Annuities

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Zecht
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Annuities

Post by Zecht »

So, this is probably a strange question, but when would it ever be a good idea to have/use an annuity? From what I have read regarding them, it appears to be a way to surrender a large amount of money in exchange for a regular cash payment over time, but seems to only depreciate in value (no inflation or COL adjustments). It also appears that the firms that handle annuities charge fees for the service, which cuts in to the capital even more, so my question is, what am I missing? Why are annuities a reasonable/usable option? Under what circumstances would this be better than relying upon dividends, bond interest, SS, and pension payments?
The Wizard
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Re: Annuities

Post by The Wizard »

Because you can get around a 7% payout, which is way more than you can safely do yourself...
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camptalcott
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Re: Annuities

Post by camptalcott »

I know people here hate them but the only experience I have is with my elderly dad.

He brought an annuity a long time ago for 200K (if he remembers correctly). It paid him 2500.00 bucks a month for over 25 years. It also gave him an inflation raise every year. He was an much sought after bachelor at the retirement village. :D
"He who dies with the most toys is still, nonetheless dead"
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nisiprius
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Re: Annuities

Post by nisiprius »

Zecht wrote:So, this is probably a strange question, but when would it ever be a good idea to have/use an annuity? From what I have read regarding them, it appears to be a way to surrender a large amount of money in exchange for a regular cash payment over time, but seems to only depreciate in value (no inflation or COL adjustments).
Unless, of course, you choose to buy one of the ones that has inflation adjustments.
It also appears that the firms that handle annuities charge fees for the service, which cuts in to the capital even more, so my question is, what am I missing? Why are annuities a reasonable/usable option? Under what circumstances would this be better than relying upon dividends, bond interest, SS, and pension payments?
You are only one person. If you don't want to run out of money, you need to budget for the oldest age you could reasonably live to. That means you will need to leave a fat margin of safety and will likely have a sizable amount of money at the end.

The insurance company earns some legitimate and deserved profits for the useful service they provide of managing a large pool of annuitants that it can treat as a total. Because it is budgeting for a pool of annuitants, it can budget for the group's average life expectancy, not the longest possible lifespan. So they can safely provide a larger monthly payout than you can provide for yourself--even after taking something off the top for themselves, and even by investing in very conservative assets. They fund the extra payments needed to people who live longer out of the unused money left by people who don't reach their life expectancy.

You can't do that for yourself, because the shorter-lived "you's" in the parallel universe can't will you their money and send it across to the longer-lived "you's" in other parallel universes.

Either

a) you do it yourself, spend a lot per month, and risk running out of money; or,

b) you do it yourself, spend considerably less per month, and accept the risk of leaving a big pile of unspent money on the table (which may be attractive if you have people you want to leave money do); or,

c) you pay an insurance company to spread the risk around, spend a lot per month, take very little risk--and, of course, leave nothing to your heirs.
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dhodson
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Re: Annuities

Post by dhodson »

First off there are many types of annuities. You seem to be talking about SPIAs which is a single premium in exchange for lifetime payments. Although they make inflation adjusted ones, they just reduce your initial payments. They are best suited in my view for people who have a higher risk of outliving their money. The returns quoted include return of principle. It isn't that people hate them or love them here, its about doing what has the best evidence/reasoning. I personally plan to purchase a non inflation adjusted SPIA at age 80 for basic needs but that will depend on my health at the time and other factors related to my financial status at that time.
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Zecht
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Re: Annuities

Post by Zecht »

dhodson wrote:First off there are many types of annuities. You seem to be talking about SPIAs which is a single premium in exchange for lifetime payments. Although they make inflation adjusted ones, they just reduce your initial payments. They are best suited in my view for people who have a higher risk of outliving their money. The returns quoted include return of principle. It isn't that people hate them or love them here, its about doing what has the best evidence/reasoning. I personally plan to purchase a non inflation adjusted SPIA at age 80 for basic needs but that will depend on my health at the time and other factors related to my financial status at that time.
Thanks! This makes significantly more sense.
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powermega
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Re: Annuities

Post by powermega »

It sounds like you're talking about a Single Premium Immediate Annuity (SPIA). You can buy a SPIA that has COLA adjustments or not, and you can also find one that will pay an income for at least a certain duration ("life with period certain"). The good news about SPIAs is that it is very easy to comparison shop for these, and the fees and expenses are pretty low because of that.

