Fixed Index Annuities

[moorso]

Is anyone familiar with FIA's? I am 65 and retired. I will begin ss at age 70 but that will not cover all my expenses . It was suggested that I buy an FIA to cover the gap between my ss and expenses. I am single with high 6 digit portfolio about 2/3 in retirement accounts and remaining 1/3 in cash and roth. It is my intention to continue converting some of my Ira to Roth until I begin ss at 70. Appreciate any thoughts or education you can share.

[straws46]

If you had said fixed income annuities most here would say that is a reasonable investment as long as you buy it from Fidelity, Schwab or Vanguard. When you substitute the word "indexed" most here would suggest that the commissions associated with such products make them poor investments. Better to build your own indexed annuity with a long term CD and a low cost total stock market mutual fund or ETF.

[livesoft]

There seem to be various kinds of Fixed Index Annuities. Whenever it becomes common knowledge how bad they are, then they change the name without changing the product to get away from bad reputation.

So what kind are you asking about? Do they have an early redemption or withdrawal penalty or surrender charges? Sometimes it is 10% the first year, 9% the second year, .... So if you need money for a roof replacement or your car breaks down and you will have to cash it in, then they are probably not something to buy.

Also, the indexing method usually confuses investors so that quite a bit of money goes to the salesperson instead of to the investor.

Here is the wiki article on them: https://www.bogleheads.org/wiki/Equity-indexed_annuity Bad news!

[Ron]

"Appreciate any thoughts or education you can share."

Here's something for you to read:

http://www.philly.com/philly/business/F ... table.html

- Ron

[David Jay]

It was suggested that I buy an FIA to cover the gap between my ss and expenses.

By whom?

The word “index”tells you to stay far, far away. And the individual who suggested it should never again be taken seriously regarding things finance-related.

[moorso]

Thanks guys. I have seen enough and will not get involved with these.

[livesoft]

Note that a Single Premium Immediate Annuity (SPIA) is not the same thing and is often recommended for similar circumstances.

https://www.bogleheads.org/wiki/Immediate_fixed_annuity

See how terminology is similar, yet different?

[Mors]

A form of annuity may be beneficial for your case, since high 6 digits portfolios have usually meaningful failure rates at retirement. SPIAs or deferred fixed annuities is what you should be looking for though for a part of your investments (funded from the bond funds part). Forget about the "guaranteed principal with an upside" products like fixed index annuities.

[BL]

SPIA (single premium immediate annuity) may be useful for buying a guaranteed lifetime income of a specific amount. It is simple enough that it can be compared for the best deal. It is insurance, not an investment, and is usually suggested for ages over 70 if you decide it is for you. An independent agent, or immediateAnnuities.com can get you a price estimate.

Forget those annuities they are trying to sell you so they can gain huge commissions!
Jane Bryant Quinn gives it to you in a nutshell in this AARP Bulletin article:
https://www.aarp.org/money/investing/in ... s-jbq.html

[naha66]

A form of annuity may be beneficial for your case, since high 6 digits portfolios have usually meaningful failure rates at retirement. SPIAs or deferred fixed annuities is what you should be looking for though for a part of your investments (funded from the bond funds part). Forget about the "guaranteed principal with an upside" products like fixed index annuities.

Explain the bolded statement please, I don't understand.

[moorso]

A form of annuity may be beneficial for your case, since high 6 digits portfolios have usually meaningful failure rates at retirement. SPIAs or deferred fixed annuities is what you should be looking for though for a part of your investments (funded from the bond funds part). Forget about the "guaranteed principal with an upside" products like fixed index annuities.

Explain the bolded statement please, I don't understand.

He must be referring to a married couple. In my case being single I don't see that size a portfolio as a problem.

[naha66]

What does being single or married have to do with it. What matters is how much do need to withdraw from your portfolio whether you have $500k or $5 million. I think he saying if you can't save a lot of money you will run out. Their are people on here who don't even have to touch there investments. Their have SS and pensions which covers all their expenses, but if you only have a high 6 figure 401k you will most likely run out of money huh! I want to know what he means by that statement.

[David Jay]

A form of annuity may be beneficial for your case, since high 6 digits portfolios have usually meaningful failure rates at retirement. SPIAs or deferred fixed annuities is what you should be looking for though for a part of your investments (funded from the bond funds part). Forget about the "guaranteed principal with an upside" products like fixed index annuities.

Explain the bolded statement please, I don't understand.

He must be referring to a married couple. In my case being single I don't see that size a portfolio as a problem.

The bolded quote is a terrible generalization. Perhaps it is true for the poster's personal situation, but not for many others. Expenses and cash flow should drive the portfolio requirement, not the other way around.

