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This doesn’t mean you put all your eggs in the annuity basket. You still take advantage of other retirement vehicles and accumulate assets, but adding to the guaranteed Social Security income stream with an annuity seems like a good idea for many, perhaps most retirees.
Certainly do it yourself investing, even withdrawing when retired, offer no guarantees – and a lot of planning and projecting that are challenges for many people – especially those who don’t read HD.
I know annuities get a bad rap, but even considering the potential lower return than investing, the annual fees (According to Morningstar Annuity Research Center, variable annuity annual fees range widely, with an industry average of 1.05%), surrender charges and possible early withdrawal limits, why wouldn’t you want to create your own pension by making annual contributions to an annuity over your working life?
Clearly, you must start with the intent of not making an early withdrawal, not stopping contributions within any penalty period. It’s a very long term commitment, just like working many years for an employer to accumulate pension value.
Those of us with a pension – an annuity we may or may not have contributed toward – know the less stress feeling of a steady monthly income, a monthly payday so to speak. An annuity isn’t an investment- except in peace of mind. I can’t think of a better way to pay the bills in retirement.
I am reading the current edition of Bernstein’s “The Four Pillars of Investing” (with a foreword by Jonathan, and recommendations for his “How to Think About Money”, HumbleDollar and bogleheads.org.) He is very clearly not in favor of annuities, including SPIAs.
For protection for funds that a retiree will require to cover living expenses he recommends a TIPs ladder. When considering annuities he is concerned about credit risk, but even more about inflation, writing:
“… the inflation risk of an SPIA has no viable solution. (SPIAs can be bought with a fixed payout escalator, but this reduces the initial payout and is actuarially neutral to an SPIA without it. With high inflation, the escalator actually works against you, since its payout is tilted further into the future, which will suffer even more from the ravages of any inflation.)”
As I observed before. For the majority of people this all needs to be simple and as hands off a possible. Most people will not or cannot manage TIPS or many other investments as may be intended.
As far as I know there are few ways to create a simple lasting steady income. Social security, a pension or an annuity.
Aside from SS and a few mostly government pensions, inflation must be managed with other investments- dividends or interest or just accumulated assets to draw upon.
All the experts and knowledgeable gurus sometimes forget about the average people who likely don’t know about them in any case.
With all due respect to Bill, inflation and credit risk are also huge issues for conventional bonds. Yet these two drawbacks are repeatedly mentioned in connection with income annuities and yet largely absent from discussions of conventional bonds. To me, what this says is that people simply aren’t comfortable with an investment that hinges on them living to a reasonable life expectancy. That’s fine — but I think folks should be honest about their qualms.
By the way, you can’t outlive an immediate annuity that pays lifetime income. You can outlive a TIPS ladder. Doesn’t that also deserve a mention?
I don’t know about other people, but I have no problem at all with the life expectancy issue. If I fell on the wrong side of the mortality credit line that would be fine, just as it’s fine if I die before the breakeven point for my Social Security, which I took at 70. If I could buy a SPIA with real inflation protection I wouldn’t hesitate. Perhaps I was spooked by living through the 70s and 80s.
Bernstein recommends dealing with the longevity problem with TIPs by “buying a large amount of the 30 year bond, which at maturity can be converted to a shorter TIPs ladder or shorter duration fund”.
Just to clarify upfront, I am new to the Forum and new to investment products.
Is it smart/dumb to use monies from an inherited IRA to fund an immediate fixed an annuity? Seems like you would pay taxes on the IRA money and then pay taxes again on annuity proceeds
I am 70, husband is 73. Just SS income, no pensions. Husband will take his first RMD this year, but it is around 7500.00. All of my savings, about 600,000 is tied up in a Roth for at least another 3 years.
As POA I manage my 97 year old aunt’s funds, about 1.5 million….mostly CDs, a small brokerage acct, her 401 K, so I have been learning about money management as I go along.
We anticipate moving into a continuing care retirement community in a few years, so a guaranteed supplemental income stream would be helpful. We have no kids.
Thoughts?
Money in an inherited IRA has to be withdrawn and, if it’s not in a Roth, taxes have to be paid, no matter what you do. Thus, that shouldn’t determine what you do once the money comes out of the account. That said, with an inherited traditional IRA, the default option should be to withdraw the sum gradually over 10 years, so you don’t pack too much taxable income into any one year and, indeed, that may be required if the original owner had already started RMDs.
So it would make sense to take a larger RMD to fund my aunt’s living expenses, reducing the value of an inherited IRA. Just a balancing act with her taxes, but at 97 it may be moot. Ah, the joys of being POA.
I’m not an expert, but from what you explained why not put the IRA in bond funds or other income based investment and draw it over the required ten years?
Does the $600,000 include the inherited IRA?
based on the RMD amount it appears his IRA is about $186,000
Why do you say your Roth is tied up for 3 years. Is it CDs?
are you confident your possible income steam will be sufficient for CCRC?
The 600,000 is my own Roth…..I accidentally rolled over most of my 401k to a Roth in 2023. Was supposed to be only 20,000 but I clicked a few areas where I shouldn’t have. That triggered a large tax bill; now I am subject to IRMA on my SS. Things are tight but doable. I am in that 5 year waiting period. ROTH is in mostly ETFs, alot of Vanguards, two bond funds, QQQ.
Sale of our house will cover the entrance fee to CCRC; our SS and maybe a small amount from retirement will cover our monthly fee. Things are inexpensive here in central PA.
C Z, With Roth’s being such a big topic for discussion, I’m surprised no one has responded to this. The 5-year waiting period for conversions only applies to earnings, not the amount originally converted, and the 10% penalty is waived if you are over 59.5.
Oh my, that’s a pretty big deal! I’ll check with the broker to see who officially monitors that. Thank you so much for responding!!
The snafu occurred with Interactive Brokers and since then the acct has moved to Schwab. Oh you have made my day!
You’re welcome. Here is a link to a plain language Ed Slott article on Roth Distribution Ordering Rules.
https://irahelp.com/slottreport/roth-ira-distribution-ordering-rules/
Again, thank you for taking the time to help me. Have a good week
Not a fan of QQQ. What sense does confining your stocks to one exchange make?
