Opinions on Annuities...Good? Bad?

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Southernbelle
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Opinions on Annuities...Good? Bad?

Post by Southernbelle » Tue Dec 26, 2017 9:10 pm

What are folks thoughts on annuities? Pros? Cons? Any opinions would be appreciated. Thank you! :D

Alex Frakt
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Re: Opinions on Annuities...Good? Bad?

Post by Alex Frakt » Wed Dec 27, 2017 2:38 am

High cost annuities - which are pretty much any annuities sold by a bank, insurance company, or anyone trying to sell you investment services - are always bad. Low cost annuities, such as those available from TIAA and Vanguard, are neither categorically good nor bad. Instead they are tools that are suitable for certain situations.

If you can you give us more details, we can do a better job answering your question.

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nisiprius
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Re: Opinions on Annuities...Good? Bad?

Post by nisiprius » Wed Dec 27, 2017 8:03 am

Unfortunately, there are many completely different kinds of product that have the word "annuity" in their name. An "annuity" just means something that makes a series of annual payments.

In order to keep it simple, I will make some simplistic statements. They include a strong dose of opinion. Please follow up with details about the actual kind of annuity that caught your interest.

Most often, "annuity" is a nickname for "variable annuity." So-called "variable annuities" are usually bad. A variable annuity consists of two phases; in the first it is basically a pure investment product, that is not very different from investing in mutual funds. Because it is surrounded by rules that suggest that the ultimate purpose of the investment is to buy an annuity, it gets tax treatment that is very slightly better than a plain taxable investment. As marketed and used, it is just a "meh" investment with a limited choice of investment "portfolios," and complicated rules that make it very expensive if you decide you want to take your money out of them after all. They are loaded with fees of many different kinds, they have not just one fee but many--I once counted seven. You probably don't know what you're getting because they are complicated products that require a forty-page book printed on onionskin in fine type just to explain the rules, and you can't trust the person who sells them to you to give you an honest summary of the rules; they will often emphasize the attractive parts and fail to mention the problematic parts unless specifically asked (and maybe even not then, since they are so complicated that one wonders if the people selling them actually understand them completely). And because of the complexity it's virtually impossible to make an apples-to-apples comparison between different company's offerings.

So-called "fixed indexed annuities" are worse. FINRA has warned that they are complex products. They are oversold. The people who sell them like to leave you with the impression that they are a magic investment that goes up when the stock market goes up and doesn't go down when the stock market goes down. They used to be called "equity-indexed annuities" and were such a problem that the name began to have a bad sound and they changed the name of the product. If you are considering one of these, be sure that you actually read this FINRA alert, "Equity indexed annuities: a complex choice," and I really mean read all of it, and be sure you know the answer to all of the questions it says you need answers to.

The simple product, called a "single premium immediate annuity," SPIA, or income annuity, is a very useful tool, particularly for people in a specific retirement situation: not enough saved to live off the actual investment earnings, and in a dilemma over how to spend down their capital or principal safely when they don't know how long they will live--don't want to be so frugal as to leave a lot of unspent money at the end, but don't want to overspend and run out of money. Because a SPIA is a tradeoff between spending the money yourself and leaving money at the end for someone to inherit, that has to be considered. Like other insurance products, an SPIA is a tool that does a job you can't do for yourself as an individual.

When I was trying to buy a SPIA, I was literally bait-and-switched by an insurance agent who swore that he would be glad to sell me a SPIA, but that "I never recommend these to my clients," and "if I send you information on a product that is much better, will you at least look it over?" He did, it was for a variable annuity, it was not what I wanted, I said so, and--mysteriously--despite several follow-up calls and his saying he'd send a SPIA quote right out, he never got around to it.
Last edited by nisiprius on Wed Dec 27, 2017 10:53 am, edited 1 time in total.
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ThePrune
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Re: Opinions on Annuities...Good? Bad?

Post by ThePrune » Wed Dec 27, 2017 9:30 am

Southernbelle,

As Alex Frakt has already said, if you have a specific financial situation for which you are considering (or have been recommended to consider) an annuity, please share specifics about that situation. This will enable us to give you personalized guidance.

Annuities cover an extremely broad range of contract types between insurance companies and individuals. Incredibly broad! That's fundamentally why blanket statements such as, "Annuities are good/bad" are impossible to answer. But just like in the arena of mutual funds, annuities come in high cost/fee versions and low cost/fee versions. I can guarantee that if a "financial adviser" is pitching an annuity purchase to you, that will be a high cost/fee version!

If you want to learn some basics about the most common types of annuities, the book I am recommending to my retirement class participants is John Olsen's Guide to Annuities for the Consumer, 2nd Ed.. I've had enough personal interactions with John to know that he is both knowledgeable (actually, a recognized expert!) as well as consumer friendly.

There are some excellent retirement planning research studies being published that show smart ways to incorporate SPIAs (Single Premium Immediate Annuities) into a retirement income plan. If your interests tend towards the academic, I highly recommend as a first article A Broader Framework for Determining an Efficient Frontier for Retirement Income by Prof. Wade Pfau. This study shows the valuable role that low cost/fee SPIAs can play in retirement income planning. This study also showed that even low cost/fee Variable Annuities with Income Riders (such as sold by Vanguard) are not as efficient as SPIAs. And it also showed that SPIAs are superior to bond mutual funds :shock: (though many folks here at the Forum might not like to hear that).

Art ThePrune
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Re: Opinions on Annuities...Good? Bad?

Post by dbr » Wed Dec 27, 2017 9:34 am

Let me just underline the excellent comments made by nisi and the references above. Be very, very sure if you are considering annuities to know exactly what you are being sold because the benefits to you range from being horribly ripped off to making use of a possibly quite beneficial tool. The magic code word is SPIA. It is unlikely anything an investment salesman or insurance agent offers you is something you want, though there may be exceptions. Note that most so-called financial advisors are salesmen.

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