OT: Annuities ?
Papi_Chulo
Miami, FL (or the nearest big-booty club)
I'm not much of a financial wizard, just know basic stuff.
Annuities seem somewhat controversial - some folks say to stay away from them and others say they are good.
What are your thoughts - would be particularly interested in hearing from those that have have dealt w/ them personally but all input is welcomed.
Annuities seem somewhat controversial - some folks say to stay away from them and others say they are good.
What are your thoughts - would be particularly interested in hearing from those that have have dealt w/ them personally but all input is welcomed.
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Annuities are an insurance product, and like all insurance products you only benefit from them when necessary, so when is it necessary? Keep in mind your social security is an annuity program, and so are pensions. If you don’t have enough of an income stream to satisfy most of your basic needs from a pension and or social security, you are somebody who can consider looking into an annuity.
Example, if you plan on retiring at age 65 and will be drawing $2,500 monthly from social security, but you need $4,500 monthly to live on, you have an income gap of $2,000/monthly. If you have cash or assets that allow you to purchase an annuity that can provide you a guaranteed income stream of $2,000/month to fill in your income gap to supplement your social security, if day go for it. For those who have an employer pension coupled with social security, they don’t have as strong of a need to shop for an annuity.
The only other option I can see for an annuity is if you’re a completely risk averse investor, and can not handle the ups and downs of the stock market. An annuity will provide you with a guarantee income base, but limited upside potential. Most wise investors know that the costs of an annuity eat up most of the benefits. I can invest without the guarantee that an annuity provides, without the 2-3% annual costs associated with that insurance product. Even investing conservatively I can easily outperform most insurance/annuity products, even the variable or index annuities. Index annuities will cap your gains when the markets goes up, so the bells and whistles they sell you on is that you have upside potential without the downside losses. Hell, given a lifetime opportunity o will take your money myself, invest it and give you a promise of payment and keep the profits to myself. That’s what an insurance company does when they offer annuities.
Thanks for the info
Had completely forgotten about that thread - I'll probably ask again in another 2 years
I'm not necessarily a huge fan either because I typically can beat the market ( and without buying bitcoin) but if you have maxed out all of your retirement contributions, own a small business, and want your money to grow tax free annuities are an option.
I hate paying fees so I shop and consider the fee structure---I hate paying taxes even more because I'm one of those who believes no one is a worse steward of our money than the Federal Government.
The only other consideration is make sure you do not need the money until you hit 59 1/2.
I see any investment as a tool. Whether or not an annuity is a good tool depends on what you want to accomplish.
Treasuries and Municipal bonds are backed by the ability of the government to levy taxes to pay their obligations. And corporate bondholders receive priority during a liquidation and usually get most of their money back. By comparison, annuities are really just a promise to pay a certain amount at a certain date under certain circumstances. If the insurance company goes through a bankruptcy during your contract, you should be protected by a State Guaranty Fund - I think every state has one - but you probably won't get the amount that was originally promised to you.
But most importantly, annuity contracts are not immune to market forces. Interest rates are still historically low, and they're probably heading upwards. You're still a young guy - I wouldn't be locking myself into a long-term contract with rates this low. Maybe three years from now things will be different ;)
In the meantime, just invest in equity index funds and keep some powder dry. And if you really feel the need to invest in fixed income assets, just create a ladder of CDs or Treasuries. That's what I would do.
Municipal bonds are backed by the ability of the government to levy taxes to pay their obligation--look at 2007/2008--Muni bonds went into the toilet when the market fell--normally it doesn't happen that way but...
Somewhere on this site in another topic I mentioned there were bonds offered from quasi government agencies right after the bear markets of 2008 backed in full by the Federal Government and paying a higher interest rate that normal. I was lucky enough to have the cash to buy a few--but overall bonds have been costing a premium and paying squat over the last decade, and when you look at a ten year period of below expected performance you are not ever going to make it up in fixed income assets.
I should add if you buy an annuity make sure you have check points where you can get out. --renewal clauses.
Instead I have a bridge over the Detroit River that I would like to sell you.
(Almost) never move your money out of a corporate 401(K) Plan where the expenses are usually low, the funds enjoy professional oversight and you enjoy bankruptcy protections. As far as moving other funds into an annuity -- not a fan, either.
