Let's Talk About Annuities

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justsomeguy2018
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Let's Talk About Annuities

Post by justsomeguy2018 » Mon Nov 19, 2018 7:34 pm

I hear these get a bad rap. Especially variable annuities which often come with high expense fees.

Are these ever a good investment? Could they be good at a certain age (e.g. 10 years away from estimated retirement) ?

I am only vaguely familiar with so-called variable annuities sold via Ameriprise Financial.

For the record, I am not looking to buy annuities at the moment, but as I think about my financial future, just wondering if they fit in anywhere, as I really don't know a ton about them and feel it is one of the last things on my list to really understand as an investment option.

mhalley
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Re: Let's Talk About Annuities

Post by mhalley » Mon Nov 19, 2018 7:47 pm

For 99.9% of the population variable annuities have no role. The only "good" annuity here is the SPIA, which is not appropriate for someone in the accumulation phase.
Annuities have inferior tax treatment when compared to standard retirement accounts. They also have inferior long-term returns when compared to low-cost index funds. While they can provide useful asset protection and some tax protection for particularly tax-inefficient investments, the only type of annuity most physicians should ever consider is a SPIA purchased around age 70 to combine with Social Security to guarantee a portion of retirement spending.
https://www.acepnow.com/article/annuiti ... nglepage=1
So how about the 0.1%?
Most investors, including high tax bracket investors like physicians, probably shouldn’t invest in even the low-cost Vanguard variable annuities over a taxable account. However, an exception can be made if you value the asset protection benefits highly, don’t have any room in your tax-protected accounts for a highly tax-inefficient asset class that you feel you really want to hold in your portfolio, don’t mind the loss of liquidity, don’t mind the loss of tax-loss harvesting ability, don’t mind the loss of the step-up in basis at death, and you have a long investment horizon.
https://www.whitecoatinvestor.com/what- ... annuities/

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David Jay
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Re: Let's Talk About Annuities

Post by David Jay » Mon Nov 19, 2018 7:49 pm

They “can” make sense if you are in a high tax bracket, the annuity is low cost (Ameriprise in particular will NOT be low cost) and you have already made use of all of your tax advantaged space including employer (401K, 403B, 457, etc.), personal (IRA, Solo 491K) and HSA (if available). One thing that they give you is tax deferral, allowing you to pay taxes on the money at a future, lower rate after retirement.

That being said, they have a very limited pool of people for whom they make sense. But annuity salespeople are pleased to sell them into situations that are not appropriate because of the nice commissions they earn.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Grt2bOutdoors
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Re: Let's Talk About Annuities

Post by Grt2bOutdoors » Mon Nov 19, 2018 8:02 pm

Variable annuities takes your growth in capital and lets you pay ordinary income tax rates. Why would you want to pay more in expenses upfront and then pay higher ordinary tax rates upon withdrawal?

If you need an annuity, consider a Single Premium Immediate Annuity only. The best time to buy one is when you need the income.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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patrick013
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Re: Let's Talk About Annuities

Post by patrick013 » Mon Nov 19, 2018 8:59 pm

An SPIA can make sense if you plan on living over 15 years
or so, or contract the annuity for a specific term, say 10
years. Then the compound return is over the rate on the
highest paying 5 year CD's slightly.

An exclusion ratio is used so you only pay taxes on the income
portion of the monthly payment not the return of principal portion
of the monthly payment. Interest rates will affect the initial premium.
So high interest rates are good. State guarantees are usually pretty
high also. Not bad for some pocket change.
Last edited by patrick013 on Thu Nov 22, 2018 4:39 pm, edited 1 time in total.
age in bonds, buy-and-hold, 10 year business cycle

Alex GR
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Re: Let's Talk About Annuities

Post by Alex GR » Tue Nov 20, 2018 7:22 am

May I ask a silly question? If I have no heirs, is an annuity (the normal kind, SPIA) a better investment than bonds? (not really comparing to MM or treasuries 'cause I know they're lower).
In other words, if I don't care what happens after I die, annuity beats bonds, right? If I understand correctly, the biggest downside of annuities is that you don't get the principal back. Not you of course but your heirs.
So it seems like a great tool in theory. Say I need $2000 in retirement (this is with a paid off house) and my SS payment is $1300 and I buy an annuity that pays $700 a month. SS+annuity covers living expenses and I don't have do draw from the portfolio :D :sharebeer

bsteiner
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Re: Let's Talk About Annuities

Post by bsteiner » Tue Nov 20, 2018 8:51 am

Alex GR wrote:
Tue Nov 20, 2018 7:22 am
... If I understand correctly, the biggest downside of annuities is that you don't get the principal back. ...
A portion of each annuity payment is principal.

