years the annuity simply pays you back your original principal.
The False Promises of Annuities and Annuity Calculators - Forbes

The point you seem to miss is that the immediate annuity GUARANTEES a return. Your stock/bond portfolio is only a hoped-for return. Believe me, I have both multiple annuities and a seven figure stock/bond portfolio, but I'm well aware one offers a guarantee and the other doesn't. A SPIA offers the highest guaranteed return available.
Bruce

 

[ETFs_Rule]

The point you seem to miss is that the immediate annuity GUARANTEES a return. Your stock/bond portfolio is only a hoped-for return. Believe me, I have both multiple annuities and a seven figure stock/bond portfolio, but I'm well aware one offers a guarantee and the other doesn't.
Bruce

And if and when your stock / bond ETF's don't pay enough income you simply sell off a portion of your investment (which is almost certain to be growing by the way). Dividends, interest, and selling all equate to money in your hands. Enjoy paying the lower capital gains tax rate with the stock / bond portfolio. Enjoy the freedom of being able to sell it ALL if you need to.

It may be "hoped for" but over long term time periods of 10 or more it's a very very good bet.

 

[Gill]

It may be "hoped for" but over long term time periods of 10 or more it's a very very good bet.

You take your "very good bet". I'll take my guarantee. Adios Amigo.
Bruce

 

[ETFs_Rule]

(1926–2012)
50% stock / 50% bond average annual return = 8.3%

 

[heeyy_joe]

To the OP: Congrats on your asset total. Avoid annuities until rates rise, and if you do purchase an immediate annuity, build a ladder of smaller annuities over several months or years, but certainly no more than 50% of your total assets when finished.

 

[Palimpsest]

Think of it however you like. I like the idea that I have essentially bought a pension, and now have a fixed base of guaranteed income regardless of the performance of my portfolio. If I die before I've received an adequate return, so be it. I will have had the peace of mind during my lifetime that I won't run out of money no matter how long I live.
Bruce

I do think of annuities as I like, as a luxury buffer. For all practical purposes, you have bought a pension -- an expensive one that you use in conjunction with your enviable "seven figure portfolio." That may very well have been a good decision for you but that's not close to the question posed by the OP, who did not have a seven figure portfolio and was asking about wading into the current low interest rate annuity market at age 54 with a threadbare budget. Not every retiree is able to lop off a 25, 35, 45 percent of his retirement savings and say "so be it" if things dont work out. There is no PBGC for annuities, so it's not quite a pension, and a flat annuity is a pricy gamble (inflation protection makes it even pricier) for someone looking at a 30-40 year retirement (and this discussion has not even ventured into a discussion of inflation.) I think the takeaway is that different retirees will have different solutions. I think it's worth looking at which MAINSREAM providers would even offer a lifetime immediate annuity to a 54 year old, and at what cost.

The good thing about annuitizing income is that you dont have to do it all at once. I certainly would not advise a 54 year old to devote any significant amount of a finite portfolio to such a pricy endeavor. In 10 years, maybe, but at 54 it's a pretty clear "no."

 

[MichaelB]

I was under the impression that States provided some guarantees to insurance sponsored annuities, something like the PBGC.

 

[Palimpsest]

I was under the impression that States provided some guarantees to insurance sponsored annuities, something like the PBGC.

Such as? How does it compare to the PBGC? I think you'll find it falls short.

 

[REWahoo]

Here's a link to state guarantee funds: nolhga.com :: Policyholder Information

 

[brewer12345]

Wow, there is a lot of hot air on this thread.

Before we all lift off and blow away, let's acknowledge something: a plain vanilla SPIA underwritten in a competitive market is nothing more than a tool, like a hammer or a shotgun. The hammer and shotgun can be used to kill someone, or they can be used to build a house (hammer) or bring home dinner (shotgun). The SPIA can be used to hedge longevity risk and ensure floor income, or it can be a way to get a truckload of inflation risk in your lap. Whether the outcome from the use of the tool is good or bad has nothing to do with the tool, but with the user of the tool.

Before the doctor slapped Wade Pfau on the ass to get him to start breathing, Prof. Moishe Milevsky was doing scholarly work that strongly suggested that annuitizing 25 to 30% of one's portfolio with a SPIA resulted in much more favorable outcomes over the length of a retirement than just withdrawing from a portfolio. This isn't that hard to fathom, and if you want ample backup financial scholarship just google Professor Milevsky and start reading.

