Annuities

[colorado4]

I'm twenty or so years from retirement and have been a PP follower for the last 5 years.  I've been happy with the results.  Has anyone explored annuities?  I've been leery of them in the past due to their high costs, surrender fees and general bad reputation.  However, I noticed that Vanguard and Fidelity both offer ones with much lower costs and no surrender fees. 

[mathjak107]

I would wait until i was ready and look in to immediate annuity's which are low cost and like buying a cd

[barrett]

I would wait until i was ready and look in to immediate annuity's which are low cost and like buying a cd

mathjak, I know you have touched on this in other threads but how do you evaluate the soundness of a company that you purchase an annuity from? I believe you said that many are backed by a state but I wouldn't trust states to remain solvent. Thanks.

[mathjak107]

i use am best ratings.

i think if someone has no trust in insurance company's and no trust in states  and no trust in the gov't money , and no trust in markets they have to re-evaluate why bother to do anything except buy gold and bury i in the yard.

then they can worry about trusting the dealer they sell to or the person they barter with not to rob them.

my answer is i go with what worked well in the past , what is currently working and what stands a reasonable chance of continuing .

[Libertarian666]

The only annuity I would consider at this point, for Americans anyway, is a single premium immediate fixed annuity from a highly-rated insurance company. These have low costs and are not terribly complicated. Stay away from anything variable or "fixed indexed", which are linked to equities and are very complex and expensive.

"Unamericans" have better options.

[mathjak107]

yep , that is the only ones to use .

i did look under the hood an an interesting product from prudential. while i don't recommend anything but immediate annuity's this one looked interesting.

it is a variable  bond index annuity.

it is an annuity with a guaranteed floor linked to a bond index.

you get a guaranteed increase of 5.50% a year or if your high water mark on the variable  bond portfolio is higher you get that amount .

looking at the prudential defined income variable annuity you see starting the annuity at 55 and  deferring to 65 gives a single about 9k a year based on 100k.

it has a 5.50% guaranteed minimum growth on the money you give them up until you draw an income. it also has a variable sub account in the ast bond index.

with 2.90% in fees the bond index will likely never be higher than the minimum guaranteed growth rate.

you cannot get access to that money that is given via the growth rate. you get 1/10% a year of it for every year you delay drawing .

it is a pretty decent proxy for a cash investment but a lousy bond investment .




here is the break out of the annuity.


[img width=600]http://mm-photography.smugmug.com/photo ... Mcx-X3.jpg[/img]

(TPG: I made this image smaller, but now it isn't very readable.  However, if you click on the image, it'll revert to its original size).

[sophie]

Annuities, in general, scare me.

I've got a slug of 403b money in TIAA-CREF.  I figured that when the time comes, I'll investigate their annuity options and make a decision. Splitting my retirement funds between an annuity and independently invested funds (i.e. the PP) is a quite attractive plan.  However, I would never, ever, advocate putting one's entire retirement savings into the hands of one company, regardless of their historical safety.

[Libertarian666]

Annuities, in general, scare me.

I've got a slug of 403b money in TIAA-CREF.  I figured that when the time comes, I'll investigate their annuity options and make a decision. Splitting my retirement funds between an annuity and independently invested funds (i.e. the PP) is a quite attractive plan.  However, I would never, ever, advocate putting one's entire retirement savings into the hands of one company, regardless of their historical safety.

Agreed, but who said anything about putting one's entire retirement savings into the hands of one company?

I see; I said "a highly-rated insurance company". In fact, I have split the annuity portion of my savings between two companies, and would recommend at least that many for any significant amount of money.

I apologize for any confusion this might have caused.

[portart]

I have an annuity with Prudential. I bought it in 2009. As it currently stands, if I was to start taking the funds, it would take 10 years to run to zero from the amount I originally put in. At that point I would begin collecting beyond the payment until the end of my life or my wife's whoever dies last. I am 66 and my wife 62. For me, this sounds like an awesome investment. The top end that calculates is 7% a year which I collect 5% of that total. So the longer I hold it, the more it goes up assuming I don't need to start collecting on it, at which it locks in and stops earning.    The fees are high but I don't care since it's only 1/3 of my portfolio and I don't expect there to be any left in anyway as long as Pru staying business (130 years so far rated AA).    If I add this amount to my SS which I will collect at 70, I can easily live on the total of the two without using my main portfolio.

