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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?