are annuities worth it or too expensive?

[Greg V]

I would need to know more about the VA in order to make any pertinent comments. Among the questions I have:

1. Is this a deferred or immediate annuity? If deferred, how many years before you start to collect.

2. What are the surrender charges if your situation changes and you want to take your money out? How much are the other sales charges and fees?

3. What portion of your investable funds are your dedicating to the VA?

4. Are your stated returns and death benefit guaranteed regardless of market performance?

5. What is the financial strength of the underwriting company?

Etc, etc.

I have not found a VA product that financially makes sense for me after I've had the chance to review all the details, but am always willing to see what's out there. The industry is always tweaking their products and bringing out new ones. It's interesting to learn about the new things.

These are complex instruments and the cautions raised by multiple posters are important to bear in mind...though it is probably academic in this case as you have already purchased the VA.

 

[Animorph]

You might want to forget about the 2x gain in 10 years. That sounds like funny money to me. Though of course we don't have the 37 pages of fine print that describe all this in detail. That's why we can't talk exact numbers.

How much money do you put in? How much money do you get out and when? Can you compare present values to see if it's worth it? Can you find a comparable product from Vanguard to compare prices? You won't find an article saying your XYZ VA is the third best VA you can get. Will a simple single payment immediate or deferred annuity work just as well for you? They typically have lower fees, and they have the lifetime income component you want.

VA's are not inherently bad, as you note, but if you're paying 2% in fees every year, and a giant sales commission, you can do much better with something else. Do you know exactly what your costs are for your VA? Not what the salesman says, but what all the fine print says.

 

[Sun456]

Hi Allan,

I have a VA also. I bought the Prudential X Series w/ HD Lifetime Income last year. I put in $150K and am guaranteed to get $23,492 per year for life in 20 yrs at 65. I also bought 3 deferred index annuities which will provide me with $23,267, $54,412 and $50,776 for a grand total $151,946 at 65. I don't care about the comments that I could have done something better with the money as I have plenty of other money to louse up with between now and then and if I do better with it than so be it.

I give all my cautions about annuity buying in other threads that you can find by searching so I won't repeat them. None of the products I bought is now available with the terms I got because the rates have gone down. I didn't get them at the peak rates because I was still in research mode on annuities at that time. Such is life. I'm very happy having something that I don't have to worry about to back stop me in my senior years. I've ridden the investment roller coaster up and down over the last couple of decades and I wanted to get off. Everyone feels differently about it. For me it was the right thing to do.

Best wishes!

 

[Kimo]

Yes..

The ones that Vanguard sells are very low fee, comparitively. Also, they don't have a bunch of goofy rules and crap, right? You simply are buying a fund that's a wrapper for an underlying Vanguard fund. The VG fund goes up, you make paper wealth, it goes down, you lose paper wealth. No funky rules to worry about (or salivate over, if you're of that ilk). Then, you have the choice at some point to conver the whole works to an immediate annuity? If that's all it is, and it's not lining the pockets of a salesman, then a VA might not be so bad. That's a long way to say that not all VA's are created equally.

This is mostly correct....you can't turn into an immediate annuity but that really isn't a problem because you can pull all the money out if you want and if you are so inclined, purchase a SPIA (or anything else for that matter) It is another reason I went with Vanguard, the fact it is an the Wellington fund and I can close it anytime with no costs...

 

[Rich]

Allan, find the Scott Burns website. Somewhere there he did a comparison of various annuities. If I recall correctly, Vanguards offering came out on top. He still wasn't't enthusiastic about the product.

Rich

 

[Midpack]

Allan, find the Scott Burns website. Somewhere there he did a comparison of various annuities. If I recall correctly, Vanguards offering came out on top. He still wasn't't enthusiastic about the product.

Rich

I'll even give the OP that link. AssetBuilder - Variable Annuities: A Product That Doesn.

There really are dozens of articles with "supporting analysis" and "a mathematical or financial foundation" warning against VAs online, just a Google away. And a search here will also provide many threads discussing the "merits" of VAs, probably the reason earlier posts didn't go into more detail.

 

[Chuckanut]

I am not a big fan of annuities but this study by Dr. Pfau has me thinking SPIA's (not variable annuities) might play a part in a future income stream. We'll see.

