Set me straight on annuities and why are they so bad

[athena53]

So, if we assume the $84K annually is correct and not a scam, as some of you say, can we discuss the simple math associated with that and go back to the fact that I need to make >6% each year on the $750K in order to make the non-annuity scenario more advantageous. 6% is pretty high I think to bank on.

No one seems to be addressing this simple comment.

I grabbed a recent male mortality table and if you start with a group of 65-year olds, 2% will die during the next year. Annuity recipients tend to be healthier (you don't buy an annuity if you expect a short life span). That death % increases a little every year. So, they can safely give you maybe 2% of your own principal back PLUS 4% from investments, which is pretty tame, and get to 6%. While most advisers recommend a withdrawal rate of 4% or less, insurers can risk paying out more to you than you put in (plus investment returns) because they have other customers who will have shorter than expected life spans. They have diversification that you don't.

 

[Luvtoride]

No way these returns are guaranteed. Typical indexed annuities give you some weird combination of some market index minus dividends, capped at a low gain in any given year. But markets tend to be very jumpy, with large moves in a couple of years and down or no gain in others, so you never get those juicy returns you thought you were promised. Worse, typically the insurance company can change formulas at their pleasure after you make the deal.

This is just another near scam played on the unwary, a high commission piece of crud that will please the salesperson and disappoint you. If you need an SPIA or MYGA, try stantheannuityman.com or immediateannuities.com.

@Gumby, talk about confrontational… “this is just another near scam”! It seems that the OP laid out his point very well,knowing full well that others here would be “wary”.

 

[ShokWaveRider]

Fixed MYGA annuities are as safe as the Insurance company and your state's guarantee fund. Stick with A+ and better and one should be fine.

 

[GenXguy]

Fixed MYGA annuities are as safe as the Insurance company and your state's guarantee fund. Stick with A+ and better and one should be fine.

A- and better should be fine. I'm getting an A rated one myself.

 

[sengsational]

Annuities are confusing and that is part of the allure for companies to write them. This plays into risk aversion. If they were simple and risk free there would be no need for a commissioned sales person to pitch them. You get what you pay for.

I have on off the wall question. Scenario 1 would be if the S&P goes through an exceptionally prolonged down cycle during the drawing years of your annuity. What happens? Scenario 2 would be the opposite and the S&P goes through an exceptionally prolonged bull market cycle and far exceeds the expected appreciation. Do you benefit and to what degree?

Are you protected from a prolonged bear market and also allowed to participate in a prolonged bull market or are you assuming some risk that you would otherwise be taking on if you owned SPY outright?

If you are getting a partial heads-I-win-tails-you-lose benefit here, what is it and is the 1% or whatever you're paying for that privilege worth it?

These comments gave me an idea...they wrote all of the rules into the annuity contract, so it would be a SMOP to give you a calculator to model different scenarios (S&P 500 does this or that in the future, or whatever other things affect the payouts). They could even let you do a side-by-side comparison with a MYGA or a portfolio. But they don't give you a calculator, do they? You have to ask yourself "why not?" Probably because it's a scam, or something near it.

 

[OldShooter]

These comments gave me an idea...they wrote all of the rules into the annuity contract, so it would be a SMOP to give you a calculator to model different scenarios (S&P 500 does this or that in the future, or whatever other things affect the payouts). They could even let you do a side-by-side comparison with a MYGA or a portfolio. But they don't give you a calculator, do they? You have to ask yourself "why not?"

Easy. Because they don't want the mark to understand the product.

 

[Koolau]

As far as annuities go, I'd only buy MYGAs. You CAN annuitize them at a future date if you wish. Otherwise, they are essentially a "CD" offered by an insurance company. You have more restrictions on taking out your money, but that's how they offer higher interest.
All the bells and whistles in the other kinds of annuities all have fees and there is too much complexity to figure them out. I'd stay away from anything but MYGAs - but YMMV.

 

[jazz4cash]

I have 3 MYGAs now and might consider a SPIA but none of the other insurance products look appealing to me.

 

[brett]

I am anything but an annuity expert.

I retired at 58. Took my full pension at 62. At that time I asked my FA about buying an annuity.

His strong advice, for many of the reasons above was to hold off until I was at least in my early/mid 70's. I did some reading in the interim and read comments by others more knowledgeable or experienced on this forum.

