Annuities objectively considered

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Realisticinvestor
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Annuities objectively considered

Post by Realisticinvestor »

In reading this forum as well as investment advice published by various "experts," it is rare that I see an objective evaluation of annuities as a component of a portfolio. I suspect that a major reason is that most annuities are "insurance products" rather than "securities," and as such are inadvertently or deliberately not promoted (or are even disparaged) by people who sell or invest in only "securities." For example, I have most of my investments with Vanguard, but dare not mention "annuities" on their blog or their censors block my comments.

This is unfortunate, because it obscures the fact that there are two types of annuities that are fundamentally different, and causes the frequent shortcomings of the one type to adversely reflect on the other type despite its wider suitability, particularly for retired people. (I don't have a personal interest in promoting either.)

The first is the "tax deferred annuity" that is essentially an after-tax retirement account that is most appropriate for investors with high incomes who have maxed out their contributions to other types of retirement accounts. The investor pays after-tax funds into the annuity and designates how the funds will be allocated among various mutual funds offered by the insurance company that manages the annuity. The invested funds are not subject to taxation until they are withdrawn, at which time they are taxed as ordinary income. The major legitimate criticism of these annuities is that there is often a large commission that goes to an insurance agent "up front;" that there are often additional high annual fees; and that even when these expenses are reasonable, these annuities may be over-sold as alternatives to retirement accounts such as 401(k)s that are more suitable for most people. I purchased one from TIAA that had very low expenses and good investment options, although I was dissatisfied with TIAA's customer service when I eventually arranged a tax-free "1035" conversion it to the second type of annuity with another insurance firm.

The other type of annuity is an "immediate payment annuity," also called a "single premium immediate annuity" (SPIA). It is fundamentally different in that the investor ("annuitant") pays a single up-front "premium," in exchange for which the insurance company guarantees specified regular payments (typically, monthly) for however long the person lives. The down side is that the annuity cannot be redeemed and normally has no further value when the person dies. (These annuities may be purchased with provisions for payments to heirs up to certain dates, but these provisions reduce the annual payout rate, or "cash flow".)

The great advantage of an immediate payment annuity is that the annual payout rate that it provides will be greater than the "safe withdrawal rate" that a person can expect to sustain by liquidating their other investments over a conservatively estimated remaining lifetime. The main reason for this is that the insurance company bases its promised lifetime payments on the average life expectancy of its annuitants, whereas an individual retired person should conservatively plan on living longer than the average life expectancy of others their age.

A strategy recommended by responsible agents selling immediate payment annuities is for retirees to use them along with Social Security and pension benefits to cover necessary living expenses, while paying for non-essentials from their other investments.

If these comments seem too "basic" for the financially sophisticated participants on this blog, believe me that most people don't understand much about annuities and will benefit from objective comments.
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Phineas J. Whoopee
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Re: Annuities objectively considered

Post by Phineas J. Whoopee »

How much of your income is derived from selling annuities, in, as you say, an objective sense?

If it's zero, then great.

Single premium immediate annuities are often recommended here for evaluation as a potential part of one's financial plan.

PJW
Last edited by Phineas J. Whoopee on Fri Dec 28, 2018 6:54 pm, edited 1 time in total.
Spirit Rider
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Re: Annuities objectively considered

Post by Spirit Rider »

As @PJW noted, you are obviously unfamiliar with this forum and haven't read the Wiki.

Otherwise, you would know that a solid consensus of Bogleheads believe that SPIAs can be a sound choice for a component of a strategy in the later withdrawal phase when mortality credits become significant. Some see the usefulness of Multi-Year Guarantee Annuities (MYGA) in early retirement.

What we don't like are expensive variable annuities and especially fixed index annuities in the accumulation phase.
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Re: Annuities objectively considered

Post by Cyclesafe »

A SPIA for one's unchaperoned dotage is tough to beat.
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Re: Annuities objectively considered

Post by nisiprius »

Realisticinvestor wrote: Fri Dec 28, 2018 6:32 pm...In reading this forum as well as investment advice published by various "experts," it is rare that I see an objective evaluation of annuities as a component of a portfolio. I suspect that a major reason is that most annuities are "insurance products" rather than "securities," and as such are inadvertently or deliberately not promoted (or are even disparaged) by people who sell or invest in only "securities." For example, I have most of my investments with Vanguard, but dare not mention "annuities" on their blog or their censors block my comments....
1) ???? What do you mean by "their blog?" I'm unaware of Vanguard having any kind of forum or blog of their own.

2) ???? It is unlikely that Vanguard would disparage SPIAs because Vanguard sells SPIAs themselves (via their partner, Income Solutions.) I know, because I personally bought an SPIA through Vanguard. You buy them through Vanguard's website, indicate details about what you want, they give you quotations from, typically, four to six companies, and you can then make the actual purchase directly out of funds in your Vanguard account.

3) ???? The Bogleheads Guide to Retirement Planning, published in 2009, describes SPIAs in considerable detail and speaks well of them.

4) ???? Taylor Larimore, one of the founders of the Bogleheads and author of The Bogleheads' Guide to the Three-Fund Portfolio, bought an SPIA himself and has written "Immediate annuities are the only kind of annuity I would consider, and then, only in good health and well into retirement."

5) ???? The Bogleheads' Wiki has an article, Immediate Fixed Annuity , which among other things says:
The suitability of adding an income annuity to the investment product mix is also highly dependent of one's wealth accumulation. For the large segments of American society who enter the retirement period with no, or very limited financial assets, an income annuity offers no solution. On the other end of the wealth distribution, for those having very large financial assets allowing them to self insure a retirement income, income annuities are not usually needed. For the large segment of the population in the middle ranges of the wealth distribution spectrum, income annuities are suitable for consideration.
I have to think you must not really have looked much in this forum.

