Do Any Annuities Offer a "Free Lunch"?

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joer1212
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Do Any Annuities Offer a "Free Lunch"?

Post by joer1212 » Sat Oct 20, 2018 11:55 am

I recently recruited the help of my financial advisor friend to reach my goal of early retirement*. He suggested an annuity, specifically this one:

http://cm.axa-equitable.com/res/prd/be9 ... c4fe1f.pdf

How does this annuity compare to other offerings on the market, and how does it compare to simply drawing from my portfolio in retirement?

* I am single, 49 years old. 600k total between tax-deferred, tax-free, and taxable accounts (in broad-market index funds)
I expect to have well over 1m by age 55
Currently employed in a Civil Service job, from which I will receive a pension at age 62
Looking to retire at 55, at the latest. Will need about 25k/year for living expenses

ResearchMed
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by ResearchMed » Sat Oct 20, 2018 12:00 pm

joer1212 wrote:
Sat Oct 20, 2018 11:55 am
I recently recruited the help of my financial advisor friend to reach my goal of early retirement*. He suggested an annuity, specifically this one:

http://cm.axa-equitable.com/res/prd/be9 ... c4fe1f.pdf

How does this annuity compare to other offerings on the market, and how does it compare to simply drawing from my portfolio in retirement?

* I am single, 49 years old. 600k total between tax-deferred, tax-free, and taxable accounts (in broad-market index funds)
I expect to have well over 1m by age 55
Currently employed in a Civil Service job, from which I will receive a pension at age 62
Looking to retire at 55, at the latest. Will need about 25k/year for living expenses
What are your expected plans for health care costs, and/or long term care, with at 25k budget all in?
What about inflation? You'll have a long time ahead...

RM
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longinvest
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by longinvest » Sat Oct 20, 2018 12:06 pm

joer1212 wrote:
Sat Oct 20, 2018 11:55 am
I recently recruited the help of my financial advisor friend to reach my goal of early retirement*. He suggested an annuity, specifically this one:
Of course, it's a variable annuity! I wouldn't walk; I would run away from this shark.

The only kind of annuity that makes sense to me is an inflation-indexed Single-Premium Immediate Annuity (inflation-indexed SPIA) bought at an advanced age when it gets cheaper, if still alive. Annuities of this kind aren't pushed by financial advisors and insurance salespeople because they don't make them money.
Last edited by longinvest on Sat Oct 20, 2018 12:18 pm, edited 4 times in total.
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BL
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by BL » Sat Oct 20, 2018 12:06 pm

Sounds like he would get the free lunch with commissions that come from your premiums.

Spirit Rider
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by Spirit Rider » Sat Oct 20, 2018 12:21 pm

Run from this parasitic Frenemy.

The short answer to the thread title is absolutely not in the accumulation phase and most certainly not the one they are recommending.

In early retirement one could make the case for Multi-Year Guaranteed Annuities (MYGAs) to supplement your pension to cover your fixed expenses.

In later retirement a SPIA may make sense to take advantage of increased mortality credits.

jalbert
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by jalbert » Sat Oct 20, 2018 12:24 pm

Of course, it's a variable annuity! I wouldn't walk; I would run away from this shark.

The only kind of annuity that makes sense to me is an inflation-indexed Single-Premium Immediate Annuity (inflation-indexed SPIA) bought at an advanced age when it gets cheaper, if still alive. Annuities of this kind aren't pushed by financial advisors because they don't make them money.
I agree to avoid variable annuities. The commissions and fees taken out will not contribute to retiring earlier.

But it is not correct that SPIAs get cheaper as you get older. When a SPIA is bought at an older age, the premium being returned to you is distributed over fewer years, resulting in a higher payout rate, but return of the principal you used to buy the SPIA at a faster rate should not be confused with a higher rate of return or discount of the purchase price of the product.
Risk is not a guarantor of return.

Tal-
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by Tal- » Sat Oct 20, 2018 12:34 pm

A few things:

1: I think your spending projections are off. I doubt that you will spend only 25K a year in retirement. That's pretty low. However, for the other bullet points, I assume that you're correct.
2: Annuities almost always return less than simple, direct investing. There are caveats here, and annuities can provide stability, but that stability comes at a cost, and that cost is hundreds of thousands of dollars out of your pocket (no exaggeration).
3: I believe that annuities have their place, but wanting to retire ASAP is not the right time to invest in an annuity. Annuities should be used when you have more money than you need, meaning you can afford to trade money for stability. This is rare in early retirement, and nearly impossible when you want to retire as soon as possible.
4: If you wanted to invest in an annuity, I would suggest a SPIA (probability with spending increases) rather than a variable annuity like this one. In a SPIA, you give a big chunk of money to an insurance company, and they promise to pay you a set amount for a set period of time (typically, until you die).
5: If you did want to use an annuity, and did want to use a variable annuity, I would NOT use this one. It's heavy in fees and complexity.
6: With a pension, I would avoid adding an annuity. While different, these two have a lot in common. If you have a pension with a big chunk of money also in an annuity, you are probably under-exposed to possible returns from stocks.
7: You're doing great! Having that much saved, and what seems like a modest lifestyle, you are on track for an early retirement! That's awesome - congrats!!! Props man :)