Now I am there-72 Ran my own numbers. The annuity never came out on top. I only did to age 95. I am a bit of a control freak....I want to control our investments.

So...based on our financial situation the only annuity will be my current non indexed pension.

Briefly discused my logic with our FA and with a friend in the the financial marketplace to confirm our decison.

Not implying this is not for the OP. I believe that he should step back from the chasm. Re-evaluate his plans. Do some basic reading on the subject. Don't be lazy and find all the answers on this forum because I have no doubt that there is other info pertaining to your financial situation that has not been included.

Walk from your FA. Looks to me like he is selling you a bill of goods. Easy sale for him or her because you are not taking the time to understand what you are potentially buying, the questions to ask,etc. Whether you realize it not, IMHO you are currently at the top of his 'Patsy' list.

 

[tim0476]

Well, first let me say that I appreciate the attention this has received.

Unfortunately, many of you have replied with general comments about annuities and FAs trying to sell them, without, it seems, reading my comments about the specific product and listening to how I intend to use it. I was told that I am just looking for someone to agree with me here, when in fact I am looking for someone to blow holes in the idea with some good facts and alternatives. Just telling me to run away from my FA means nothing to me.

For those who want to understand it......it is a bit long but read on.

I know this product very, very well. In fact, I paid a lawyer and an actuary (who receive nothing from me buying the annuity or not buying it), to make sure we understand it fully. By some comments, many of you do not understand an income rider and the guarantees that come with it.

There is what I call a left side (contact/accumulation value), and a right side (income base).

Left side sucks, and this is how the insurance company makes money. Hypothetical illustrations of how index performance can make you (the insured) tons of money. In reality, high fees, withdraw penalties, poor surrender options, and changes over time to caps and participation rates cause this value to go to zero. Also, the big thing. It is insurance. Actuaries know many will die early, and the death benefits stink for the reasons just mentioned.

However, right side. This is the insurance policy side used for the guaranteed income associated with the rider. This is the side that counts if you are using the policy to provide you (and your spouse) with a guaranteed income stream for life, even if you live to 100+. With current rates, a policy from a A+ rated company and a $750K premium provides me $90K/year for the rest of my life and/or my wife's starting in 7 years. This will happen even after the left side (contract value) goes to zero. There is no reason to doubt this is the case, it is clearly spelled out in all the contracts. The reason why this works for the insurance companies is basic actuary science. They know that enough people will not live long enough to pay off for the insured, and this aspect alone makes them tons of money. This is about longevity events and protection with guaranteed income. For example, I am not necessarily concerned about longevity for myself, but my wife is in very good health and has always taken care of herself. Noone has the crystal ball...it's insurance.

Nothing else that I have found can do with this $750K that the income rider can do. No bond ladder, CD ladder, TIPS blah blah blah can provide this type of guarantee. This is buying a pension (if you have one then don't look at this product). If you have enough money where you don't have to draw down your investment savings to pay expenses, then don't look at this product. If you care about legacy and leaving money behind, then don't buy this product. Don't put any more than 25% of your savings in the annuity. For me, I will have a sizeable chunk of money left that I still need to invest properly. This aspect of the decision is very important because annuities, like most private pensions, do not adjust for inflation. You will have to rely on SS and the remainder of your investment portfolio to provide you with some level of inflation protection. This is about taking some pressure/risk off of the portfolio and providing some, not total, protection from market down turns, bad timing, sequence of returns etc.

Now I gave a lot of thoughts and facts in this post. If anyone can provide me with something concrete that provides me with the same guarantees, then I would love to hear those. General comments about me not understanding, needing to step back, my FA buying a boat on the commission are frankly not of any value to me unless they are backed with specific facts. And those facts I welcome for sure. If they are not provided, it simply tells me that the responder does not understand the product and should not be commenting.

 

[VanWinkle]

Sounds like you've made up your mind..... but the income rider is funny money as you indicated and the truth is that in many cases(mine included) you could have bought an immediate annuity with the left side money and received almost the same amount as the income rider without the ongoing(rest of your life) fees taken from the left side(until it runs out). You are correct that it will pay for the rest of your life but don't think the income rider is magic because you're paying for it the entire time there is a balance of left side money. I wish you good luck no matter what you decide and sometimes the idea that it is insurance and not an investment can be calming.