(This forum is brutal toward people who promote whole life insurance as an investment. The forum is not anti-insurance, but it is indeed anti whole-life insurance. )
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Re: Annuities objectively considered

Post by heyyou »

Using the progressive RMD % on the entire portfolio value is another way to self-annuitize your assets in retirement. One could say that BHs (Bogleheads) frown on high cost annuities precisely due to the added fees, not due to the annuity concept.

Still waiting for the legalities to change for Vanguard to offer a low cost "tontine" but we can see the opposition from the insurance industry which can see how VG has hurt high cost brokerages. Perhaps VG could open an office in Bermuda which would offer a tontine.
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Re: Annuities objectively considered

Post by 2015 »

The best information I have seen anywhere on annuities is from Stan the Annuity Man. I think I found out about it from here, ordered a free set of booklets explaining all types of annuities. Had to provide my email in order to get the free booklets but have never gotten spammed since ordering them a few years ago.

I personally don't need to go the annuity route, but if I did it would naturally be an SPIA.
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Re: Annuities objectively considered

Post by Sandtrap »

Thanks for the interesting information.
I have an old friend 80+ that has a TIAA deferred annuity, long outlived (getting his money's worth), and has purchased SPIA's over time after retirement. He and his DW are doing quite well with this approach.

DW and I might also consider SPIA's at some point in later retirement per "Bogle Basic Options". (per "Spirit Rider" above")

Otherwise:
Not sure if you are asking a question?
Or presenting investment options for consideration and debate?
Or?

Confused. :shock:
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Greenman72
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Re: Annuities objectively considered

Post by Greenman72 »

I priced an annuity for a 72 year-old woman a few weeks back. A SPIA would have paid her 7.1%, in exchange for her giving up complete and total control of her money.

The evil, geeedy, life-sucking, bloodthirsty variable annuity company would have paid her a guaranteed 6.5%, without the need to annuitize. She would have still had reasonable control of her money, possibility for gains (even while taking guaranteed income), possibility of increases in guaranteed income (due to a a high-water-Mark lock-in on the GMWB) and a guaranteed death benefit of 100% of her premium (less any withdrawals). Yes—this comes at a price—A de-facto 2.6% AUM fee, plus the fees on the underlying investments. But in my mind, that’s still better than giving up complete and total control of your money, cosindering that the SPIA only paid 0.6% more over the course of a lifetime.

There is a time and a place for all annuities. Even high-fee, advisor sold variable annuities. Yes—they tend to be oversold, but they’re not 100% evil. They should be used sparingly as part of an overall plan.
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Re: Annuities objectively considered

Post by Spirit Rider »

I hope you didn't charge that poor 72-year old woman for steering her to an entirely inappropriate investment for her age.

Your so called guarantee is likely extremely misleading. Your so-called 6.5% guarantee is almost certainly on a Minimum Guaranteed Surrender Value (MGSV) of 87.5%. So the guarantee is really 6.5% of 87.5% of the principal. For a 5.6875% guarantee on 100% of the principal.

Add to that all the other smoke and mirrors and downright deceptions no doubt involved in the product.
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Re: Annuities objectively considered

Post by smectym »

Skepticism about annuities is justified. Of course hysterical condemnation is ridiculous, as is greeting newbies who post about annuities with all the warmth and hospitality of “peasants with pitchforks.” Fortunately, that is never seen on this forum.

We hold a substantial sum in a Vanguard Variable Annuity (VA). We have accumulated significant additional tax-deferred earnings. Unlike IRA’s or 401(k)’s, under VA rules no RMD’s kick in at 70.5. We consider that a plus.

A downside of variable annuities is that earnings on capital gains and stock dividends do not receive the favorable capital gains tax rate. However, the same is true of 401(k)s and IRAs. it’s not unique to VA’s. It’s the trade off one accepts for tax deferral, which can last for decades for the 401(k), and decades more with the VA.

Unlike the strict caps on annual contributions for 401(k), VA contributions are for practical purposes unlimited. You might get static from some firms if you try to contribute over $5 million. Even that is probably just going to amount to some due diligence after which the transaction would be approved. But most of us don’t have that problem.

Another point: unlike the 401(k), there is no current year tax deduction for VA contributions. That’s a negative for the VA. Indeed, the VA is probably only appropriate for those who have maxed out their 401(k) and still need additional tax deferred space.

And who does really need that space? The argument can be made that the best deal is simply to buy and hold equities for many years in a taxable account: because if you don’t sell, the capital gains can’t be taxed. There is good logic to that and in retrospect I wish we had done more of that.

Nevertheless, we’re not sorry or kicking ourselves for holding a substantial VA. And every so often we roll a portion of the VA over to an immediate annuity via a 1035 exchange to produce monthly income. The tax treatment of such monthly payments is favorable, as only the pro rata portion of each check attributable to earnings is taxed.

Vanguard has some of the lower priced VA’s on the market. I admit I wish their costs were even lower and certainly cost is a big problem with VA’s generally.

In short, VA’s are probably not appropriate for most investors, but some high earners might take a closer look. And it’s not “either/or” between a VA and an immediate annuity, because, as explained above, the one may be converted into the other on a favorable tax basis.

Smectym
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Re: Annuities objectively considered

Post by The Wizard »

I don't really see a question from the OP.
So I'll just mention that I get several thousand $$ per month income from immediate annuities at TIAA that I started in 2013.
These are both "fixed" (Trad) and variable (TREA and CREF Stock).

