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Are annuities ever worth buying—and, if so, which type?

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Kurt Yokum
Kurt Yokum
2 months ago

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.

John Wood
John Wood
3 months ago

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.

James Morgan
James Morgan
3 months ago

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.

tshort
tshort
1 year ago

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.

tshort
tshort
1 year ago

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?).

booch221
booch221
1 year ago

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.

Mike Zaccardi
Mike Zaccardi
1 year ago

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.

Bob Wilmes
Bob Wilmes
1 year ago

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

Jackie
Jackie
1 year ago
Reply to  Bob Wilmes

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.

BenefitJack
BenefitJack
1 year ago

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:

  • The longer you expect to live, the better to defer commencement,
  • For a married couple:
  1. Deferring commencement by the spouse with the larger benefit will increase the amount the couple will receive per month as long as either lives,
  2. Deferring commencement by the spouse with the smaller benefit aving the spouse with the lower benefit defer commencement will increase the amount the couple will receive per month while both spouses live,
  • The lower the after-inflation rate of return you earn on risk free investments, the better it becomes to delay commencement – the higher the after-inflation rate of return you earn, the better it becomes to take benefits early.

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.

Rick Connor
Rick Connor
1 year ago

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.

Randy Starks
Randy Starks
3 months ago
Reply to  Rick Connor

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 .

Last edited 3 months ago by Randy Starks
James McGlynn CFA RICP®
James McGlynn CFA RICP®
1 year ago

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.

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