In our case, SS pays all expenses if taken at age 70. The portfolio requirement is to replace spousal benefit when the first spouse passes. That is about $16,000 a year. Even at a conservative 3% withdrawal rate (i.e. failure rate is almost nil), my portfolio requirement mid-6 digits, not high 6 digits.

[Mors]

What does being single or married have to do with it. What matters is how much do need to withdraw from your portfolio whether you have $500k or $5 million. I think he saying if you can't save a lot of money you will run out. Their are people on here who don't even have to touch there investments. Their have SS and pensions which covers all their expenses, but if you only have a high 6 figure 401k you will most likely run out of money huh! I want to know what he means by that statement.

Check this Vanguard retirement tool with the below assumptions:

$800K retirement nest egg
4% withdrawal per year
https://retirementplans.vanguard.com/VG ... ggCalc.jsf

with 30/70 stocks/bonds allocation, by running monte carlo simulations you have 90% probability that your savings will last for 30 years. In this case, annuitizing some of your fixed income makes sense, since a 10% failure rate is not considered a safe margin of failure.

Of course, if you can draw less annually thanks to SS and other sources of income, then your situation will be different.

[David Jay]

What does being single or married have to do with it. What matters is how much do need to withdraw from your portfolio whether you have $500k or $5 million. I think he saying if you can't save a lot of money you will run out. Their are people on here who don't even have to touch there investments. Their have SS and pensions which covers all their expenses, but if you only have a high 6 figure 401k you will most likely run out of money huh! I want to know what he means by that statement.

Check this Vanguard retirement tool with the below assumptions:

$800K retirement nest egg
4% withdrawal per year
https://retirementplans.vanguard.com/VG ... ggCalc.jsf

with 30/70 stocks/bonds allocation, by running monte carlo simulations you have 90% probability that your savings will last for 30 years. In this case, annuitizing some of your fixed income makes sense, since a 10% failure rate is not considered a safe margin of failure.

Of course, if you can draw less annually thanks to SS and other sources of income, then your situation will be different.

The failure rate is associated with the withdrawal rate, not with the portfolio size. Withdraw 4% of an $160,000 or 4% of an $4M, the failure rates will be similar.

[mickroark]

These are great for retirement, but must grow like a mutual fund. So at 65, no they are not good investments. I own one bought at 55 and will receive $5000.00/mo at age 65 guaranteed till I die. If any money is left over in the annuity my spouse will get the death benefit when I pass.

Please note these are not tax efficient. You must pay taxes on the gains when first payment begins.

[HomerJ]

SPIA may be what you want. SIngle Premium Immediate Annuity.

You give the insurance company $100,000 and they give you $7000 (or whatever - usually based on your age) for life. The $100,000 is gone. They are basically giving you your money back for the first 15+ years.

But you don't have to worry about running out of money. Very simple.

A "Fixed Index Annuity" is a different product. It's a variable annuity, where they invest your money for you, charge enormous fees, and there's all kind of fine print.

They call it a "Fixed Index Annuity" because

(1) Index makes it sound respectable.
(2) the old names for it were written about as terrible investment ideas in various financial magazines and websites, so they had to change the name so you couldn't google how bad it was.

What they will do is promised you a guaranteed floor, with possible upside from the market. But their will be all kinds of limitation on the upside (only so much per month, dividends not included, etc.), and the floor is false too.

You might have $100,000 in an "income account" that is supposedly growing at the guaranteed "5%" or whatever, but that is NOT the cash value. That's just a number they use later when you convert the variable annuity into an income stream. But they pay you less on that "income account" than you would normally get from a SPIA.


Here's an example.

Say you give them $100,000 and they guarantee 5% a year growth. So in 10 years, your "income account" has grown to $163,000. Then the contract states that they will annuitize that amount at 6%. 6% of $163,000 is $9,780 a year for life.

So far, so good.

But, at your age + 10 years, you might be able to get a 8% SPIA. $9,780 a year for life on the open market might only cost you $122,250.

So your $100,000 really only grew to the equivalent of $122,250 over ten years. Which is really only a 2% return. They promised you a "guaranteed 5%", but your money really only grew the equivalent of 2%.

You could have put the $100,000 in long-term CDs or a 10-year Treasury note, and done better.

[itstoomuch]

HomerJ, is essentially correct
There's more to it though.

