Annuity - decision process & why ?

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ps56k
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Annuity - decision process & why ?

Post by ps56k » Fri Jan 12, 2018 4:33 pm

Some friends have annuities - I never even considered them...
SO - now I'm wondering, did I miss out - should I re-think getting one - and WHY ?

Where does one even start to think about yes, no, maybe, why, which -

Here are some comments from my friends.....
when we discussed - Long Term Care, Annuity, Life Insurance
For this thread... I'm just focusing on the ANNUITY aspect

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I have 3 Variable Annuities, started between 7/01 and 1/06. They all featured the ability to invest in equity funds with a minimum guaranteed growth rate of 5 – 7%. My strategy was to choose the most aggressive funds available given the growth guarantee. The oldest of these only offered annuity options for payout and the growth was guaranteed for 10 years. This has been annuitized since 2011 with the choice of 10 year certain payout (in the event of an early demise) on a single life (mine). This had a CAGR (Compounded Annual Growth Rate) of just under 7.5%, after fees. The annuity payments are about 50% exposed to Income Tax.

The others afford a choice of taking a Lifetime payout of 5 – 6% without annuitizing (which is also a choice). This has the advantage of maintaining a Death Benefit and preserves the ability to annuitize at a future date. These have had a post-fees CAGR of just under 6% and 5%.

Nobody “needs” an annuity, it is just a tool like any other. Currently in a low interest rate environment the payout amounts are relatively low. The tradeoff is a guaranteed, fixed payment amount (guaranteed by the financial strength of the insurance company and state reserve requirements) with some tax advantages but with losing control (and inheritance) of the premium amount expended (ignoring the unacceptable surrender fees).

Review how you would fare under the self-funding plan given another 35- 50% market plunge with a 5 – 15 year recovery period. There are Monte Carlo simulation models to assist with determining the probability of not outliving your assets.

The best advice is to develop a detailed financial model so that you can play out various scenarios and see how you feel. It is advisable to incorporate Social Security payments and Income Taxes with a 10 year planning horizon (enough to encompass IRA/401(k) RMD rules). And, of course, you need a working retirement budget to know how much annual net cash flow is enough. Let me know if you would like an excel spreadsheet to use as a starting point. The Excel Goal Seek function is very helpful in planning to use up income brackets when planning IRA Roth conversions.

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I have one immediate pay @5.5% yearly for my life.

I have one future dated 6 years from 5.5 years ago so this fall.
This is also paid as a lump sum - but until you start drawing money out, it Increases @7.5 percent per year.
The payout is @6% yearly for life

Sue has one future dated to 2017 - paid as a lump sum. Accumulates @8% yearly until she starts with drawing - then 6%/yearly for life.

One negative - these were funded from IRAs.
Because of that Sue and I can not jointly hold the annuity.

I did not want the pressure of self funding -

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We just opened 2 QLACs (Qualified Longevity Annuity Contract) to allow us to move IRA money to deferred annuities which will commence payments at age 85 (or any earlier date we choose under FL law). The motivation for this is to reduce the amount of our IRA RMD (Required Minimum Distributions) in an effort to control our tax bracket (despite the unknowns of possible tax reform) and avoid additional Medicare premiums (admittedly a High Class Problem). Effectively we harvested the stock gains of this year to create future cash flow and control near term taxes.
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FiveK
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Re: Annuity - decision process & why ?

Post by FiveK » Fri Jan 12, 2018 5:41 pm

Whenever there is a discussion about annuities and I hear the word "return", this phrase comes to mind: You keep using that word I don't think it means what you think it means - Inigo Montoya - quickmeme.

Not always, but all too often, the "return" on an annuity is not the same as the return one gets from stock or bond investments. The annuity "return" may be
- the amount paid back to you each year, as a percent of the amount you put in. E.g., you give the insurance company $100K, they give you $6K/yr and call it a 6% return. Not quite the same as investing $100K and having it grow to $106K, $112.36K, etc.
- the amount by which a certain number grows. That certain number is not withdrawable by you, but instead becomes the basis for an annuitized payout. E.g., you give the insurance company $100K. They take that number and do increase it by 6%/yr, so after 10 years your number is $179,085. But you can't withdraw that amount - the amount you may withdraw is calculated differently, and will be much less. You may annuitize the $179,085 at some rate. If that rate is, say, 5%, you get $8954/yr.

The only way to know for sure what you are getting is to wade through the prospectus, decipher the jargon, and determine the formula, usually a relatively simple one, that describes how your money is treated. The formula itself may be simple, but mining the prospectus to determine it is not.

There is a good chance that your "never even considered them" has saved you both time and money.

A notable exception to all the above is a Single Premium Immediate Annuity, particularly if you are ~70 years old or older.
Last edited by FiveK on Fri Jan 12, 2018 6:05 pm, edited 2 times in total.

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David Jay
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Re: Annuity - decision process & why ?

Post by David Jay » Fri Jan 12, 2018 6:00 pm

I like Jane Bryant Quinn's perspective: "Quinn's First Law of Investing is never to buy anything whose price you can't follow in the newspapers. Even when the price is in the newspapers, you shouldn't buy anything too complex to explain to the average 12-year old."

I looked at a number of annuities last year for posters here on BH. Typical expenses are between 2% and 3% per year, which you can find by wading through the 90 page prospectus.

The "guarantees" that are used to entice people to buy are, as "FiveK" suggests, not dollars that you can actually withdraw and walk away with.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

2comma
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Re: Annuity - decision process & why ?

Post by 2comma » Fri Jan 12, 2018 7:26 pm

A single premium immediate annuity at a later age makes sense for some. It's a simple concept anyone can understand - I'll give you a chunk of money and you'll pay me X amount for life. It is easy to price and compare these annuities.

All of the others were built to be sold, I doubt 2% of buyers really understand them and less than 10% of those selling them really understand them but they do know what commission they'll get. I cannot understand them so I'll never "invest" in them. Investing should be simple and variable annuities are the antithesis of simple.
If I am stupid I will pay.

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