GlennK wrote: ↑Wed Aug 26, 2020 11:43 am
From the article, it states
"But if retirees do forgo the annuity, they will have difficulty matching its payout, even if they start at age 67. Annuities have their disadvantages, but they do yield more than most investment alternatives."
Is this true? What other investment alternatives are they comparing annuities to? And if true, why doesn't everybody use single premium annuities rather than live off the assets?
That statement is both true and "not even wrong." There are so many differences between the annuitization they propose and alternate says to use wealth for retirement income that I would probably have to type for an hour to get into what I know about it, and I am not an expert.
You might google "the annuity paradox" for academic literature on the topic of why people don't use annuities as much as academic theory would suggest they should.
Just a few things to think about are:
1. The money invested is gone forever and cannot be used for an emergency, a discretionary expenditure, or accumulated and grown for heirs. The annuitant loses all control of their wealth. 4% withdrawal schemes almost all the time leave behind more money in real dollars than the investor started with.
2. The annuities they talk about are not inflation indexed, though fixed increment annuities can be had. What they pay then is much less.
3. The payout is secured only by the underwriter and any state guarantees. There is risk that needs to be managed.
4. Total annuitization of all the wealth is clearly a bad idea for all kinds of reasons. I have the idea it used to be a rule that no one should be sold annuities for more than half their wealth. I don't know where I got that, but it would be a good idea. The article does not suggest advice at that level of complexity. A lot of people would argue that annuitizing some of your income stream is a good idea. At the least Social Security provides an inflation indexed annuity that can be increased by delaying SS until age 70, a common recommendation on this forum.
Etc., etc., etc. so that one can see this is a complex issue that needs more consideration than just plugging a notice into a plan document.