[Mark Leavy]

Okay, I'm going to show a lot of ignorance here, but...

Say... I wanted to setup an annuity to take care of someone that I care about.  Let's say 30 years with some sort of calculated withdrawal rate.    Why would I buy an annuity instead of just setting up a structured ladder of CD's that would support some predetermined amortization schedule?

For these annuity companies to stay in business, I assume that they can't promise better returns than I can get from the market.  So... do they use laws of large numbers to give me some value?  (i.e. lower volatility, better returns based on average lifespan)  Is it a better tax treatment?

Again, I'm definitely curious as I would like to set something up - but my lizard brain hasn't zeroed in yet on what an annuity offers over my own amortization program.

[mathjak107]

The insurers can pay out way more than you can get  because they invest in something you can't.

dead bodies.  those who live add to the payments for those who die.

you can't ladder cd's out long enough.

eventually rates may dip again and you may have to utilize principal to keep the cash flow up.

spending cd's at times rates are down to fill a shortfall means less income now going forward on the spent money.

an immediate annuity is paying a 65 year old  male about a 6% draw rate.

you are not going to get that from cd's  without drawing out principal..

[Mark Leavy]

Thank you, Mathjak - that was cogent.

[barrett]

According to the Freakonomics guys Levitt & Dubner, people who have an annuity actually live longer. Obviously correlation is not the same as causation but those regular payouts seem to be good for longevity.

If you want to listen to Dubner talk briefly about this, go here:

http://freakonomics.com/2013/01/10/how- ... e-podcast/

The segment is only six minutes long and the bit about annuities is at the 4:30 mark.

[mathjak107]

actually they have it backwards , people who buy annuity products are healthier and have longevity in their family.

it isn't the kind of product one buys if they have any doubts about making it over the long haul..

[barrett]

actually they have it backwards , people who buy annuity products are healthier and have longevity in their family.

it isn't the kind of product one buys if they have any doubts about making it over the long haul..

mathjak, I think you might be making a mistake in assuming that everyone is as informed as you are! Many "advisors" push annuities regardless of an investor's life expectancy.

[mathjak107]

I remember reading an article from the society of actuary's  that said if it wasn't for the fact that annuity buyers tended to be  healthier people they would likely have paid about a percent higher.

[flagator]

What of you think of these annuities offered by Vanguard and Fidelity? They are marketed as low cost.

Thank you.

[mathjak107]

they are lower cost but not low cost. as an example fidelity annuity's include no death benefit if you die before you annuitize.

that is standard on most other annuty's so you have to add an insurance rider to get it.

bingo now you are at the normal cost.

i would simply just go to immediate annuity .com and buy a simple one .


it is like buying a cd  , no other fees or expenses other than here is your rate.


here is a tip though.

if you are married and want a spouse to get your annuity  you may want to consider still getting the higher paying single annuity and instead of  giving up a piece so it carry's over to a spouse use a life insurance policy instead.

the life insurance money is tax free , the annuity is not .

[barrett]

i would simply just go to immediate annuity.com and buy a simple one .

it is like buying a cd, no other fees or expenses other than here is your rate.

here is a tip though.

if you are married and want a spouse to get your annuity, you may want to consider still getting the higher paying single annuity, and instead of giving up a piece so it carry's over to a spouse, use a life insurance policy instead.

the life insurance money is tax free, the annuity is not .

This looks like one of those posts that in ten years I might wish I could remember.

mathjak, for those of us interested in making sure a spouse is taken care of in the event we keel over, are you suggesting buying both a single annuity and a life insurance policy?

In my situation I have a spouse who needs investment simplicity in the event I am no longer around to handle this stuff. My wife is just not interested in investing as long as we are not losing money. I also keep coming back to something you said in another thread... that it might be a good idea (again for spousal simplicity's sake) at the end of one's life to just "throw everything in Wellesley and call it a day."

