Are Annuities the Best Retirement Strategy for My Parents?

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othrif
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Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

Hello everyone,

I’m evaluating a retirement strategy for my parents, both aged 61, who are considering investing their entire retirement savings into a single premium fixed index annuity offered by Global Atlantic. They are planning to use $500,000 from their 401k, IRA, and taxable accounts to purchase this annuity. Here’s a brief overview of their situation and the annuity terms:

- **Current Situation**: They have a combined annual income of around $120,000 with monthly expenses of $7,000, living in the DMV area.
- **Annuity Details**: The annuity requires a single premium payment of $500,000 right now. It will start providing a fixed income of $5,000 per month starting at age 67, which coincides with their planned start of Social Security benefits, totaling another $5,000 per month.
- **Total Monthly Income at 67**: They aim to have a combined monthly income of $10,000 from the annuity and Social Security, which they believe will suffice for their needs considering a projected decrease in expenses post-retirement.
- **Investment Period**: They can withdraw their investment from the annuity penalty-free after 8 years but will face penalties if withdrawn earlier.
- **Projected Returns**: The credit value added to their account from the annuity averages around 3.5% annually.
- **Lifespan Considerations**: Assuming they live until age 95, over 35 years, the annuity would pay out $1.68 million. Additionally, a death benefit of $500k is provided if they pass away at 95.

**Concerns and Questions**:
1. **Risk Aversion**: They are worried about the volatility of the stock market and prefer the certainty of a fixed income for life, despite the annuity’s fixed payout not keeping pace with potential inflation.
2. **Financial Soundness**: Is placing all their investable assets into this annuity a sound financial move, given it locks their money at a fixed rate?
3. **Inflation and Expense Management**: What are the risks of a fixed income in light of potential inflation and unforeseen expenses in older age?
4. **Alternative Strategies**: Are there more flexible or secure retirement strategies that might address inflation concerns better while providing a stable income?

Any insights, experiences with similar annuity products, or alternative suggestions would be greatly appreciated!
Fairfox
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Fairfox »

I’d be concerned with all eggs in one basket, for a couple reasons:
- depending on the solvency of one insurer for the annuity. I think this is likely bigger than the amount covered by state backup - you/they should check. Consider stacking multiple annuities from different companies.
- do they have a good emergency fund/ability to handle lumpy expenses? Would they be able to save some of the proposed income, to build up a reserve for unexpected events?
billfromct
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by billfromct »

Did they get any other annuity quotes from anyone else or just this one “sales person”?

I didn’t see any reference if they are still working or retired now.

bill
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Stinky
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Stinky »

othrif wrote: Sun May 12, 2024 5:12 pm Hello everyone,

I’m evaluating a retirement strategy for my parents, both aged 61, who are considering investing their entire retirement savings into a single premium fixed index annuity offered by Global Atlantic. They are planning to use $500,000 from their 401k, IRA, and taxable accounts to purchase this annuity. Here’s a brief overview of their situation and the annuity terms.....
I'm familiar with the use of an indexed annuity to provide lifetime income in generally this manner. The annuity would have a rider, named something like "guaranteed lifetime withdrawal benefit", which would guarantee a certain amount of monthly income starting at a certain age, for the lifetime of the annuitants. Then, at death, any account value left in the annuity would be paid out to the beneficiaries. So that part of the situation you describe is plausible.

But I have a lot of questions about the specific situation that you mention. In general, I have doubts that the specific product that you mention would perform as you outline. Here are my concerns -

--- A person can't commingle Roth IRA, traditional IRA, and taxable accounts into one annuity. That would require three annuities.

--- Is $500,000 all of their investible assets? Most all life insurance companies will require that no more than 50% of investible assets (stocks, bonds, money market, etc.) can be used to purchase annuities. If they have $1 million or more, they could commit $500,000 to purchase annuity(ies). But if they have less than $1 million, they can't purchase $500,000 in annuity(ies).

--- I'd be concerned about concentration in one company. Find the website of the life and health insurance guaranty fund for their state from the drop-down in this website, and find the limit for annuities in their state of residence.
https://www.nolhga.com/policyholderinfo ... ocation/ga

--- Here's the most important concern that I have. Even if it were advisable to put their entire $500,000 into one Global Atlantic indexed annuity, I don't believe that they could draw down $5,000 per month for the rest of their lives. The only website that I know of that provides quotes for income riders on indexed annuities is Stan the Annuity Man's website. When I go through the calculation for a man and a woman age 61, starting to draw income in 6 years, with a premium of $500,000, I get a monthly benefit for Global Atlantic of $3,406 per month. Here's a link to the website. https://www.stantheannuityman.com/annui ... come-rider

--- I doubt that the indexed annuity will make 3.5% per year over time, especially with a guaranteed withdrawal benefit rider which costs about 1% per year.