Happy hunting.
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by Dottie57 » Sat Oct 20, 2018 12:35 pm

jalbert wrote:
Sat Oct 20, 2018 12:24 pm
Of course, it's a variable annuity! I wouldn't walk; I would run away from this shark.

The only kind of annuity that makes sense to me is an inflation-indexed Single-Premium Immediate Annuity (inflation-indexed SPIA) bought at an advanced age when it gets cheaper, if still alive. Annuities of this kind aren't pushed by financial advisors because they don't make them money.
I agree to avoid variable annuities. The commissions and fees taken out will not contribute to retiring earlier.

But it is not correct that SPIAs get cheaper as you get older. When a SPIA is bought at an older age, the premium being returned to you is distributed over fewer years, resulting in a higher payout rate, but return of the principal you used to buy the SPIA at a faster rate should not be confused with a higher rate of return or discount of the purchase price of the product.
True. But it is a higher return of principal amount plus some interest for life based on longevity tables. If you live longer than longevity tables suggest you receive more than the premium you “win”. If you die before the longevity tables suggest the insurance company.

SPIA is longevity insurance. You keep being paid until you die.

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Re: Do Any Annuities Offer a "Free Lunch"?

Post by nisiprius » Sat Oct 20, 2018 12:36 pm

No, they're not a free lunch. The one time I actually looked at a variable annuity, it came with a forty-page fine-print prospectus on onionskin, and eventually I got tired of reading and just decided to count the number of different kinds of fee that were mentioned, and then I got tired of that after counting seven of them... layer on layer, fee after fee after fee after fee after fee after fee after fee. SO, not a free lunch. Maybe a "fee lunch?"

Larry Swedroe and Jared Kizer wrote a book entitled The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly. Here's part of the table of contents:

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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

longinvest
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by longinvest » Sat Oct 20, 2018 12:40 pm

jalbert wrote:
Sat Oct 20, 2018 12:24 pm
Of course, it's a variable annuity! I wouldn't walk; I would run away from this shark.

The only kind of annuity that makes sense to me is an inflation-indexed Single-Premium Immediate Annuity (inflation-indexed SPIA) bought at an advanced age when it gets cheaper, if still alive. Annuities of this kind aren't pushed by financial advisors because they don't make them money.
I agree to avoid variable annuities. The commissions and fees taken out will not contribute to retiring earlier.

But it is not correct that SPIAs get cheaper as you get older. When a SPIA is bought at an older age, the premium being returned to you is distributed over fewer years, resulting in a higher payout rate, but return of the principal you used to buy the SPIA at a faster rate should not be confused with a higher rate of return or discount of the purchase price of the product.
As an insurance product, not as an investment, it does become cheaper. In old age, it can complement Social Security, if insufficient, as longevity insurance.

I wanted to keep my post short and to the point. I've written longer ones (even recently) detailing my thoughts. The OP was asking about a variable annuity; I think my reply was appropriate.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international) stocks / (nominal/inflation-indexed) long-term domestic bonds | VCN/VXC/VLB/ZRR

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mickeyd
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by mickeyd » Sat Oct 20, 2018 1:59 pm

Please, Please do not deny your insurance agent, financial guy, money manager the opportunity of being able to send his kids to that private school, operate out of that fine corner office, park all 3 of those leased Lexus automobiles in the drive way of that fine home on the best side of town.

Or, you can pass on the offer and keep the money for your use.
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Mel Lindauer
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by Mel Lindauer » Sat Oct 20, 2018 2:18 pm

Because of the high costs associated with the Variable Annuity, you'd actually be DELAYING your retirement. You'd do much better by simply investing in low-cost, tax-efficient mutual funds, such as those offered by Vanguard.

The only "free lunch" would be enjoyed by that shark trying to sell you the high-cost, high-commissioned product.
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by Mel Lindauer » Sat Oct 20, 2018 2:20 pm

Because of the high costs associated with the Variable Annuity, you'd actually be DELAYING your retirement. You'd do much better by simply investing in low-cost, tax-efficient mutual funds, such as those offered by Vanguard.