Have had this for a few years and my funds have quadrupled. And it is only about 6- 7 % of my portfolio . Bulk is various Vanguard ETFs.
Just wanted to say my comment was a criticism of Invesco and not you, CZ.
For most people immediate annuities can be a great tool to give them confidence about their income in retirement. At some level of financial assets, however, they become moot. When your income from your portfolio plus SS is much larger than your annual expenses the regularity of your income on a monthly basis isn’t important. You can just keep one third of your annual expenses in cash in your checking account…..And, you don’t have to be a financial genius; just do asset allocation and use index funds.
But what percentage of Americans have near that level of assets? The median net worth of individuals 65 + is less than $400,000 and the average is under $1.7 million, including homes according to NerdWallet.
Consider how many people know what asset allocation or index funds are.
FED Data from 2022: Wealth (Total of all assets less liabilities)
All Households 192,084 (Median or 50th%tile)
Average this cohort 1,059,470 (82.5%tile)
Households 65-69 years 393,480 (Median or 50th%tile)
Average this cohort 1,836,884 (82%tile)
Average all households 1,059,470 (73%tile)
Households 70-74 years 438,700 (Median or 50th%tile)
Average this cohort 1,714,085 (82%tile)
Average all households 1,059,470 (71%tile)
In plain English, for all US households, 50% have less than 192,084; and while the “average” household wealth is over a million, 82.5% have less than that.
Not surprisingly, wealth is greater for older folks, and the numbers reflect that. Nevertheless, the skewing of wealth towards the top means that over 70% of those higher worth households are still below the US “average” wealth level.
These numbers include all assets but exclude the value of pensions and social security benefits. Nevertheless, it illustrates the vital importance social security plays in the security of our nations’s citizens.
Yes Sir Richard, I agree… I’ve also got several annuities that I’ve cultured over my working years to secure guaranteed income. My retirement income is generated by 5 lifetime payments accounts.
Absolutely, I do pay fees and taxes galore.
But when adding my net from the deposits to the banks, there is just over $10,110 per month in 2025 from all of the retirement accounts. So, why not still be happy?
One little trick was to switch the Traditional IRA around to different companies, finding firms that offer so many percent bonus to a switched account. After 5 or 10 or whatever years, the money is credited to the account. When the amount deposited is fairly large, the bonus is also! Doing several switches over the years of the growth period, adds quite an amount to the balance. This naturally gives a better payout.
There’s other ways to max the account balance that is dependent on the individuals situation and the account that is being grown.
Finding the tricks and following the protocol discovered gives the best results.
That’s a new one on me.
I have retired firefighter friends with pensions, and always thought “I wish I had a pension”. Well, I can have a pension with a SPIA to supplement Social Security when the time comes. Peace of mind that comes with guaranteed lifetime income is priceless.
We bought deferred annuities-QLACs-last year. Not only do they provide a level of longevity insurance (to supplement delayed SS with its COLA) but they ring fence those 80+ years to end of life, thus allowing a license to spend in years when it can really be enjoyed.
I don’t have any objections to annuities, but I realized that my assets were such that it’s very unlikely I’ll spend them all in my lifetime.
I consider “longevity insurance”, where the annuity doesn’t start until later (e.g. age 85, if ever) to be a good idea for many, but couldn’t find one with reasonable fees.
Like immediate fixed annuities, deferred income annuities — a.k.a. longevity insurance — don’t have explicitly stated fees. Instead, the income you’re quoted is net of any fees charged, so I’m not sure how you decided the fees weren’t “reasonable.”
I have been a proponent of SPIAs and MYGAs since I retired at age 63 (12 years now). For us, it provided the peace-of-mind that we wanted in retirement. The use of SPIA also allowed us to choose how much additional lifetime income we needed such that in combination with my SS benefit, it would cover our essential expenses. It was also important (to us) to limit the amount used for this annuity to be no more than 1/3rd of our portfolio. I thought of this as “setting aside” 1/3rd of our retirement assets to fund our own joint-survivor “pension.” I also wanted to minimize the amount used for this annuity income in order to maximize the investable assets. With this arrangement, all IRA withdrawals would be for discretionary spending and could be variable. This strategy, in turn, also mitigates sequence of return risk (SoRR) by supporting variable savings withdrawals, if necessary. In our case, we need roughly 3% of our portfolio to fund our annual discretionary spending. That led to setting up a “bond allocation” of 30% to cover up to 10 years of discretionary expenses. Half of that bond allocation is CDs and MYGAs. (covering the “next” five years of withdrawals). The other half is bond funds and buffered ETFs. Consequently, that leaves 70% of our portfolio to be invested for the long-term (>10 years). Over the past 12 years (in retirement), this asset allocation has allowed our portfolio to grow fairly consistently and is much higher today than when I retired (after annuitization). This long-term investment horizon can also help mitigate SoRR as well. All these “features” are based on having sufficient lifetime income (factoring SS benefits and annuity income).
Another interesting benefit of using SPIA (purchased within an IRA) is the ability to use that annuity payout to further reduce your RMD (via Secure Act 2.0). In our case, our nominal RMD (for our initial 100% tax-deferred portfolio) started off around 4% of our portfolio. We then converted 40% of our portfolio to Roth over a six-year period. That reduced our RMD to 2.4% of our portfolio. If I then compute the revised RMD using “excess” SPIA payout to reduce the non-annuitized T-IRA RMD, the revised RMD drops to 0.9%. Currently, we use 3% for spending and have no need to use this revised RMD. However, when a spouse passes away (and now has to file as single), this revised RMD (at ~1%) can avoid the widower’s tax penalty by substantially reducing taxable income. Roth income (~2%) would then supplement any additional income needed – allowing the same 3% withdrawal rate while keeping taxes comparable to filing MFJ.
This has been an excellent discussion . Now that Vanguard is not in the annuity business, where should I look for purchasing a SPIA?