--- Having a death benefit of $500,000 at age 95 is not guaranteed. Depending on how much income they could actually get ($3400 per month? $5000 per month?), I'm doubting that the account value would be $500,000 at age 95, after 28 years of withdrawals.

In summary, I have multiple doubts about this approach to providing retirement income - disbelief that $5,000 in monthly income could be generated from this annuity, concentration in one insurer, potential over-exposure to annuities, etc.

If you could post a proposal from Global Atlantic in this thread, that would be useful. Please redact any personally identifiable information.

I expect that my response may have raised more questions that it answered. Please post back with your questions.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
niagara_guy
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by niagara_guy »

I have no personal experience with annuities. What I hear is that lots of annuities pay large commissions (they are good for the salesman, not good for the customer). I think the only annuities recommended here are SPIA (single premium immediate annuities) that are pretty simple and easier to understand. I also believe that the general recommendation is to buy an annuity that is not linked to the stock market returns, evidently these annuities provide much higher commissions to the 'sales guy,' and are often impossible to understand. Others will correct me if I am wrong (Please!).
PFM
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by PFM »

Global Atlantic (Forethought Life) has a Comdex rating of about 75. For an annuity like that, I would want a company with a rating well over 90.
Rex66
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Rex66 »

They don’t even seem to need an annuity

This is like trying to find a solution to no problem

The agent must be salivating at the chance to sell this

Way above state limits, poor financial rating, non guaranteed even from this company.

You would expose them to inflation risks to boot.

First rule should be if you want guaranteed income then defer SS to age 70.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by sailaway »

Generally you cannot invest more than half your portfolio in a single annuity.

Moreover, mixing assets like this would probably require them to cash out the traditional accounts, resulting in a large tax bill.

Also, why do they need their retirement income to match their current income?
aristotelian
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by aristotelian »

Would they be liquidating their entire 401k for this? That would be quite a tax hit.

How much of their portfolio does the $500k represent?

Annuities are a good way to maximize guaranteed income but I don't see why they need that when SS covers all but $2000 of their expenses. If they want their income to be guaranteed, purchasing an annuity for $2k/month would be a more reasonable solution.
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othrif
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

Stinky wrote: Sun May 12, 2024 6:14 pm
othrif wrote: Sun May 12, 2024 5:12 pm Hello everyone,

I’m evaluating a retirement strategy for my parents, both aged 61, who are considering investing their entire retirement savings into a single premium fixed index annuity offered by Global Atlantic. They are planning to use $500,000 from their 401k, IRA, and taxable accounts to purchase this annuity. Here’s a brief overview of their situation and the annuity terms.....
I'm familiar with the use of an indexed annuity to provide lifetime income in generally this manner. The annuity would have a rider, named something like "guaranteed lifetime withdrawal benefit", which would guarantee a certain amount of monthly income starting at a certain age, for the lifetime of the annuitants. Then, at death, any account value left in the annuity would be paid out to the beneficiaries. So that part of the situation you describe is plausible.

But I have a lot of questions about the specific situation that you mention. In general, I have doubts that the specific product that you mention would perform as you outline. Here are my concerns -

--- A person can't commingle Roth IRA, traditional IRA, and taxable accounts into one annuity. That would require three annuities.

--- Is $500,000 all of their investible assets? Most all life insurance companies will require that no more than 50% of investible assets (stocks, bonds, money market, etc.) can be used to purchase annuities. If they have $1 million or more, they could commit $500,000 to purchase annuity(ies). But if they have less than $1 million, they can't purchase $500,000 in annuity(ies).

--- I'd be concerned about concentration in one company. Find the website of the life and health insurance guaranty fund for their state from the drop-down in this website, and find the limit for annuities in their state of residence.
https://www.nolhga.com/policyholderinfo ... ocation/ga

--- Here's the most important concern that I have. Even if it were advisable to put their entire $500,000 into one Global Atlantic indexed annuity, I don't believe that they could draw down $5,000 per month for the rest of their lives. The only website that I know of that provides quotes for income riders on indexed annuities is Stan the Annuity Man's website. When I go through the calculation for a man and a woman age 61, starting to draw income in 6 years, with a premium of $500,000, I get a monthly benefit for Global Atlantic of $3,406 per month. Here's a link to the website. https://www.stantheannuityman.com/annui ... come-rider

--- I doubt that the indexed annuity will make 3.5% per year over time, especially with a guaranteed withdrawal benefit rider which costs about 1% per year.

--- Having a death benefit of $500,000 at age 95 is not guaranteed. Depending on how much income they could actually get ($3400 per month? $5000 per month?), I'm doubting that the account value would be $500,000 at age 95, after 28 years of withdrawals.

In summary, I have multiple doubts about this approach to providing retirement income - disbelief that $5,000 in monthly income could be generated from this annuity, concentration in one insurer, potential over-exposure to annuities, etc.