 

[tim0476]

VanWinkle. Correct. Right side is the phantom account that is only used to calculate the guaranteed payment when you turn on income. If you care about the left side, then don't buy this product. In my case, I care about the income.....not the death benefit, surrender value, etc. I accept that fact that the $750K is gone in order to pay me $90K for the rest of my life and my wife's. If we live long enough, this will be worth it. If me or my wife live to be 90 yrs old, then we would have received $2.25M in payments from the $750K. Yes, I know the historical market returns show you can get more than this, but not if you are drawing down that money in the 25 years to pay for expenses. That would be a big roll of the dice.

Also, are you aware of any immediate annuities that will pay $90K for the rest of my life for $750K. All the quotes I got they were much lower. I am 58 now. Please point me to what you were looking at.

 

[Gumby]

..... If they are not provided, it simply tells me that the responder does not understand the product and should not be commenting.

I have no opinion about your annuity one way or the other, but I do want to address this sentence.

When you post on this board, you don't get to control or set conditions on who may respond to you or how they must respond. Every member has the right to post in response to you so long as they don't violate the Community Rules while doing so. By asking the original question, you invited them to respond and you get what you get. You may agree or disagree with them. You may find some of their responses uninformed. If you have no use for any response, just ignore it. If you think the post has violated the Community Rules, report it to the moderators.

I noted at the beginning of this thread that your tone seemed needlessly confrontational. I see it has not changed. I hope it will.

 

[REWahoo]

Noone seems to be addressing this simple comment.

Unlikely, as Noone hasn't hasn't been seen on the forum since 2019.

 

[tim0476]

Gumby, two comments back and I will leave it at that.

1) I completely understand the rules of the forum. I am just asking for people to provide me with information based on facts and not just feelings. This is asked just as a courtesy, and I don't see anything wrong with that. As an example, someone posted earlier in the thread several comments about the product that were just incorrect (e.g. the monthly payments are based on the hypothetical account/contract value which means the monthly payments themselves are hypothetical. this is NOT a correct statement).

2) I disagree with your comments about confrontation on my part. I have been told in this thread this is a scam, I don't know what I am talking about, and I am simply paying for my FA's Hawaiian vacation. Now those sound confrontational to me, and you did not call those out.

 

[tim0476]

VanWinkle, I am trying to find the immediate annuities you are referring to that match the deferred income rider I was quoted for from Midland National and North American. I went to immediateannuities.com and received quotes nearly half the FIA with the income rider deferred for seven years. ($47412 for the best immediate annuity vs $90000 for the FIA income rider deferred 7 years).

 

[RetiredHappy]

I thought I had responded to this thread before but I guess not. Based on your needs and the payout, I would absolutely do it.

I did something similar when we sold our business and retired. I was 53 and while we had enough to retire on, I needed the assurance of a steady income stream, much like making my own pension payment to supplement our Social Security benefits. I took all of my IRA money and bought deferred fixed income annuities that would start paying when I turned 60. Interest rates were close to 0 then and my payout was no where close to your numbers.

Due to deferring the start of payout, insurance companies bank on holder dying before they even start paying. Even though there is return on premiums if someone dies before they start collecting or after they start, insurance companies would still make on the interests of those premiums.

I bought 2 deferred fixed income term polices, first paid in 7 years' time for 10 years and the second to be paid in 17 years time for 15 years, which would get me to 85 years old. Several years later, I found this forum and pk4usk calculated that the effective interest rate for the payout was 5+%. I suspect that your numbers are even higher. Also, if I die before the term is up, my beneficiaries will continue to be paid for the rest of the term.

We have plenty in my husband's IRA and my taxable brokerage account which continue to grow.

 

[Luvtoride]

Tim0476, I think you have done a very good and thorough job of explaining this type of annuity product and making the case for why/ when it would be used. Coincidently, in today's Morningstar Morning Digest (email), John Rekenthaler has a very interesting article on the same subject. He is coming from the perspective that since Pensions are "missing" from most of today's retirees, this type of annuity can be attractive source to supply that supplemental income amount, albeit with several warnings and caveats (and poor marketing). I hope all can view the full article from the link below.

