Why are pensions revered, but annuities reviled?

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Stormbringer
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Why are pensions revered, but annuities reviled?

Post by Stormbringer » Sat Apr 22, 2017 8:21 am

I read lots of stuff about the good old days when everyone had a pension, but at the same time whenever anyone brings up annuities people's blood starts to boil. I don't get it. It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension.

Am I missing something?
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Re: Why are pensions revered, but annuities reviled?

Post by The Wizard » Sat Apr 22, 2017 8:23 am

Yes.
You are missing that annuities are painted with a very wide brush.

It would be good if the various annuity products out there were rated with a Boglehead-esque approach, but I don't see that happening.
There are some evil equity indexed annuities that have high commissions and expenses.

Note: about 60% of my retirement income comes from payout-phase lifetime immediate annuities from TIAA, both fixed (Trad) and variable (TREA and CREF Stock)...
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bberris
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Re: Why are pensions revered, but annuities reviled?

Post by bberris » Sat Apr 22, 2017 8:30 am

The blood-cooking arises when someone wants to buy a fixed index annuity or some flavor of that. The names keep changing to protect the guilty.

I haven't noticed any boiling blood from SPIA's

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Re: Why are pensions revered, but annuities reviled?

Post by retiredjg » Sat Apr 22, 2017 8:33 am

Agreed. SPIA's are generally not reviled around here. The other kinds of annuities (names keep changing...) often have high fees and serve the salesperson more than the customer.

stan1
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Re: Why are pensions revered, but annuities reviled?

Post by stan1 » Sat Apr 22, 2017 8:34 am

Pensions weren't a choice once you selected an employer and were viewed as a benefit/entitlement. Many people contribute far less money to a pension than they get back. Annuities usually aren't subsidized. Plenty of people have bought out their pensions for a cash payment partly because they didn't trust their employer to fully pay out. Plenty of Bogleheads believe they can manage their money as well as an insurance company and want control. Some people also prefer not to trust an insurance company. FInally even with SPIAs we are still in a low interest rate environment. The federal Thrift Savings Plan assumes a lifetime 2.375% annual interest rate on annuities purchased today. If you buy that annuity today you are locking in that rate for the rest of your life. Would have been great to lock in an 8-10% rate of return for the rest of your life 20 years ago but no insurer will do that today.

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Re: Why are pensions revered, but annuities reviled?

Post by The Wizard » Sat Apr 22, 2017 8:42 am

Another part of the problem is that "some" folks fail to make any distinction between Retirement assets and Personal assets, not that it's mandatory or critical to do so.

So long as a person/couple has plenty of $$ coming in in retirement, they can ignore the distinction...
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Re: Why are pensions revered, but annuities reviled?

Post by David Jay » Sat Apr 22, 2017 8:51 am

Stormbringer wrote:I read lots of stuff about the good old days when everyone had a pension, but at the same time whenever anyone brings up annuities people's blood starts to boil. I don't get it. It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension.

Am I missing something?
Yes.

Use the advanced search function by author ""Taylor Larimore" and search phrase "SPIA"
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Re: Why are pensions revered, but annuities reviled?

Post by tibbitts » Sat Apr 22, 2017 8:53 am

Pensions are often revered either because they're:

1. historical, meaning we see someone who's been receiving one for years, with terms that wouldn't be available to employees today;

or

2. still based on wildly optimistic earnings projections that bear no resemblance to reality, at least for "grandfathered" employees. Some may fail and need to be bailed out, but some (particularly government) are likely to be bailed out with minimal loss of benefits.

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Re: Why are pensions revered, but annuities reviled?

Post by oldcomputerguy » Sat Apr 22, 2017 8:53 am

stan1 wrote:Pensions weren't a choice once you selected an employer and were viewed as a benefit/entitlement. Many people contribute far less money to a pension than they get back. Annuities usually aren't subsidized. Plenty of people have bought out their pensions for a cash payment partly because they didn't trust their employer to fully pay out. Plenty of Bogleheads believe they can manage their money as well as an insurance company and want control. Some people also prefer not to trust an insurance company. FInally even with SPIAs we are still in a low interest rate environment. The federal Thrift Savings Plan assumes a lifetime 2.375% annual interest rate on annuities purchased today. If you buy that annuity today you are locking in that rate for the rest of your life. Would have been great to lock in an 8-10% rate of return for the rest of your life 20 years ago but no insurer will do that today.
Ironically, I do have a very small pension (approx. $450/month) from 14 years with a former employer when I hit age 65. The irony is that the former employer is a very well known insurance company. :oops:
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Re: Why are pensions revered, but annuities reviled?

Post by Ged » Sat Apr 22, 2017 9:11 am

Actually I think there is a lot to be wary of with respect to pensions. I'd much rather have a generous employer match.

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Re: Why are pensions revered, but annuities reviled?

Post by MarginalCost » Sat Apr 22, 2017 9:41 am

I don't think annuities are reviled here. I think the selling of annuities is disdained - especially the obfuscation, complexity, and fees that many brokers attempt to layer on. A large part of why SPIAs are held in more esteem is because their simplicity makes them easy to compare, and they are bought and sold almost like commodities. This competitive market also minimizes the advantage to the seller which complexity usually creates.