If you could post a proposal from Global Atlantic in this thread, that would be useful. Please redact any personally identifiable information.

I expect that my response may have raised more questions that it answered. Please post back with your questions.

Thank you so much for the detailed reply. This is so helpful. Here is an image proposed from the annuity provider: Image
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Stinky »

othrif wrote: Sun May 12, 2024 8:29 pm
Thank you so much for the detailed reply. This is so helpful. Here is an image proposed from the annuity provider: Image
Oh my goodness gracious! Either your parents entirely misunderstood what the salesman told them, or (much more likely) the agent GROSSLY misrepresented the product

Thanks so much for posting this picture of the illustration. It tells me all that I would need to know. Don’t let them buy this annuity with plans to use it as the agent told them.

I was wrong in my first post in thinking that the annuity had some type of “guaranteed withdrawal benefit”. The illustration doesn’t show that benefit; rather, it shows that there are no riders at all. And therefore, there are no guarantees that withdrawals can continue for the rest of your parents’ lives.

The worst part of this illustration is that the interest rates assumed are flagrantly inconsistent with the 3.5% average interest rate mentioned in your original post.. The proposal doesn’t show all years, and I didn’t use a calculator or a spreadsheet to precisely look at the interest rates assumed. But the proposal appears to use about a 10% earned interest rate on account value for 2 years, then zero in the next year. That pattern repeats several times in the illustration. Such a pattern would roughly equate to a 6-7% interest rate on average per year.

While I think that 3.5% is a POSSIBLE interest rate for an indexed annuity, I think that a 6-7% is IMPOSSIBLY OPTIMISTIC.

Now, I’ll give you the really bad news, based on a little spreadsheet I put together. If your parents were to buy this annuity for $500k at age 61, earn 3.5% every year, and start withdrawals of $60k per year at age 67, they would deplete the annuity entirely at age 79 or so. No more payments. No death benefit. No nothing.

Why did the agent flagrantly misrepresent the annuity? I can’t know what was in his mind, but he would stand to make a commission somewhere in the range of $30k-$40k if your parents bought this.

My previous concerns (can’t commingle pots of money, single insurer exposure, etc) still stand. But they are overwhelmed by the gross misrepresentations from the agent about the interest rate they will earn.

Run, run, as fast as you can. And don’t believe another word that comes out of this salesman’s mouth.

Post back with questions. And please show this to your parents.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by retiredflyboy »

Purchase an immediate annuity that would give them $2,000 a month and keep the rest invested in a diversified stock and bond fund 40-60 to 60-40 stock to bond. SS is indexed to inflation and if the take a 3% withdraw rate and increase a little over time for inflation from investments they should do really well. Do NOT place all those dollars in the annuity!
Facts are stubborn things. Everything works until it doesn’t.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by 3feetpete »

The best annuity around is to delay SS until 70 even if they retire before then. When they are using their 401k to finance their retirement for a few years, they will for all intents and purposes be buying an annuity with their 401k plan. It pays about 8% And that is COLA adjusted and guaranteed by the Federal Government. And there is no commitment to go all the way to 70. The COLA adjustment is a big deal. It was almost 10% in January 2023.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Harmanic »

Even if they were going to buy a good annuity, like a SPIA from a highly rated company, it makes no sense if they are not delaying Social Security. Social Security is the best annuity there is because it has favorable mortality credits and inflation adjustment. Look up the term "social security bridge" to consider strategies to delay social security to age 70 and maximize payments.

I agree with Stinky. The annuity you posted stinks.
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Stinky
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Stinky »

Harmanic wrote: Mon May 13, 2024 6:27 am I agree with Stinky. The annuity you posted stinks.
Thank you for your support.

I try to keep my posts about life insurance and annuities as reasoned and factual as possible.

But, if the presentation by the salesman to the parents was as OP says, there was an over-the-top misrepresentation of what the indexed annuity could reasonably be expected to do. The parents would own an annuity that will almost certainly run out of money well before the parents die, with no death benefit left for the heirs, while the agent will walk away with a fat commission.

Such bad behavior by the agent needs to be called out.
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othrif
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

This thread has been so helpful. Thank you all!

I am summarizing to them the important points that were raised in this thread. Unfortunately, the salespeople of the annuities definitely fed on their fears.

Here are two tactics that they used:

1. Imminent Stock Market Crash Fear: Pull your money from stocks ASAP and put them in an annuity. Using sensational headlines to instill fear about an impending market crash like: https://markets.businessinsider.com/new ... ine-2024-5.

2. Long Recovery Times Post-Market Drops: Let's pull a picture of the S&P500. If you look at the market drops, it takes years for the market to recover. You cannot afford to keep your money in the stock market if you are withdrawing at retirement. Let's take few examples: In June 2000 the S&P500 was 1480, it took 7 years to recover until May 2007. In September 2007, the S&P500 was 1526, it took 6 years to recover until March 2013.
Image.