Basically, if you are in reasonably good health and your family history has longevity, there is a good chance that you will live past your normal life expectancy. For those kinds of people, SPIAs can be a very good deal. You can use the SPIA to pay for your basic ongoing expenses and leave your investment accounts for more unplanned (ex. new car) and discretionary (ex. travel) expenses. By having an income to take care of your expenses, you can more easily manage your accounts in a tax-efficient way too since your income will be more predictable, you wont have to sell investments when you don't want to, or take more money out of your qualified accounts than you need to.
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dhodson
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Re: Annuities

Post by dhodson »

One thing though to keep in mind is that insurance companies use different tables for life insurance then annuities. They know that only healthy people purchase a SPIA.
itstoomuch
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Re: Annuities

Post by itstoomuch »

How old is OP?
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
heyyou
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Re: Annuities

Post by heyyou »

The insurance company becomes the manager and owner of that portion of your assets that you spend on the annuity, but they do promise a steady payout. Due to simplicity and competition, a single premium immediate annuity (SPIA) is the best buy. All of the others are intentionally more complicated to hide higher fees. The older you are, the better the payout rate. The rates are more attractive after age 75, and that buffers some of the inflation risk of the fixed payout rates. Some older retirees will plan to periodically buy smaller annuities, perhaps in increments of 10% of portfolio, depending on current interest rates or to diversify over time. That also lets you buy from different providers to stay under the limit of your state's annuity guarantee amounts.

Wade Pfau found that SPIAs helped portfolio longevity, then later saw that the equivalent was just raising your equity allocation during retirement for a larger nest egg at an advanced age. Many here did not like the idea of increasing equity risk during the senility years. Read all of Phau's annuity papers to not miss that important switch from portfolio longevity helper to just boosting equity allocation during retirement. Those allocation gymnastics tie into his suggestion of a U shaped equity allocation from ages late 50s to late 80s to buffer a bad first decade of returns at the start of retirement.

Pfau showed that annuities are the best path for portfolios with no margin of safety on withdrawal rates, those retirees who cannot afford to cut any spending even during bad markets. For slightly more affluent others, it is a choice about whether to pay the fee for having the insurance company pay a steady income. As usual, if you have a very large nest egg, you do not need to buy a product that insures that you will have income if you live into your 90s or beyond.

Annuities might be good if your spouse will struggle with managing the portfolio after your demise, or if you have longevity and your heirs do not need your money. Taylor gave his heirs their portion of his assets while he could see them enjoy the benefits, then spent the rest on annuities that cover himself and his spouse.

Yes, there are times when annuities are appropriate for a portion of your assets, but that has not slowed the annuity sales people from recommending them for every situation. I would not buy from any salesperson that recommended an annuity other than a SPIA, and would run from the recommendation of spending a large portion of the portfolio on one annuity.
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obgyn65
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Re: Annuities

Post by obgyn65 »

To the OP: you will know to buy an annuity when the time is right. I bought a couple of deferred annuities a couple of years ago and will buy SPIAs when in my 60s or 70s. I am 49.
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skepticalobserver
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Re: Annuities

Post by skepticalobserver »

This has been discussed ad nauseam, but here goes.

As noted there are many types of annuities. I’ll stick to the SPIA, the plain vanilla type, wherein you hand over a lump sum to an insurance carrier and they disburse a series of payments to you, either for your life or a “period certain” (10, 20, 25 years, etc).

An SPIA is not an investment. Lifetime payments are configured to return to you your own money for the vast majority of the actuarial payout period— there’s some positive IRR after that, especially if you live past the predicted death date. Accordingly, the lifetime SPIA is sold as “longevity” insurance. It is also marketed as “tax efficient” because the majority of each payment is tax free—little wonder since most of each payment is return of principal!

Insurance companies are not in the business of giving it away. The question here is this: might you be better off holding on to your dough and invest it instead of irrevocably gifting it to an annuity carrier?