Stan1's point about how pensions are usually partially subsidized is also important.

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Re: Why are pensions revered, but annuities reviled?

Post by afan » Sat Apr 22, 2017 9:42 am

Note that some retirees have been hurt when their municipal pensions were cut as the government entity went bankrupt. Fully protected pension benefits are fine, but many pensions are at risk.
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Re: Why are pensions revered, but annuities reviled?

Post by CyclingDuo » Sat Apr 22, 2017 9:49 am

Stormbringer wrote:I read lots of stuff about the good old days when everyone had a pension, but at the same time whenever anyone brings up annuities people's blood starts to boil. I don't get it. It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension.

Am I missing something?
Fees, expenses, 150 page prospectuses, etc... get attached to the general term "annuity". However, SPIA's don't receive as much wrath as other annuity products on these forums.

SPIA's themselves are not for everyone, but may indeed meet the needs of some/many as you mention.

https://www.forbes.com/sites/rickferri/ ... 306d0528ba

http://www.obliviousinvestor.com/single ... e-annuity/
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Re: Why are pensions revered, but annuities reviled?

Post by grok87 » Sat Apr 22, 2017 9:56 am

I think regular fixed annuities make a lot of sense (spia). But there are still a bunch of issues:

1) you have to buy it yourself and may get ripped off on price. Pensions are much nicer as they are instituional vs retail pricing.

2) corporate pensions are federally backed up to certain limits. Whereas spia's have some sort of squishy state guarantee fund bAcking that is not a g.o. (General obligation) Of the state

3) it's really hard to buy any spia with inflation protection.
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Re: Why are pensions revered, but annuities reviled?

Post by itstoomuch » Sat Apr 22, 2017 10:06 am

For us, it was a matter of timing, deRisking, and recognizing a good offer.
See signature line below and what it implies.
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Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Why are pensions revered, but annuities reviled?

Post by Ron » Sat Apr 22, 2017 10:30 am

Being an old guy who spent much of his working life in companies that had pensions and then suddenly thrust into the universe that I had to fend for myself by saving/investing for the future, I would say (at least to me) pensions were given where annuities are bought, requiring you to give up a portion of your hard earned savings/investments.

I don't think most folks who have pensions think much about their "cost", since they don't require the employee to give up anything - other than their work (sweat of their brow).

I basically worked for two companies in my lifetime (after I spent four years in the military). The first company had a pension but the rule at the time was that you had to be employed by them 10 years before you became vested. I left after eight years, so I received nothing for my eventual retirement. The second company, from which I retired after almost 30 years of service, had a pension plan when I started but it was eliminated three years later and replaced with a 401(k) plan. Under ERISA rules, employees were given cash for their credits under the discontinued pension plan that either could be spent or rolled over into an IRA (I chose the IRA, whereas most cashed out and spent their "bonus", as they saw it).

When I retired in early 2007 (a decade ago) I had no pension but I did have a decent portfolio value thanks to my 2.5 decades of contributions between my 401(k) and IRA's. Since I retired early (maybe not early compared to a lot of folks on this board, but certainly earlier than the other employees I worked with) and had no pension, I had to make the decision to either use only my portfolio for retirement expenses or share the risk by purchase of an SPIA. While I was lucky enough to get a good return (IRR of 4.79%, which did not include return of premium paid), it still gave me pause (actually a bit of financial shock) to reduce my holdings by the amount of the one time premium payment for the annuity.

At the time, I certainly would have rather my former company "take care" of me by just giving me a pension. However, after living in retirement for a decade and seeing what was the result of the money I paid out for my own "pension", I have no regrets in the decision I made, based upon the options at the time. In fact, it worked out so well that I kept delaying SS benefits until I no longer can delay them and will start my age-70 benefits in ten months. At that time, SS plus my SPIA income will more than cover my current retirement expenses.

FWIW,

- Ron
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Re: Why are pensions revered, but annuities reviled?

Post by Dottie57 » Sat Apr 22, 2017 10:33 am

The Wizard wrote:Yes.
You are missing that annuities are painted with a very wide brush.

It would be good if the various annuity products out there were rated with a Boglehead-esque approach, but I don't see that happening.
There are some evil equity indexed annuities that have high commissions and expenses.

Note: about 60% of my retirement income comes from payout-phase lifetime immediate annuities from TIAA, both fixed (Trad) and variable (TREA and CREF Stock)...

I am thinking about SPIA, and wonder why you chose TIAA. Also at what age did you purchase?

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Re: Why are pensions revered, but annuities reviled?

Post by Ketawa » Sat Apr 22, 2017 11:04 am

stan1 wrote:FInally even with SPIAs we are still in a low interest rate environment. The federal Thrift Savings Plan assumes a lifetime 2.375% annual interest rate on annuities purchased today. If you buy that annuity today you are locking in that rate for the rest of your life. Would have been great to lock in an 8-10% rate of return for the rest of your life 20 years ago but no insurer will do that today.
This isn't how the TSP annuities work. It wouldn't make any sense for the payout to be 2.375% for all potential annuity buyers at any age. 2.375% is the "annuity interest rate index", which then feeds into a worksheet that is used to determine the payout.