With maximal SS starting at age 70 in a year, my total retirement income will be quite healthy and my remaining portfolio will be almost surplus to my needs and continue to grow nicely long-term...
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Re: Annuities objectively considered

Post by Cyclesafe »

smectym wrote: Sat Dec 29, 2018 12:52 amNevertheless, we’re not sorry or kicking ourselves for holding a substantial VA. And every so often we roll a portion of the VA over to an immediate annuity via a 1035 exchange to produce monthly income. The tax treatment of such monthly payments is favorable, as only the pro rata portion of each check attributable to earnings is taxed.
I recall being informed by Vanguard that it was not possible to annuitize a portion of a variable annuity. It was all or nothing. But you seem to be saying that a portion of the VA can be 1035'ed and the annuitized elsewhere. Is that what you have done?
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Re: Annuities objectively considered

Post by zuma »

nisiprius wrote: Fri Dec 28, 2018 7:20 pm
Realisticinvestor wrote: Fri Dec 28, 2018 6:32 pm...In reading this forum as well as investment advice published by various "experts," it is rare that I see an objective evaluation of annuities as a component of a portfolio. I suspect that a major reason is that most annuities are "insurance products" rather than "securities," and as such are inadvertently or deliberately not promoted (or are even disparaged) by people who sell or invest in only "securities." For example, I have most of my investments with Vanguard, but dare not mention "annuities" on their blog or their censors block my comments....
1) ???? What do you mean by "their blog?" I'm unaware of Vanguard having any kind of forum or blog of their own.
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Re: Annuities objectively considered

Post by SGM »

Mel has written several articles recommending SPIAs. This forum has generally been positive towards SPIAs.

Our plan is to purchase several SPIAs over a ten year period from age 70 to 80. Ten years ago I considered purchasing a variable annuity through Vanguard, but felt it had increased costs and no additional benefit compared to a buy and hold taxable account.

We have a non cost of living adjusted pension is similar to a SPIA and backed by a well funded corporate plan. Delaying SS is the equivalent of buying a cost of living adjusted annuity.

We are happy with a TIAA-CREF annuity from a prior employer. It has a variable and non-variable component and has increased payouts greatly in the few years since it was annuitized. TIAA does not guarantee the payout and thus has lower costs than most insurance companies. It also has been described as Tontine-like.
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Re: Annuities objectively considered

Post by Stormbringer »

For what it's worth, here is how I look at. People mostly live their lives by the cash flow statement, not the balance sheet. Every month money comes in, and money goes out. There is:
  1. Income we need.
  2. Income we want.
For income I need (i.e. for non-discretionary expenses such as food on the table, roof over my head, etc.), I feel that unnecessary risks are simply unacceptable, and that includes both longevity risk and inflation risk. The only things I know of that ensure we will never run out of purchasing power as long as we live are social security, a well-funded pension with a COLA, and an SPIA with an inflation adjustment. If your essential basic expenses are covered by the first two, then you don't need an SPIA.

The 4% rule says we "probably" won't run out of money in 30 years, which to me means I "might" be rummaging through garbage cans when I'm 90, and that simply isn't good enough.

For the income I want, a probabilistic, portfolio-based approach is just fine. If the markets don't deliver, then we skip a vacation, drive the old car an extra year, eat in a bit more, or whatever adjustments are needed to make it work.
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Re: Annuities objectively considered

Post by Sandtrap »

The Wizard wrote: Sat Dec 29, 2018 3:12 am I don't really see a question from the OP.
So I'll just mention that I get several thousand $$ per month income from immediate annuities at TIAA that I started in 2013.
These are both "fixed" (Trad) and variable (TREA and CREF Stock).

With maximal SS starting at age 70 in a year, my total retirement income will be quite healthy and my remaining portfolio will be almost surplus to my needs and continue to grow nicely long-term...
Outstanding!
Do you think your retirement income stream would be as reliable if you did not have this SPIA setup??
j
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Re: Annuities objectively considered

Post by Horton »

Stormbringer wrote: Sat Dec 29, 2018 9:06 am For what it's worth, here is how I look at. People mostly live their lives by the cash flow statement, not the balance sheet. Every month money comes in, and money goes out. There is:
  1. Income we need.
  2. Income we want.
For income I need (i.e. for non-discretionary expenses such as food on the table, roof over my head, etc.), I feel that unnecessary risks are simply unacceptable, and that includes both longevity risk and inflation risk. The only things I know of that ensure we will never run out of purchasing power as long as we live are social security, a well-funded pension with a COLA, and an SPIA with an inflation adjustment. If your essential basic expenses are covered by the first two, then you don't need an SPIA.

The 4% rule says we "probably" won't run out of money in 30 years, which to me means I "might" be rummaging through garbage cans when I'm 90, and that simply isn't good enough.

For the income I want, a probabilistic, portfolio-based approach is just fine. If the markets don't deliver, then we skip a vacation, drive the old car an extra year, eat in a bit more, or whatever adjustments are needed to make it work.
Well said.
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Re: Annuities objectively considered

Post by Oicuryy »

Greenman72 wrote: Fri Dec 28, 2018 11:02 pm But in my mind, that’s still better than giving up complete and total control of your money, cosindering that the SPIA only paid 0.6% more over the course of a lifetime.
Really?

You think it is worth spending 8.45% of her monthly payout for the option to take excess withdrawals that would reduce her benefit base and guaranteed withdrawal amount pro-rata?

Really?!