Do You Need Bonds in Retirement? - The Smarter Investor (usnews.com)

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2151259

 

[Animorph]

Hi Allan,

I have a VA also. I bought the Prudential X Series w/ HD Lifetime Income last year. I put in $150K and am guaranteed to get $23,492 per year for life in 20 yrs at 65. I also bought 3 deferred index annuities which will provide me with $23,267, $54,412 and $50,776 for a grand total $151,946 at 65. I don't care about the comments that I could have done something better with the money as I have plenty of other money to louse up with between now and then and if I do better with it than so be it.

I give all my cautions about annuity buying in other threads that you can find by searching so I won't repeat them. None of the products I bought is now available with the terms I got because the rates have gone down. I didn't get them at the peak rates because I was still in research mode on annuities at that time. Such is life. I'm very happy having something that I don't have to worry about to back stop me in my senior years. I've ridden the investment roller coaster up and down over the last couple of decades and I wanted to get off. Everyone feels differently about it. For me it was the right thing to do.

Best wishes!

There are some numbers we can work with! I get about 4.84% return for the Prudential VA at guaranteed levels and if you live to 95. A little over 4% if you live to 85. Plus your lifetime guarantee and hopefully a chance for better income if things go well.

 

[Sun456]

There are some numbers we can work with! I get about 4.84% return for the Prudential VA at guaranteed levels and if you live to 95. A little over 4% if you live to 85. Plus your lifetime guarantee and hopefully a chance for better income if things go well.

Very interesting! I did alot of calculations but not the one your doing. So for my other three can you do the same?
EQ $250K in, $54,412 in 20 years at age 65.
ML $250K in, $50,776 in 20 yrs at age 65.
AV $133K in, $23,267 in 20 yrs at age 65.

Thanks!

 

[Independent]

Well thanks--I appreciate your comments. BUT you have not provided any supporting analysis with your recommendation for "others to stay away". It would be nice if you had a mathematical or financial vs purely emotional/anecdotal foundation for your perspective. I, for one, think I am asking a fair and important question, substantiated by pretty detailed information, and apoplicable not only to me, but likely a host of others.

Care to respond in kind? Anyone?

I am sincerely looking for numerically solid supporting or rebutting information. Heck I would even take a solid analysis report reference from an expert objective third party group, like consumers reports, if I could find one.

Further, recognize there is an massive industry around this exceptionally important need (guaranteed lifetime with drawls with fair and reasonable expense). Surely not everyone in the industry are "bad actors" (granted many are, and its wise to know how to spot them). But a market demand so great (longevity insurance) will also draw at least a few players in the industry offering a good product at a fair cost/risk tradeoff. You really think such a huge market would go without the emergence of at least a few "fair" players? There is so much to gain for all parties.

So I ask again--provide numerical or substantial objective expert 3rd party support for your position. Else, I can't accept your generous but obvious disingenuous platitudes about my golden product find. Nor should anyone unilaterally stay away from such a product based on what information you did not provide.

With respect,
Allan

It appears that you are buying the product primarily for the non-COLA'd lifetime income. But, you haven't given your age so it's hard to do numbers. Contact a NYL or MetLife rep and get a quote on a 10 year-deferred, no cash value, lifetime pay, annuity for your ages (aka pure longevity insurance).

If the NYL or MetLife product costs more than the single premium you're paying on the VA, you've found a better deal (assuming you really want/need lifetime non-COLA'd income). If it costs less, then presumably the extra premium on the VA buys you things in addition to the lifetime income. Make a list of those extras and see if they are worth the extra premium.

 

[Animorph]

EQ 6% to age 95, 5.25% to 85
ML 5.75% to 95, 5% to 85
AV 5.2% to 95, 4.4% to 85

 

[allanlevy]

+1

They are paying you back with your own money. That is the bulk of what you are getting and you are getting it in dribbles.

No the VA does not go to zero if you live too long, it grows with market performance (in this way it behaves a bit like a bond at maturity, when you die the account balance xfers to hiers.)

 

[REWahoo]

Someone is smoking some really good stuff...