The percentage of "payout" is contingent on the annuitant's life expectancy. Payout is not and should not be confused with yield, cash on cash return, rate of return or IIR. Return on investment, as paltry as it may be, arrives many years after the lump sum payment is made. The SPIA product appeals to those who figure they can out run their mortality--hole in one insurance.
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gasdoc
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Re: Annuities

Post by gasdoc »

I am not a big fan of insurance companies, but I believe the previous poster is overly negative about annuities. They are not an investment, as he states, but neither are they always a poor bet necessarily. There is a subset of individuals- those for whom the standard 3-4% withdrawal rate will fall just short of funding their basic expenses- that might benefit from the 7% or so payout rate that an annuity can offer. Yes, on average, it will be a poor investment, but it is the only way to reliably spend down the principal to zero without knowing how long you will live.
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Re: Annuities

Post by skepticalobserver »

bkinder:

Under the right circumstances an SPIA may be useful as a money management tool, perhaps for part of a portfolio for someone who does not want to , or can't, manage money. This being said, if IRRs were posted next to the payout rates, in the same size type, not too many SPIAs would be sold.
golforme
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Re: Annuities

Post by golforme »

I have a question about what an agent should provide. My dad purchased several insurance policies and single pay annuities from an independent "wealth preservation" agent. When my mother died two years ago, Dad notified the agent who requested three certified copies of the death certificate. We assumed he was making the proper notifications. Two annuities are at issue. One was a joint with right of survivorship, so payments continued. The other, on my mom alone, continued to pay since the ten year certain period had not expired. Only when those payments continued after the ten year period did we realize something was wrong. I contacted the agent who said he would notify the company since we hadn't, and Dad got the claimant forms he should have received for the joint annuity, and a request for repayment of about $3000 in overpayments on the single annuity on my mom.
This agent has cost our family a huge amount of money in legal bills to correct errors, and lost income from an annuity for my dad that he represented in writing as being ten years certain, but which actually lasted 95 months. This latest issue, while a relatively small amount of money, is the final straw for my dad. Before I pursue this and push the agent to repay the $3000, I'd like to know if it is reasonable to have expected him to notify the annuity issuer. The insurance policy had been sold, but I am sure he made that notification.
Thank you for any thoughts on this.
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Re: Annuities

Post by skepticalobserver »

golforme:

I'm not entirely clear as to the facts or to your losses.

There are 2 SPIA's. One is a joint SPIA for your mom and dad, with the right of survivorship. After your mom passed away this annuity continued to pay your dad. I assume there's no problem with this annuity. The second was an SPIA for your mom's life with a ten year period certain. Your mom passed away, but the ten year period had not expired. Under this annuity her estate (your dad) was entitled to receive payments until the ten year period expired. You say, however, that the insurance company mistakenly made payments past the ten year expiration date in the amount of $3,000. Your dad then had to reimburse the insurance company for the $3,000 over payment. Your dad had notified the agent that he may have been receiving payments past the period certain but the agent failed to notify the insurance company in a timely manner.

Are you saying that the agent who sold the period certain annuity to your mom misrepresented the time period (8, not ten years)?

What services were needed to generate legal costs?

If your dad had the benefit of $3,000 he mistakenly received, and which he returned, what is the nature of his loss?
Last edited by skepticalobserver on Thu Dec 18, 2014 1:50 pm, edited 10 times in total.
Independent
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Re: Annuities

Post by Independent »

There are already a number of excellent responses that say SPIAs can be a good tool for people who can benefit from pooling their longevity risks.

I'll add one thing that I didn't notice. Deferring your Social Security start date can be viewed as buying a CPI-adjusted SPIA from the federal government. When I compared the SS vs. private SPIA payouts, I decided that SS was a noticeably better deal in my situation. So I'm deferring SS. I can imagine some unlikely circumstances where I would add a private SPIA around age 80, but those are "unlikely circumstances".
skepticalobserver
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Re: Annuities

Post by skepticalobserver »

Independent:

At age 80 you'd be better off self-annuitizing a lump sum. Although at that age an SPIA payout is an eye popper, the rate of return would stink unless you have Ripley's Believe or Not family longevity.

The SS annuity is a bargain and should not be compared to commercially available annuity products
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Re: Annuities

Post by technovelist »

I have instructed my wife, should she outlive me by many years during a period that is unfavorable to our (her) portfolio, to purchase an SPIA when the remainder of her portfolio is just sufficient to pay the income she needs.