[mathjak107]

boy you touched upon an area my wife being a widow before i met her could give you some lecture on.

i call it  the wife factor!

while i am happy doing my own investing for all our income my wife would not be.

I have some very strong opinions on financial planning for women which may not apply to every woman but it does apply to most women. here are some things few ever think about when giving advice to women.

as if we didn't know it ,women are different creatures than men. they think different ,have different needs ,wants and requirements.

any good financial planner will tell you:

most men who see planners  are more interested in growing wealth , they care about allocations ,investments , getting the biggest bang for the buck ( no pun intended),beating indexes , etc .

women clients are different as far as what brought them to that planners office and it is nothing like the mans reason. a mans reason is usually facts and figures , a womens reason is she has a story to tell. ( don't they always?) ha ha ha


women have very different concerns and it is usually centered around the fact they have visions of being alone eventually and being the proverbial bag lady under the bridge after they out lived their money.

women want security , I know that because when I approach women in clubs they usually call out security ,security, ha ha ha

women live longer than men , a big point when planning but more important while 80% of all men die married ,80% of all women die alone.

I think that sentence requires reading a 2nd time as there is a huge difference in situation for a woman.

women usually don't like to take on much volatility,especially a widow who just lost a social security check or someone alone..


am not a financial planner nor do i give individual financial advice and only talk in general terms.

i am pretty shore i will start to migrate over in a few years towards an insurance based mix of our own investing and a pay check in the mail box for her covering the essential expenses.

her  deceased husband left her in a mess of investments . she trusted the broker at the bank and he put her in tech and dot coms and she lost a big chunk of her savings.

perhaps wellesely , an immediate annuity and a single premium life policy may be a good answer at some point .

[barrett]

perhaps wellesely , an immediate annuity and a single premium life policy may be a good answer at some point.

And let's not forget having all your Social Security paperwork in order.

[mathjak107]

that is a topic by itself .

because i retired at 62 we had to do a lot of research  and consulting with some very smart folks on that subject.

we decided that since we would eventually spend down invested assets by delaying as well as my wife who is already collecting not getting a spousal adder that break even could run 22-24 years by delaying to long.

so i decided to play it by ear . she takes it at 62 and i will delay if our portfolio does not take a hit early on . if it does i will file and use that money instead.

unless you live to at least 90 delaying until 70 while spending down your own invested assets and giving up checks may not be worth the wait .

the big difference does not kick in unless you live to at least 90. then you can see a 5% real return difference between filing early and holding a balanced portfolio.

but each case will be just different enough .

[mathjak107]

most planner do not know much about the 2nd 1/2 of the game . they are good only through the accumulation stage.

after that the 2nd half or decumulation stage is really a specialized field with fiew who know all the latest research and techniques in retirement planning.

the likes of an ed slott are rare.

however excellent sites have now cropped up like social security solutions . they have real experts and depending what you want to spend can do a pretty comprehensive work up.

i would highly recommend following the research by michael kitces and dr pfau on the subject as well.

[barrett]

mathjak, did you have any trouble finding a true expert in SS issues?  I recently read a pretty good book on that topic, and I'm surprised (I guess I shouldn't be) by how complex the system is.  I think there is definitely a real need for experts in that area.

Was the book Get What's Yours?

I think playing it by ear until the time comes is good advice as long as one is getting educated about SS along the way. Our own particular case would seem to make us ideal candidates for waiting. I am 8 & 1/2 years older than my wife and, most likely, her benefit via me would be greater than what she would get based on her own earnings.

But the game isn't up yet. I have another eight years until full retirement age. Much can change in that time.

[mathjak107]

the issues you will hit are not only spousal benefits , but the taxing of ss , what you pay for medicare , medicare surcharges , the effects of rmd's on all of that , tax brackets , and medical subsidy's if you go out before  65.

all tie in to each other and effect each other and you need not only real good knowledge on the subject but software to run the different scenario's .

the less you are working with the more important this stuff gets .

you can be right at edge of getting ss taxed , take just 1k more and see a marguinal tax rate of almost 50% on that extra 1k because how all the moving targets interact