 

[Sun456]

No the VA does not go to zero if you live too long, it grows with market performance (in this way it behaves a bit like a bond at maturity, when you die the account balance xfers to hiers.)

I looked at a several VA. Generally they do go to zero not too long after you start taking payments (same thing for my equity indexed annuities). BUT your income doesn't go down for life. The things that cause the real account to go to zero include:
1) When you start taking payments your getting a fixed percentage to take out each year that is based on a virtual account guaranteed increase per year and your age. This is usually higher than the 4% safe withdrawal rate. This is taken off your real dollars account.
2) The fees every year are taken off your real dollars account, not the virtual account that is growing for you to get your guaranteed income. The fees can be based on your virtual account. This whittles things down out of the real account in a hurry.

But if you die before you start taking payments then your heir will generally get a chunk of change. It won't be as big a chunk of change as it would have been if it had been in the market due to the fees but the fees are buying you the life time income, should you need it.

In the models I got from the insurance companies if you start taking payments your real account slides to zero faster than you would think.

 

[brewer12345]

Someone is smoking some really good stuff...

And they would like you to join them for a big 'ol toke.

 

[Independent]

I am sincerely looking for numerically solid supporting or rebutting information. Heck I would even take a solid analysis report reference from an expert objective third party group, like consumers reports, if I could find one.

Here's another way of getting a numerically solid comparison.

Any VA will allow you to do the following:

- Pay a premium of $100k
- Accumulate your premium with investment returns, less a variety of fees (fund level and annuity level), providing a daily fund balance.
- Allow you to withdraw your balance, less some surrender charge, at any time
- Allow you to withdraw just a portion of your balance periodically

Let's say you want to start taking $875, in nominal dollars, 10 years after you buy it. That would be $10,500 per year. Any VA will let you do that, and then it will:
- Continue to calculate a fund balance daily. Now it is with investment returns, less a variety of fees, and less the $875/mo withdrawals.
- Continue this until both you and your spouse are dead, and pay the remaining balance to your beneficiary.

Of course, it's possible that the calculation above will lead to a zero fund balance before you die. If so, you can't make any more withdrawals.

The guaranteed lifetime withdrawal rider probably guarantees that if you do all of that, and your fund balance goes to zero, the company will continue making payments - assuming you followed a specific set of steps.

But, you pay some additional fee to get that guarantee. That means that your fund balance is lower at every point in time, including when you die. The benefit of the GLWB is that it will continue to pay monthly amounts even if the balance goes to zero before you die.

Got all that? If so, your numerically solid comparison is to calculate the balance on this VA and another VA, at various points in time and across various investment scenarios. See the difference in surrender and death benefits, and compare that to the value of the guarantee. This requires that you understand the fees on this product and some competitors product, and that you are thinking across various investment scenarios. But, you should't be buying a VA unless you are thinking about those things.

Most people on this board would suggest that you start your comparison with Vanguard because

The Vanguard Variable Annuity offers low management fees, as well as low mortality and expense risk charges.
The average costs for the Vanguard Variable Annuity, at 0.58%, are more than 70% lower than the annuity industry
average of 2.28%, according to Morningstar, Inc., December 2012. That difference can save you an average of $1,700
a year in fees for every $100,000 you invest.*

Note that the Vanguard VA also has a version of a GLWB, but details vary. Their fee for the GLWB is 120 basis points.

I'm not trying to tell you this is a bad idea. I think some insurance companies have been slow to drop their guaranteed percents and may be giving people a better deal than they intended. But, you asked for numbers.

 

[allanlevy]

I looked at a several VA. Generally they do go to zero not too long after you start taking payments (same thing for my equity indexed annuities). BUT your income doesn't go down for life. The things that cause the real account to go to zero include:
1) When you start taking payments your getting a fixed percentage to take out each year that is based on a virtual account guaranteed increase per year and your age. This is usually higher than the 4% safe withdrawal rate. This is taken off your real dollars account.
2) The fees every year are taken off your real dollars account, not the virtual account that is growing for you to get your guaranteed income. The fees can be based on your virtual account. This whittles things down out of the real account in a hurry.

But if you die before you start taking payments then your heir will generally get a chunk of change. It won't be as big a chunk of change as it would have been if it had been in the market due to the fees but the fees are buying you the life time income, should you need it.