I’d start by getting some quotes through Fidelity, Schwab or ImmediateAnnuities.com:
https://humbledollar.com/money-guide/immediate-fixed-annuities/
I’d then check each insurer’s rating for financial strength. You want to buy from a solid company like New York Life or Guardian Life. Finally, consider buying immediate annuities from multiple companies, so you further spread the risk involved.
From many of the comments here, it appears the loss of pensions is no big deal. Many HD readers seem confident they can do better than any annuity if given the cash. Ummmm🤔
An annuity may not be the greatest investment, but they can be great for peace of mind and you don’t have to be great at investing.
Let someone else worry about investments and managing withdrawals.
Agree. I think there’s a lot of old perceptions hanging around that came from the personal finance community about how bad annuities are. To be fair, many of those are still true – the industry did it to themselves with all the sales-driven commission chasing, high fees, and complex products.
That all said, I’ve come to think of them as a tool. Annuities have a place in my financial plan as both longevity insurance (see comment about SPIAs below) and as part of my bond ladder in the form of MYGAs – multi-year guaranteed annuities aka fixed annuities.
More power to you. I calculated and could never make an annuity work out for us. It always seemed to cost us money. If you are disciplined, you can do much better putting money in your IRA or Roth and invest it, to make your own annuity. Exactly what I did, and now live off my RMD, as steady yearly income. However, if they work for you, then fine, but annuities of any kind are not for me.
How can RMD be steady or guaranteed? My RMD changes each year. You not only have to be -disciplined, but an astute investor.
I’ve never understood the appeal of annuities, given their cost and returns. As one commenter noted, however, HD readers are probably not typical investors and likely count on being able to generate better investment returns than a more typical investor might. I find the suggestion of an annuity particular galling when the proposed annuitant may be asked to contribute all or significant portion of their investible funds to purchase the annuity. That said, for investors with sufficient wealth, it may make sense, especially where their other assets may business interests and/or illiquid.
Why all or significant portion? Why not just enough to cover basic expenses?
When I was in my 20s we bought a charitable gift annuity, which provides lifetime income along with some charitable giving, another way of pooling risk. It was a great deal for us as the rates were quite favorable in the early 1980s. My recollection is that the internal rate of return was 6%. Of course we only had a limited amount of money to commit to it. But it goes back to the point several have made in this discussion, including Jonathan, that people don’t actually understand annuities.
One way of looking at it is that annuities bet you will die while life insurance bets you won’t. They both provide some protection from uncertainty at the cost of some return.
In both cases, the cash products can have lower fees and offer simpler propositions. Of course, people also don’t understand that insurance companies and their contracts offer different levels of financial security, and very few people even consider the rating of the insurance company when they are comparing contracts.
As others have said, having the ability to understand and compare such things is not common to all people and whatever ability we have is a gift, in my opinion. I am grateful although I don’t always what to do with whatever gift I have.
If you have longevity in your genes, a SPIA at 80 to generate enough income to cover your fixed expenses is cheap longevity insurance.
At 80, the actuarial tables call for you living only 5-7 more years (M/F), so the effective rate of return becomes very favorable if you end up living another 5-10 years longer than that.
Let’s look at this a different way. Say you have a pension with survivor benefits. That pension is more than sufficient to cover all expenses and more.
However, at age 65 you can forgo the pension and take a lump sum of $3,000,000, but of course you must invest and withdraw to make it last over two lifetimes.
Would you take the lump sum and absorb the responsibility risk along with it?
Envision you are not a knowledgeable HD reader, but more average in financial acumen.
That’s simply a maths question with a bit of +/- on risk aversion. If your pension there is sub $100k you might argue that the lump sum (assuming non immediately taxable) delivers more upside re potential growth and inheritability. Of course the price you’d pay would be shouldering the risk.
Immediate guaranteed life annuities should be a part of a balanced financial plan. 3-4 sources of income in retirement is nice if you can afford these things.
Great thread. I understand the appeal of annuities. 2 major issues prevent me from buying an SPIA.
— Unplanned/catastrophe financial needs of me or a family member — The lump sum annuity prerequisite would significantly impact my liquidity.
— The performance of equities, over my lifetime, has been miraculous — especially domestic stocks. Indexed mutual funds at 60/40 has made retirement possible much earlier and wealthier than I ever imagined. I retired 9 years ago and, despite >4% withdrawals, my portfolio is larger than when I retired. Doesn’t mean it will continue, but hard to ignore the track record that has clobbered annuity returns.
An immediate annuity should be viewed as a bond substitute, not an alternative to stocks. That said, I’d argue that the predictable income from an immediate-fixed annuity makes it possible for retirees to allocate more to stocks, potentially resulting in greater long-term wealth.
Absolutely! If you have sufficient annuity income, the need for additional bonds can be nonexistent.
And it does then give you license to be much more heavily invested in equities.
Mathematically correct, people should (if they want to know what their real situation is) calculate a total portfolio, total income approach.
This is how the industry tends to do it if you pay for advisory services. My guess is they see it as a value added service (doing simple present value calculations and explaining it) to justify their fees.
Thanks Jonathan…points well taken. Perhaps bond alternative more accurate…guaranteed income (+) while sacrificing liquidity (-)
Sorry, late to the “Annuity Party”.
I bought 2 variable annuities several months before I retired 15 years ago using the cash value of my whole life policies to fund them. I thought I had a reasonable understanding when I puchased, but yes, they’re a little confusing. However, I’ve been very pleased with the results. I don’t mind being told I messed up, but here are the total figures for both:
$576,359 – Purchase Price
$432,924 – Withdrawn thru 12/31/24 ($2,588/mo, guaranteed)
$437,198 – Surrender (cash out) Value (not going to happen:)
$652,253 – Guaranteed Death Benefit
Six years ago, I bought a $350,000 Immediate Annuity, but let it accumulate the monthly payments and didn’t start drawing on it until 3 years ago (inflation). It’s now worth $378,881 and is paying $1,213 per month.
The above along with both my wife’s and my SS and occasionally taking capital gains and dividends from various mutual funds enable us to live a comfortable, but not extravagant lifestyle. My secondary goal was preservation of principal that I could leave to my sons and apparently that is working.
