Category talk:Annuities
From Bogleheads
The following is a literally wikified version of Immediate Annuities and Deferred Annuities. Please move the contents to appropriate pages or remove them as necessary. PiperWarrior 16:37, 20 August 2008 (UTC)
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Immediate Annuities
An immediate annuity is one method of turning a nest egg into a stream of income payments. Decisions involving immediate annuitization should be made in conjunction with a well thought out withdrawal strategy. An immediate annuitization is often a payout option on a deferred annuity. For a basic introduction to immediate annuities, please refer to Vanguard's Plain Talk Series:
Should You Consider an Income Annuity?
The following definitions can help explain the technical terminology associated with Annuities.
Definitions
Guaranteed Minimum Withdrawal Benefit (GMWB)
Inflation Protected Annuity (IPA)
Mortality and Expense Risk Charge
Systematic Withdrawal Schedule
bob90245 has completed a four-part series of articles on Immediate Annuities:
Papers
- The (Mostly) Pros and (Few) Cons of Lifetime Payout Annuities by Thomas G. Walsh, F.S.A., C.F.P.
- Annuities and Inflation by Thomas G. Walsh, F.S.A., C.F.P.
- Annuities:Now, Later, Never? by Benjamin Goodman, Director, Actuarial Consulting Services TIAA-CREF and Michael Heller, Vice President, Actuarial Consulting Services TIAA-CREF, October 2006
- Reducing Retirement Income Risks: The Role of Annuitization by John Ameriks and Paul Yakodoski
- Merging Asset Allocation and Longevity Insurance: An Optimal Perspective on Payout Annuities by Peng Chen and Moshe A. Milevsky Date: February 20, 2003
- Asset Allocation with Annuities for Retirement Income Management by Paul D. Kaplan Date: 2005
- Asset Allocation within Variable Annuities: The Impact of Guarantees by Moshe Milevsky and Vladyslav Kyrychenko (June 28, 2007)
Advanced Papers
- Optimizing the Retirement Portfolio: Asset Allocation, Annuitization, and Risk Aversion by Horneff, Wolfram J., Mitchell, Olivia S., Maurer, Raimond and Dus, Ivica (July 2006)
- Optimal Asset Allocation and The Real Option to Delay Annuitization: It's Not Now-or-Never by Moshe A. Milevsky and Virginia R. Young Version: 13 April 2002
- Money in Motion: Dynamic Portfolio Choice in Retirement by Horneff, Wolfram J., Maurer, Raimond, Mitchell, Olivia S. and Stamos, Michael (February 2007)
- Life-Cycle Asset Allocation with Annuity Markets: Is Longevity Insurance a Good Deal? by Wolfram J. Horneff, Raimond Maurer, Michael Z. Stamo (December 2006)
Allocation During Retirement: Adding Annuities to the Mix by William Reichenstein, AAII Journal, November, 2003
How about:
- Making Retirement Income Last a Lifetime by John Ameriks, Robert Veres, Mark J. Warshawsky.
- ANNUITIES: NOW, LATER, NEVER? from Benjamin Goodman and Michael Heller.
- The Longevity Annuity: An Annuity for Everyone? by Scott, Jason S., Financial Engines Inc. (June 2007)
- Real Longevity Insurance with a Deductible: Introduction to Advanced-Life Delayed Annuities by Moshe Milevsky, (2004)
- An Annuity People Might Actually Buy by Anthony Webb, Guan Gong, and Wei Sun
Rational Decumulation by Babbel, David F. and Merrill, Craig B., (July 2006). Wharton Financial Institutions Center Working Paper No. 06-14
and
The TIAA Graded Payment Method and the CPI
For State Guarantee Funds providing protection from insurer default, see:
NOLHGA:What Happens When An Insurance Company Fails
Deferred Annuities
A Deferred Annuity is an insurance contract that delays payments of income, installments or a lump sum until the investor elects to receive them. This type of annuity has two main phases, the savings phase in which you invest money into the account, and the income phase in which the plan is converted into an annuity and payments are received. A deferred annuity can be either variable or fixed. Earnings within the contract are tax deferred, and are taxed upon withdrawal at income tax rates (similar to qualified retirement plans) and share with these plans the 10% early penalty tax for withdrawals made prior to age 59 and 1/2.
bob90245 offers the following:
I have put together this primer on annuities. (Source is attributed at the end.)