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Re: Annuities objectively considered

Post by The Wizard »

Sandtrap wrote: Sat Dec 29, 2018 9:13 am
The Wizard wrote: Sat Dec 29, 2018 3:12 am I don't really see a question from the OP.
So I'll just mention that I get several thousand $$ per month income from immediate annuities at TIAA that I started in 2013.
These are both "fixed" (Trad) and variable (TREA and CREF Stock).

With maximal SS starting at age 70 in a year, my total retirement income will be quite healthy and my remaining portfolio will be almost surplus to my needs and continue to grow nicely long-term...
Outstanding!
Do you think your retirement income stream would be as reliable if you did not have this SPIA setup??
j
Reliable? That's a funny word.
I set up my immediate annuities with TIAA to track inflation to some degree over the long run.
So around 50% of my annuity income tracks commercial real estate (TREA) and 15% tracks the broad stock market (CREF Stock).

I setup my annuities to adjust monthly rather than annually for increased excitement.
Stocks declined from 11/20 to 12/20 as we know, so my monthly payment just after New Year's will decline a bit also.
But I'm ok with that since my overall income exceeds my expenses by a fair amount...
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Re: Annuities objectively considered

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Greenman72 wrote: Fri Dec 28, 2018 11:02 pm I priced an annuity for a 72 year-old woman a few weeks back. A SPIA would have paid her 7.1%, in exchange for her giving up complete and total control of her money.

The evil, geeedy, life-sucking, bloodthirsty variable annuity company would have paid her a guaranteed 6.5%, without the need to annuitize. She would have still had reasonable control of her money, possibility for gains (even while taking guaranteed income), possibility of increases in guaranteed income (due to a a high-water-Mark lock-in on the GMWB) and a guaranteed death benefit of 100% of her premium (less any withdrawals). Yes—this comes at a price—A de-facto 2.6% AUM fee, plus the fees on the underlying investments. But in my mind, that’s still better than giving up complete and total control of your money, cosindering that the SPIA only paid 0.6% more over the course of a lifetime.

There is a time and a place for all annuities. Even high-fee, advisor sold variable annuities. Yes—they tend to be oversold, but they’re not 100% evil. They should be used sparingly as part of an overall plan.
I am not 100% against Variable Annuities with the so-called living benefits. Bottom line is that such annuities sold 2007 and before might have guarantees that are worth the cost but since then insurance companies have cut back on those guarantees. Problem is, these are complex instruments and not easy to analyze. They have many moving parts. You have to read the fine print. Even the people who sell them can get confused. This is why such products are not recommended here. Also not so easy to get an objective opinion.

From what I have seen, the costs are high, the benefits marginal, and comparisons difficult. Each insurance company will structure a similar product somewhat differently. I would never say never but most of the time one should pass on the more complex annuity products. To be safe, stick with the Single Premium Immediate Annuities. They are a plain vanilla product and are relatively easy to compare.
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Re: Annuities objectively considered

Post by Stinky »

nedsaid wrote: Sat Dec 29, 2018 1:36 pm
Greenman72 wrote: Fri Dec 28, 2018 11:02 pm
I am not 100% against Variable Annuities with the so-called living benefits. Bottom line is that such annuities sold 2007 and before might have guarantees that are worth the cost but since then insurance companies have cut back on those guarantees. Problem is, these are complex instruments and not easy to analyze. They have many moving parts. You have to read the fine print. Even the people who sell them can get confused. This is why such products are not recommended here. Also not so easy to get an objective opinion.

From what I have seen, the costs are high, the benefits marginal, and comparisons difficult. Each insurance company will structure a similar product somewhat differently. I would never say never but most of the time one should pass on the more complex annuity products. To be safe, stick with the Single Premium Immediate Annuities. They are a plain vanilla product and are relatively easy to compare.
+1 on nedsaid’s comment

I’ve seen the VA business from the inside, and I totally agree with his comment on the VA living benefits. Many insurers grossly underpriced the benefit in 2007 and before, because the actuaries didn’t fully understand the risks in the benefit, and those policies are a pretty good consumer value. But VAs sold since then, including those for sale today, are almost always not a good consumer value. Exceptions exist - see Vanguard and TIAA - but they are the exceptions.
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Re: Annuities objectively considered

Post by columbia »

The Wizard wrote: Sat Dec 29, 2018 1:19 pm
Sandtrap wrote: Sat Dec 29, 2018 9:13 am
The Wizard wrote: Sat Dec 29, 2018 3:12 am I don't really see a question from the OP.
So I'll just mention that I get several thousand $$ per month income from immediate annuities at TIAA that I started in 2013.
These are both "fixed" (Trad) and variable (TREA and CREF Stock).

With maximal SS starting at age 70 in a year, my total retirement income will be quite healthy and my remaining portfolio will be almost surplus to my needs and continue to grow nicely long-term...
Outstanding!
Do you think your retirement income stream would be as reliable if you did not have this SPIA setup??
j
Reliable? That's a funny word.
I set up my immediate annuities with TIAA to track inflation to some degree over the long run.
So around 50% of my annuity income tracks commercial real estate (TREA) and 15% tracks the broad stock market (CREF Stock).

I setup my annuities to adjust monthly rather than annually for increased excitement.
Stocks declined from 11/20 to 12/20 as we know, so my monthly payment just after New Year's will decline a bit also.
But I'm ok with that since my overall income exceeds my expenses by a fair amount...
Since it nearly impossible to get any usable information from the TIAA website....what kind of rate did you get with the Stock variable option?
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Re: Annuities objectively considered

Post by ThrustVectoring »

There's one annuity product that's worth buying, and that's a single premium immediate annuity. And that's only because it gets around the ban on tontines.