Is there something I’m missing here?
Bob, Thanks for the interesting info. I’m not very familiar with how VAs work. Is the surrender value $437K today, after ~14 years of $2,588 per month withdrawals? If you died today would your beneficiary get the combined cash value and death benefit?
There’s nothing wrong with being happy with what you’ve created for yourself. I think you felt the need to settle your income streams and were more than willing to give up gains to get them.
I’m going to guess that you weren’t really interested in the DIY, set the portfolio and make the decisions situation.
Bob G, do you mind sharing what your overall fees are? My understanding, at least for a variable annuity, there is an extra fee for the death benefit rider. My late mother was paying 3.55% annually in fees and that included a death benefit rider.
I buy 3yr fixed annuities in a regular retirement account – tax deferred and guaranteed 5%. But you HAVE to buy with a discount brokerage like Fidelity or Vanguard to avoid huge fees and sales commissions.
Don’t mind at all and yes, it’s painful when they take it out. The annual total for both is $5,761 which is 1.3% of the current surrender values. There could be hidden fees, but they are well hidden.
That’s quite a difference in fees. Thanks for sharing!
It’s the price I pay so I don’t run out of money and my heirs get my money back:)
To me the main problem with annuities is they’re are complicated to the average retiree and there are many ways to hide (sometimes absurd) fees by even scrupulous advisors. My mother’s advisor, who is a family friend, sold her one that could have been had with a few thousand less in fees.
You must be talking about variable annuities. Immediate annuities are super-simple — no more complicated than a CD or a savings account. You just need to decide whether the prospective return seems reasonable and the financial institution seems financially sound, and that’s pretty much it.
Jonathan, for my clarity when you say immediate annuity, is that the same as a Single Premium Immediate Annuity (SPIA)?
That’s correct.
What I’m seeing in this annuity conversation is the trade off between capital appreciation and income. Is more income more valuable (ie taking an annuity) or overall net worth growth more valuable? As with everything it really depends on your goals and your intentions for your money. Thanks for the post, Dick!
As the comments below make clear, many folks read the word “annuities” and simply assume they’re a bad deal, in part because of all the fees associated with tax-deferred variable annuities. But immediate-fixed annuities are an entirely different animal — something I’ve been saying for more than two decades. It seems my words haven’t made the slightest difference! Here’s an article I wrote for HumbleDollar in 2018 that talks about four types of annuity that are worth considering.
I look at the big picture, the simple end goal.
In this case I see a steady, no worry (to the extent possible) income stream in retirement as the goal.
The matter of fees, returns, penalties is secondary.
Logically an immediate annuity is the way to go, but practically that lump sum payment decision is not.
Look at the people who give up a pension annuity for a lump sum. Keeping cash is an overwhelming incentive for many.
Peace of mind and little effort security – even at a price is most important me.
The way I see it, if annuities are as bad as many people portray them how can they even be a viable business?
Jonathan, fear not, I for one remember the difference and am pretty sure I learned it here. 🙂
For many folk’s Immediate Annuities are a good deal. Add up your monthly non discretionary expenses, subtract existing guaranteed forms of income you’ll receive in retirement. If there’s a shortfall plugging it with an immediate annuity (with or without an inflation adjustment) might make sense. It did for me,
I’m curious if the industry publishes the surrender rate on annuities. What percent of people find them so unsatisfactory that they’ll pay a 10-25% fee to be rid of it.
I retired in January 2024, but I still have a few resources. I am reaching out to someone and I will add what I learn to this later.
In the mean time, I am posting this link for one and all to peruse.
https://www.winkintel.com/2024/06/100-facts-americans-need-to-know-about-annuities/
You are, I presume, referring to tax-deferred variable annuities. As far as I know, there’s no way to surrender your income stream once you purchase an immediate-fixed annuity.
That was what was suggested.
Fixed immediate annuities are different. As annuities go, the fixed immediate is a more direct calculation, easier to understand.
Johnathan: You are correct where immediate annuities are concerned, however, as I am sure you know, there are a number of different types of annuities.
Deferred Annuities, Multi-Year Guaranteed Annuities, and even Fixed Indexed Annuities can be surrendered. In addition, FIA with income riders can be surrendered as well, even after the income stream has been started.
However, all of these possibilities will be based on the contractual agreements in the actual annuities. These contracts differ from annuity to annuity and company to company.
The surrender period for annuities also vary considerable, with most reputable companies today have 7-10 year surrender periods.
Whenever someone tells me they have a financial advisor, I’ll ask them if the advisor put them in annuities. The answer is always yes, but they couldn’t explain anything what an annuity is, the costs or the reason why.
Olin…That is odd.
The majority of Financial Advisor eschew annuities, because annuities are NOT included in AUM, which is where many advisers derive their income.
I’m aware you were in the financial field, but I’m basing my response on what was shared with me. So far, it seems to be that all the ones I’ve asked are put in annuities. I don’t know which kind because the person doesn’t know. And this is not based on one particular advisor, but from various ones in different states. A very large and well known investment brokerage did the same to my brother, and he doesn’t understand annuities.
A few days ago the daily Insight on HD read: There are those who seize control of their financial life—and then there are those who wake up to find a variable annuity in their IRA.
I saved that headline because my parents were put in that trap. My father died before the surrender period ended. When the surrender period was up, I asked the current advisor what should we do, and was told to renew the annuity. Another advisor at a large firm said, they couldn’t sell her an annuity because of her age (over 85). Which one was honest? Plus, my mother was paying 3.55% in annual fees. We moved the money and got the advisors hands out of her pocket book.
There is a book called Everybody Wants Your Money. The author talks about that very same headline. Ironically, that author later on went to work for the same institution that did my parents wrong. If you can’t beat them, join them!
Maybe these advisors are not fiduciaries?
There is absolutely NO doubt that there are bad actors in the financial services field, and aside from s the case I every other filed, law, medicine, you name it…it is the bad actors that screw it up for all the honest and integrity filled others.
Your parents were not treated fairly or honestly, of that there can be no doubt. In the vast majority cases, if an annuitant dies while in the surrender period, the remaining period is waived.