In the models I got from the insurance companies if you start taking payments your real account slides to zero faster than you would think.

If the real account value shrinks then this would become a terrible investment. The assumption is the market performance keeps the real account value at at least the initial investment, hopefully substantially higher. Are you saying your ins agent on an equity based VA had the real account value depreciate towards zero with speed after your with drawl began? Yikes! Double yikes!! What were the WR rates that caused this (I am dealing with 5.25% WR)

 

[Sun456]

If the real account value shrinks then this would become a terrible investment. The assumption is the market performance keeps the real account value at at least the initial investment, hopefully substantially higher. Are you saying your ins agent on an equity based VA had the real account value depreciate towards zero with speed after your with drawl began? Yikes! Double yikes!! What were the WR rates that caused this (I am dealing with 5.25% WR)

My VA is a Prudential Highest Daily with Lifetime Income. Yes VA are terrible investments. It is alot easier if you think of them as an insurance product and not an investment. My WR is 5% at 65. They ran some very optimistic models, some historical models and some pessimistic models. Frankly I'm buying them for the guaranteed income so I looked at the models and just ignored the ones that were tweaked to be unrealistically favorable. If they happen then great. If not I've got the minimum they contractually promised me.

My annual fees are 2.8% per year and that doesn't include any of the fund fees. Those are probably another 1-2.5%. I would have to dig out the paperwork to be sure but lets assume 2% average. So my VA investment has to make at least 4.8% every single year just to break even. The funds are sort of funny funds. They aren't the ones you would buy on the street. My guess is the insurance companies have some influence on their fees which can change and their performance. Remember they want to keep your money, not give it back to you. So what is the likely hood that the return every single year will be at least 4.8%? I think it isn't likely. That is just to keep the value dead even. So yes, terrible investments.

But the virtual account goes up 5% every single year. And if your 2.8% account fee is off the virtual account then the fees are rising with that, not your real money account. Pretty tricky! (I don't think mine did this but some I looked at did.) So then you have a constantly increasing value over 4.8% to keep up with every year to just break even. Not so easy to do and probability of this happening is pretty low.

So why did I buy it? Because I wanted the guaranteed income and didn't care about getting the lump sum principal back. It also has an income doubler if I need health care assistance in my home or go to a nursing home. This is the reason the fees are a little higher than some others.

For my Prudential Highest Daily VA I judged that the highest daily feature was only good in the first several years. After that the fees will have taken their toll and then it's likely that the virtual money will out pace the real account value.

Edit: Despite what I've written above I'm still very happy with my purchase. They key with annuities is to really understand what your getting and what your giving up. If your happy with the trade-offs a particular product makes and it helps you achieve your goals then they can be a great fit. They aren't the end-all be-all for every situation and for every thing you get your either paying for it or giving something up somewhere else.

 

[pb4uski]

If I understand your situation, you would make a single premium and then in 10 years receive 10.50% of your single premium each year for life (5.25% * the doubled annuity value).

By my calculations, if your then receive that 10.5%of your single premiums for 10, 20, 30 or 40 years your IRR is 0.32%, 3.80%, 4.96% or 5.44%, respectively. Obviously the longer you live and receive benefit payments then the better your return is.

 

[sheehs1]

If the real account value shrinks then this would become a terrible investment. The assumption is the market performance keeps the real account value at at least the initial investment, hopefully substantially higher. Are you saying your ins agent on an equity based VA had the real account value depreciate towards zero with speed after your with drawl began? Yikes! Double yikes!! What were the WR rates that caused this (I am dealing with 5.25% WR)

Maybe , maybe not. It depends on your reason for buying it. Not only can the real value account go to zero quickly once you start taking withdrawals but so can the Guaranteed Death Benefit if one pays an extra fee for that. Even if you have already purchased, it is worth it to have your guy run the scenarios during the withdrawal phase under different market conditions. (I repeat myself). Once you get thru the years with heavy surcharges for redeeming it, you can possibly make another determination and can choose to keep it or cancel it.