With SPIAs, 100% of the money put into the system gets turned into income that retirees can (and should) spend. Standard investments have the problem that retirement savings of people who die earlier get sent to heirs rather than getting spent on retirees. In other words, there's effectively a "mortality credit" given to long-lived retirees at the expense of shorter-lived ones, which makes retirement saving far more efficient.
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Re: Annuities objectively considered

Post by NotWhoYouThink »

[ quoted post removed by admin LadyGeek]

No need to spend hours reading everything ever written about annuities on this forum. There is user-friendly information here on the forum in the wiki, about annuities and many other subjects. Respectfully asking, rather than attacking people trying to point it out to you will get you far. After reading what is on the wiki, feel free to come back with questions, comments, or suggestions for improvements.
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Re: Annuities objectively considered

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I removed several off-topic comments and replies. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

...At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
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Re: Annuities objectively considered

Post by The Wizard »

columbia wrote: Sat Dec 29, 2018 1:53 pm
Since it nearly impossible to get any usable information from the TIAA website....what kind of rate did you get with the Stock variable option?
Good question.
TIAA variable annuities, such as CREF Stock and TREA have a 4% Assumed Investment Return (AIR).
When I annuitized in 2013 at age 63, I got an initial payout rate of 6.52%, based on single life, 10- year guarantee.
But that's just the starting point.

Subsequently, the monthly payout is adjusted based on performance from the 20th previous to the 20th of the present month.
If more than 4% annualized, your payout check increases.
If less than 4%, it decreases.
On a monthly basis, the hurdle is 0.333%.

So if you think CREF Stock will increase more than 4% per year long-term on average, it's a good bet.
Note: because CREF Stock is a VA, dividends are included in its NAV.
So exceeding 4% growth per year on average isn't all that hard...
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Realisticinvestor
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Re: Annuities objectively considered

Post by Realisticinvestor »

Sandtrap wrote: Fri Dec 28, 2018 9:08 pm Thanks for the interesting information.
I have an old friend 80+ that has a TIAA deferred annuity, long outlived (getting his money's worth), and has purchased SPIA's over time after retirement. He and his DW are doing quite well with this approach.

DW and I might also consider SPIA's at some point in later retirement per "Bogle Basic Options". (per "Spirit Rider" above")

Otherwise:
Not sure if you are asking a question?
Or presenting investment options for consideration and debate?
Or?

Confused. :shock:
As a person with an interest and background in economics and personal finance (but no self interest in promoting particular "investment products") I was presenting an investment option for discussion. That is supposed to be the purpose of forums such as this. I am gratified that some of the responses expanded upon the basic pros and cons of the two main varieties of annuities that I described.
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Realisticinvestor
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Re: Annuities objectively considered

Post by Realisticinvestor »

smectym wrote: Sat Dec 29, 2018 12:52 am Skepticism about annuities is justified. Of course hysterical condemnation is ridiculous, as is greeting newbies who post about annuities with all the warmth and hospitality of “peasants with pitchforks.” Fortunately, that is never seen on this forum.

We hold a substantial sum in a Vanguard Variable Annuity (VA). We have accumulated significant additional tax-deferred earnings. Unlike IRA’s or 401(k)’s, under VA rules no RMD’s kick in at 70.5. We consider that a plus.

A downside of variable annuities is that earnings on capital gains and stock dividends do not receive the favorable capital gains tax rate. However, the same is true of 401(k)s and IRAs. it’s not unique to VA’s. It’s the trade off one accepts for tax deferral, which can last for decades for the 401(k), and decades more with the VA.

Unlike the strict caps on annual contributions for 401(k), VA contributions are for practical purposes unlimited. You might get static from some firms if you try to contribute over $5 million. Even that is probably just going to amount to some due diligence after which the transaction would be approved. But most of us don’t have that problem.

Another point: unlike the 401(k), there is no current year tax deduction for VA contributions. That’s a negative for the VA. Indeed, the VA is probably only appropriate for those who have maxed out their 401(k) and still need additional tax deferred space.

And who does really need that space? The argument can be made that the best deal is simply to buy and hold equities for many years in a taxable account: because if you don’t sell, the capital gains can’t be taxed. There is good logic to that and in retrospect I wish we had done more of that.

Nevertheless, we’re not sorry or kicking ourselves for holding a substantial VA. And every so often we roll a portion of the VA over to an immediate annuity via a 1035 exchange to produce monthly income. The tax treatment of such monthly payments is favorable, as only the pro rata portion of each check attributable to earnings is taxed.

Vanguard has some of the lower priced VA’s on the market. I admit I wish their costs were even lower and certainly cost is a big problem with VA’s generally.

In short, VA’s are probably not appropriate for most investors, but some high earners might take a closer look. And it’s not “either/or” between a VA and an immediate annuity, because, as explained above, the one may be converted into the other on a favorable tax basis.

Smectym
I appreciate your reinforcement of what I said in my "OP" ("original post" for anyone not conversant with techno-speak). I also agree think that your additional observation is both correct and important -- to the effect that "the best deal is simply to buy and hold equities for many years in a taxable account." (That is the "best deal" for individuals, if we conveniently disregard the need for federal and state governments to obtain revenues from somebody.)

Even without regard to the necessity of government collecting taxes (however we agree or disagree with how the revenues are spent) this implies that "tax deferred" retirement plans -- including tax deferred annuities, a.k.a. "variable annuities," a.k.a. "VAs," and various forms of tax-deferred IRAs -- tend to be over-sold.

In the variable annuity that I had with TIAA, I invested most of the value in the CREF inflation protected bond fund while concentrating my equity investments in "taxable" a.k.a. "non-retirement" accounts. Admittedly anecdotally -- I have been very satisfied with the after-tax returns that I am continuing to enjoy having converted that "variable annuity" with TIAA to an "immediate income annuity" with another insurance firm that offered a higher annual cash flow to me than TIAA offered.