For example, a single SPIA that is not inflation adjusted starting at age 65 has an annual payout of 6.7%.

An inflation-adjusted SPIA starting at age 65 has an annual payout of 4.7%, although if CPI increases by more than 3% then the increase is capped at 3%. This is competitive against a hoped-for 3-4% SWR, which has the same goal of providing inflation-adjusted retirement income over the course of 30 years.

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Re: Why are pensions revered, but annuities reviled?

Post by itstoomuch » Sat Apr 22, 2017 11:06 am

Dottie, interest rates may be changing in the near future. The Annuity Shoppers Guide is inrformative on all forms of annuities. Note the rates graphs of SPIAs. Those who bought early ( T.L.) got a much better deal than someone of the same age today.. our deferred GLWB, high fee'd variable and fixed indexed annuities (2008+2012) are much better than a SPIA issued today at age 67/70. Whether this will be true tomorrow is the great unknown.
Ymmv :sharebeer
Last edited by itstoomuch on Sat Apr 22, 2017 1:00 pm, edited 2 times in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Why are pensions revered, but annuities reviled?

Post by dm200 » Sat Apr 22, 2017 11:10 am

Stormbringer wrote:I read lots of stuff about the good old days when everyone had a pension, but at the same time whenever anyone brings up annuities people's blood starts to boil. I don't get it. It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension.
Am I missing something?
Not all "annuities" are reviled here. The term "annuity" encompasses many different products. I think some of the SPIA (lifetime) annuities are considered too expensive. (Don't know if true or not). Pensions (generally) have protection of the PBGC as well. One (sometimes big) difference between a lifetime annuity and pension is that females get the same pension lifetime benefits, but get less with a lifetime annuity.

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Re: Why are pensions revered, but annuities reviled?

Post by nedsaid » Sat Apr 22, 2017 11:39 am

Stormbringer wrote:I read lots of stuff about the good old days when everyone had a pension, but at the same time whenever anyone brings up annuities people's blood starts to boil. I don't get it. It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension.

Am I missing something?
One reason is that pensions were mostly employer funded, so it was a bit like a gambler playing with the house's money. People have to give up control of a large sum of money, their own, to purchase an annuity. The control issue is hard to deal with, not so hard when it isn't your own money.
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Re: Why are pensions revered, but annuities reviled?

Post by NiceUnparticularMan » Sat Apr 22, 2017 11:59 am

I think many people recognize the benefits of risk-pooling longevity risk. Social Security, pensions, and SPIAs are all ways of doing this. But just accumulating a real large retirement portfolio is another way of handling longevity risk (and one your heirs will probably like better). So between Social Security, a really large retirement portfolio, and possibly a pension, you may reasonably feel like a SPIA would be unnecessary. But for people whose retirement portfolios are not so large, perhaps adding a SPIA to the mix would be a good idea. I also think they could make sense as a deflationary hedge in lieu of long bonds.

Of course there are very few entities out their really pushing SPIAs. Plus rates on long-term income instruments are low in general these days. And then there is the whole psychological barrier of giving up a bunch of your savings all at once (something you didn't have to experience with a pension as it was funded for you in small bits you never had in your hands anyway). All that is probably more than enough reason to explain why they are not more popular, but I think that might change somewhat if long-term rates head up at some point.

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Re: Why are pensions revered, but annuities reviled?

Post by ruralavalon » Sat Apr 22, 2017 1:29 pm

Stormbringer wrote:I read lots of stuff about the good old days when everyone had a pension, but at the same time whenever anyone brings up annuities people's blood starts to boil. I don't get it. It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension.

Am I missing something?
Yes you have missed something.

Equity indexed annuities or similar are reviled and do start the blood boiling, because of high sales expenses and misleading marketing.

Inexpensive, simple Single Premium Immediate Annuities (SPIAs) or similar are usually endorsed. The percentage rates paid vary (we may buy one when rates come up), and it is hard to find one that is inflation adjusted.
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Re: Why are pensions revered, but annuities reviled?

Post by Levett » Sat Apr 22, 2017 1:38 pm

I don't think the OP missed anything.

His query clearly identifies SPIAs--e.g.,

"It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension."

The OP said nothing about equity-indexed annuities.

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Re: Why are pensions revered, but annuities reviled?

Post by gd » Sat Apr 22, 2017 1:44 pm

This is a DIY crowd. It sometimes undeweights issues such as the value or requirement of having an advisor or financial instrument that will remove actions or decision-making burdens from people unable or unwilling to deal with them. That choice does not occur with a pension, but is very much present with an annuity. (edited)

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Re: Why are pensions revered, but annuities reviled?

Post by Spirit Rider » Sat Apr 22, 2017 1:59 pm

Levett wrote:I don't think the OP missed anything.

His query clearly identifies SPIAs--e.g.,

"It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension."

The OP said nothing about equity-indexed annuities.

