Annuity Gets a Hug

[easysurfer]

Here come's the "A-word".

http://www.nytimes.com/2010/01/30/your-money/annuities/30money.html

Okay, now time to duck as I see some rocks about to be thrown?

 

[MasterBlaster]

If Obama wants to enlighten everyone on the benefits of having an immediate annuity for part of your nestegg so that you have a baseline standard of living income stream, then I would support that. This type arrangement just may allow one to draw down the remeining nestegg faster and leave less at your demise.

If Obama wants to force people to invest their lifetime savings in the Nancy Pelosi "give your fair share-socially responsible investing" fund then I would scream bloody murder.

What exactly has Obama proposed ?

 

[clifp]

I pretty much agree with MasterBlaster. The longer I'm retired and the more I hang around this board and see the newbie questions and ideas the more attractive SPIA seem for many Americans.

I am scared to death to see what damage Congress would do to SPIAs if the get involved.

Finally, I want to quibble with a couple of things the author said

One reasonable point they might make is that insurance companies can die, leaving your annuity worthless. State guaranty agencies exist, but they may cover only $100,000 to $500,000. I’ve linked to a list of the agencies in the Web version of this column so you can see what they insure.

These guarantee are worth much less than they appear, at least based on the research I did into the Hawaii association. For the most part unlike say FDIC, where banks actually pay insurance premiums, all the States do is tell insurance companies they have to belong to the State Guaranty Association. AFAIK doesn't actually collect premium put rather assess members when a insurance company becomes insolvent. While I imagine this works fine when smaller insurance companies go bust, in the event of a systemic failure like we saw with muni bond insurers or an AIG scenario there won't be enough money to pay be people even the few hundred thousand they guarantee. Finally, unlike FDIC insurance where you can get $100K/ bank, there is a lifetime cap typically in the 200-500K range. Now days a 200K annuity does not buy you a lot of income.

Then there’s the possibility, however small, that you’ll spend too much in spite of yourself or run into a once-in-a-generation market event that will cause you to run out of money sooner than you expected."

There is also the distinct possibility where insurance companies offer too generous benefits, the world changes and insurance have no way of earning enough to pay out the annuities. Imagine interest rates remain low for the next 10-20 years and the market continues to limp along provide annual returns in the 4-5% range while inflation remains low say 1%. How do insurance companies earn enough money pay off the 8% SPIA, or the various variable annuities annuities the wrote earlier in the decade?

 

[rescueme]

I have an SPIA, purchased when I retired just under three years ago, at age 59, with 10% of our then combined retirement portfolio value. It was a key component in our decision for me to delay SS till age 70, primarily for the benefit of my wife. In other words, it acts as "gap insurance" for an early retiree who is not eligible for SS at retirement, and wishes to delay SS even if eligible.

It is for a 28-year guarantee period, and payments continue to my DW if I pass first. If either, both of us live beyond the 28 year period, payments continue at 100% for the rest of our lives.

If we both pass before the 28 year term ends, remaining monthly payments continue to our estate (trust, for the benefit of our disabled son).

We intend to also buy additional SPIA's in the future as we age and don't wish to manage our respective portfolios to make things a bit easier.

For us, it was a good decision and only for our situation. For others? They will have to "do the math" to see if it makes sense...

 

[LOL!]

I haven't done any research, but it seems like any state guaranty (guarantee?) on SPIAs is woefully underfunded. It has been suggested on this forum not to have an SPIA at any one company that is more than the state guaranty for your state.

If US Government offered Federal guaranties in larger amounts for SPIAs, this might be a good thing.

 

[M Paquette]

What exactly has Obama proposed ?

The idea being floated is that on retirement, if you don't take any action, by default a portion (probably half, set by plan sponsors) of the 401K or similar plan funds will be put in a trial income product, basically a Single Payment Immediate Annuity with an option to opt out at the 24 month point. At the 24 month point the retiree would be informed by the provider and given the option to elect to use another distribution option (e.g. sit on it til 70 1/2, then take the minimum required distributions).

The annuity provider or providers would be one of the plan options, just as various mutual funds are currently made available. Part of the proposal involves getting a better backing insurance entity for annuities than the state insurance associations and their marginal (and inadequate) backing, something along the lines of the FDIC.

This is similar to the automatic enrollment in 401Ks, for the other end. It's not horrible. I've seen worse, such as insurance salesmen getting the 401K rolled over into an IRA (with fees) containing a variable annuity (with fees) holding a variety of subaccounts (with fees), or the 401K being emptied as a lump sum to fund the purchase of a boat (no, really!).

I'm pretty sure most folks here and over at bogleheads.org would elect not to take the default action.