Perhaps somebody else would like to compare the current payouts on immediate payment annuities being offered by TIAA to those by other insurance firms. One other point is that TIAA did not previously offer the option of annually increasing payouts as did other firms.
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Re: Annuities objectively considered

Post by nisiprius »

Realisticinvestor wrote: Sat Dec 29, 2018 6:59 pm[I previously had a TIAA variable annuity...] One other point is that TIAA did not previously offer the option of annually increasing payouts as did other firms...
TIAA has long offered two options, a "level payment" option and a "graded payment" option, which creates an annually increasing payment. I personally opted for the graded method when I converted to a "lifetime contract" in 2007. It turns out that TIAA has offered the graded payment option since 1982.
The TIAA Graded Payment Method of receiving traditional TIAA annuity benefits was introduced in 1982. Under it, a part of current annuity dividend income is withheld each year in order to increase the annuity income for the following year. As a result, the starting income is lower than under the standard method, but the graded method has a superior capacity for real growth and a built-in mechanism to help maintain purchasing power. This issue examines the actual benefit payment experience of the graded method in terms of how changes in payment amounts have related to changes in the Consumer Price Index.
As far as I know, TIAA does not offer an SPIA as such. The "lifetime contracts" are still a kind of variable annuity, with payouts determined by growth of the different "vintages" in one's TIAA Traditional account. That means there isn't any obvious way to make an apples-to-apple comparison between a TIAA lifetime contract and a traditional SPIA.

I could tell you that in 2017, the CPI-adjusted SPIA I bought through Vanguard paid out 5.5% of the price I paid in 2007, and the TIAA annuity paid out 7.9% of the value of the account at the time I converted it to lifetime graded payment at about the same time. In other words, the TIAA contract looks like a much better deal, as one might expect given that the insurance company Vanguard used is for-profit while TIAA is a non-profit. However, since the TIAA contract has no explicit link to the CPI it's not apples-to-apples, nor (due to "vintages") would the numbers be the same for other participants.
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Re: Annuities objectively considered

Post by Sandtrap »

Realisticinvestor wrote: Sat Dec 29, 2018 6:27 pm
Sandtrap wrote: Fri Dec 28, 2018 9:08 pm Thanks for the interesting information.
I have an old friend 80+ that has a TIAA deferred annuity, long outlived (getting his money's worth), and has purchased SPIA's over time after retirement. He and his DW are doing quite well with this approach.

DW and I might also consider SPIA's at some point in later retirement per "Bogle Basic Options". (per "Spirit Rider" above")

Otherwise:
Not sure if you are asking a question?
Or presenting investment options for consideration and debate?
Or?

Confused. :shock:
As a person with an interest and background in economics and personal finance (but no self interest in promoting particular "investment products") I was presenting an investment option for discussion. That is supposed to be the purpose of forums such as this. I am gratified that some of the responses expanded upon the basic pros and cons of the two main varieties of annuities that I described.
Thanks for the response. You brought up good points.
Annuities are a rich topic to explore here.
As a retiree, I'm more than interested in these options going forward.
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Re: Annuities objectively considered

Post by vineviz »

ThrustVectoring wrote: Sat Dec 29, 2018 1:55 pm There's one annuity product that's worth buying, and that's a single premium immediate annuity. And that's only because it gets around the ban on tontines.

With SPIAs, 100% of the money put into the system gets turned into income that retirees can (and should) spend. Standard investments have the problem that retirement savings of people who die earlier get sent to heirs rather than getting spent on retirees. In other words, there's effectively a "mortality credit" given to long-lived retirees at the expense of shorter-lived ones, which makes retirement saving far more efficient.
I'd suggest that there could be a role for a deferred income annuity, or DIA, in the retirement income plan for many people as well. A DIA with a lifetime payout is arguably a more "pure" form of longevity insurance than a SPIA, and in some cases, if purchased early in retirement, can provide that insurance at relatively low expense. Purchasing a DIA early in retirement, before it becomes evident that self-selection for longevity is taking place, generally produces a much higher payout. The difference in payout between a 25 year DIA at age 60 and a 20 year DIA at age 65 can be fairly dramatic, for instance.

A DIA can also be used to fill in the income gap between early retirement and the first social security check, though it has fewer advantages over a SPIA in this application.
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Re: Annuities objectively considered

Post by livesoft »

A 12/21/ article in the NYTimes is about some new kinds of annuities:
Meet the People Trying to Put a Friendlier Face on Annuities
Even Dan Solin has a new kind of product mentioned in the article.
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nisiprius
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Re: Annuities objectively considered

Post by nisiprius »

livesoft wrote: Sat Dec 29, 2018 8:31 pm A 12/21/ article in the NYTimes is about some new kinds of annuities:
Meet the People Trying to Put a Friendlier Face on Annuities
Even Dan Solin has a new kind of product mentioned in the article.
Hmmm... seems like a mix of good and dubious products. I think the article is talking about SPIAs rather than variable annuities, so-called "fixed indexed annuities," and the like, but they sure don't make that clear.

I thought this was interesting:
Now, he’s the founder of Alex.fyi, which will start selling the simplest annuities — where you turn over a lump sum and get a check for life after that — early next year... Mr. Smith is noteworthy in part for the transparency he promises. I got angry missives last weekend from outraged salespeople wanting to know why I suggested that prospects ask them to disclose their commissions. Mr. Smith chuckled when I told him that; he sees no reason not to explain what his company will earn on every sale.
I've been casually poking around on the ALEX.fyi site looking for that commission information, but I haven't found it yet. Can anyone find it? I tried clicking on various places where the word "transparency" appears, but none of them appeared to be links. Maybe this will become clearer when actual sales go live on the site.

