FREE NEWSLETTER
Go to main Forum page »
| Cookie | Duration | Description |
|---|---|---|
| cookielawinfo-checkbox-analytics | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics". |
| cookielawinfo-checkbox-functional | 11 months | The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". |
| cookielawinfo-checkbox-necessary | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary". |
| cookielawinfo-checkbox-others | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other. |
| cookielawinfo-checkbox-performance | 11 months | This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance". |
| viewed_cookie_policy | 11 months | The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data. |
the only annuities we have are Social Security and VA Disability……1 we paid dollars into the other I paid with my health that is enough for us…….unless the US goes bankrupt we are safe
Generally, I am not a fan of annuities. Beyond the plain vanilla single premium immediate annuity, I would consider are the charitable gift annuity. You make a gift to a charity of your choice and they pay you an income for life. It offers a competitive, sometimes superior rate to the typical single premium immediate annuity and allows some estate and gift planning opportunities.
There are those who strongly reject the use of annuities as an integral component of a comprehensive retirement plan, such as Fischer Investments, which may do so for self-serving purposes. Fischer has actually published booklets condemning the use of annuities.
I’d like to share my personal experience to counter such “advice.”
In October 2015, my wife and I purchased a joint variable annuity contract, investing $453,000 and selecting investments from various sub-accounts. We benefitted from a strong market and over 3 1/2 years saw the value of the account grow to $558,000, even with a substantial market decline in 2018. In February 2019, we started taking lifetime income payments. To date, we have received a total of $145,857, which averages to $2472/month for the past 59 months. As of 12/31/2023, the value of our account was $447,120, essentially what we invested back in 2015. We are guaranteed an income of $23,567 annually, or $1965 monthly for the rest of our lives (supplemented, but not guaranteed, by Earnings Sensitive Adjustments, which increase the annual payments based upon market returns). Since we are now beyond the early withdrawal penalty period, we plan to use a 1035 Exchange to withdraw the funds and purchase a Joint Single Premium Immediate Annuity (SPIA) that has an annual payout rate in excess of 7.0%. The annual income will be approximately $10,000 more than the guaranteed income from the variable annuity (around $33,000 per year until the second of us passes away). We are aged 75 and 73. If one of us lives for 20 years longer, using the combine annuities, we will have received approximately $805,857 from our initial premium payment of $453,000. Some might say that we could have done better by investing our money in a balanced portfolio of mutual funds, but we would have been seriously hurt by the sequence of withdrawals in 2022. I have run a calculation, using our original account value of $558,000 from which we started withdrawing income, an annual withdrawal of $26,000, or $2167 monthly, and a conservative annual return of 4%. (I acknowledge that the withdrawal rate is somewhat arbitrary.) Starting withdrawals in 2019 and after 25 years, we would have withdrawn $650,000 from such an account, and the balance in the account would be $220,093. It would continue to pay $26,000 annually for 8.5 more years, when the younger of us would be 101. The Annuity, on the other hand, would continue to pay $33,000/year for as long as either one of us might live. In my opinion, the annuities are a better financial investment. More importantly, they are a much better emotional investment because we sleep much more comfortably knowing that the income from the annuity is guaranteed for the rest of our lives. (One note of caution. Annuities are used primarily to generate guaranteed income. They are not the best vehicle for bequeathing money to others.)
Annuitants live longer than the general population:
https://pentera.com/blog/charitable-gift-annuitants-really-do
&
https://freakonomics.com/podcast/how-to-live-longer/
Yes, annuitants do live longer. Many who buy lifetime income do so because they expect to do better than estimates/predictions. Those in the business call it anti-selection. And, yes, the actuaries do price it into the purchase price/cost of the annuity.
100% I love annuities, I have an awesome defined benefit superannuation scheme which is basically an annuity funded by my employer. They are mostly shut off now in Australia because they are so great for the members . I think it can be a great way to outsource risk to the insurer if you aren’t keen on the indexing strategy
Every time I get tempted by a new twist on an annuity, I remember that this instrument comes from an insurance company who has diligently calculated for the House to always win. Ultimately, it fails the trust test when knowing the investment completely is difficult, if not impossible.
I’m a fan of Immediate Annuities to create “private pensions” for those not covered by a Defined Benefit Plan, and to appreciably mitigate (if not eliminate) the sequence of returns risk in retirement, while allowing one to remain invested in stocks, because there can be little to no need for the portfolio to generate income.
As educators, we accumulated a reasonably large retirement fund in TSA’s before retiring in 2006. At that time we converted the TSA’s to IRA’s managed by financial advisors with brokerage firms. We did quite well initially, growing our funds to around $1M, but got clobbered in the Great Recession, losing about 45% of our savings. We remained invested (somewhat more conservatively) and recovered our losses over the next 6+years. We realized at that time that our retirement account had grown by about 1% over a 9-10 year period, and that the only ones making money were the brokerages.
We also learned about “sequence of returns risks” and resolved to secure our retirement income by investing in Variable Annuities. We chose highly reputable companies, and purchased 5 annuities, each guaranteeing 5-6% returns on the Income Base and market returns after fees. We purchased riders to guarantee lifetime income for both of us. (Yes, we’re we’re fully aware of the fees, but the guarantees were worth it to us.) The bull market increased the values of our accounts and locked in the Income Base (from which lifetime payments are determined) in each account. Over 4 years the growth was approximately 45%, at which time we started taking income, which we will continue to receive until we die – hopefully many years from now. The comfort that secured income provides is palpable.