I would not be eager to buy a SPIA now unless I were 70 or better. The low interest rate environment makes the purchase a real push unless you are old enough that mortality credits make more of a difference than interest rates. Better to kick the can for a few years, IMO. That said, I am very likely to annuitize a portion of my portfolio when I am 60 or so. I find the research compelling and DW is likely to live past 90, so a joint life annuity will make a lot of sense for us especially if I can buy one that is inflation adjusted.

What long term equity returns might be is largely irrelevant to the would be annuitant. That is more of a concern to those in the accumulation phase. What the potential annuitant cares about is the volatility and sequence of returns. As a new retiree, I don't feel like I can fully pull the plug since I am too young for annuities to make a difference and fully exposed to sequence of returns risk. If you are older, SPIAs let you deal with these problems pretty effectively.

Of course, you should be careful who you buy this stuff from. As is the case for all long term insurance products, you ideally want to buy such things from a large, highly-rated (AA-/Aa3 or better) insurer and always prefer a mutual or fraternal company. If you are parting with a material sum, consider diversifying with a few such companies. I am lucky in this respect. I have a cash balance pension with my former employer. I left my 401k funds in place rather than rolling them over because I have the option to use the qualified money to purchase additional pension credit and buy more inflation-adjusted payout when I start the base pension. Due to the nature of my former employer, such pension and any additional purchase has zero default risk.

 

[Palimpsest]

I think you'll find that coverage varies from state to state, but the common factor is that it is capped somewhere in the low to mid six figure range. I think someone earlier posted that they found a roughly 5% payout for a 54 year old male. 5% of 250k is roughly 1000 a month, double that for 500k. If that's the limit of coverage then it is not a PBGC equivalent and may raise the question of why are states not willing to protect more?

 

[brewer12345]

I was under the impression that States provided some guarantees to insurance sponsored annuities, something like the PBGC.

Read the nolhga link, but the cliff's notes version is that the states do not stand behind the guarantees.

 

[MichaelB]

Read the nolhga link, but the cliff's notes version is that the states do not stand behind the guarantees.

Thanks for both posts. I'm no great fan of annuities but have read some of the Milevsky and Pfau work and see the potential benefit for select portfolios. For the OP of this thread I'm not sure enough information has been shared to judge the advantage of an annuity, but we all benefit from less hot air and more reasoned discussion.

 

[Brooks Saddle]

I'm not so sure I should enter the fray as it looks like maybe the point of beating a dead horse has come . States do not guarantee annuities or any other type of insurance product. States do require all admitted insurors to participate in a pool for the lines of business they write business in that provides some protection to policyholders. If I purchase an annuity from a company that goes under the other insurors in the state that provide annuities all of the other annuity providers have to participate in making me whole up to a certain limit which varies by state.

Annuities are neither evil nor excellent. They are a tool that is useful for some and not for others. They are not an investment so by comparing them to stock and bond returns is running off of the track. When one purchases an annuity one is purchasing an income stream to last the rest of their life regardless of what happens in the equity markets. One may purchase an annuity because while a mixed stock and bond portfolio may return 8%+ the market may also go down and it may do so for a long period of time. Then what? If I rely strictly on my portfolio I could conceivably run out of money but with an annuity I know I have an income stream coming in as long as I live.

For those that complain that one could die the day after purchasing one and lose their money, that's the nature of the beast. I could also purchase one and live way beyond my normal life span and then I would have made out like a bandit. You can't have it just one way as it works both ways. That's what insurance is; a pooling of risks. Besides there are workarounds for this issue if it really concerns one.

To the argument that the insurors make money. Of course they do as that's what the free enterprise system is about. Do the market makers for your stocks and bonds make money Do insurors make exorbitant money? I would say not because if they did their profits would be so high we wouldn't buy their annuities but would in fact buy their stock.

I probably will not buy an annuity in my lifetime but I can see where it is a distinct advantage to some to do so. The arguments I've read that say it is a bogus deal are specious and lacking an understanding of the product.

As for the OP, at your age, it most likely is not a good deal. Annuity payout are based upon a return of your premium, interest income (not stock gains) and survivor credits. From the reading I have done, survivor credits really don't start working until one hits their seventies.

If you want to know more about annuities there is an excellent book called annuities for dummies that I recommend. Also, google Larry Swedroe who knows more about investments and annuities than anyone on this forum. Also the recommendation of Dr Wade Pfau is a good suggestion as well.

With whatever you decide, good luck!