The ‘Three-Legged Stool’ of Retirement Is Missing a Leg​

Personal annuities can only get the system so far.

The ‘Three-Legged Stool’ of Retirement Is Missing a Leg

Personal annuities can only get the system so far.

www.morningstar.com

 

[DJRR]

You do you. Clearly you think you know more about it than everyone else. Personally:

Left side sucks, and this is how the insurance company makes money. Hypothetical illustrations of how index performance can make you (the insured) tons of money. In reality, high fees, withdraw penalties, poor surrender options, and changes over time to caps and participation rates cause this value to go to zero. Also, the big thing. It is insurance. Actuaries know many will die early, and the death benefits stink for the reasons just mentioned.

Nothing else that I have found can do with this $750K that the income rider can do. No bond ladder, CD ladder, TIPS blah blah blah can provide this type of guarantee. This is buying a pension (if you have one then don't look at this product).

I would not be able to reconcile the belief that the company is ripping off their customers on the left while at the same time providing above market returns on the right to the "smart" customers. If it does not smell right it usually is not.

You are trying to stretch an early retirement that you cannot currently afford by using a product that you believe is going to give you above market returns without any risk.

People are skeptical that you have found the holy grail and are expressing how they have been screwed over by similar "guarantees". They are offering alternatives to achieve a similar result through simpler products. That is not good enough so you want to reach for it. I get it. Hope it works out for you as promised.

 

[jazz4cash]

Good luck, OP. I hope it works out for you. I understand your frustration with unconstructive comments. I’ve always believed these products are suitable for the right situation but they get oversold.
Very few investors will take the time and effort you have to understand these things. I am confident you will take advantage of the free look period if you do go forward. BTW could you share the name of the product you select. I lost track along the way.

 

[VanWinkle]

To op, in my case the original annuity with income rider was 2013 when rates were low and it was out of
the penalty phase in 2023 after 10 years. The income rider benefit was calculated on the 2013 interest rate
and barely beat a 2013 immediate annuity quote. The difference was due to the interest rate change I
am guessing. You may never have that problem, but they get to decide the payout when you initiate
the income rider. I have a pension, that I could have taken as a lump sum, so I am not anti annuity, just
not a fan of fixed indexed annuities with an income rider. Your milage may vary, but it seemed like a
10 year waste of time to me.

Best to you,

VW

 

[tim0476]

Gumby, now read the last post from DJRR if you are looking for something that is confrontational.

DJRR, it's simple you see. It is an insurance policy, and they are ripping people off on the left-hand side, but with hopes on the right-hand side that you will not live long enough to make it beneficial for you. Also, no one has presented me with alternatives for similar products and similar results, so why do you say that?
You are so very wrong when stating that I think I know more than everyone else. I would not be here if I thought I did.

Vanwinkle, your statement is incorrect if I am reading it correctly. They don't decide the payout WHEN I initiate the income. The payout is expressly stated upfront in the contract for each year I decide to start the income, year 1 through year 10. It is a contractual guarantee, even if/when the account value goes to 0.

Products are Midland Income Planning Annuity and North American Income Pay Pro 10.

 

[levindb]

Tim0476-are you willing to post the annuity contract as an attachment here? Most annuities that I have looked at are 80-200 pages long, with most of the words protecting the insurance company. By sharing the details, maybe someone here can point out something that you, your lawyer, and the actuary have missed. Your summary of the contract does seem too good to be true...so, maybe more eyes can help support your opinion, or highlight the risks that may be hidden in the fine print.

 

[Gumby]

Gumby, now read the last post from DJRR if you are looking for something that is confrontational.
.....

Posting standards are not relative. The fact that others could improve their posting behavior does not excuse yours. Just so you know, most of the discussions like this between moderators and members occur privately (which means, among other things, that you have no idea what the moderators have said or not said to DJRR). I made my last post public because we have seen more frequent posting recently where the OP throws out a challenge, as it were, and then is disappointed when others rise to that challenge and post in response. I thought that this would be a good message for all new members - if you don't want to hear the responses, then don't ask the question. As I said before, if at any time you believe that a response violates the Community Rules, then by all means report it. If the moderators agree, we may do something about it, but we will not publicly debate it with you.