I researched annuities a while back and concluded that they were a poor investment. However I don’t really recall all of the details, just my conclusion..
typically if you die the annuity dies with you. Your heirs get nothing.
Start doing some real research now, set up a good diversified portfolio. The standard back of the envelope calculations are a diversified portfolio will give you an average 7% over 15 or 20 year spans. With inflation and fees taking 3 % you have 4% to pull out. If you start with 1 million, you can pull out 40K per year with occasional adjustments for inflation and never go broke. Most annuities pay out in about the 4% range. Some won't adjust for inflation. All they are doing is diversifying your portfolio and waiting for you to die so they can keep all of your money. Your heirs get nothing and you lose the ability to sell off your portfolio to take unexpected expenses.
For every salesman trying to sell an annuity to every person, which is wrong. There is a person yelling that annuities are a chumps game, which is also wrong. There are places where they are the perfect investment
I personally have looked into them several times over the last number of years, but there has always ended up being a catch I haven’t been willing to accept.
My feeling is if you have especially young heirs and want to provide a means for them, prepay that education or pay off the mortgage that will be more appreciated in the long run.
Based on what I know about papi, he probably does not need an annuity.... he may want one for any number of reasons but probably does not need one.
I use them primarily for the income component. Say you need 50k a year in retirement to meet ordinary obligations, not a lavish lifestyle but enough to cover basics. You are getting 20k from social security and no pension. So you need to replace 30k a year. Conventional financial planning says do not withdraw more than 5 percent per year, so that your money lasts as long as you do. So you need at least 600k to meet the minimum. If you are 10 years out from retirement you can drop 300k in an annuity and forget about it, between social security and the annuity your 50k a year is guaranteed. Use the rest of your money to really build the life you want with the security of knowing your basics are covered. Does that cost something, yes it does.... is it worth it, for some yes and others no.
The issue for a lot of people is really the order of their returns. Use my previous example, say you have your 600k in a index ETF and retire in 2007. By the end of 2008 you have 360k in your account. Now you can reduce your income to 18k or keep drawing the 30k. If you keep drawing the 30k you will run out of money if you live long enough. With an annuity that is not an issue. Did you pay something for the annuity, yes.... but in this real life, recent example it would have been worth it. That's the thing about insurance, all insurance, you buy it and hope you never need it. I hope I never need my car, home, or health insurance but I still pay for it. All an annuity does is insure your income, that's important to some people, not important to others
It basically puts the management of my funds in the hands of others - so they can manage the funds to provide money over the remainder (of my retirement) life.
I’m very accustomed to having control over my “nest egg” - and not knowing what I’ll end up doing with my withdrawals during retirement. Annuities are almost the opposite...
@D-lac- That was a weak example you gave- essentially saying that buying annuity is good mainly if buyer times purchase just prior to a large drop in the market. That means that those who buy at other times will get hosed to make up for those down year losses.
I don't believe @Dadillac was advocating buying annuities, I believe he was more rightfully pointing out that there are legit reasons for individuals to consider an annuity as an investment, but you should treat it just as any other weapon in your arsenal and be sure it fits the scenario that it is being applied to.
@Cashman I don't know the definitive answer, but I'd guess that you can take your annuity in a single lump sum payout, once your term of employment is done, then you just roll that into a IRA or other self directed vehicle.
I probably generate 10 percent of my income from annuity sales. They are not right for everyone AND they are not wrong for everyone. Annuities often have ways the agent can reduce their compensation by reducing the surrender charge, many agents don't do this. I always take the lowest upfront commission with shortest surrender charge because that usually works out best for the client. It all depends on who your advisor is, there are ROBs in every business
If I blow all my self directed funds - that would be highly unlikely - and it would indicate I’m unable to manage anything. So I’m going to see how both investments go.
The old employer pension plans must be annuity based - as their intent was to provide income for life - after a specific age.
As far as the fees go, all of them have fees, it's just whether they are disclosed or not. Index annuities are famous for saying they have no fees but they have cap rates that limit your return. Annuities are a complicated investment and you should understand exactly what and why you are buying it