Seeking advise on New Annuity investments

[Spock]

On an inflation adjusted basis Vanguard Wellesly is over 9x more valuable that it was 34 years ago in 1985. While neither the return nor the principal is 'guaranteed', one also has full access to one's money at any time. Perhaps that is a good substitute for an annuity?

With 20ish% of Wellesley's bonds rated BBB or lower, the optimistic bond ratings, and the expected down rating of some BBB to junk in the next recession, I would not view Wellesley as an annuity.

 

[mickeyd]

It's really more of a half-truth. It is true that they get paid by the insurance company. But what is left unsaid is that if you want out early, then the insurance company collects it from you with the surrender charge.

I see it as 100% true. The insurance company will pay commission ONLY if salesman sells the annuity product. If sale is not made, no commission will be paid by LI company, thus all future commission is generated from the funds that the paying customer forks over to the LI company.

 

[pb4uski]

I see it as 100% true. The insurance company will pay commission ONLY if salesman sells the annuity product. If sale is not made, no commission will be paid by LI company, thus all future commission is generated from the funds that the paying customer forks over to the LI company.

Perhaps you should go back and read the post that I was responding to.

"half-truth

/ˈhaf ˈˌtro͞oTH/

noun

a statement that conveys only part of the truth, especially one used deliberately in order to deceive someone."

In this case the producer omits the fact that the surrender penalty will result in the policyholder effectively paying all or part of the producer's commission if the policyholder surrenders early... and many surrender charge schedules go out 10 years. So the policyholder does pay... either through a lower crediting rate compared to if there was no commission or through a surrender charge. So the insurer does pay the producer.. but one way or the other recovers the cost from the policyholder.

There is no such thing as a free lunch.

 

[MI-Roger]

Thank you all for your comments. sorry about the delayed response due to travel. My wife & me read every post here and are grateful for the advise. We decided on the 'RUN' advise and so dropped considering any of the above annuities. We decided to take sometime on it and consider vanguard funds. Will come back to seek some advise on the same once we get better educated on those funds. Again appreciate all the advise here and steering us in the right direction. Happy holidays.

Well...you really kicked the Hornets' Nest with this question.
My view is that a Good Annuity will provide Rocking Chair money in retirement with no effort on your part. I don't think any of the other respondents considered the potential/likelihood/inevitability that at some point in our advancing ages we will/may no longer have the mental clarity to self manage our investments to produce the necessary annual income. A good Annuity will provide that. But beware, there are LOTS of bad ones out there.

Laddering CD's, laddering SPIA's, and other devices will also generate stable predictable retirement income. BUT.... do you trust that you will still be able to make these investment decisions when well into your 80's? Will your Spouse be able to make these decisions if you pass first? Some of us will, but many of us won't.

In my view of the world, a successful retirement must include a source of stable income, as well as a source for future growth.

You must fully understand whatever you buy - regardless of the financial device.

I get flamed here regularly for the following two reasons:

1. I do not hate Annuities. In fact, I see how a good one can be a valuable part of a retirement portfolio.
2. I have no use for Index Funds. Segmented Index Funds are fine depending upon market conditions, but I avoid broad market Index Funds such as a S&P500 Fund.

Let the fun begin - again.

 

[capjak]

I get flamed here regularly for the following two reasons:

1. I do not hate Annuities. In fact, I see how a good one can be a valuable part of a retirement portfolio.
2. I have no use for Index Funds. Segmented Index Funds are fine depending upon market conditions, but I avoid broad market Index Funds such as a S&P500 Fund.

#1 agree
#2 I don't hate broad index funds

They are all tools of investing that serve different functions.

 

[pb4uski]

....

1. I do not hate Annuities. In fact, I see how a good one can be a valuable part of a retirement portfolio.
2. I have no use for Index Funds. Segmented Index Funds are fine depending upon market conditions, but I avoid broad market Index Funds such as a S&P500 Fund.

Let the fun begin - again.

Please elaborate on your reasoning, especially on how an annuity can be a valuable part of a retirement portfolio and why index funds are to be avoided.

 

[explanade]

The people trying to sell annuities might have a better sales pitch if they can guarantee that regardless of unforeseen market conditions or some catastrophic events which would cause cataclysms, their annuities would be fully guaranteed to pay.

Are they even saying that, that if we have another 2008-2009, their annuities product would continue for the primary insured's lifetime?

 

[ncbill]

IIRC, there's no COLA available anymore on annuities...is that really the case?

Maybe TIPS could compensate?

 

[MarieIG]

IIRC, there's no COLA available anymore on annuities...is that really the case?

Maybe TIPS could compensate?

It has been a long time since I looked at annuities, but I recall that I was unpleasantly surprised at the initial payouts of the inflation adjusted annuities (or those with a built in yearly increase). I don't know if they are still available.

 

[jazz4cash]

IIRC, there's no COLA available anymore on annuities...is that really the case?

Maybe TIPS could compensate?

No, that is not the case but TIPS might be a better hedge.

https://www.immediateannuities.com/immediate-annuities/annuities-and-cost-of-living-adjustments.html

 

[pb4uski]

IIRC, there's no COLA available anymore on annuities...is that really the case?

Maybe TIPS could compensate?

My understanding is that there are some COLA annuities out there but they are pretty rare and costly.

However, if you're willing to accept a fixed percentage increase you could roll your own by combining a SPIA with a series of deferred annuities.

For example, say that you want income of $3,000/month adjusted for inflation and that you expect inflation to be 3% a year.

You could buy an SPIA that pays $3,230* for life plus a 5-year deferred annuity that pays $514** for life plus a 10-year deferred annuity that pays $597** for life, et al. The deferrd annuities effectively increase your benefits a fixed 3%/annually every 5 years.

*$3,000*(1+3%)^2.5
**$3,000*(1+3%)^7.5 - $3,000*(1+3%)^2.5
***$3,000*(1+3%)^12.5 - $3,000*(1+3%)^7.5 - $3,000*(1+3%)^2.5

You would receive $3,230/mo for the first 5 years, $3,744/mo for the next 5 years and $4,341/mo and those cash flows would broadly approximate a 3%/year increase in the cash flow starting with $3,000/month.

If you really wanted to be anal about it you might buy a $3,000 /mo SPIA + a 1-year deferred annuity that pays $90/yr + a 2-year deferred annuity that pays $93/mo + a 3-year deferred annuity that pays $95/mo.... etc. Put it all together and you would have cash flows that increase 3%/year.

However, there might be some minimum premium that would mess up doing something like this that you would have to work around by having the increases being every 5 years or 10 years or some other increment.

 

[capjak]

pb4uski: COLA (CPI adjusted) were offered by Prudential. They have decide to no longer provide the product.....so there are no COLA Annuity (SPIAs) anymore ended Jan 2020. Guess they were not popular or too big a risk for the insurance company with little profit?

There are still several companies that do as you describe and have a fixed annual increase from 1-5%.

I think it might be better to buy a nominal SPIA (no increase) and hold some back for a future purchase to adjust for inflation (let the money sit in TIPS until needed).