OT: Annuities ?

Papi, you asked this same question 3 years ago. Are you in need of a remedial lesson?

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.

^ damn - how the hell did you remember I asked this 3 years ago - I don't remember myself but I assume I may have - I post too-much on TUSCL to keep track of what I post.

Thanks for the info

No problem. Still would like to hear other’s take on this topic. It’s like listening to the financial pundits on the news, I don’t listen to gain knowledge, I only listen so I know what kind of information(misinformation) is being put out to everybody. Always be prepared, so educating yourself early on in life is the greatest financial asset you can acquire.

Meat72 covers the subject well. I bought annuities several years ago through an advisor. I should have done more due diligence prior to purchase as the costs Meat72 talks about do take their toll. It was a period in time when the recession hit so profits weren't so much of an issue. Would I buy them again, it depends on my finances, I wouldn't advise you either way because I don't know what you want to accomplish other than profits.

^ thanks

Had completely forgotten about that thread - I'll probably ask again in another 2 years

And a small counter point---the tax advantages.

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.

Meat 72 summarized it well.

I see any investment as a tool. Whether or not an annuity is a good tool depends on what you want to accomplish.

If you want to A) simplify your life, B) have a more efficient tax situation, C) have more liquidity, and D) probably even receive a higher rate of return, I would just invest in some bonds or a bond ETFs instead of annuities.

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.

corporate bondholders receive priority during a liquidation---GM?

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.

I would not recommend annuities. High fees.

Instead I have a bridge over the Detroit River that I would like to sell you.

And it comes with an Ambassador-ship!!!!!! ;-)

Financial Advisors push the features and benefits of variable annuities because they pay the advisor so well. I know FAs that encouraged people to leave their 401(k) plan (within which they were earning 0.25% per year) and move the money to a variable annuity (paying the advisor 8.0%). Do the math -- that's 32 years of commission upfront and then he's gone! They'll talk about guaranteed minimum death benefits and guaranteed distributions and downside protection -- but the reality is they get paid and, over time, you do the paying. IMHO, almost never worth the cost!

(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.

Dougster is never around when you need him.

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..

Jack--isn't that river filled up with enough discarded weapons from crimes over the last century you can walk across it without a bridge......:--)

I researched annuities years ago and decided they are such a bad option for me I haven't looked at them in 25 years. This is dated and possibly inaccurate. Age and alcohol may have affected my memory.

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.

@PensionKing is the expert and @K's analysis is great -- but you can always concoct some unusual situation where annuities pay off. For example you happen to live to be 105 and the market under performs historical averages. I think any simple analysis using average life expectancy and historical returns shows that annuities are a very bad deal.

Warrenboy75, we dredge the river periodically and move the weapons to a channel down towards Lake Erie. :)

I hear a commercial all the time that if you have at least half a million, there is almost always a better option than annuities. I don't know why they keep putting the commercial on my satellite channel.

Annuities is a chumps play. They exist to enrich insurance companies, and insurance sales people. Buy laddered CDs if you want absolute safety. Your best play is a good ETF and just hold it.

There is a place for annuities, just not in everyone's portfolio. There are some big advantages to them and those come with a fee, often 2 to 2.5 percent per year. You have to weigh whether those advantages are worth it to you. Tax deferral, guaranteed income, protection from the market losses.... just to name a few.

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

^^^Well no I was being a bit snarky, annuities can help high net worth individuals steady an income stream but it does so at a bit of a high cost. But in the context of this thread I don’t think, and I may be wrong, this is a smart investment for Papi, he still has a number of peak earning years ahead of him, he’d be better advised to max his savings and, concentrate on wealth building, at this point in his life he hasn’t indicated a need to protect any major net worth, therefore my snark regarding annuities
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.

I was not directing that to you 25, more of just a broad comment.

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 main issue is the cost and insurance intentionally drives it up because the insurance cos use this to show profits

True.... everything has a cost. It just depends on whether you want the benefits associated with that cost. There are low cost annuities, they are stripped down to annuity basics then you can add only the features you want. The ones that concern me the most are the indexed annuities. Those are sold as if they were an index ETF and they are not. That being said, there are a few of those worth investing in if you need the other benfits.

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

This is a very useful discussion. Due to a change in employer - I’m receiving an annuity as a small component of my long term retirement plan. It’s something new - with respect to the fees associated.

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...

In that case I would not worry about the fees associated with the annuity.... you are already receiving payments, you just need to outlive their actuaries

There seems to be a lot of people out there eager to sell annuities to you and me. That means that it must be good for the seller(s), but not necessarily that good, or even good for you and me.
@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.

@minnow there are a lot of people selling things all of the time, with investments it pays to know what you are buying and how it works, if you don't understand the particulars of an instrument, you shouldn't even consider buying into it.
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.

It was a true real life example... that has affected nearly everyone that retired in the mid 2000s. If you feel up to it read up on monte carlo simulators for predicting success in your financial plan.... timing of returns is just as important as the return itself.

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

TwentyFive - thanks. I’m thinking of keeping my money in the annuity. It’s money that I’m not depending on. The overwhelming majority of my funds will remain in self directed investments - so I’m ok with keeping my annuity portion as is.

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.

Those are called defined benefit plans as the benefits you receive are pre defined..... new plans are like the 401k, a defined contribution plan. When GM went into bankruptcy their largest expense was the defined benefit. Companies were losing their ass on them

I don't see much discussion on the benefits of an immediate annuity vs. the disadvantages of indexed annuities. Some have fees -some don't. I don't think any non-retired person should have one but if you have all your exposure to the market through investment accounts it is not a bad idea to have some guaranteed income. Interest rates now are not good on immediate annuities but will improve over time as we also get older and that helps too. Everybody above says they can beat the market. I guess they all must be brilliant or lucky. I see an annuity as a part of a four part approach to retirement. A: Pension B: Social security C: Investments and D: a little money in an annuity..This investment should not be more than %25 of your resources.

I'm not a fan of annuitization, so I usually stay away from immediate annuities. They have their place but that place is even more rare.

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