Disclaimer:
FIa since 2012.
Saw maybe a dozen presentation s from FA, annuity salespeople, bank reps, & other FAs.
Thery are complicated, more so than GLWB VAs.
See this thread: Annuity vs. decumulation: apples to apples comparisons?
FIa fit into our Grand Design.
Our FA, refuses to sell anymore FIa.
I am amblivalent to our ownership. We not sold. We bought.
You get "married" to annuities. Getting out of any Annuities is costly. So you gotta know the why's, what's, when's, how's, and ifs.
I think we did an adequate job of due diligence.
We bought a Pension.
2012 is not 2018.
Ymmv

[moorso]

What does being single or married have to do with it. What matters is how much do need to withdraw from your portfolio whether you have $500k or $5 million. I think he saying if you can't save a lot of money you will run out. Their are people on here who don't even have to touch there investments. Their have SS and pensions which covers all their expenses, but if you only have a high 6 figure 401k you will most likely run out of money huh! I want to know what he means by that statement.

Thats pretty easy. I can live on $50,000 annually pretty well being single. That swells to probably $100,000 if I'm married. So for comparison purposes, if I am single I can survive quite nicely on ss taken at age 70 with a starting portfolio of high 6 figures. If I were married, I would need a portfolio of 1.5 million with ss to feel comfortable.

[itstoomuch]

More:
Fall 2012, this is what Contract said:
5% guaranteed growth, compounding for 15 years on Income Acct.
Hold for 5years and age 70 (our RMD), Income derived from Income Acct =6.5%
Survivor's benefit of remainder of Accumulation account, if any.
~3.5% total fees, 7 year surrender period.

This is what I saw:
A $100K buy @age 65, contractually would give 127,628 Income Acct Value at 5th Anniversary @age 70. Yielding 6.5% Income on that value=$8296/yr, single life, remainder to spouse if any.
But since this is within a normal S/B IRA, a typical value of 4% SWR is more logical since the funds came from a S/B rollover. The 127,628 actually in BH common use, is a nominal value of 207,395, or ~15.6% compounding APR on the original 100k, holding for 5 years Guaranteed.
It was beyond my wildest dream (cliches here) . I wanted more, but had no more funds available .
Do You See It ? It took me many a presentation to see this.

today's GLWB FIa and GLWB VA are significantly different. The use of GLWB in your personal retirement portfolio is at your own risk.
DO YOUR Due Diligence.
YMMV always.

[Mors]

What does being single or married have to do with it. What matters is how much do need to withdraw from your portfolio whether you have $500k or $5 million. I think he saying if you can't save a lot of money you will run out. Their are people on here who don't even have to touch there investments. Their have SS and pensions which covers all their expenses, but if you only have a high 6 figure 401k you will most likely run out of money huh! I want to know what he means by that statement.

Check this Vanguard retirement tool with the below assumptions:

$800K retirement nest egg
4% withdrawal per year
https://retirementplans.vanguard.com/VG ... ggCalc.jsf

with 30/70 stocks/bonds allocation, by running monte carlo simulations you have 90% probability that your savings will last for 30 years. In this case, annuitizing some of your fixed income makes sense, since a 10% failure rate is not considered a safe margin of failure.

Of course, if you can draw less annually thanks to SS and other sources of income, then your situation will be different.

The failure rate is associated with the withdrawal rate, not with the portfolio size. Withdraw 4% of an $160,000 or 4% of an $4M, the failure rates will be similar.

Of course. But if you have a larger portfolio, you can afford to withdraw a smaller percentage in order to cover your needs. I put 4% there because for an 800k portfolio it is a reasonable amount to withdraw annually.

[David Jay]

We’ve probably hijacked this thread too much already, but the problem was your original statement, which could be very confusing to someone looking for answers, as follows:

...since high 6 digits portfolios have usually meaningful failure rates at retirement.

There is no useful concept for the OP in that statement. High 6 digit portfolios have no different failure rates than high 5 digit or high 7 digit portfolios of the same composition and duration. The withdrawal rate determines the likelihood of failure, not the size of the portfolio.

[itstoomuch]

Is anyone familiar with FIA's? I am 65 and retired. I will begin ss at age 70 but that will not cover all my expenses . It was suggested that I buy an FIA to cover the gap between my ss and expenses. I am single with high 6 digit portfolio about 2/3 in retirement accounts and remaining 1/3 in cash and roth. It is my intention to continue converting some of my Ira to Roth until I begin ss at 70. Appreciate any thoughts or education you can share.

To be honest, We never considered looking at this type of annuity as a SPIA. The future value was much more valuable.
Some alternatives: Laddered SPIAs, Laddered CD's (local bank is offering 24 month CD, $10,000, 2.0%), GLWB VA's (see Vanguard, Fidelity), MultiYear Annuities, combinations of...
I am the type of person who look at everything and always retain knowledge that I can say, No.

Recent FIa and VA with GLWB riders are different from our time.
YMMV
GL