For those who may be interested, we advise due diligence. We probably spent 3 months working with an advisor to fully understand the intricacies of the contracts we purchased. We purchased policies from some of the very best Insurance companies. And, we felt that we really knew what we were getting into. We watch and sympathize with friends and relatives who are stressed over current market volatility, the losses they have incurred, and the negative impact it is having on their anticipated retirement income. We feel quite satisfied with our decision to go with annuities when we did.
I recently learned about MYGAs – multi-year guaranteed annuities. Some are advocating these as a replacement for bond positions in a portfolio’s asset allocation. They pay out a fixed rate – up to 3.2% or so – over a fixed period of time. So you can set up a ladder and keep rolling them over as they mature. There are no hidden costs or fees to buy them.
Given the state of bond ETFs these days and their prospects for the next year at least, I am intrigued.
They’re less appealing if you’ll be under age 59 1/2 when they mature, because you’re compelled at that point to leave the money in the annuity structure to avoid tax penalties. Also, watch out for teaser rates!
If they’re part of your taxable portfolio, what does age 59-1/2 have to do with it? Are you saying that after age 59.5 you can withdraw them from the annuity structure and not pay taxes on income from them??
(seems to me like an IRA or maybe a ROTH would be a better place for them anyways – is that what you’re getting at with the 59.5?).
Think of buying a tax-deferred fixed annuity as similar to putting money in a nondeductible IRA. It’s a retirement account — and thus you typically can’t make withdrawals before age 59 1/2 without triggering tax penalties. After 59 1/2, tax penalties won’t apply, but you will owe income taxes on the account’s earnings.
Just be aware that if you fund an annuity with money from a tax deferred account like an IRA or 401, the annual annuity distributions do NOT count towards your required minimum distributions on any money left over in your tax deferred accounts.
SPIAs are a good choice. QLACs mentioned in the thread are also effective. I think the most important thing is to work with a fiduciary financial planner to ensure you are buying the right product at the right price for your situation.
Annuities are perhaps among the riskiest products, but not for the risks we often talk about. Annuities’ risk lies in buying the wrong type — and that’s easy to do given the complexity of the products.
Ensuring an individual does not outlive their money is very important. That’s where a good annuity can show its mettle. In addition to delaying taking Social Security to age 70, the right annuity can bolster financial security later in life.
Some experts such as Dr Wade Pfau, recently wrote a book about Safety First Retirement Planning. He suggests that in the era of low interest rates, single premium immediate annuities (SIPA) could supply the income normally generated by a bond component of a retirement portfolio. This will allow you to take the risk of overall total market index funds to hedge the inflation component of your retirement portfolio.
He provides some very keen observations on sequence risks and how using a bucket strategy for retirement income disbursements can be tripped up in executing the bucket strategy.
I highly recommend his book for safety conscious retirees who are considering annuities.
https://www.amazon.com/Safety-First-Retirement-Planning-Integrated-Worry-Free/dp/1945640065
Thanks for posting the link to this book!
Regarding retirement savings – after saving and investing diligently for so many years, and now being on the cusp of early retirement, I am very nervous about snatching defeat from the jaws of victory by leaving too much in stocks. Maybe a SIPA is right for us. Hopefully I can learn enough from the book that I can get over my aversion to handing a huge chunk of our savings to an insurance company.
If you need additional, guaranteed, inflation-protected monthly income in retirement, I always recommend you consider/evaluate deferring social security benefit commencement – either to full retirement age or to age 70 (be careful, remember to consider spouse’s benefits, GPO, WEP, age/health and life expectancy differences, etc.) You can fill income gap with ad hoc distributions from retirement savings, income from part time employment, income from a second career, a spouse’s income, pension benefits, savings, etc.
Consider:
And, of course, today, most of us have near-zero risk free after-inflation rates of return.
For most middle-class Americans, it is a valuable alternative – fairly priced, incorporating a surviving spouse benefit, inflation indexed benefits and guarantees that all but avoid default and insolvency risks.
One of my near term goals is to get a better “real world” understanding of annuities. I think I understand them conceptually, but I don’t have real world experience of what is available, what they cost, who to buy one form, and what funds (taxable or pre-tax) to use. I’m thinking of an immediate, short term annuity as a bridge between retirement and Social Security at 70.
Rick, The fees will eat you up unless you go through a reputable annuity broker that will explain the up-front fee and on-going fees with annuities. It’s a contract with an insurance company and how many people do you know that would read the entire contract before signing it? I doubt most people understand annuities and their onerous “got ya, penalties and fee(s)” clauses.
QLAC are OK if you can wait that long before collecting. At least they are fairly transparent and I think even Vanguard offers them for their customers through an insurance company of course. Just make sure they are highly rated by AM Best https://web.ambest.com/home .
I like longevity annuities- QLAC’s (Qualified Longevity Annuity Contracts). I use IRA money and can postpone RMD’s as I wait to collect income. I also earn higher returns than a bond since I earn “mortality credits”-additional income earned as a survivor from other deceased annuitants who earn nothing. They also give me an incentive to live longer and collect more income. They can be easily compared and are not convoluted like variabl annuities.