Tell Me About Immediate Annuities

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Firewood42
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Joined: Fri May 11, 2012 7:06 am

Tell Me About Immediate Annuities

Post by Firewood42 »

I recently saw a posting on here about immediate annuities. The rate of 7.5 percent was mentioned not as an actual amount but to try and get income tax info about one in an IRA.

This peaked my interest, is it possible to get returns close to this amount. My wife is 66 and I am 70, self employed all our life and needing more income off our savings. Just want to know more about them and what the possible returns would be, not whether they would be suitable for us or not.
Johm221122
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Re: Tell Me About Immediate Annuities

Post by Johm221122 »

Try immediate annuities .com
http://www.immediateannuities.com/
John
livesoft
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Re: Tell Me About Immediate Annuities

Post by livesoft »

Please do not forget that with an immediate annuity, some of the "return" is the return of your principal. So to make up some numbers, suppose you are 80 years old and give me a $100,000. I promise to give you back $10,000 a year until you die and I hope you die when you are age 85. What is your return?

I believe Vanguard also has an online annuity "quote" tool which can give you an idea of payout rates.
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sscritic
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Re: Tell Me About Immediate Annuities

Post by sscritic »

The 7.5% is a return, but not that return. Part of the money they are giving you is made up from the return the insurance company earns on its investments and business and part of the money is a return of your own money. You start by giving them an amount, and when you die that specific amount is gone.

If it is coming out of an IRA, the money is taxable just like any other money coming out of the IRA. This makes sense since if you took your own money out you would pay tax; when the insurance company returns your own money to you out of the IRA you also pay tax. If you took out earnings yourself, you would pay tax; when the insurance company pays out earnings to you, you pay tax. Note that what the insurance company pays you is not broken down into "your own" and "earnings" and the "earnings" are not strictly earnings, but the extra amount built into your annuity payment.
PacNorWest
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Re: Tell Me About Immediate Annuities

Post by PacNorWest »

The high return percentage may well be simple interest - not compound interest.
Make sure that is clear.
Johm221122
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Re: Tell Me About Immediate Annuities

Post by Johm221122 »

Firewood42 wrote:I recently saw a posting on here about immediate annuities. The rate of 7.5 percent was mentioned not as an actual amount but to try and get income tax info about one in an IRA.

This peaked my interest, is it possible to get returns close to this amount. My wife is 66 and I am 70, self employed all our life and needing more income off our savings. Just want to know more about them and what the possible returns would be, not whether they would be suitable for us or not.
As far as income tax it will all be taxable income if regular Ira
Do you want to leave money to family/charity?don't put this money in SPIA
stay under your state guarantee (it's on annuity. Com site)
dbr
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Re: Tell Me About Immediate Annuities

Post by dbr »

Please recognize that the contract with an annuity is that you give up the investment forever in exchange for which the insurance company promises to pay you a certain monthly income for as long as you live. This is not an investment and the concept of return does not apply. The mechanics are that the money they pay you is funded in part from the money you gave them, in part from what they can earn on that money, and in part from the money other annuitants have given them that will not be paid out because those people have died.

It can make a tremendous amount of sense to annuitize as this way one insures against the risk of living too long and one establishes a steady income stream. Withdrawal from a portfolio of highly variable future performance is a poor match to the problem of obtaining steady income.

The biggest drawback in a fixed annuity is loss of purchasing power due to inflation. One may find an inflation indexed annuity to attempt to solve this problem. Annuities are also subject to agency risk in the company not making good on the payments. This is rare but not impossible. There are provisions for state sponsored guarantees of annuities up to a certain point.

It is a fact that annuities are not purchased nearly as much as objective financial theory suggests they should be. This is known as the annuity paradox.
dbr
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Re: Tell Me About Immediate Annuities

Post by dbr »

PacNorWest wrote:The high return percentage may well be simple interest - not compound interest.
Make sure that is clear.
Single premium immediate annuity (SPIA) payout is not interest or even return.

