Annuities

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willyd123
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Annuities

Post by willyd123 » Sun Sep 02, 2018 3:40 pm

Bogleheads -

I assume that annuities have been discussed within this website many times but I could not find a succinct summary of pros and cons. I am taking a course regarding decumulation strategies and I just completed a section on annuities. My first observation is that they can be so complicated, I feel like you have to be an actuary to have any chance of fully understanding them and assessing whether they make sense which is why I'd be so reluctant to buy them.

I know they can have substantial fees which is a major negative especially to the Boglehead community but I'm not sure there is another product that can address longevity risk other than Social Security. Also, if you are healthy and have a family history of expanded longevity, I assume that the "mortality credits" as they call them could be pretty valuable. In other words, if you live longer than the mortality tables would suggest, than you are "beating" the insurance companies that sell annuities, theoretically anyway.

Does it make sense to buy an annuity to cover your essential living expenses or more? If so, what type of annuity makes sense? Is there a way to buy an annuity with lower fees?

The Wizard
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Re: Annuities

Post by The Wizard » Sun Sep 02, 2018 3:49 pm

willyd123 wrote:
Sun Sep 02, 2018 3:40 pm

...Does it make sense to buy an annuity to cover your essential living expenses or more? If so, what type of annuity makes sense? Is there a way to buy an annuity with lower fees?
If you have no pension, then yes, some level of Immediate Annuties with a guarantee period makes sense.
I have several thousand dollars per month income from payout phase immediate annuities with TIAA...
Attempted new signature...

fabdog
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Re: Annuities

Post by fabdog » Sun Sep 02, 2018 3:51 pm

Here's the WIKI on annuities

https://www.bogleheads.org/wiki/Outline ... #Annuities

Immediate annuities are much simpler, and much cheaper, if you want/need an income stream as part of your decumulation strategy

I'm guessing your class is being taught by a local financial planner and/or insurance agent. You'll get some helpful info but also a pretty steady sales pitch

Mike

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Cyclesafe
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Re: Annuities

Post by Cyclesafe » Sun Sep 02, 2018 7:03 pm

There is a narrow window of circumstances where a SPIA (an inflation adjusted one, if you can actually find one) could make sense. But chances are you ( or anyone) don't (doesn't) obviously fit. One has to run the numbers which involve projections of income, projections of expenses, and assumptions of individual life expectancies. If you are only now learning about basic investing, learn about annuities last.

In my situation (no legacy or charitable intent other than paying taxes) I will consider annuitization of an existing investment variable annuity after age 75 if my wife and I are healthy well beyond our years and no relative seems to be stepping up to take over the management of our trust.

Dottie57
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Re: Annuities

Post by Dottie57 » Sun Sep 02, 2018 7:32 pm

IMO, the only annuity worth. purchasing is an SPIA (single premium immediate annuity). It is an insurance bet. The ins co thinks you may leave this earth earlier and you think you may live longer. Being an insurance product, the ins co has good actuarial tables to determine how much to pay out.

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Mel Lindauer
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Re: Annuities

Post by Mel Lindauer » Mon Sep 03, 2018 1:37 pm

Some live longer than expected while others die before reaching their full life expectancy. The insurance company doesn't care which group you eventually fall into. The folks who die younger than expected are subsidizing those who live longer, not the insurance company. The insurance company only cares that they get the ratio correct and that's how they make their money with Single Premium Iimmediate Annuities.

The insurance companies also adjust the payouts, knowing that most folks who buy SPIAs expect to outlive their normal life expectancy while folks with a family history of not living that long are less likely to purchase an SPIA.
Best Regards - Mel | | Semper Fi

mhalley
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Re: Annuities

Post by mhalley » Mon Sep 03, 2018 1:58 pm

Otar has an excellent chapter on when and how much to annuitize in his book. The pdf is about 6 bucks.

http://retirementoptimizer.com/

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Mel Lindauer
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Re: Annuities

Post by Mel Lindauer » Mon Sep 03, 2018 4:28 pm

One other thing to keep in mind is that you don't want to annuitize all of your savings since you'll need money available for emergencies.
Best Regards - Mel | | Semper Fi

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