3. Locking in Rates Due to High Federal Interest Rates: If you wait 7 years later before you get an immediate annuity, you don't guarantee these extremely favorable rates.

I would appreciate help responding to each one of the points above.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Stinky »

othrif wrote: Mon May 13, 2024 8:16 am This thread has been so helpful. Thank you all!

I am summarizing to them the important points that were raised in this thread. Unfortunately, the salespeople of the annuities definitely fed on their fears.

Here are two tactics that they used:

1. Imminent Stock Market Crash Fear: Pull your money from stocks ASAP and put them in an annuity. Using sensational headlines to instill fear about an impending market crash like: https://markets.businessinsider.com/new ... ine-2024-5.

Sure, they could put their money into an annuity to safeguard it against stock market drops. Just don't put it into THIS annuity.

Global Atlantic, the company mentioned in your post above, offers other annuities that are of better consumer value. For example, Global Atlantic sells a multi-year guaranteed annuity (MYGA) that credits a guaranteed 5.40% for a 7 year term, or 5.30% for a 5 year term, or 5.15% for a 3 year term. Here's a link to the seven year MYGA product as shown on the Blueprint Income site. https://www.blueprintincome.com/fixed-a ... 1&id=40870

(I'm not recommending Global Atlantic. Rather, I'm just showing another product offered by the same company.)

Why didn't the advisor show them this product instead of the one that MIGHT average 3.50% per year? Maybe it's because the commission on the MYGA is probably less than one-half of the commission on the indexed annuity that he was peddling?


2. Long Recovery Times Post-Market Drops: Let's pull a picture of the S&P500. If you look at the market drops, it takes years for the market to recover. You cannot afford to keep your money in the stock market if you are withdrawing at retirement. Let's take few examples: In June 2000 the S&P500 was 1480, it took 7 years to recover until May 2007. In September 2007, the S&P500 was 1526, it took 6 years to recover until March 2013.
Image.

This is just an extension of the fear factor mentioned in your point #1. Same song, second verse.

3. Locking in Rates Due to High Federal Interest Rates: If you wait 7 years later before you get an immediate annuity, you don't guarantee these extremely favorable rates.

There's nothing at all in the indexed annuity quote that "locks in" the current rates. Nothing at all. There are annuity products that can lock in the current rates, but the Global Atlantic indexed annuity product that was pitched to your parents does not lock anything in. That is, except that a high commission is locked in for the advisor.

I would appreciate help responding to each one of the points above.
See embedded comments above.

Please post back if any of the counter-arguments are unclear.
Last edited by Stinky on Mon May 13, 2024 8:44 am, edited 1 time in total.
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vtjon
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by vtjon »

You might look up "Stan the annuity man" (Google it). I have heard him on some podcasts and his own YT channel. He seems to know what he's talking about. Other posts here note that he has a "Bogleheads-view" to annunities.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by BarbK »

Stinky wrote: Mon May 13, 2024 8:31 am
othrif wrote: Mon May 13, 2024 8:16 am ...

1. Imminent Stock Market Crash Fear: Pull your money from stocks ASAP and put them in an annuity. Using sensational headlines to instill fear about an impending market crash like: https://markets.businessinsider.com/new ... ine-2024-5.

Sure, they could put their money into an annuity to safeguard it against stock market drops. Just don't put it into THIS annuity.

Global Atlantic, the company mentioned in your post above, offers other annuities that are of better consumer value. For example, Global Atlantic sells a multi-year guaranteed annuity (MYGA) that credits a guaranteed 5.40% for a 7 year term, or 5.30% for a 5 year term, or 5.15% for a 3 year term. Here's a link to the seven year MYGA product as shown on the Blueprint Income site. https://www.blueprintincome.com/fixed-a ... 1&id=40870

(I'm not recommending Global Atlantic. Rather, I'm just showing another product offered by the same company.)

Why didn't the advisor show them this product instead of the one that MIGHT average 3.50% per year? Maybe it's because the commission on the MYGA is probably less than one-half of the commission on the indexed annuity that he was peddling?

What a great explaination from Stinky in his earlier post on this thread.

If going the MYGA route, they could get 5.4% from Mass Mutual (5 years) for $100K, an A++ company
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by David Jay »

If your parents are concerned about inflation and stock market risk, they can purchase 5-Year TIPS bonds from the US Treasury that are guaranteed to exceed inflation over the next 5 years, then when those treasuries mature they can purchase an SPIA with that money (in 5 years).
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othrif
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

Rex66 wrote: Sun May 12, 2024 8:00 pm They don’t even seem to need an annuity

This is like trying to find a solution to no problem

The agent must be salivating at the chance to sell this

Way above state limits, poor financial rating, non guaranteed even from this company.