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Sandtrap
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Re: Let's Talk About Annuities

Post by Sandtrap » Tue Nov 20, 2018 8:55 am


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bertilak
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Re: Let's Talk About Annuities

Post by bertilak » Tue Nov 20, 2018 9:00 am

Alex GR wrote:
Tue Nov 20, 2018 7:22 am
May I ask a silly question? If I have no heirs, is an annuity (the normal kind, SPIA) a better investment than bonds? (not really comparing to MM or treasuries 'cause I know they're lower).
In other words, if I don't care what happens after I die, annuity beats bonds, right? If I understand correctly, the biggest downside of annuities is that you don't get the principal back. Not you of course but your heirs.
So it seems like a great tool in theory. Say I need $2000 in retirement (this is with a paid off house) and my SS payment is $1300 and I buy an annuity that pays $700 a month. SS+annuity covers living expenses and I don't have do draw from the portfolio :D :sharebeer
Even if you have no heirs, you might have various causes or charities you would like to leave some money to as opposed to leaving it to an insurance company.

Well, to be fair, you are actually leaving it to all the annuitants that outlive you. That is how the insurance companies can afford to make the contracted payments to geezers even older than you! :happy
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Mel Lindauer
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Re: Let's Talk About Annuities

Post by Mel Lindauer » Tue Nov 20, 2018 9:22 am

Alex GR wrote:
Tue Nov 20, 2018 7:22 am
May I ask a silly question? If I have no heirs, is an annuity (the normal kind, SPIA) a better investment than bonds? (not really comparing to MM or treasuries 'cause I know they're lower).
In other words, if I don't care what happens after I die, annuity beats bonds, right? If I understand correctly, the biggest downside of annuities is that you don't get the principal back. Not you of course but your heirs.
So it seems like a great tool in theory. Say I need $2000 in retirement (this is with a paid off house) and my SS payment is $1300 and I buy an annuity that pays $700 a month. SS+annuity covers living expenses and I don't have do draw from the portfolio :D :sharebeer
You had to DRAW money from the portfolio to buy the annuity and a large part of each payment is simply a return of YOUR initial payment which you took from your portfolio.

There's no free lunch here.
Best Regards - Mel | | Semper Fi

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vineviz
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Re: Let's Talk About Annuities

Post by vineviz » Tue Nov 20, 2018 10:30 am

Alex GR wrote:
Tue Nov 20, 2018 7:22 am
May I ask a silly question? If I have no heirs, is an annuity (the normal kind, SPIA) a better investment than bonds? (not really comparing to MM or treasuries 'cause I know they're lower).
In other words, if I don't care what happens after I die, annuity beats bonds, right? I
Yes, but . . . .

The VAST majority of SPIAs are annualized to produce a level (i.e. "nominal") payout just like most bonds.

However, if we experience an unexpected and dramatic increase in inflation during your retirement you'd find that the annuity payments lost a significant amount of purchasing power.

Inflation-adjusted annuities are available, but they tend to be expensive. If you want to spend virtually your whole portfolio before you die, my opinion is that you'd likely be best off annuitizing PART of your portfolio when you first retire (say 20 or 30%) and then annuatizing a portion of the remainder every 4 or 5 years thereafter until age 80 or so (when SPIAs are no longer available).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Dottie57
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Re: Let's Talk About Annuities

Post by Dottie57 » Tue Nov 20, 2018 2:45 pm

vineviz wrote:
Tue Nov 20, 2018 10:30 am
Alex GR wrote:
Tue Nov 20, 2018 7:22 am
May I ask a silly question? If I have no heirs, is an annuity (the normal kind, SPIA) a better investment than bonds? (not really comparing to MM or treasuries 'cause I know they're lower).
In other words, if I don't care what happens after I die, annuity beats bonds, right? I
Yes, but . . . .

The VAST majority of SPIAs are annualized to produce a level (i.e. "nominal") payout just like most bonds.

However, if we experience an unexpected and dramatic increase in inflation during your retirement you'd find that the annuity payments lost a significant amount of purchasing power.

Inflation-adjusted annuities are available, but they tend to be expensive. If you want to spend virtually your whole portfolio before you die, my opinion is that you'd likely be best off annuitizing PART of your portfolio when you first retire (say 20 or 30%) and then annuatizing a portion of the remainder every 4 or 5 years thereafter until age 80 or so (when SPIAs are no longer available).
I agree with multiple SPIA purchases.

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