As far as not selling an annuity to a person over 85, that too is a pretty standard practice. That is partially the result of misinformed and misguided pronouncements of SEC and FINRA.
I am glad your mom had you around to assist her.
Kevin, your comments are very much appreciated! Your knowledge is one of the benefits to being an HD reader and to learn from other experienced people in the financial world.
Thank you sir. I aspire to become more “Jonathan like” in my efforts.
Why pay someone to give your money back? Why not build your own annuity instead?
It seems to me that HD is all about empowering readers to take control of their financial future. So,Why give your money to an insurance company just to have them dribble it back to you? Why sign a contract loaded with fine print for some so-called “guarantee”? If you’re reading this, you’re likely savvy enough to skip the middleman and create your own annuity.
Why am I wrong?
The mortality credits are one reason. Imagine buying an income annuity with 1/10 of your money for say $100k at age 65. Yearly income is around $7,300. If you live to be 95 it is still paying. It’s a form of longevity insurance. It’s only for a small portion of your money. The rest is invested. Adding say a 20 year guarantee ensures if you get hit by a bus after one payment, heirs get paid for 19 years and 11 months. I used one just to ensure essential expenses were covered by guaranteed income.
To reiterate what Jonathan noted, the advantage of fixed annuities is that insurance companies are able to pay a substanially higher rate than what you can earn from CDs or bonds because risk is pooled across multiple annuitants, which you obviously can’t do if you create your own annuity.
William: I was involved in the financial services industry directly for over 40 years. After two careers in that field, I became an academic. From 2009-2024, I was a college professor, teaching, speaking and writing on Life Insurance Planning, Long Term Care, and Annuities…as part of my responsibilities teaching courses in the CFP Curriculum, the ChFC Curriculum, the CLU Curriculum and the RICP Curriculum.
I tell you that as a basis for what I am about to say…
The reason I will say “you are wrong ” is that there is nothing available in the realm of investments that can do what annuities can do. Period. You might not like them. You might even disparage them, as you did in your post, What you cannot do is disprove my contention.
Reasonable people can disagree. You may actually believe that there are no guarantees in life. I do not hold that belief and therefore I do believe that annuities should be a consideration when a person is planning for their retirement.
I don’t believe there are guarantees in the stock market, but I do understand the law of large numbers, the concept of reversion to the mean, and the historical returns of the stock market. I also understand that if a person wants growth in their portfolio, assuming a degree of risk is required.
And where risk is concerned, the life insurance industry has the answer. Only life insurance companies offer both life insurance and annuities. And the reason they can make the guarantees necessary to do what only they can do, is because they understand and work within the realm of the law of large numbers. Life insurers know precisely how many people will die this year. What they do not know is who they are.
Likewise, insurers can use this same information to offer annuities. With annuities, the insurers know that some people who buy them will die earlier than estimated, while others will live longer than assumed. This creates something called morality credits that only exist in the world of insurance.
If you die too soon, your family is provided for with life insurance. If you live too long, you won’t run out of money.
Can you name any investment company or any investment product other than life insurance companies and their products that can accomplish the same results?
Back to annuities.
Annuities are a financial tool. Holding the belief that you do is the equivalent of going into a tradesman’s tool box, in a field in which you are not an expert, and removing a tool, because you don’t think he needs it. I would imagine that you would never think off doing that, so I would also recommend that you consider the fact that for many people, an annuity is not only appropriate, it may even be “the right tool with which they can build their retirement income.” Why would you take it upon yourself to remove it from their financial tool box?
There are many different types of annuities. There are many different scenarios where an annuity can be a solution to a problem that a retiree is trying to solve, that requires a consistent stream of income, that he/she cannot outlive. Is an annuity the only solution? Of course not, but it is the only solution that can guarantee lifelong income, regardless of market performance, for the joint lives of a couple in retirement.
Now…it’s your turn. “Why am I wrong.”
👍
I’m actually very curious to know how immediate annuities achieve such high payout rates?
What happens to a policy when an insurance company goes bankrupt? Should I be worried about total loss? My research show that 68 life insurance companies have gone bankrupt in the past 20 years.
William: In the past 20 years, 569 banks have failed in the US. Compared to bank failures, the insurance industry is looking pretty good.
Now to your actual question. As Liam mentioned, when life/annuity providers “fail” the majority of the time the life/annuity owners to not experience any losses.
This is because 1. Most carriers are acquired by others in their same state, and business goes on, without interruption, 2. State Guaranty Funds provide, on average, $250-$300K in coverage for annuities.
I was actually just looking up what happened to holders of AIG annuity contract during the Great Recession, and from the brief reading I did it seems like they faced no interruptions to their payments. Now, of course that would not be the case without the $180B from the government rescue money, but it all worked out in the end.
I have always thought that annuities were not anymore beneficial than a CD ladder or bond ladder. Yes it’s guaranteed return is comforting but it doesn’t factor in emergency costs of living or medical expenses. And you are faced with penalties to retrieve your own money if needed.
Gary…that is why insurance carriers limit your purchases of annuities.
They understand that you should “never put all your eggs in one basket” or all your money in annuities. in most instances, carriers limit you to not more than 40-50% of your portfolio.
You need to involve an insurance company if you want a risk pool where annuity buyers are guaranteed lifetime income, no matter how long they live.
ABSOLUTELY CORRECT Jonathan.
I understand the risk pool, but my concerns are longevity combined with inflation. If I had bought an annuity when I retired from full-time work in 2000 it would be worth a lot less in real terms today. Just like my pension.
Your Social Security is inflation adjusted and having an investment pool that includes stocks, bonds including TIPs, REITs will help with inflation. You can buy an inflation adjustment on an income annuity but I personally didn’t like the numbers. Too much to go into here.
But the same is true if you’d bought bonds or certificates of deposit, or left money in a savings account.
Forgive me for being cynical but “Are there any guarantees in life?”
Yes, this I can guarantee: Whenever the topic of immediate fixed annuities comes up, some readers will argue they’re a bad deal. Yet these same folks will work at a job they hate for 20 or 30 years to get a pension, which is essentially the same thing.