You would expose them to inflation risks to boot.

First rule should be if you want guaranteed income then defer SS to age 70.
I wanted to understand this point. Why defer until age 70? Can’t they start receiving SS at age 62?
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othrif
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

David Jay wrote: Mon May 13, 2024 10:46 am If your parents are concerned about inflation and stock market risk, they can purchase 5-Year TIPS bonds from the US Treasury that are guaranteed to exceed inflation over the next 5 years, then when those treasuries mature they can purchase an SPIA with that money (in 5 years).
On this point, could you help me understand the difference between purchasing TIPS and US treasury bills. Looking at today’s rates, treasury bills are 4.5% while TIPS are unclear to me how much they earn from looking at https://www.treasurydirect.gov/marketab ... ities/tips.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Rex66 »

othrif wrote: Tue May 14, 2024 7:45 am
Rex66 wrote: Sun May 12, 2024 8:00 pm They don’t even seem to need an annuity

This is like trying to find a solution to no problem

The agent must be salivating at the chance to sell this

Way above state limits, poor financial rating, non guaranteed even from this company.

You would expose them to inflation risks to boot.

First rule should be if you want guaranteed income then defer SS to age 70.
I wanted to understand this point. Why defer until age 70? Can’t they start receiving SS at age 62?
As you delay, your guaranteed monthly goes up. It also has true inflation protected.

Reasons to receive early are you are unhealthy and thus more likely to die soon or just can’t defer bc have no money.

Never buy a life annnuity unless willing to do this bc it’s the best annuity.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Stinky »

othrif wrote: Mon May 13, 2024 8:16 am This thread has been so helpful…….

Unfortunately, the salespeople of the annuities definitely fed on their fears.
Have you been successful in allaying the fears of your parents?

Equally importantly, have you convinced them to cut off contact with this snake of a salesman?
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othrif
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

Stinky wrote: Tue May 14, 2024 9:01 am
othrif wrote: Mon May 13, 2024 8:16 am This thread has been so helpful…….

Unfortunately, the salespeople of the annuities definitely fed on their fears.
Have you been successful in allaying the fears of your parents?

Equally importantly, have you convinced them to cut off contact with this snake of a salesman?
Partially. I convinced them to go the MYGA route. I am still running the numbers with them to see if they even need an annuity. My thinking is that they will start receiving SS at age 67 or 70. They can easily invest part of their money in a safe investment, to be determined which one, then the rest in a target retirement fund with low expense ratio.

They seem convinced that they want to assurance of guaranteed fixed income for life with an annuity. I am trying to see if it makes sense for them to get a delayed annuity or an immediate one.

We are talking to few more companies to shop around. The other thing I am trying to do is have them speak to a flat fee only financial advisor who is not selling them anything, any recommendations?
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Stinky »

othrif wrote: Tue May 14, 2024 9:06 am
Stinky wrote: Tue May 14, 2024 9:01 am
othrif wrote: Mon May 13, 2024 8:16 am This thread has been so helpful…….

Unfortunately, the salespeople of the annuities definitely fed on their fears.
Have you been successful in allaying the fears of your parents?

Equally importantly, have you convinced them to cut off contact with this snake of a salesman?
Partially. I convinced them to go the MYGA route. I am still running the numbers with them to see if they even need an annuity. My thinking is that they will start receiving SS at age 67 or 70. They can easily invest part of their money in a safe investment, to be determined which one, then the rest in a target retirement fund with low expense ratio.

They seem convinced that they want to assurance of guaranteed fixed income for life with an annuity. I am trying to see if it makes sense for them to get a delayed annuity or an immediate one.

We are talking to few more companies to shop around. The other thing I am trying to do is have them speak to a flat fee only financial advisor who is not selling them anything, any recommendations?
Your response is mentioning two different purposes for an annuity -

—- If your parents purchase a MYGA, they will be purchasing a product that is somewhat analagous to a CD, in that it guarantees a fixed rate of interest for a fixed period of time. The biggest differences between a MYGA and a CD are the limited liquidity without penalty during the term and the lack of FDIC guarantees.

—- If your parents want to have lifetime income from an annuity, they would purchase a single premium immediate annuity (SPIA). They could do that now, or at any time in the future. While interest rates may seem attractive right now, the passage of time will increase the monthly payments from a certain deposit more than a change interest rates might affect the monthly payments.

I definitely think that a MYGA is a far wiser choice for “accumulation” purposes than the Athene indexed annuity they were pitched.

And I also think that, for most folks, delaying the start of social security payments is a wise choice.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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othrif
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

Stinky wrote: Tue May 14, 2024 10:02 am
othrif wrote: Tue May 14, 2024 9:06 am
Stinky wrote: Tue May 14, 2024 9:01 am
othrif wrote: Mon May 13, 2024 8:16 am This thread has been so helpful…….