Lev
What the OP missed is that the consensus on Bogleheads does anything but revile SPIAs. SPIAs are considered a very viable retirement option to guarantee a steady income stream especially later in retirement when the mortality credits add up.

Bogleheads do not believe in using insurance products for investment, but an SPIA purchased later in retirement is really longevity insurance. Just like many believe that delaying Social Security, is the most cost effective inflation protected longevity insurance you can buy.

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Re: Why are pensions revered, but annuities reviled?

Post by dm200 » Sat Apr 22, 2017 2:35 pm

The other "difference" (or perceived difference) is that getting a pension for life has no relation to life expectancy, health status, etc.

With a lifetime annuity, folks here have concerns about shorter life expectancies, health issues, etc.

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Re: Why are pensions revered, but annuities reviled?

Post by FinancialDave » Sat Apr 22, 2017 3:05 pm

Stormbringer wrote:I read lots of stuff about the good old days when everyone had a pension, but at the same time whenever anyone brings up annuities people's blood starts to boil. I don't get it. It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension.

Am I missing something?
Let's break this down.

1. In the first place most people's blood does not "boil" over the thought of buying a SPIA, however the term annuities covers a broad spectrum of products many of which do make my blood boil- indexed annuities and variable annuities are the most common ones that have been abused in the past - not to say they can't have "some" limited applications.

2. Converting some portion of say your retirement account to a SPIA is a perfectly acceptable way to gain some "Guaranteed income" if that is what you are looking for, but it is NOT IMHO in any way comparable to a pension, which is in fact a deferred annuity that is in most cases being paid for by your employer. This would not be comparing apples to apples to compare a pension to a SPIA any more than it would be to compare the amount of money you would need to set aside while working for a deferred annuity at age 65 to the amount of money needed to buy the same cash flow from a SPIA at retirement.

3. One reason why at this particular time annuities are especially a bad long term investment is in fact because these annuities are based on the current prevailing interest rates. Insurance companies in general hold bonds against their obligations and the return they are getting on these bonds is in the neighborhood of 3%. Now compare this to baby boomers like myself whose pension terms were intially set up some 30+ years ago when interest rates were a multiple or more higher. Or as came to light on this very site a couple years ago, someone who had a deferred annuity they bought some 20+ years ago that at least by my calculation was getting her an 8% return on her money. Hardly something you could do today by buying a deferred annuity.

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Re: Why are pensions revered, but annuities reviled?

Post by willthrill81 » Sat Apr 22, 2017 3:30 pm

Ged wrote:Actually I think there is a lot to be wary of with respect to pensions. I'd much rather have a generous employer match.
Ditto that. I know of at least one financial podcaster who says that given the choice between a pension and a 401k with a good match, he'd recommend the 401k every time.
Ron wrote:When I retired in early 2007 (a decade ago) I had no pension but I did have a decent portfolio value thanks to my 2.5 decades of contributions between my 401(k) and IRA's. Since I retired early (maybe not early compared to a lot of folks on this board, but certainly earlier than the other employees I worked with) and had no pension, I had to make the decision to either use only my portfolio for retirement expenses or share the risk by purchase of an SPIA. While I was lucky enough to get a good return (IRR of 4.79%, which did not include return of premium paid), it still gave me pause (actually a bit of financial shock) to reduce my holdings by the amount of the one time premium payment for the annuity.
In general, I think that's a big reason why annuities, in general, are so seldom purchased. You must (usually) permanently give up access to current assets in return for a future benefit. That's a tough pill for most people to swallow, even when you know precisely what the nominal benefit is.

Another commonly cited reason is that people are afraid that if they die early (i.e. before their life expectancy), the insurance company 'won'. I don't buy that argument at all, though, because if the retiree kept their capital, they would have to have spent that money before their untimely death to come out ahead. The only real merit to this is that with the annuity, heirs are left with nothing unless you've paid for a rider to that effect. For me, that's the biggest drawback of any annuity, even a SPIA.

That being said, I'll consider buying a SPIA large enough to cover my necessary expenses upon retirement in about 20 years. I plan on retiring at about 55 and also plan to wait until 70 to collect SS, so the primary purpose of the SPIA would be to provide a similar payout to what I'll get from SS for the 15 year period. I might just buy a 15 year annuity, or I might get a lifetime annuity so that I'd have two 'guaranteed' sources of income after reaching age 70. Interest rates will probably have to be higher than now for me to pull the trigger on it though.
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Re: Why are pensions revered, but annuities reviled?

Post by Johnnie » Sat Apr 22, 2017 3:45 pm

Most pensions are now government, the best guarantor of any financial promise because it has a monopoly on legal violence. (And the worst possible defaulter because the promisee has no recourse.) Surely that has contributed to the good odor government pensions have with their beneficiaries. I suspect holders of private pension promises have a less felicitous attitude, with insurance company annuity sellers held in even lower regard.

Incidentally, in recent recent weeks I have had two first-hand reports from relatives of thuggish tactics used to sell super high-cost, low value annuity products that deliver lucrative commissions to salesman. If you are approaching retirement age and have accumulated some wealth you will probably be targeted. (Beware the invitation to a free no-obligation dinner at a nice local joint.)