Here's a link to the Federal Register page for the proposed rules, which in turn has links to the various studies.
http://www.thefederalregister.com/d.p/2010-02-02-2010-2028

 

[clifp]

FWIW, it is worth rescueme, based on your situation I think a SPIA makes perfect sense. I'd even go as far as saying that even if invested 1/2 your money, given you have a disable son would be very sensible.

Eventhough, I often bring up the the potential riskiness of insurance companies,the fact is that historically annuities have been very safe investments. But like everything in life there are risks.

 

[haha]

In the UK, part of the Tory platform for the upcoming elections is to ban the current compulsory annuitization of retirement funds.

George Osborne: Conservatives to scrap compulsory annuities at age 75 - Telegraph

 

[kumquat]

In the UK, part of the Tory platform for the upcoming elections is to ban the current compulsory annuitization of retirement funds.

George Osborne: Conservatives to scrap compulsory annuities at age 75 - Telegraph

Do you think this is good or bad?

I like the part that says

McPhail said: "It would also send an important message to prospective savers; that they will be able to retain control of the money that they have saved up. This in turn will encourage more people to engage with the pension system in the first place."

Here in Canuckistan, our DC pensions (and I believe other tax sheltered savings) used to require conversion to an annuity. Now, one can elect to create an income fund that requires certain (taxed) annual percentage withdrawals depending on age. The government gets its cut but the insurance industry doesn't. How can that be bad?

 

[F4mandolin]

If that was the guy they were talking about a few days ago (news summary, I only half listen), the news folks here didn't seem to think Osborne actually "said" anything. Mostly just fluffy ideas without details (hmmm, like a politician?).

 

[ziggy29]

Well, if the feds are going to start pushing or encouraging immediate annuities for part of one's retirement income, they'd better be ready to develop something similar to the FDIC for them, but with necessarily higher limits. Right now the only backstops are some state insurance guarantee funds; here in Texas that maxes out at $100,000 which might buy a 60-year-old a puny $500 a month. And that's without inflation adjustments; get it COLA'd (where you can find it) and you'd probably be lucky to get half of that.

The other problem immediate annuities share with investing is that what you get depends on current market conditions. Somewhat cruelly, at a time when the market is really, really lousy, immediate annuities aren't likely to be a decent buy because it will probably mean very low interest rates and thus lousy payouts. So even these fail to replicate a standard pension fund's feature of smoothing out the "birth lottery" in terms of when you are born and when you retire determining your "luck" in terms of securing retirement.

 

[Independent]

I'll agree that SPIAs are probably under used, but I don't see much that the gov't can/should do to offset that. Maybe they could require a little disclosure information -- like the annual 401k statement giving the SPIA purchase amount, or maybe just a fact sheet. That at least protects the employer from lawsuits that could arise because the employer suggested an annuity.

But, the big problems with SPIAs are well summarized by the Treasury guy

It’s the wealth illusion, the sense that my 401(k) account balance is the largest wad of dollars I’ll ever see in my lifetime, and I feel pretty good about having that. Meanwhile, I feel pretty bad about the seemingly small amount of annuity income that large balance would purchase and about the prospect of handing it over to an entity that will keep it all if I’m hit by the proverbial bus after walking out of their office.

I've pitched the idea of creating a "Mutual fund with longevity credits" instead of a "Single Premium Immediate Annuity". I think the mutual fund structure could make buyers more comfortable.

But, I think for most people the best approach is a good discussion of the benefits of deferring Social Security. That seems like a more approachable way of thinking about income you can't outlive.

 

[Bikerdude]

According to Immediate Annuities - Instant Annuity Quote Calculator. I can purchase my pension for $175,000. No cola (same as pension). Divide that between two highly rated insurance co. for $87,500 each. This is well within my state's insurance amount.

 

[rescueme]

I've pitched the idea of creating a "Mutual fund with longevity credits" instead of a "Single Premium Immediate Annuity". I think the mutual fund structure could make buyers more comfortable.

But, I think for most people the best approach is a good discussion of the benefits of deferring Social Security. That seems like a more approachable way of thinking about income you can't outlive.

Actually, the two points you mentioned are exactly the reason that we went with our SPIA (even at an early age).

The 10% of our then joint portfolio value to purchase the annuity was done with the ideas you put forth. We had the remaining 90% in a traditional portfolio; the SPIA was a bit of diversification and removal from our management of its value in a traditional investment sense.

The other reason is that our SPIA is actually acting as a "bridge" to allow us to have income and delay (my) SS till age 70. Even though I'm eligible for SS now (I'm 62), the combination of delaying SS till age 70, primarily for the benefit of my DW, and having me file for spousal benefits at her FRA (we're the same age) and get 50% of her FRA SS income (even though she plans on taking SS at age 62), uncovers more than one use for an SPIA, beyond just longevity insurance...