Meanwhile, Vanguard has sold these "simplest annuities" for well over ten years now, and it began disclosing commissions since about 2010 when it first started using the Income Solutions platform:
Please be advised that all annuity quotes reflect a one-time, upfront commission equal to 2% of the deposit amount. The amount displayed already reflects this commission, and is the amount you would receive from your annuity. This commission is paid by the insurance company to Hueler Investment Services, Inc. only if a purchase is made; there is no cost to obtain a quote.
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Re: Annuities objectively considered

Post by smectym »

Cyclesafe wrote: Sat Dec 29, 2018 3:50 am
smectym wrote: Sat Dec 29, 2018 12:52 amNevertheless, we’re not sorry or kicking ourselves for holding a substantial VA. And every so often we roll a portion of the VA over to an immediate annuity via a 1035 exchange to produce monthly income. The tax treatment of such monthly payments is favorable, as only the pro rata portion of each check attributable to earnings is taxed.
I recall being informed by Vanguard that it was not possible to annuitize a portion of a variable annuity. It was all or nothing. But you seem to be saying that a portion of the VA can be 1035'ed and the annuitized elsewhere. Is that what you have done?
Yes, cyclesafe, There must’ve been some miscommunication. It’s just a fact that you can roll over all or a portion of your Variable Annuity via a 1035 exchange to a term or life annuity to receive periodic payments, and Vanguard itself provides a convenient method to do that. We’ve done that several times.

Smectym
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Re: Annuities objectively considered

Post by The Wizard »

nisiprius wrote: Sat Dec 29, 2018 7:37 pm ...As far as I know, TIAA does not offer an SPIA as such. The "lifetime contracts" are still a kind of variable annuity, with payouts determined by growth of the different "vintages" in one's TIAA Traditional account. That means there isn't any obvious way to make an apples-to-apple comparison between a TIAA lifetime contract and a traditional SPIA...
Actually, before I annuitized an additional increment of TIAA Traditional in 2017, I did do a comparison with immediate annuities dot com.
I got a 7.04% payout with TIAA whereas the 8 or 10 results from that website were all well under 7%. This was for age 67, single life, 10 year guarantee, non-graded.

But yes, your personal mix of Trad vintages can impact your payout rate significantly.

Additionally, TIAA some years has increased the payout dollar amount of existing Trad annuitants by 1% or 2% due to strong reserves. By this, I mean an existing payout of $1000/month goes to $1010/month for a 1% increase.
Most conventional SPIAs don't do this...
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Re: Annuities objectively considered

Post by TravelforFun »

Several people mentioned the SPIA payout is significantly more than the safe withdrawal rate of 3 to 4%. What would be a typical SPIA payout rate assuming when you (the one who buys the SPIA) die, the payments stop?

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Re: Annuities objectively considered

Post by vineviz »

TravelforFun wrote: Sun Dec 30, 2018 11:48 am Several people mentioned the SPIA payout is significantly more than the safe withdrawal rate of 3 to 4%. What would be a typical SPIA payout rate assuming when you (the one who buys the SPIA) die, the payments stop?
For a 65 year-old male, the current payout rate is in the range of 6.5% to 7.0%.

It'd be a little lower for a female and little higher for an older annuitant.

https://www.immediateannuities.com
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Re: Annuities objectively considered

Post by TravelforFun »

vineviz wrote: Sun Dec 30, 2018 11:56 am
TravelforFun wrote: Sun Dec 30, 2018 11:48 am Several people mentioned the SPIA payout is significantly more than the safe withdrawal rate of 3 to 4%. What would be a typical SPIA payout rate assuming when you (the one who buys the SPIA) die, the payments stop?
For a 65 year-old male, the current payout rate is in the range of 6.5% to 7.0%.

It'd be a little lower for a female and little higher for an older annuitant.

https://www.immediateannuities.com
Thanks vineviz.

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Re: Annuities objectively considered

Post by marcopolo »

vineviz wrote: Sun Dec 30, 2018 11:56 am
TravelforFun wrote: Sun Dec 30, 2018 11:48 am Several people mentioned the SPIA payout is significantly more than the safe withdrawal rate of 3 to 4%. What would be a typical SPIA payout rate assuming when you (the one who buys the SPIA) die, the payments stop?
For a 65 year-old male, the current payout rate is in the range of 6.5% to 7.0%.

It'd be a little lower for a female and little higher for an older annuitant.

https://www.immediateannuities.com
I don't think this would provide an apples to apples comparison. As, I believe those annuity rates are without any inflation adjustments, whereas SWR rates are typically assuming inflation adjusted withdrawals. I think the annuity rate would still be higher, even with inflation adjusted payouts, but the gap, I think, would be much smaller.
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Re: Annuities objectively considered

Post by chipperd »

We haven't gotten a response from the OP. The question I have is, what is the OP's question? Seems like just a promo to me, so my question is, where is my free dinner?
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Re: Annuities objectively considered

Post by smitcat »

chipperd wrote: Sun Dec 30, 2018 12:24 pm We haven't gotten a response from the OP. The question I have is, what is the OP's question? Seems like just a promo to me, so my question is, where is my free dinner?

He posted above at 7:37 last night...