ETA - I informed them that an SPIA from a brand-name insurer is a legitimate product not a scam. Their situation doesn't indicate an annuity though.
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Re: Why are pensions revered, but annuities reviled?

Post by willthrill81 » Sat Apr 22, 2017 3:54 pm

Johnnie wrote:Most pensions are now government, the best guarantor of any financial promise because it has a monopoly on legal violence. (And the worst possible defaulter because the promisee has no recourse.)
Not to get off topic or political, but that's part of the reason that I don't put much importance on long-term government guarantees. If they change the rules, which they have many times in the past, you're left holding the bag.
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Re: Why are pensions revered, but annuities reviled?

Post by Levett » Sat Apr 22, 2017 4:35 pm

gd wrote:

"This is a DIY crowd."

Yep.

And it leads, inevitably, to adopting some strategies/products and rejecting others.

Lev

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Re: Why are pensions revered, but annuities reviled?

Post by FinancialDave » Sat Apr 22, 2017 5:02 pm

Ditto that. I know of at least one financial podcaster who says that given the choice between a pension and a 401k with a good match, he'd recommend the 401k every time.
I don't dispute the math of this if you know what to use for "future returns earned by the 401k participant." :?:

Companies know how each choice affects their balance sheet and there is a very good reason why they have pushed the pensions out and it is NOT because they want to make less money.

There is at least one financial blogger who says that given the same choice between pension and a 401k with a "typical" match I believe that those with a pension and a 401k will do MUCH better. By the way I know of very few companies that have a pension and do not have a 401k or TSP plan, so that those with a pension can do both - how sweet is that!

:moneybag

The reason is buried in the fact that since companies have started enrolling new workers automatically in their 401k, the average retirement savings being done has improved!
Last edited by FinancialDave on Sat Apr 22, 2017 5:04 pm, edited 1 time in total.
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Re: Why are pensions revered, but annuities reviled?

Post by *3!4!/5! » Sat Apr 22, 2017 5:04 pm

willthrill81 wrote:
Ged wrote:Actually I think there is a lot to be wary of with respect to pensions. I'd much rather have a generous employer match.
Ditto that. I know of at least one financial podcaster who says that given the choice between a pension and a 401k with a good match, he'd recommend the 401k every time.
To make a legitimate comparison between pension (Defined Benefit plan), and 401k etc (Defined Benefit plan) the funds from which could be used for an SPIA, the real comparison the magnitude of the match.

Typical DC plan
Employee contributes $1.00,
Employer contributes $0.50.

Typical DB plan
Employee contributes $1.00,
"Employer" contributes $5.00.

(I say "Employer" because they promise that one way or another, society will pay for the pension so it is really all of us that provide these massive subsidies to the privileged few with pensions.)

So the fact that one can buy an SPIA means a DC plan can be turned into an income stream, which might qualitatively resemble a pension, but there is a huge difference in quantity, due to the gigantic subsidies that DB plans receive, at great expense to the rest of society.

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Re: Why are pensions revered, but annuities reviled?

Post by arcticpineapplecorp. » Sat Apr 22, 2017 5:08 pm

There are a few options that I have at retirement. A couple options allow taking the employee contributions in a lump sum that reduces the monthly pension payout by a certain amount. Now ideally, the pension amount should reduce by an amount that is actuarily neutral, meaning it doesn't benefit you to take out your contributions, unless you can do better using the contributions to buy a private annuity that pays more than what you're giving up in the full pension amount. But legislators are still trying to enact legislation to change that. Until then, the reduction in pension amount is less than the amount of income that can be generated from the lump sum (contributions withdrawn) if annuitized with a private insurer. Naturally, it makes sense to take the contributions out and purchase an annuity, if it's going to yield a higher amount than what the pension would provide if contributions were left in the pension fund.

Needless to say, I once read in a report by my state pension board that over 90% of retirees choose the option that withdraws contributions in exchange for the reduced pension. This clearly makes sense if they come out ahead using their lump sum to purchase a private annuity that provides more income than what they're losing (in the reduced pension). Unfortunately, I've known several employees who took out their contributions to do kitchen remodeling :oops: (and wound up paying tax on the entire amount withdrawn, perhaps at a higher tax bracket, because it was not rolled into an IRA or annuitized). They've now got lower monthly income for life. But at least they've got a nice kitchen. :wink:

edit: what I mean, if I'm not making sense is the following:
$2000/month full pension (leave all contributions in, no withdrawals) vs.
$1800/month pension if take out all employee contributions, say $100,000 withdrawal of employee contributions (6.25% per paycheck)

$200 difference in monthly pension. But if you take the $100,000 of your contributions and purchase a private annuity, let's say it yields $5000 a year income or $416.66 a month income. It makes sense then to take the $100,000 withdrawal and get $416.66 a month income even though you're giving up $200 in the monthly pension from the pension plan. You're coming out ahead. And I think that's why so many take the lump sum option.

Legislators are wanting employees to keep the money in the fund to prevent further underfunding overall. Changes to make it actuarily neutral would mean instead of taking a $200 monthly pension reduction if you withdraw your contributions, you'd actually see a reduction by $416.66 (what you'd get outside the pension plan).