Types of Annuities
Deferred Annuities are used to accumulate assets. Funds will grow at a rate that can be either fixed or variable.
Fixed Annuity
The money you put in a fixed annuity earns interest at a rate that is guaranteed for a specific period of time—ranging from one to five years or more, depending on the terms of the contract. When that period ends, a new rate may take effect—or the old rate may be offered again.
Variable Annuity
With a variable annuity, your money is put in subaccounts that are invested in stock and bond funds. The return on your investments is subject to the risk of market fluctuation. Your total account value depends on how much risk you take, the performance of the subaccounts, and what charges and fees are deducted.
Immediate (Income) Annuities (note:see the Reference Library Topic Immediate Annuities) are used to convert a lump sum into an income stream (regular payments). If the income stream is fixed, it is considered a fixed immediate annuity. Some fixed immediate annuities are offered with inflation-adjusted payments or graded payments that rise at a fixed rate, of for example, 3% annually. However, these options reduce the initial payment received but with the anticipation that payments will grow steadily over time.
If the income stream is variable, it is considered a variable immediate annuity. Like deferred variable annuities, your money is put into subaccounts. These subaccounts can be invested in stock or bond funds. Payments will fluctuate based on the underlying subaccounts. With funds invested in stocks, it is possible that payments could grow at a rate higher than can be achieved by fixed immediate annuities.
Source: The Individual Annuity: A Resource in Your Retirement (pdf)
The following definitions can help explain the technical terminology associated with Annuities.
Definitions
Guaranteed Minimum Accumulation Benefit (GMAB)
Guaranteed Minimum Income Benefit (GMIB)
Guaranteed Lifetime Withdrawal Benefit (GLWB)
Guaranteed Minimum Withdrawal Benefit (GMWB)
Inflation Protected Annuity (IPA)
Mortality and Expense Risk Charge
Systematic Withdrawal Schedule
Cautions
Sales practices associated with Variable Deferred Annuities are often clouded with conflicts of interest as much of the product is sold through commissioned agents. Insurance benefit charges make annuities a higher cost investment medium than other investment vehicles. No-load, lower cost Variable Annuities are available from Vanguard, TIAA-CREF, and Fidelity.
links:
SEC: Variable Annuities: What You Should Know
NASD : Variable Annuities: Beyond The Hard Sell
Transfers
Tax free exchanges of non-qualified Annuity contracts are permitted through what is known as a Section 1035 Exchange.
Transfers are quantifiable decisions. The following paper provides guidance for determining the suitability of a transfer.
1. Exchanging Variable Annuities: An Optional Test For Suitability by Moshe Milevsky and K. Panyagometh (2003)
Papers
- Household Ownership of Variable Annuities by Jeffrey R. Brown and James M. Poterba (2005)
- . Variable Annuities versus Mutual Funds: A Monte Carlo Analysis of the Options by Milevsky, M.A. and Panyagometh, Kamphol, (2001)
- Who Should Buy A Nonqualified Tax Deferred Annuity? by William Reichenstein (2001)
- Retirement Planning: Annuities and When They Make Sense by William Reichenstein, AAII Journal, July, 2003
- Non-qualified Annuities in After-tax Optimizations by William Reichenstein (2005)
- The New Variable Annuity by Colin Devine, Heather L. Hunt, and Keith Walsh (2004)
- Asset Allocation and the Transition to Income: The Importance of Product Allocation in the Retirement Risk Zone by Moshe Milevsky and Thomas Salisbury (September 2006)
- An Overview of Equity Indexed Annuities by Craig McCann, PhD and Dengpan Luo, PhD (2006)
Papers
The following papers are technical. They deal with the economic pricing of Variable Annuity benefit riders. The papers allow one to measure the cost/benefit trade off for each insurance benefit.
- The Titanic Option: The Pricing of the Guaranteed Minimum Death Benefit in Variable Annuities and Mutual Funds by Moshe Milevsky and Steven Posner
- Static and Dynamic Valuation of Guaranteed Minimum Withdrawal Benefits by Moshe A. Milevsky and Thomas S. Salisbury (2004)
- Guaranteed Minimum Withdrawal Benefit in Variable Annuities by Dai, Min, Kwok, Yue Kuen and Zong, Jianping (Feb 2007)