Unfortunately, the salespeople of the annuities definitely fed on their fears.
Have you been successful in allaying the fears of your parents?

Equally importantly, have you convinced them to cut off contact with this snake of a salesman?
Partially. I convinced them to go the MYGA route. I am still running the numbers with them to see if they even need an annuity. My thinking is that they will start receiving SS at age 67 or 70. They can easily invest part of their money in a safe investment, to be determined which one, then the rest in a target retirement fund with low expense ratio.

They seem convinced that they want to assurance of guaranteed fixed income for life with an annuity. I am trying to see if it makes sense for them to get a delayed annuity or an immediate one.

We are talking to few more companies to shop around. The other thing I am trying to do is have them speak to a flat fee only financial advisor who is not selling them anything, any recommendations?
Your response is mentioning two different purposes for an annuity -

—- If your parents purchase a MYGA, they will be purchasing a product that is somewhat analagous to a CD, in that it guarantees a fixed rate of interest for a fixed period of time. The biggest differences between a MYGA and a CD are the limited liquidity without penalty during the term and the lack of FDIC guarantees.

—- If your parents want to have lifetime income from an annuity, they would purchase a single premium immediate annuity (SPIA). They could do that now, or at any time in the future. While interest rates may seem attractive right now, the passage of time will increase the monthly payments from a certain deposit more than a change interest rates might affect the monthly payments.

I definitely think that a MYGA is a far wiser choice for “accumulation” purposes than the Athene indexed annuity they were pitched.

And I also think that, for most folks, delaying the start of social security payments is a wise choice.
Thank you for clarifying, I missed the distinction.

One other argument that they were told. Currently the money they want to use for the annuity is in tax deferred accounts (401k and traditional IRA). They were told that they could decrease their tax liability by buying a whole life insurance since it can grow tax free. I am agin not sure how to think about this new product.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by bsteiner »

othrif wrote: Tue May 14, 2024 3:42 pm ...
One other argument that they were told. Currently the money they want to use for the annuity is in tax deferred accounts (401k and traditional IRA). They were told that they could decrease their tax liability by buying a whole life insurance since it can grow tax free. I am agin not sure how to think about this new product.
Buying both life insurance and an annuity is like betting on both teams in the same game.
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othrif
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

bsteiner wrote: Tue May 14, 2024 3:53 pm
othrif wrote: Tue May 14, 2024 3:42 pm ...
One other argument that they were told. Currently the money they want to use for the annuity is in tax deferred accounts (401k and traditional IRA). They were told that they could decrease their tax liability by buying a whole life insurance since it can grow tax free. I am agin not sure how to think about this new product.
Buying both life insurance and an annuity is like betting on both teams in the same game.
In which case one would be more suitable? I was always warned against life insurance.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Stinky »

othrif wrote: Tue May 14, 2024 3:42 pm One other argument that they were told. Currently the money they want to use for the annuity is in tax deferred accounts (401k and traditional IRA). They were told that they could decrease their tax liability by buying a whole life insurance since it can grow tax free. I am agin not sure how to think about this new product.
ABSOLUTELY NOT!

Your parents don’t need a whole life policy. They don’t need to be spending money on life insurance. Especially whole life.

If it wasn’t clear before, it’s now absolutely clear that the salesman does not have their best interests at heart.

As I said in thread previously, advise your parents to run, run, as fast as they can. Away from this money-grubbing mess of an insurance salesman.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by David Jay »

othrif wrote: Tue May 14, 2024 7:50 am
David Jay wrote: Mon May 13, 2024 10:46 am If your parents are concerned about inflation and stock market risk, they can purchase 5-Year TIPS bonds from the US Treasury that are guaranteed to exceed inflation over the next 5 years, then when those treasuries mature they can purchase an SPIA with that money (in 5 years).
On this point, could you help me understand the difference between purchasing TIPS and US treasury bills. Looking at today’s rates, treasury bills are 4.5% while TIPS are unclear to me how much they earn from looking at https://www.treasurydirect.gov/marketab ... ities/tips.
Regular Treasury Bonds have no automatic inflation protection. 4.5% is nominal, if inflation in a given year is 5% then the future purchasing power is reduced 0.5% in that year.

TIPs pay the rate indicated plus CPI. If the interest rate is 1% and the inflation rate in a given year is 5% then the TIPS will pay 6% for that year, so purchasing power goes up 1% for that year. The future purchasing power will be the interest rate quoted, regardless of the rate of inflation.
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othrif
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

Thank you, this has been very helpful.

My remaining question now is why I should encourage them to defer taking SS until age 70? Isn’t it better to get the money now while they can, obviously no one knows how long they will live for.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by eigenperson »

othrif wrote: Tue May 14, 2024 5:13 pm Thank you, this has been very helpful.