In the meantime, I'm delaying SS until 70 to increase the amount she will receive if I die first. Also, the fact that I'm still working (just got a job where I can work from home (yee-ha!)) means that we won't have to withdraw anything for awhile, thus improving the portfolio longevity.
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Independent
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Re: Annuities

Post by Independent »

skepticalobserver wrote:Independent:

At age 80 you'd be better off self-annuitizing a lump sum. Although at that age an SPIA payout is an eye popper, the rate of return would stink unless you have Ripley's Believe or Not family longevity.

The SS annuity is a bargain and should not be compared to commercially available annuity products
I view annuities as longevity insurance. I expect poor rate of return, just like I expect a poor rate of return on my auto insurance. I wouldn't buy either for the "average" or "expected" payout, but rather for the "unusual, but expensive event". (In my case, I'm pretty sure I can self-insure my residual longevity risk, so I'm not expecting to buy any more annuities.)

I'm not sure how to read this: "The SS annuity is a bargain and should not be compared ... ". Maybe we're just using different words to say the same thing.
When I use the word "bargain" I think I am always making a comparison to something else.
golforme
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Re: Annuities

Post by golforme »

Thanks for responding. This is a convoluted situation. The history with this agent has been a nightmare. This advisor had my parents redo their financial plan 10 years ago. As part of this, he sent them to a designated lawyer who drew up several trusts, and he sold them insurance policies and annuities.

In 2012, I read through all of the trusts, and found a number of errors. We met with the agent, and went through everything. One annuity for my dad had payments of $14,000 a month. The agent told them that it would be for ten years certain, and in his letter that accompanied the policy stated that it was for "life or ten years certain." In reading the contract, it appeared to me to be for 95 months. I questioned him about the discrepancy and he insisted he would "never sell anything but a ten year certain policy." When we asked him to verify the details he came back with a "you were right" email. He then claimed that the plan all along was to allow their other assets to grow during the annuity payouts. I contacted an attorney who specialized in elder financial abuse, and he said too much time had passed since the policy was issued to file a lawsuit. The payments stopped in July 2012, and my dad is still alive, so the lost income thus far exceeds $400,000. After the meeting in 2012, we contacted an attorney and were able to fix most of the errors in the original legal work. The cost of those corrections was about $6,000.

There are two annuities at issue now. One was for my mom and it was ten years certain. The other was joint. When my mom died in 2013, my dad notified the agent who requested certified death certificates. We thought he was making the notifications, but when the ten year certain period was up in September of this year, I noticed the payments were continuing. That's when I called the agent to ask why, and he said we had failed to notify the company. So now my dad has filled out the paperwork, the joint annuity is continuing, and the company wants him to reimburse the $3,000. Because of this history of errors that this agent has made, my dad feels like he should make the repayment. Is it unreasonable to expect that an agent who has sold all of these products would handle the notifications?
skepticalobserver wrote:golforme:

I'm not entirely clear as to the facts or to your losses.

There are 2 SPIA's. One is a joint SPIA for your mom and dad, with the right of survivorship. After your mom passed away this annuity continued to pay your dad. I assume there's no problem with this annuity. The second was an SPIA for your mom's life with a ten year period certain. Your mom passed away, but the ten year period had not expired. Under this annuity her estate (your dad) was entitled to receive payments until the ten year period expired. You say, however, that the insurance company mistakenly made payments past the ten year expiration date in the amount of $3,000. Your dad then had to reimburse the insurance company for the $3,000 over payment. Your dad had notified the agent that he may have been receiving payments past the period certain but the agent failed to notify the insurance company in a timely manner.

Are you saying that the agent who sold the period certain annuity to your mom misrepresented the time period (8, not ten years)?

What services were needed to generate legal costs?

If your dad had the benefit of $3,000 he mistakenly received, and which he returned, what is the nature of his loss?
skepticalobserver
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Re: Annuities

Post by skepticalobserver »

As far as the matter concerning the $400,000 loss I’ll assume your attorney made a correct assessment on the statute of limitations.

As I understand the matter regarding your late mother’s lifetime ten per period certain SPIA, the insurance company was not notified until it came to your attention that $3,000 in overpayments had been made. You contend that it was the agent’s responsibility to notify the insurance company of her death; the agent asserts that it was your responsibility to do so.

On the issue of death notification, my best guess is that procedures for that are spelled out in the annuity contract. More importantly, since your father had the benefit of the $3,00 overpayment and suffered no apparent loss by making repayment, it is not clear that the insurance agent has any legal responsibility in the matter.
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