A major point of confusion in use of the word annuity is that there are many kinds of annuity products, fixed and variable, immediate and deferred, single premium, etc. For retirement purposes the SPIA is the one application that is not like any of the others, and SPIA is also the only one that would often be recommended rather than exactly the opposite for all the rest.
sscritic
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Re: Tell Me About Immediate Annuities

Post by sscritic »

Johm221122 wrote: Do you want to leave money to family/charity?don't put this money in SPIA
I would change this to
Do you want to leave this money to family/charity?don't put this money in SPIA
You can put this money in an SPIA and leave that money to family/charity. Having an annuity and leaving money to family/charity are not mutually exclusive.
ResNullius
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Re: Tell Me About Immediate Annuities

Post by ResNullius »

My mother-in-law is 87, and she just moved into a retirement home. SS and some small annuities from her husband's prior work come close to covering her monthly expenses. She doesn't have a lot of money, but my wife and her sister are getting their mother a $100K immediate annuity that pays out at a rate of just over 15%. The older you are, the higher the payout rate. This extra money will totally cover her for at least 5 more years, then they probably will get her another $100K annuity to stretch her for another 5 or more years. After that, things are going to get a little tougher to manage.
dbr
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Re: Tell Me About Immediate Annuities

Post by dbr »

Annuitizing some of one's assets can provide enough income to avoid depleting the remainder which can be more reliably invested for heirs. It is also possible to buy annuity riders that guarantee payback to heirs, at a cost of lower payments to the annuitant.
whomever
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Re: Tell Me About Immediate Annuities

Post by whomever »

I may not be understanding the question, so I'll answer a different one :-) : 'How much would an immediate annuity pay a 70/66 year old couple?'

To answer it, I googled 'brkdirect' because I knew that was one company offering them and plugged birthdates of 1942 and 1946 into their calculator and asked for a 'Joint and Survivor' quote, i.e. the payment continues as long as either spouse is alive. That company would pay $5307 annually for a $100,000 investment.

If you go there, the page explains some of the tax angles.

Shop around of course; that quote is for Nebraska, YMMV, etc. But it's a ballpark number, if that's what you are asking.
jimkinny
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Re: Tell Me About Immediate Annuities

Post by jimkinny »

There have been a lot of threads about SPIAs on this forum. Do a search on this forum, also check out the Boglehead Wiki and perhaps buy the Boglehead Guide to Retirement.

SPIAs are a good insurance product but not right for many. I will probably get a few when I reach 70 years of age, but not before. Maybe not then, but certainly worth consideration.

jim
Professor Emeritus
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Re: Tell Me About Immediate Annuities

Post by Professor Emeritus »

dbr wrote:Please recognize that the contract with an annuity is that you give up the investment forever in exchange for which the insurance company promises to pay you a certain monthly income for as long as you live. This is not an investment and the concept of return does not apply......

It is a fact that annuities are not purchased nearly as much as objective financial theory suggests they should be. This is known as the annuity paradox.

1) Actually it is an "investment" by any definition. Like life estates, it is an investment that is bounded by a lifetime. Delaying social security is a similar investment. However I do agree that the concept of rate of return is not relevant.
2) all DB pensions and social security are annuities. A home you own and live in is effectively a lifetime annuity for the value of the rent plus a remainder interest. On this basis many people have the bulk of their retirement "income" annuitized. s.
3) Annuities are fairly priced for unsophisticated investors, however they rarely have the needed funds.
dbr
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Re: Tell Me About Immediate Annuities

Post by dbr »

Professor Emeritus wrote:
dbr wrote:Please recognize that the contract with an annuity is that you give up the investment forever in exchange for which the insurance company promises to pay you a certain monthly income for as long as you live. This is not an investment and the concept of return does not apply......

It is a fact that annuities are not purchased nearly as much as objective financial theory suggests they should be. This is known as the annuity paradox.

1) Actually it is an "investment" by any definition. Like life estates, it is an investment that is bounded by a lifetime. Delaying social security is a similar investment. However I do agree that the concept of rate of return is not relevant.

I wouldn't quarrel over the issue and connection to estates and SS is a good point. Of course, the mention that an annuity is not an investment is in the context of distinguishing the insurance component and lack of ability to liquidate that separate thinking about the annuity from thinking about stocks and bonds.

2) all DB pensions and social security are annuities. A home you own and live in is effectively a lifetime annuity for the value of the rent plus a remainder interest. On this basis many people have the bulk of their retirement "income" annuitized. s.

Yes, when considering income streams pensions and SS are part of the annuity side. I had not heard of construing the ownership of a home this way but also a good point that might help people better understand how owning a home has a role in retirement planning. There are, of course, the expenses of owning a home.

3) Annuities are fairly priced for unsophisticated investors, however they rarely have the needed funds.