Or 50 years
😂
I almost spit out my coffee on that one Jonathan.
Soooo true!
Take a broader view of all this.
If the great majority of people were able or inclined to do as you suggest, they would all be living the highlife in retirement. As you know, that is not the case. “Create your own annuity” Ask the next ten people you meet to define “annuity.”
MAYBE a person reading HD is savvy enough, maybe not. But I guarantee being financially savvy and acting on that knowledge is not the norm in the wider population.
I would suggest though that anyone able to recognize an annuity as a suitable retirement tool is likely savvy enough to manage their own investment portfolio as well. And vice versa, the people who would likely most benefit are not likely to recognize or be in a position to acquire a suitable annuity contract.
RQ…Had to chuckle about your answer.
“But I guarantee being financially savvy and acting on that knowledge is not the norm in the wider population.”
It reminded me of something I have been saying my entire “weight loss attempting” life…
KNOWING what to do to lose weight is one thing. Actually DOINGt is something altogether different!
I don’t think you are wrong, at least as it applies to many HDers. For less savvy retirees the annuity remains a good option.
Good post, Mr. Quinn.
Annuities, as part of an overall plan, can provide both guaranteed income and peace of mind.
in the late 1980s or early 1990s, I started a variable deferred annuity account with Fidelity because I wanted to save for retirement in a tax-deferred way above the contribution limits for my 401(k). I contributed to the variable deferred annuity account for roughly 25 years. Upon retirement in 2017, I converted the accumulated amount into a monthly income stream.
In 2023, our Fidelity advisor suggested that we convert part of our taxable account into a single premium annuity. We did that and now have a second income stream from an annuity.
We both receive Social Security benefits, and we each have a modest pension. These are also guaranteed income streams.
I also take my RMD withdrawals as monthly payments, which provides another steady income stream. An RMD withdrawal is not an annuity as such, but, even though the assets in the 401(k) account is subject to market fluctuation, it functions similarly to one in terms of providing a steady monthly payment.
These various income streams cover our expenses and provide peace of mind coverage against fluctuations in the financial markets that affect our savings in other taxable and tax deferred accounts.
For us, annuitizing a portion of our savings, in addition to receiving Social Security and modest pensions, has worked well.
Excellent post…and so true!
We currently receive our SS benefit and annuity income. Our portfolio is able to stayed invested for growth, since we do not need to make withdrawals from it.
Having used Roth Dollars to buy our annuities, we also enjoy tax free income in those dollars while getting COLA on our SS benefit.
Having retired later than most, the combination of tax-free and COLA incomes, will shield us somewhat from inflation fears. In later years, if inflation becomes an issue, we can start annual withdrawals or discontinue using RMDs as QCDs.
The problem I see with annuity is not only high fees, but it doesn’t keep up w inflation. If you can figure out whether with both spouses SS can cover all or almost monthly expenses, then put a sum from roth IRA that equal to the lesser spouse SS into TIPs ladder when one of us passes away may be able to achieve both as income stream and keep up w inflation.
Variable annuities have high fees. By contrast, immediate fixed annuities have no stated expense ratio. But folks who are far smarter than me, and who have analyzed immediate annuities, say the implied expense ratio is very low. One indication: Insurance salespeople get very little in commission for selling immediate annuities, as Dan mentions below, which is why they aren’t heavily promoted to customers.
Most pensions don’t have a COLA either, mine doesn’t so we use income from investments as necessary. Remember, you wouldn’t take all your investments to buy an annuity, just a portion.
Do most retirees know what a Tips ladder is or use any kind of advisor?
Very few people know about this strategy, which is probably a pretty darned good alternative for someone unwilling to fork over a big chunk of cash to an insurance company.
Having said that, a ladder of immediate annuities could also be constructed to deal with inflation.
Two thoughts here. Many times I’ve been asked for my opinion about annuities. This is typically how the conversation goes: A friend will ask me my opinion about annuities. I will ask “what kind of annuity”. Friend won’t know there are different kinds, and their eyes roll back into their heads when I try to explain.
My other thought is that many advisors won’t even suggest a single premium immediate annuity because they don’t make much money off of them. (Another good argument for using a fee based professional).
Exactly! Excellent points!
This is exactly the reason we took the small pensions instead of the rollover: more guaranteed income. It was “extra” so we didn’t feel we needed to consider legacy for it. I agree with what Jonathan said about taking a simple annuity at retirement if you need more guaranteed income than SS. I had read about the simple ones and the simple ones that start paying out at a later age. We talked about it, but decided against them. We may talk about the later age one again when we are 70. There is longevity in Spouse’s family. Chris
RDQ, I agree with you and appreciate your compassion of annuities to a pension. My wife and I each have a pension (mostly employer paid) and receiving that direct deposit every month is a great feeling of knowing that the money to pay the bills comes will be there every month.
We have assets in other investments that we can annuitize or not at our choice.
I’m not commenting on the Annuity Instruments that are sometimes sold with inappropriate disclosures, but being able to take advantage of a lifetime income stream of monthly (not dependent on dividends, interest rates or market performance) is certainly a reassuring benefit in retirement.
It certainly is. I’m not sure those who don’t have or never will have a pension actually appreciate the value they bring to retirement. The lure of managing a lifetime of savings may give an inflated feeling of confidence to some. I’m too risk adverse myself.
When people on HD.com and elsewhere talk about their anxiety-free retirement with their company or government pensions, I’ll admit to feeling a flash of what I’ll call pension envy!
I’m one who can tell you that those who “never will have a company pension” do indeed appreciate the value those pensions bring to retirement. When my company back in the 1990s decided to kill pensions for those “born in 1960 and after,” none of us workers born in 1960 suddenly felt an inflated sense of confidence in our retirement, but rather the opposite. “Vanguard”? What was that? We rightly suspected that the vagaries of a self-directed 401(k) could not replace the reassurance of a pension check steadily arriving after age 65. (Meanwhile, those in the company born before 1960 got access to both a 401k and their grandfathered-in company pension. Not sure how long that lasted.)