The only "free lunch" would be enjoyed by that shark trying to sell you the high-cost, high-commissioned product.

Here's a Forbes column I did some time ago on these things:

https://www.forbes.com/2010/06/04/varia ... 6a5a3d653e
Best Regards - Mel | | Semper Fi

jalbert
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by jalbert » Sat Oct 20, 2018 2:26 pm

True. But it is a higher return of principal amount plus some interest for life based on longevity tables. If you live longer than longevity tables suggest you receive more than the premium you “win”. If you die before the longevity tables suggest the insurance company.
Those benefits are independent of when you buy the annuity. Delaying purchase of a SPIA has the following properties:

1. You pay the insurance company admin fees for a shorter period of time. This likely makes it cheaper to delay.

2. Life expectancies increase over time. This likely increases the cost when delaying.

3. Your assets held while delaying are unlikely to be matched with respect to duration to your liabilities up to your life expectancy. This means the assets earmarked for the annuity purchase may fluctuate in a different manner than the annuity purchase price in response to interest rate fluctuations.

4. There are inefficiencies with annuity pricing— while primarily driven by interest rates, insurance companies may overprice SPIAs at times when they do not want more of them on their balance sheet.
Risk is not a guarantor of return.

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Re: Do Any Annuities Offer a "Free Lunch"?

Post by pkcrafter » Sat Oct 20, 2018 3:13 pm

Do Any Annuities Offer a "Free Lunch"?
NO!
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Taylor Larimore
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by Taylor Larimore » Sat Oct 20, 2018 3:34 pm

joer1212 wrote:
Sat Oct 20, 2018 11:55 am
I recently recruited the help of my financial advisor friend to reach my goal of early retirement*. He suggested an annuity, specifically this one:

http://cm.axa-equitable.com/res/prd/be9 ... c4fe1f.pdf
joer1212:

Ask your advisor-friend to let you read the Prospectus (1,752 pages) before you buy. Especially read the lengthy "Disclaimer" in the Prospectus. The Prospectus is your contract with the insurance company. You should read and understand every word. Also, ask your "advisor friend" the amount of his commission which directly reduces your return.
Jane Bryant Quinn, syndicated columnist and author of "Smart and Simple Financial Strategies": "You shouldn't buy anything too complex to explain to the average 12-year old."
I once sold annuities and own two. The only annuity I would consider, and only after age 70, is a Single-Premium Immediate Annuity (SPIA).

Best wishes
Taylor
Last edited by Taylor Larimore on Sat Oct 20, 2018 3:41 pm, edited 1 time in total.
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FiveK
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by FiveK » Sat Oct 20, 2018 3:41 pm

joer1212 wrote:
Sat Oct 20, 2018 11:55 am
How does this annuity compare to other offerings on the market,
About as bad as similar products.
and how does it compare to simply drawing from my portfolio in retirement?
The annuity is worse. I hope the consistent message from all responses is persuasive to you - is it?

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Re: Do Any Annuities Offer a "Free Lunch"?

Post by bsteiner » Sat Oct 20, 2018 3:47 pm

Taylor Larimore wrote:
Sat Oct 20, 2018 3:34 pm
...
Ask your advisor-friend to let you read the Prospectus (1,752 pages) ...
I can sum up the 1,752 pages in one sentence: in exchange for paying about 2.5% to 3% a year, you get to convert your qualified dividends and long-term capital gains to ordinary income and you give up the basis step-up at death.

heyyou
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by heyyou » Sat Oct 20, 2018 3:53 pm

American Express is not known for low fee products.
The complexity of the fees on page 4 of the .pdf, are designed to hide more costs than to simply explain them. Gov't regulations require some explanation of the fees, but there are no rules about the intricacy of those explanations.

NotWhoYouThink
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by NotWhoYouThink » Sat Oct 20, 2018 3:58 pm

Many free Three Martini Lunches for the salesman.

joer1212
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Re: Do Any Annuities Offer a "Free Lunch"?

Post by joer1212 » Sat Oct 20, 2018 7:17 pm

Thanks for all the informative feedback, guys. I took all your comments to heart and concur with the overwhelming consensus here that this annuity is not for me. I will continue on my current path of diligently investing in broad-market, low-cost index funds.

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Re: Do Any Annuities Offer a "Free Lunch"?

Post by Earl Lemongrab » Sun Oct 21, 2018 2:23 pm

BL wrote:
Sat Oct 20, 2018 12:06 pm
Sounds like he would get the free lunch with commissions that come from your premiums.
That was my thought. The OP didn't specify free lunch for whom.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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