True. I think Jim Otar points out in his book the problem that annuities don't work for people needing too high a withdrawal rate (red zone) because they don't have the funds and aren't especially needed by people with very low withdrawal rates. They are recommended when in the gray area.
ourbrooks
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Re: Tell Me About Immediate Annuities

Post by ourbrooks »

The payout on an SPIA can actually be approximated by a formula! The formula is 1/life-expectancy + 10year Treasury rate. An example: A 65 year old man has a life expectancy of 17.16 years. 1/17.16 = 5.8% Ten year Treasuries are paying about 1.70% so an annuity bought now ought to pay out around 7.5% The actual quote I get from immediateannuities.com is 6.58%, probably because the formula doesn't take into account commissions, but it's good enough to make some generalizations:

1. The older you are when you buy the annuity, the higher the payout. The older you are when you buy the annuity, the less sensitive the annuity is to interest rates.
2. A dual life annuity pays until both members of a couple die. The rate is based on the joint life expectancy.
3. There are also annuities which adjust the payout for the rate of inflation; their payout is generally about 3 percentage points less than a fixed annuity.

An alternative method for coping with inflation is an annuity ladder. You buy an initial fixed annuity and set aside some cash. Every few year or so, you buy another annuity to compensate for inflation. It turns out that it really doesn't matter where you put the cash; the increase in payout due to age typically more than makes up for the effects of inflation on the cash. Unlike an inflation adjusted annuity, if you die before you've made all the adjustments, your heirs get the cash.

If you can buy a large enough annuity (or annuity ladder) to cover your expenses and there's still some left which you were planning to give to your heirs, you have an interesting option: You can continue to save it until you die or you can give some/all of it right away, because the annuity will continue paying as long as you live.
The Wizard
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Re: Tell Me About Immediate Annuities

Post by The Wizard »

dbr wrote:Annuitizing some of one's assets can provide enough income to avoid depleting the remainder which can be more reliably invested for heirs. It is also possible to buy annuity riders that guarantee payback to heirs, at a cost of lower payments to the annuitant.
This is exactly the theme song that I usually play when this topic arises.
And it's the plan I'll be following next year.
:)
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Sandman62
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Re: Tell Me About Immediate Annuities

Post by Sandman62 »

sscritic wrote:
Johm221122 wrote: Do you want to leave money to family/charity?don't put this money in SPIA
I would change this to
Do you want to leave this money to family/charity?don't put this money in SPIA
You can put this money in an SPIA and leave that money to family/charity. Having an annuity and leaving money to family/charity are not mutually exclusive.
Do you simply mean that, as you receive your monthly annuity payments, you gift some or all of it (assuming you don't need the funds for living expenses, which then begs the question of "Why did you get a SPIA?")? Or that you just stockpile the annuity payments in a bank account, then pass it on in lump sum as inheritance? :confused
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Mel Lindauer
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Re: Tell Me About Immediate Annuities

Post by Mel Lindauer »

Here's a link to a Forbes column I did on Single Premium Immediate Annuities. Hope it helps.

http://www.forbes.com/2010/07/29/single ... dauer.html
Best Regards - Mel | | Semper Fi
dpbsmith
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Re: Tell Me About Immediate Annuities

Post by dpbsmith »

1) Chapter 7 of The Bogleheads' Guide to Retirement Planning is my attempt to explain single-premium immediate annuities.

2) There are many things you need to understand and many pros and cons. But let me just address the basic question: "is it possible to get returns close to this amount. My wife is 66 and I am 70, self employed all our life and needing more income off our savings. Just want to know more about them and what the possible returns would be." As others have noted, this is not interest or an investment return. There's a website called BRK DIrect EZ-Quote. The ONLY reason I'm using it is that you can get a quick online quotation from them with real numbers in it. I'm not suggesting them as a place to actually buy an annuity. But I can enter in your numbers and this is what I get. For a couple, date of birth 12/1/1946 and 12/1/1942, life contingent, $100,000 "investment:"
Your investment of $100,000 will yield 2.03% based upon our mortality assumptions and the U.S. Treasury yield curve as of February 20, 2013. This investment will provide you with $621 every month for as long as you live, beginning on April 1, 2013.
Notice that a) the RETURN is only 2%, yet b) the PAYOUTS are $621/month = $7,452/year = 7.45% of the premium paid.

No contradiction, and no magic.

So, yes, it is possible to get an annual income for life that is more than 7% of the premium you pay in. An investment return would mean 7% per year forever; an annuity payout means 7% per year for as long as you live, then no more. The "extra," the difference between the 2% their investment pay them and the 7% they pay you comes from the fact that the insurance company knows that they only need to pay that 7% for a limited time. They can do that because they are selling annuities to a pool of many people, and within that pool, the people who outlive the statistics are balanced by those who do not.
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