"As a person with an interest and background in economics and personal finance (but no self interest in promoting particular "investment products") I was presenting an investment option for discussion. That is supposed to be the purpose of forums such as this. I am gratified that some of the responses expanded upon the basic pros and cons of the two main varieties of annuities that I described."
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Re: Annuities objectively considered

Post by nedsaid »

vineviz wrote: Sat Dec 29, 2018 8:25 pm
ThrustVectoring wrote: Sat Dec 29, 2018 1:55 pm There's one annuity product that's worth buying, and that's a single premium immediate annuity. And that's only because it gets around the ban on tontines.

With SPIAs, 100% of the money put into the system gets turned into income that retirees can (and should) spend. Standard investments have the problem that retirement savings of people who die earlier get sent to heirs rather than getting spent on retirees. In other words, there's effectively a "mortality credit" given to long-lived retirees at the expense of shorter-lived ones, which makes retirement saving far more efficient.
I'd suggest that there could be a role for a deferred income annuity, or DIA, in the retirement income plan for many people as well. A DIA with a lifetime payout is arguably a more "pure" form of longevity insurance than a SPIA, and in some cases, if purchased early in retirement, can provide that insurance at relatively low expense. Purchasing a DIA early in retirement, before it becomes evident that self-selection for longevity is taking place, generally produces a much higher payout. The difference in payout between a 25 year DIA at age 60 and a 20 year DIA at age 65 can be fairly dramatic, for instance.

A DIA can also be used to fill in the income gap between early retirement and the first social security check, though it has fewer advantages over a SPIA in this application.
I met with a Fidelity Advisor a few weeks ago and we discussed a similar product. Foggy memory says that if I put down $200,000 today at age 59, that I could receive $1,300 a month for life at age 65. Contrast this with a 65 year old buying an SPIA today with $200,000 could get $1,100 a month. The problem with what I was offered was that there was no death benefit. So if I bought today and died before age 65, my heirs would get zero. I could however, buy such a policy with a return of premium benefit though that would reduce the monthly payment. In fact, I would not buy such a deferred policy without a return of premium or a period certain payout. But it did raise an eyebrow and was something worth thinking about.
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Re: Annuities objectively considered

Post by capjak »

@nedsaid.

Fidelity is just not competitive on their SPIA and deferred income annuity.

I ran on immediate annuity.com and their rate for a 59 year old getting income at 65 based on 200,000 premium was $1473 per month and if you want return of premium prior to 65 if you pass you reduce it to $1394 per month.
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Re: Annuities objectively considered

Post by nedsaid »

capjak wrote: Sun Dec 30, 2018 2:49 pm @nedsaid.

Fidelity is just not competitive on their SPIA and deferred income annuity.

I ran on immediate annuity.com and their rate for a 59 year old getting income at 65 based on 200,000 premium was $1473 per month and if you want return of premium prior to 65 if you pass you reduce it to $1394 per month.
Thanks a bunch, this is very good information. I found the quote, for $200,000 paid at age 59 with payments to start at age 65, the monthly payments were $1,348.26 without return of premium. Keep in mind that the quotes will vary state by state. But yes, this shows the value of shopping around. The specific product was New York Life Guaranteed Future Annuity II.
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Re: Annuities objectively considered

Post by Oicuryy »

nedsaid wrote: Sun Dec 30, 2018 2:21 pm The problem with what I was offered was that there was no death benefit. So if I bought today and died before age 65, my heirs would get zero.
That is part of the deal. If you buy car insurance and don't have an accident you don't get your money back. If you buy homeowners insurance and your house doesn't burn down you don't get your money back. And if you buy longevity insurance and don't live long you don't get your money back.

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Re: Annuities objectively considered

Post by vineviz »

Oicuryy wrote: Sun Dec 30, 2018 3:03 pm
nedsaid wrote: Sun Dec 30, 2018 2:21 pm The problem with what I was offered was that there was no death benefit. So if I bought today and died before age 65, my heirs would get zero.
That is part of the deal. If you buy car insurance and don't have an accident you don't get your money back. If you buy homeowners insurance and your house doesn't burn down you don't get your money back. And if you buy longevity insurance and don't live long you don't get your money back.

Ron
There are plenty of annuities that allow SOMEONE to get your money back when you die, but it’s true that you’re probably out of luck in that scenario either way.
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Re: Annuities objectively considered

Post by lostdog »

SPIA's are decent.

The rest are like the pay day loans of the middle class.
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Re: Annuities objectively considered

Post by TigerNest »

I’ll probably get an annuity when I’m very old to protect against longevity risk. I think it’s a fine product for a specific use case.

The problem is simple annuities got commoditized and insurance companies and agents don’t make much money off of them. The insurance industry tried to ‘innovate’ by creating complex obfuscating products that are almost always worse than just investing the money on your own. After all, the profit comes from somewhere.

There are a lot of well-meaning insurance agents out there that were trained by companies and don’t realize they’re not very good. By the time they’re sophisticated enough, they’ve probably convinced themselves. As Upton Sinclair once said, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.“
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Re: Annuities objectively considered

Post by nedsaid »

Oicuryy wrote: Sun Dec 30, 2018 3:03 pm
nedsaid wrote: Sun Dec 30, 2018 2:21 pm The problem with what I was offered was that there was no death benefit. So if I bought today and died before age 65, my heirs would get zero.
That is part of the deal. If you buy car insurance and don't have an accident you don't get your money back. If you buy homeowners insurance and your house doesn't burn down you don't get your money back. And if you buy longevity insurance and don't live long you don't get your money back.

Ron
Except I don't view this as longevity insurance as such. It is more like prepaying for a pension. I think of longevity insurance as annuities that start paying at age 85, purchased somewhere in your sixties. In this case with Fidelity, I was looking 5-6 years down the road and not 26 years.
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