Sorry if I didn't explain myself well. That's my understanding of it anyway.
Last edited by arcticpineapplecorp. on Sat Apr 22, 2017 5:59 pm, edited 3 times in total.
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Re: Why are pensions revered, but annuities reviled?

Post by The Wizard » Sat Apr 22, 2017 5:29 pm

Dottie57 wrote:
The Wizard wrote:Yes.

Note: about 60% of my retirement income comes from payout-phase lifetime immediate annuities from TIAA, both fixed (Trad) and variable (TREA and CREF Stock)...

I am thinking about SPIA, and wonder why you chose TIAA. Also at what age did you purchase?
I contributed tax deferred $$$ to my 403(b) plans with TIAA (formerly TIAA-CREF) for four decades. So that was the first reason. Second reason is that their fixed rate annuities have good payout rates and their variable annuities have simplistic structure.

TIAA does have employer qualification requirements, so most folks working for commercial companies won't be eligible.
Secondly, if one was eligible, coming in with newly rolled over $$ might be different; you'd definitely want to compare payout rates.

I annuitized my primary chunk at start of retirement, age 63. I am annuitizing an additional amount next month, age 67, to celebrate market performance over the last four years...
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Re: Why are pensions revered, but annuities reviled?

Post by grok87 » Sat Apr 22, 2017 6:41 pm

bberris wrote: The names keep changing to protect the guilty.
nice phrase
Keep calm and Boglehead on. KCBO.

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Re: Why are pensions revered, but annuities reviled?

Post by Jeff Albertson » Sat Apr 22, 2017 6:52 pm

Stormbringer wrote:I read lots of stuff about the good old days when everyone had a pension, but at the same time whenever anyone brings up annuities people's blood starts to boil. I don't get it. It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension.

Am I missing something?
Distinguished behavioral economist Richard Thaler provides your answer in these two articles:

The Annuity Puzzle
http://www.nytimes.com/2011/06/05/busin ... 5view.html
Getting the Most Out of Social Security
http://www.nytimes.com/2011/07/17/busin ... th-it.html

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Re: Why are pensions revered, but annuities reviled?

Post by Jimmie » Sat Apr 22, 2017 7:02 pm

Ron wrote:Being an old guy who spent much of his working life in companies that had pensions and then suddenly thrust into the universe that I had to fend for myself by saving/investing for the future, I would say (at least to me) pensions were given where annuities are bought, requiring you to give up a portion of your hard earned savings/investments.
Ding! Ding! Ding!

Couldn't agree more.

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Re: Why are pensions revered, but annuities reviled?

Post by Levett » Sat Apr 22, 2017 7:03 pm

And the OP might wish to read the original link of this thread.

viewtopic.php?t=214931

Lev

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Re: Why are pensions revered, but annuities reviled?

Post by nisiprius » Sat Apr 22, 2017 7:10 pm

There is a category of product that is called a "variable annuity." They are complex combinations of an investment component and an insurance component. In theory, the investment grows and then at retirement is converted to a life annuity.

In practice, variable annuities are oversold by insurance agents and insurance companies. The insurance component, the idea of it becoming a life annuity, entitles it to a fairly weak tax break. As typically sold, they are sold basically as investments; the insurance is just the fig leaf that entitles it to a tax break.

Most people with variable annuities never annuitize them. When I was shopping for an SPIA about ten years ago, I couldn't find a single insurance agent that would actually sell me one; they all said "sure, glad to, but I never recommend these" and proceeded to talk up variable annuities instead. Being familiar with my TIAA-CREF plans, which is a legitimate kind of variable annuity that usually does end up being annuitized, I kept asking about how that part worked, and it was like I was talking a different language. The agents really didn't know, or pretended not to know, about the change from the accumulation to the annuitization phase. I would say "so what happens when I annuitize it?" "What do you mean, 'annuitize' it?" "Turn it into an annuity." "It is an annuity...."

So, variable annuities are reviled because they are often oversold, crappy investments that are sold successfully because they're too complicated for buyers to understand... and they aren't revered because they aren't really presented with the intention of providing lifetime income. That may have changed somewhat in recent years because I'm seeing more and more references "GLWB riders" (I keep trying to figure out what kinds of sexual orientation GLWB stands for), but the very fact that it's an optional "rider" should tell you something.

Now, the snapper. Because variable annuities are pushed and oversold so much, "variable annuities" are customarily referred to simply as "annuities."
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Re: Why are pensions revered, but annuities reviled?

Post by itstoomuch » Sat Apr 22, 2017 7:23 pm

Not all of us can get TIAA-CREF or a PER' s tier 1 plan. I had to buy one when I participated in the great meltdown of 2007-2009 on the verge of retirement. So how much did you worry in this time frame? :annoyed
Last edited by itstoomuch on Sat Apr 22, 2017 9:09 pm, edited 1 time in total.
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Re: Why are pensions revered, but annuities reviled?