I am a risk-averse person who nevertheless had to manage my lifetime of savings and is now cobbling together a “self-made” pension. Since this pension depends on current Social Security numbers, time will tell how this cobbled-together pension of mine does.
Wow! Age based changes. That sounds discriminatory. When I changed our plan from a traditional pension to a cash balance plan it was for people hired after a future date. Thus they knew the terms of employment in advance.
Your SS is not going anywhere.
If you want to buy an immediate fixed annuity in retirement, and thereby lock in a stream of predictable income, there’s no need to fund a variable annuity during your working years and pay what are typically very high expenses.(Vanguard via Transamerica and Fidelity are two exceptions.) Instead, you can simply fund an IRA, 401(k) or 403(b), and then use that money to buy your immediate annuity.
We over save for retirement and typically contribute to a non-qualified company deferred compensation plan as a tax deferred savings plan. While the investment choices in NQDC plan are broad, solvency risk is high and there is no 10 year withdraw period if one of us dies prematurely.
Is a deferred variable annuity a safer alternative if the fees at Fidelity or Vanguard are reasonable? What about the situation where are educated enough about a TIPS ladder and comfortable managing it?
“you can simply fund an IRA, 401(k) or 403(b), and then use that money to buy your immediate annuity.”
…or for those concerned about losing legacy money if you were subject to an early demise setting up a bond ladder would guarantee a return of the balance of undistributed funds.
Depending on your goals, a bond ladder can be a fine idea. But it’ll give you less monthly income than an immediate annuity and you aren’t guaranteed lifetime income.
That sounds like a plan.
The only drawback is that requires turning over a stash of cash at once and that is something hard for many people to do after many years of saving.
I was just looking for a less painful way.
It’s the same deal if you amass money in a variable annuity: You still have to pull the trigger and buy the income annuity, rather than cashing out the variable annuity.
I have a small variable annuity I was talked into decades ago and stopped contributing to as soon as I could. Today it has a value of $129,000. A few years ago I called just to see what annuity it would buy, it was around $200 a month.
But my mindset is, it’s an annuity, it’s designated money so I would view converting it to payments very differently than taking other resources and thus easier.
That’s just the way I think. Compartmentalize for specific purposes and decisions are easier.
Dick, Fidelity’s Annuity estimator tool show that an 80 year old male in NJ could buy an $1,105 per month life annuity for $129K. That includes a guaranteed payout of $129K. A 10-year guaranteed annuity would pay $1,124. I’m sure it has increased since you called, but $200 a month sounds like a pretty bad deal.
Don’t be sorry, Dick.. We all get to decide how we play the annuity game, but another strategy would be to maximize your social security benefits by delaying them until the maximum age of 70– One of the best ways to deal with sequence of returns risk.
not only does your annual payout rise by about 8% for each year that you delay after full retirement age, according to the Social Security administration, but it’s the only lifelong annuity you can get with annual inflation adjustments backed by the US government with up to a 100% survivor benefit.
for couples, the spouse with the greater Social Security benefit might wait until age 70 unless both spouses are in poor health.
That was my strategy Marjorie.
I waited until 70 because 1.) I was still employed 2.) It provided a much higher benefit for my wife, should I predecease her 3.) Our total retirement expenses (including 10% charitable, giving annually) is covered by our SS Benefits, with @$12,000 in surplus.
Then I purchased Income Annuities, with Roth Dollars, for our “lifestyle wants.”
That left our portfolio invested in equities to grow, since we aren’t using it for income.
Life is Good!
My plan is to convert a substantial portion of my retirement savings into a TIAA Traditional annuity when I finally start taking withdrawals. I like that the TIAA annuity offers a variety of payout options, including taking an interest-only payment.
Here’s what my Gemini AI program has to say about the TIAA annuity:
The TIAA Traditional Annuity is a fixed annuity product offered by TIAA that provides guaranteed income for life, including monthly retirement checks and potential for increases during retirement. It’s a core part of many retirement plans offered by TIAA, and it’s designed to provide a predictable stream of income, even in volatile market conditions.
Key Features:
How it Works:
In Summary:
The TIAA Traditional Annuity is a fixed annuity product that offers guaranteed income for life, potential for income increases, and guaranteed growth during accumulation. It’s designed to provide a reliable source of income during retirement and can be a key part of a comprehensive retirement plan.
The AI summary on the advantages of the TIAA Traditional Annuity seems fair. I also ran Gemini AI on the disadvantages of the Traditional Annuity and these mostly applied to high income savers: 1) it can be viewed as a bond substitute, but there is an opportunity cost of potentially missing out on equity growth and keeping up with inflation; 2) distributions are common income, with high taxes for those in high tax brackets compared to capital gains; 3) heirs lose out. The HD comments suggest people sleep better with the annuity boost to stable monthly SS and pension payments. My mother has a traditional annuity that helps control her shopping budget!
Kristine, thank you for this post. I have owned TIAA Traditional for 6 years as a bond substitute, but never considered converting those funds to an annuity until now. Thanks for the idea!
FYI, I started investing at TIAA with their (domestic stock) Equity Index in 2009, which grew with excellent returns in the run up of the stock market in those years. In 2019, I converted the full balance into TIAA Traditional as a bond substitute, not paying much attention to its 3% guaranteed crediting rate at that time. As interest rates dropped at the start of Covid in 2020, however, that 3% guaranteed return was terrific. And with the rising interest rates in 2022- 2023 that led to 15 – 20% capital losses in bond funds, TIAA Traditional held 100% of its value. So it’s been a wonderful way to invest about 15% of our portfolio as a bond substitute for the last several years.
If any HD readers using TIAA Traditional do not know about the ability to withdraw funds from TIAA Traditional for at least 90 days and then reinvest at the then current (and typically higher) crediting rate, talk to your TIAA rep about that. Or let me know, and I’ll look it up and get the info to you.
It’s good to see how many other HD readers have TIAA Traditional. I too have essentially used it as a substitute for bonds.There have been many times over the last 25 years I have appreciated the guaranteed return on my Traditional account.
Good summary, Kristine.