My remaining question now is why I should encourage them to defer taking SS until age 70? Isn’t it better to get the money now while they can, obviously no one knows how long they will live for.
Social Security is designed to pay out the same amount on average, whether you take it at 62 or 70.

Most people don't live exactly the average lifespan. If you live longer than average, it is better to take social security late. If you live shorter than average, it is better to take it early. This might make you think "oh, then it doesn't matter."

However, the scenario that matters is the one where they live a long time. Your parents have assets, so if they die young, they will not run out of money, whether they take social security early or late. But if they live a long time and take social security early, they may deplete their assets and end up with a very small amount of money later in life.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Rex66 »

If they believe they will live past about 78 then delaying will win and has better survivor benefits. What you do is if you are super healthy and that changes then start claiming earlier.


Whole life is absolutely the worst possible recommendation for this situation. The guaranteed return is below inflation so you actually lose purchasing power if you get the guaranteed. If you get the current illustration it’s probably under 4%. Only way to win with WL is to die much earlier than they anticipated.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by bsteiner »

othrif wrote: Tue May 14, 2024 5:13 pm Thank you, this has been very helpful.

My remaining question now is why I should encourage them to defer taking SS until age 70? Isn’t it better to get the money now while they can, obviously no one knows how long they will live for.
Deferring Social Security is effectively buying an inflation protected annuity at much better pricing than they could get if they bought an annuity from an insurance company. If they were considering buying an annuity from an insurance company why wouldn’t they (or at least one of them) defer Social Security?
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by David Jay »

bsteiner wrote: Tue May 14, 2024 6:23 pm
Deferring Social Security is effectively buying an inflation protected annuity at much better pricing than they could get if they bought an annuity from an insurance company. If they were considering buying an annuity from an insurance company why wouldn’t they (or at least one of them) defer Social Security?
The spouse with the larger SS earnings should almost always defer. This is due to the way survivor’s benefits are calculated. When one spouse passes, the survivor receives a total benefit equal to the higher earner’s benefit. When one spouse passes, the smaller benefit amount ends, the higher benefit amount continues.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by simplesimon »

othrif wrote: Tue May 14, 2024 5:13 pm Thank you, this has been very helpful.

My remaining question now is why I should encourage them to defer taking SS until age 70? Isn’t it better to get the money now while they can, obviously no one knows how long they will live for.
There's the risk of living too long, in which case delaying until age 70 is a massive benefit. And there's the risk of not living long enough and "leaving money on the table".

Most Bogleheads would consider living too long the worse risk as leaving money on the table is really only detrimental to heirs assuming the retirees have a decent nest egg, which your parents do.

Annuities do sound like a strategy your parents should utilize based on what you said: 1) they don't want to take any market risk, 2) they want income for life in the form of a paycheck rather than dealing with managing cash flow from funds. Unfortunately there are lots of bad types of annuities and only a couple of good ones. By posting about the annuity that was being sold to your parents you averted disaster.

You didn't say it explicitly but it sounds like your parents plan to retire at age 67? Assuming they can keep the $500k safe and get close to matching inflation with MYGA's, cash, CD's, or TIPS or a combination of these, then they should have what they need to retire by then. Or you can explore DIA's today or wait until they're age age 67 and explore SPIA's.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

simplesimon wrote: Wed May 15, 2024 4:50 am
othrif wrote: Tue May 14, 2024 5:13 pm Thank you, this has been very helpful.

My remaining question now is why I should encourage them to defer taking SS until age 70? Isn’t it better to get the money now while they can, obviously no one knows how long they will live for.
There's the risk of living too long, in which case delaying until age 70 is a massive benefit. And there's the risk of not living long enough and "leaving money on the table".

Most Bogleheads would consider living too long the worse risk as leaving money on the table is really only detrimental to heirs assuming the retirees have a decent nest egg, which your parents do.

Annuities do sound like a strategy your parents should utilize based on what you said: 1) they don't want to take any market risk, 2) they want income for life in the form of a paycheck rather than dealing with managing cash flow from funds. Unfortunately there are lots of bad types of annuities and only a couple of good ones. By posting about the annuity that was being sold to your parents you averted disaster.

You didn't say it explicitly but it sounds like your parents plan to retire at age 67? Assuming they can keep the $500k safe and get close to matching inflation with MYGA's, cash, CD's, or TIPS or a combination of these, then they should have what they need to retire by then. Or you can explore DIA's today or wait until they're age age 67 and explore SPIA's.
You are correct, they do want to retire at 67 (with worst case scenario at 70).

