Bogleheads

TimDex · Joined: 19 Feb 2007 Posts: 761

My approach to annuities has always been that they have a place, and can be useful to investors.

On efmoody.com (commentary) I ran across a different perspective, one I hadn't seen before:

Taylor Larimore · Posted: Wed May 02, 2007 5:27 pm Post subject: Annuities have a place

Hi Tim:

You wrote:

BrianTH · Joined: 20 Feb 2007 Posts: 1344

Right, but that is just underscoring the primary purpose of an immediate annuity, which is to provide longevity insurance. So, for example, if you took your $100,000, put it into something returning 4.17%, and also took out some capital each year for a total of 7.4%, then at the end of your expected lifespan you should reach zero. But what if you then live longer? Oops, you are out of cash. But the immediate annuity will keep paying as long as you hold on (and obviously, that extra money comes from those who do not make it to their expected lifespan). So, the immediate annuity protects you against unexpected longevity.

And this is crucial because one of the major reasons why safe withdrawal rates are so low is that people have to self-provide for longevity. Immediate annuities free you of this need and so allow you to increase your safe withdrawal rates.

Of course, nothing comes free, and there is a loser in all this: your heirs. If you have to self-provide for longevity, and if you die around on schedule or earlier, they get the money you were holding onto. And odds are you will do that--that is where the actuarial tables come from. But with the immediate annuity, they get nothing no matter when you die (assuming no special provision to that effect, which will cost you).

So, the immediate annuity serves to increase your withdrawal rate by freeing you of the need to provide against longevity, but at a cost to your heirs. And when you view it that way, those numbers look pretty good, meaning it does not look like the insurance company is taking too much extra for itself. Just don't ask your heirs to be happy about it.

Shakespeare · Joined: 06 Apr 2007 Posts: 16 Location: Great White North

grumel · Joined: 30 Mar 2007 Posts: 1629 Location: Germany

Like with all kind of insurances: you are always better off withouth them, if you can afford to do so, cause the insurance company will make a good profit and has some aditional cost compared to simple investing. However what are people suposed to do that cant afford ? Bet on social securtiy ? If i remember right there was a lot of complaining about ppl doing this on that forum. So be happy if people with far less money then the average boglehead care for themself.

alvinsch · Joined: 19 Feb 2007 Posts: 1575 Location: Northwest

Is the government subsidizing longevity insurance? Say the estate tax returns to taxing everything above $1M and one has a $2M estate. If one were to annuitize $1M to remove it from the estate tax, then wouldn't that effectively raise one's after tax "return" from the annuity making it more attractive to those who will be affected by the estate tax?

Is this a fair way to look at it?

BTW: I'm retired but haven't annuitized but can see how it might make sense at some point. Hard to mathematically model, but I'm pretty sure money is much more valuable to me while living than when I'm dead. Wink

- Al

grabiner · Joined: 20 Feb 2007 Posts: 3159 Location: Columbia, MD

alvinsch · Joined: 19 Feb 2007 Posts: 1575 Location: Northwest

bob90245 · Joined: 19 Feb 2007 Posts: 3616

TimDex and BrianTH,

Thanks for the info. It helps me up the learning curve when it comes to understanding immediate fixed annuities. I've copied your comments to my notes along with the rest of the research I've done on my website HERE.

I also found an annuity calculator here:

http://www.moneychimp.com/arti....payout.htm

dm200 · Posted: Thu May 03, 2007 9:30 am Post subject: I am trying to

understand (and evaluate) immediate annuities as part of my retirement. Posts like this help to understand this very confusing topic.

One type of immediate annuity that I am trying to understand is the variable immediate annuity. I think this is different from the "Variable annuity" that is often sold to folks, and often has high expenses, and is inappropriate for most folks.

So, my confusion is the use of the term "Variable annuity" for what seems to be an immediate annuity (or annuitizing with a payout that you will not outlive) with some sore of return that is not fixed and has some possibility (or probability) of growth.

Vanguard has these and I am trying to figure them out.

dan

bob90245 · Joined: 19 Feb 2007 Posts: 3616