My wife and I are retired academics who divided our monthly contributions when we were working between equities and TIAA’s traditional annuity. We had initially planned on converting a chumk of our TIAA balances to immediate fixed annuities but we are fortunate to have accumulated sufficient wealth that we are comfortable simply taking annual RMDs.
One of the nice things about the TIAA annuity is that it pays a loyalty bonus for long-term contributors to the Traditional Annuity fund who choose the lifetime income option. The TIAA income options tool indicates that my loyalty bonus would add 10% to my monthly annuity income. Thus, if you know that you are going to convert a substantial portion of your TIAA balance to the Traditional Annuity it might be to your advantage to have all of the non-equities portion of your IRA money in the Traditional Annuity now if you haven’t already done so.
Thanks for sharing your experience with the TIAA Traditional account. I started contributing to it in 1999, so I have some of those ‘loyalty’ points built up. Not sure how much additional money it will provide me with, but I’m happy I started putting money it back then. Many of my colleagues either avoided the Traditional account altogether or, if they had funds in it, they would transfer them out when they discovered it was an ‘annuity’. I always thought it sounded like a pretty nice way to have a guaranteed stream of income so I just kept adding to it over the years. Thanks again.
Hi, Kristine. I agree with Gemini AI that TIAA offers a solid package of annuity products (though their quote does seem, however, drawn solely from the TIAA website). Even with substantial savings in TIAA traditional investment pools, for tax reasons I have chosen not to annuitize. Instead, I take my own “one time” withdrawals, which are essentially self-directed “interest-only” withdrawals done quarterly. In this way I do not commit to a withdrawal plan or annuity and can preserve the account value for my estate. I began withdrawing eight years before the required RMDs will kick in, also to minimize future taxes.
That’s good to know about the ability to take self-directed withdrawals. I’m hoping I won’t need to access these funds for awhile. It’s good to know about all the possible options in case I need them sooner rather than later.
But don’t you have a pension from the college, Kristine?
Nope. My pension is from my first job. I worked in a laboratory at a state government run hospital.
I know in my current industry (education) companies selling annuities have developed a reputation for deceptive marketing, and our 403b plans are not typically subject to the same fiduciary safeguards as 401k plans. For decades unsuspecting teachers have paid into annuities contracts without any disclosure of the associated fees, and the results are reduced retirement savings for public sector teachers. And you might suggest that teachers need to be more conscientious of there retirement savings, and that’s certainly a fair point, but i think many would be very surprised at the mess that is the 403b in most public school districts. Teachers are normally offered several providers for their account, sometimes dozens of different providers, to research and invest with. It’s a very confusing process for any teacher, who’s time is normally scarce anyhow. Naturally the most perfidious companies take advantage of this by sending sales reps directly to schools to solicit teachers for their retirement contributions, systematically steering them toward high-cost annuity plans. And once they’re locked in? It’s 2-3% fees a year, commissions, and if you want to get out it’s a brutal surrender charge, sometimes north of 20%! I’m only going over the very basics, but if this sort of thing interests you I HIGHLY recommend the website 403bwise, or the Teach and Retire Rich podcast.
While I agree that annuities have their place, I would caution anyone to be deeply skeptical of anybody who is steering you toward getting one. And if you’re a teacher with a pension? Don’t waste your time. Invest in your 403b or 457b account instead.
Liam:
I was also an academic and I agree with your observations. Our 403b was, IMHO, basically selected as payback/pay off to a board member.
When I asked questions about it, those questions were “not welcomed.” One of the issues dealt with the ability for 403bs’ to allow a special catch up provision, after 15years of service, in your final three years of service. Our 403b did not elect to offer that benefit. Why? I could never get am straight answer.
TIAA enjoys almost “Sainthood” Status among Colleges and University faculty members, and I have zero experience with them, so I offer no opinion…but based on what was described above, it certainly presents itself as a great choice for your retirement dollars. I hope those who selected them receive the benefits promised.
TIAA is the provider for my school, so that’s where my 403b account is. We have low cost options with Vanguard through them, so for those who know what to look for it’s easy to find a low-fee option. That’s very dependent on your school/district though. Overall I’d rate TIAA well, but I would switch to a Vanguard or Fidelity in a heartbeat if I had the option. I do take a lot of issues with their use of the term “guaranteed income,” which is entirely a marketing term. They even go as far as to use it as a category of your asset allocation (e.g. you have equities, fixed income, and guarantee income divisions) which gets touted as increasing your diversification. They also rely heavily on their past reputation, despite having a different business structure these days. Overall, they’re good, but they aren’t on the level of Vanguard.
If you are anyone with a pension, don’t buy an annuity.
I completely agree. The annuity plans typically marketed to those in public education are entirely redundant, and most of the players in that industry are predatory.
Valuable insights, Liam, that not many know about. I am sure you helped someone today. Chris
Luckily, everyone gets to decide how they want to play that game. I already have one annuity – – – it’s called Social Security. That’s enough for me.
Does Social Security cover your expenses? I am considering a SPIA when I hit 75 to 80 in an amount sufficient to cover my expenses. The primary reason is because my mother’s dementia gives her the mental acuity of a 5-year-old. I want secure income when I may no longer be able to make good decisions. The SPIA would probably replace my bond allocation. Then, I could be very aggressive with the balance of my portfolio for heirs.
Jung – thanks for your question. Yes, Social Security covers my expenses. I retired at 67 but waited until I was 70 to begin Social Security. I have IRA and investment accounts, too. I started drawing from my IRA a couple of years ago to get “used to” RMDs before the time came. Most/all of that money goes into a Money Market account, and then later to my investment account.
do you see that strategy as viable for most average people with minimal investing acumen?
You have to save/invest to get an annuity in the first place, so I’m not sure if getting an appropriate annuity is any more reasonable an option than investing an appropriate amount of money in a retirement account.
Dick – like I said, everyone gets to decide how to play this game. So what I said above is MY plan. Your mileage may vary. 🙂
Or, as you see in almost every investment/advice website: Investing involves risk, and you may lose some or all of your invested capital. It’s important to understand the risks associated with any investment and consider seeking advice from a financial advisor.