Something that is unclear to me is that why fixed index annuity with a guaranteed income rider starting 7 years later always gives the best possible income payments for life. Even if I took the single premium of about $320k I would give the annuity company and invested it for 7 years at a 7% to get about $500k and plugged the numbers for a SPIA, the payment of $31.5k/year will still be lower than what a FIA quoted us now for $36k. Note that both have a survivor benefit where if one of the partners passes away the other continue receiving the payments.

The FIA is advertised with a 1% fee and still beats a SPIA.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Rex66 »

It’s bc they know some of those people will have major health events between now and 7 years. They would never have purchased the spia 7 years from now but are sort of stuck. Sure there is a walk away value but it’s killed by the fees and if they do use the income rider they likely aren’t going to live to 100 or whatever. The best case for income rider is when it beats the spia but it’s a short like 2 year deferral period.
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Stinky »

othrif wrote: Sat May 18, 2024 10:40 am Something that is unclear to me is that why fixed index annuity with a guaranteed income rider starting 7 years later always gives the best possible income payments for life. Even if I took the single premium of about $320k I would give the annuity company and invested it for 7 years at a 7% to get about $500k and plugged the numbers for a SPIA, the payment of $31.5k/year will still be lower than what a FIA quoted us now for $36k. Note that both have a survivor benefit where if one of the partners passes away the other continue receiving the payments.

The FIA is advertised with a 1% fee and still beats a SPIA.
If a person wants to have an income stream for life, starting at some well-determined future date, it's useful to look at three scenarios for providing that scheme -

--- Investing the funds at X% interest until that future date, then purchasing a SPIA with a "premium refund" feature

--- Purchasing an indexed annuity with a "guaranteed withdrawal benefit" (GWB) rider

--- Purchasing a deferred income annuity (DIA), with a "premium refund" feature, that starts payments at that future date

You've already looked at the first two of the scenarios above. (But to make the comparison "apples to apples" as much as possible, you should price the future-purchased SPIA with a "premium refund" feature)

When an indexed annuity is used in this way, the negatives surrounding the use of an indexed annuity (participation and cap rates subject to change by the insurer, surrender charges, rider fees, etc.) all fade away. All that's left is the amount of monthly income, guaranteed for life, that will be paid out by the GWB rider.

And there are definitely times where the indexed annuity with GWB rider wins. The only way to know is to run the numbers on the scenarios.

One caveat on the indexed annuity/GWB rider - I've heard rumors that the GWB riders on some indexed annuities pay out at a certain rate while the indexed annuity account value is positive, but the payout rate reduces if/when the indexed account value is drawn down to zero. If you go the indexed annuity/GWB route, make sure that the payout amount is level for life, whether the policy account value is positive or zero.

Post back with questions.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by ScubaHogg »

No one seems to have posted this yet. A board member, Obliviousinvestor (Mike piper), CPA and author has created a free website to analyze when to take social security. As I understand it it calculates which decision creates the highest net present value for the recipient.

You might like to see it

https://opensocialsecurity.com/
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othrif
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by othrif »

Thanks again for all the help.

Here is a new quote I received from Corebridge Financial which used to be known as American General Life Insurance Company.

Image

Any thoughts?
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Rex66 »

Thoughts haven’t changed

Defer SS to age 70

Why do they need guaranteed income over that especially non inflation protected income
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Re: Are Annuities the Best Retirement Strategy for My Parents?

Post by Stinky »

othrif wrote: Sun May 19, 2024 10:05 am Thanks again for all the help.

Here is a new quote I received from Corebridge Financial which used to be known as American General Life Insurance Company.

Image

Any thoughts?
Presuming that your parents are pretty darned sure that they want to set aside a lump sum today and start receiving income for life at a future date, I think that this is a pretty attractive offer.

Just to unpack what it shows to me -

—- Your parents are each 60 years old now. They will pay a premium of $321,000 from their IRA today.

—- They will start taking withdrawals in 7 years from now, starting in 2031. No withdrawals prior to that time.

—- The withdrawals are $36,096 per year, payable each year so long as either is alive.

I looked at a couple of sources to assess the attractiveness of this offer -

—- I got a quote for a deferred income annuity (DIA) from immediateannuities.com for a policy with a premium refund feature, to make it generally comparable to the Corebridge quote. The best offer was from Guardian Life for $2,600 per month ($31,200 per year). Of course, that’s less than what they could get from the Corebridge product quoted.

—- I went to stantheannuityman.com to get quotes for other indexed annuities with GWB riders. The only way that I could beat the $36,096 Corebridge quote is to go with products that might reduce the monthly payment when the account value is exhausted, or with companies rated B++ by AM Best.

If your parents use the product as intended (defer for 7 years, then take out lifetime income under the rider), I think that it’s a good value compared to the alternatives.

However, if your parents use the product for “accumulation” purposes and don’t activate the withdrawal benefit rider, then the product has all of the normal negative attributes of an indexed annuity.

Post back with questions.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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