Post by bsteiner » Sat Apr 22, 2017 7:33 pm

grok87 wrote:I think regular fixed annuities make a lot of sense (spia). But there are still a bunch of issues:

1) you have to buy it yourself and may get ripped off on price. Pensions are much nicer as they are institutional vs retail pricing.
...
3) it's really hard to buy any spia with inflation protection.
I think these are major factors.

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Re: Why are pensions revered, but annuities reviled?

Post by The Wizard » Sat Apr 22, 2017 7:45 pm

nisiprius wrote: ...Now, the snapper. Because variable annuities are pushed and oversold so much, "variable annuities" are customarily referred to simply as "annuities."
Right.
There's definitely a confusion factor when talking about annuities.
And the insurance industry is quite possibly OK with that...
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Re: Why are pensions revered, but annuities reviled?

Post by CurlyDave » Sun Apr 23, 2017 12:50 am

Stormbringer wrote:...Am I missing something?
I think you are. For me, SS at 62 and a pension were "free" in that I had no choice about taking them. My company offered the pension as a benefit and SS was mandated by law.

An annuity I have to buy with my own money.

As much as I am thankful to have the income floor early SS and the pension represent, I don't think they were particularly good investments. And, I for sure don't need/want any more of anything similar. Postponing SS beyond 62 is the same as investing portfolio money into an annuity. You may want to do that with your money, but I have more rewarding places to put mine.

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Re: Why are pensions revered, but annuities reviled?

Post by AlohaJoe » Sun Apr 23, 2017 1:53 am

Stormbringer wrote:I read lots of stuff about the good old days when everyone had a pension, but at the same time whenever anyone brings up annuities people's blood starts to boil. I don't get it. It seems to me that upon retirement, converting some portion of your retirement account into an single-premium immediate annuity (SPIA) is for all practical purposes the same thing as retiring with a pension.

Am I missing something?
Nope. All things being equal, it isn't as if pensions have some secret source of money or secret ways of managing money. One set of retirement researchers who strongly believe in this viewpoint have written a nice article about it, "A Pension Promise to Oneself"
There is nothing magical about the pension promise that an employer with a traditional defined benefit (DB) pension plan makes to an employee. The employer saves and invests money on the employee’s behalf, according to a set of rules that are designed to make sure that enough money is available to pay the promised benefit, then pays it to the employee as a post-retirement income stream. Failures do occur, but that’s because people — employers and employees — don’t stick to the rules.

[...]

Money is not created or destroyed in either one [defined contribution versus defined benefit schemes]. What you get is what you put in, plus or minus investment returns after fees. The only differences are: (1) who is making the contributions, and (2) who is managing the process. And any economist will tell you there is no difference, in terms of total compensation, between the employer making the contributions directly (in a DB plan) and the employer giving the money to the employee to invest himself (in a DC plan)
Assuming the same level of contribution between the two plans, the only difference is that with pensions there's a lot of "out of sight, out of mind" at work. (In the same way that people usually ignore the employer portion of FICA contributions.) That might sound overly dismissive but behavioural biases are real and shouldn't be discounted. There's a real difference between paying for something at $100 a week for 40 years compared to being asked to pony up $600,000 at all once.

To try to overcome that behavioural bias, Nobel-prize winning economist Robert Merton has long argued that retirement planning should be refocused from assets to income and radically redefine customer engagement:
The customer need worry about three things only: her retirement income goals, how much she is prepared to contribute from her curren t income, and how long she plans to work. The only feedback she needs from her plan provider is her probability of achieving her incom e goals. She should not receive quarterly updates about the returns on her investment (historical, current, or projected) or about the curren t allocation of her assets. These are important factors in achieving success, but they are not meaningful input for the choices about incom e that the customer has to make.
I said "assuming the same level of contribution between defined-benefit and defined-contribution"...and as a few other posters have pointed out, that rarely holds in the real world. Companies aren't switching from DB to DC "just because". Sure, some of it is because they've realised it is dumb for a steel company to also be in the longevity insurance game (why not auto and home insurance, too, while they're at it?). But mostly it is because they were able to substantially reduce their contributions.

We've seen that reduction continue as things like vesting of employer contributions become more widespread.

Nevertheless, that's an apples to oranges comparison. That's not about whether pensions are better than 401(k). That's about whether $1,000 is better than $100. But it is hard to disentangle the two, especially since most conversations aren't really mathematically rigorous academic papers; it's just normal people like you and me talking to each other about how we think, feel, and act.

As others have said, there is probably some cost savings by getting institutional pricing of the pension -- but I've never seen it quantified and I'm doubtful that it is very large. All the research I've seen on Money's Worth Ratios and annuity pricing adjustments suggests that the annuity market is pretty competitive.

For instance....from some research papers on annuity pricing
we find that, when discounting at the risk-free rate, MWR’s for annuitants are surprisingly high—greater than 95% in most countries and sometimes greater than 100%
Or another one writing on the UK market:
Depending on the assumptions we make about future longevity, the present value of an annuity is of the order of between 90 per cent and 120 per cent of the purchase price, and has averaged 98 per cent over the sample period.
So I don't buy the argument that annuities have fees so much higher than an institutional pension plan that they become undesirable.