I no longer have the simulations and data that I analyzed within the last few years, otherwise I'd share, but I did have them run projections once I started taking withdrawals. I was more than surprised to see the account values go to zero and the Death Benefit that I was paying extra for go to zero. Yes they would still pay me the contracted amount but "poof" there went my principle. That Guaranteed Death Benefit was not guaranteed when account values went to zero. Also a surprise.
Tricky wording, tricky fine print and tricky fees. One has to really study these products to know what they are getting.

As long as someone is willing to accept all of that in return for the contracted pay out and they fully understand it then so be it. It's their decision. We just try to help others understand enough so they do their own analysis and come to their own conclusion for their own situation.

 

[Sun456]

So here is my real world example. I bought my Prudential VA last year for $150K.

My current account value is $167,855 so I have a 11.9% appreciation. This is locked in for my lifetime income value. I selected an investment mix of 51% asset allocation and 49% bond. Probably way too conservative for this last year. But hindsight is 20/20. If I want to get out of the annuity right now I can get back $154K as there is a steep surrender fee of $13,500. My death benefit is $158,855.33.

My minimum worst case lifetime income value in July (my anniversary date) was $166,950 so I'm a little bit ahead of the minimum contractual guarantee. The highest daily value is locked in and will grow at 5% compounded until I'm 65. But, wait, there is another feature. The value of the virtual account is guaranteed to double at year 12. So far my highest daily with the compounded 5% guarantee isn't enough to get me ahead of that so I don't have a change in my guaranteed amount after 20 yrs. If I had been a little more aggressive with my investment selection I might have been but hindsight is 20/20...

 

[ERD50]

... The assumption is the market performance keeps the real account value at at least the initial investment, hopefully substantially higher. ...

And what magic is used to create a fund that can pay out for years yet never go down? And why would they share this magic with people like us?


-ERD50

 

[Animorph]

So here is my real world example. I bought my Prudential VA last year for $150K.

My current account value is $167,855 so I have a 11.9% appreciation. This is locked in for my lifetime income value. I selected an investment mix of 51% asset allocation and 49% bond. Probably way too conservative for this last year. But hindsight is 20/20. If I want to get out of the annuity right now I can get back $154K as there is a steep surrender fee of $13,500. My death benefit is $158,855.33.

My minimum worst case lifetime income value in July (my anniversary date) was $166,950 so I'm a little bit ahead of the minimum contractual guarantee. The highest daily value is locked in and will grow at 5% compounded until I'm 65. But, wait, there is another feature. The value of the virtual account is guaranteed to double at year 12. So far my highest daily with the compounded 5% guarantee isn't enough to get me ahead of that so I don't have a change in my guaranteed amount after 20 yrs. If I had been a little more aggressive with my investment selection I might have been but hindsight is 20/20...

What features did you like about your VAs compared to a single payment deferred income annuity?

 

[Sun456]

What features did you like about your VAs compared to a single payment deferred income annuity?

Two things. This particular VA has an income double for home health care (must lose two activities of daily life) and nursing home confinement. No other one I looked at had the home health care component. I also have 3 equity indexed annuities. I'm pretty sure the caps and participation rates won't allow me to get more than what the minimum guarantee is. I plan to have this money accumulating for 20 yrs. The VA gave me a way to get more out of the market if it should go up, up, up. With the quantitative easing who knows what will happen.

 

[allanlevy]

First thanks very much for this calculation. Its interesting to me that you do this based upon only the cash flow of the draw amount annual for the duration (correct?). So you assume 0 return of principle at the end of the duraction making the assumption that the actual cash value is zero (or negative) and only the account balance provides the return. OK (or at least that is what I think you are doing.

In contrast, I ran scenarios for 5-8 (ok even 10)% market performance of the equity fund the VA is wrapped around. That does change the ROI different from the method you describe above. The other thing is the effect of tax deferred account, and the probability of increased payout amounts due to the resetting (increasing) of the income base over time as a function of market volatility. How does one model that on the ROI, which presumably has some lift aspect to the return (no? wishful thinking on my part?

Finally, just as a point of comparison on the 20 year duration I came up with an ROI of 3.7% and 4.2% respectively when the underlying equity fund performance is 6% and 8% respectively. Not to distant from your 3.8% figure.

Thx again!