At the end of the day....I think the answer almost entirely comes down to behavioural reasons.

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Re: Why are pensions revered, but annuities reviled?

Post by Iridium » Sun Apr 23, 2017 2:45 am

I would say that it is largely equivalent to have a SPIA vs pension. However, at the margin, pensions are a better deal than SPIAs:

1) If the expected actuarial cost is X, then the SPIA has to charge some amount over X so it can make a profit for the insurance company's owners. With the pension fund, the amount charged (including the employer's portion) will simply be X, as the pension fund is owned by the employer, which has a powerful incentive to keep costs low.

2) Given the backing of the employer, pension funds can be far more aggressive in making their investments than a SPIA can. An insurance company can't really wait out a 50% drop in the market, because they'll be declared insolvent (and the insurance company liquidated) before the market recovers. Meanwhile, a pension fund would become underfunded, which isn't exactly fun for the employer, but doesn't represent the same sort of existential threat it would represent to an insurance company. As a result, return assumptions for SPIAs largely follow bond rates (as the money will almost certainly get invested into bond-like instruments), whereas the return assumptions for pension funds are much closer to equity rates (as their funds are heavily invested into equities). Right now, a SPIA will be priced with a return assumption less than 3 percent. Meanwhile, CalPERS is pricing with an assumption of 7.5 percent!

3) One big difference between pension and SPIA is that you pay into the pension for your entire career, whereas the SPIA is purchased after you retire. Should you retire in good health, then your return is enhanced with the contributions of everyone who died prior to retirement or were in such poor health at retirement they would not have elected to purchase a SPIA. In addition, your contributions effectively grow at the pension's return assumption, including all the time prior to retirement. This is both a pro and con of pensions: if you can invest the money yourself and beat the pension's return assumption, then, all else being equal (which as the other points illustrate, it isn't), you would get a higher payout with the SPIA purchased at retirement. If you can't meet the return assumption, then, all else being equal, you'll get a higher payout with the pension fund. I believe that it is possible to beat a 'normal' pension fund's return assumption, but would require a high equity position and nerves of steel; neither of which are common among average Americans.

4) Organizations that convert from pensions to 401ks frequently use the conversion as an opportunity to do a stealth benefit cut. In other words, an employer that might have originally contributed 9% of salary (and had the employee kick-in an equal amount) to the pension, would frequently do no more than a 5% employer match when converting from a pension system to 401k system. The result is that, all else being equal (it isn't), the employee now has to contribute 4% of salary more into retirement. As best I can tell, this actually seems to be the largest source of resentment when it comes to the death of pension funds, even though it really has nothing to do with pension vs 401k/SPIA (there is no reason why an employer couldn't do a 9% match with a 401k nor any reason why an employer couldn't bump mandatory contributions from employees up 4% of salary, with a similar cut to employer contribution).

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Re: Why are pensions revered, but annuities reviled?

Post by SGM » Sun Apr 23, 2017 3:03 am

I like pensions and SS. We are happily delaying SS until 70 while taking advantage of the old file and suspend, restricted application for DW. TIAA-CREF which is a fixed and variable annuity from 4 years of employment at a university and is a very good product for us. It has been annuitized.

I am considering an SPIA ladder later on. The effect on a legacy is minimal and actually might increase the amount left for a legacy by allowing the rest of the portfolio to be invested in riskier assets and for a longer time without touching. We also have Roth accounts that may serve as a legacy as well as a taxable account.

I would avoid any other variable annuities or equity index annuities because of complexity, inappropriateness and high cost.

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Re: Why are pensions revered, but annuities reviled?

Post by naraicjul » Sun Apr 23, 2017 3:05 am

Can anyone point me to decent research papers comparing the merits of SPIAs with self-managed alternatives (using bonds, etc.)?
We always did feel the same way, we just saw it from a diferent point of view

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Re: Why are pensions revered, but annuities reviled?

Post by Levett » Sun Apr 23, 2017 6:11 am

naraicjul asked:

"Can anyone point me to decent research papers comparing the merits of SPIAs with self-managed alternatives (using bonds, etc.)?"

Yes, I can (with the proviso that every point of view, including my own, will have some stated and/or unstated behavioral bias because we are human beings).

See the essay by Michael Kitces, "Understanding the Role of Mortality Credits--Why Immediate Annuities Beat Bond Ladders for Retirement Income."

https://www.kitces.com/blog/understandi ... nt-income/

Also, you may also wish to look at the following link, which will provide a pretty useful bibliography (along with the content of the article):

http://crr.bc.edu/briefs/how-can-we-rea ... 01k-world/

There's a download link attached to the brief. This article calls attention to a much obscured distinction between a "consumption frame" and an "investment frame."


One other relevant subject you may wish to seek out (there are a number of institutional studies)--namely, the topic of "retirement satisfaction" with respect to annuitants, in particular. The Rand Corporation and Towers Watson have produced two such studies.

I hope some of this information proves useful.

Lev

Disclosure: I am a partial annuitant (TIAA), I have been retired for a number of years, and I am also a long-term Vanguard client with a sizable mutual fund commitment).

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