Why do people buy annuities?

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beyou
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Re: Why do people buy annuities?

Post by beyou »

cshell2 wrote: Tue Apr 02, 2024 7:25 am
beyou wrote: Tue Apr 02, 2024 6:57 am
AlwaysLearningMore wrote: Mon Apr 01, 2024 8:34 pm As an insider you have perspective most of us will never have. Trying to square your statements with the AM Best ratings, and longevity in business of NY Life and Penn Mutual. (Our extended family have had long, good experiences with both.)
Just a question but I wonder who pays for AM best ratings ? S&P / Moody’s are paid for ratings by bond issuers themselves, creating a conflict of interest. This was exposed for everyone during the GFC, when previously AAA rated bonds defaulted. To me relative ratings are somewhat useful, but even AAA rated institutions have failed.

Executive Life was highly rated…until it wasn’t.
If you buy lifetime protection, you are counting on the current rating being valid many years in the future, but things can change. Here is a list of insurance firms that went bankrupt.

https://www.atlas-mag.net/en/article/ba ... in-the-usa

Not sure I ever heard of any mutual fund manager going bankrupt, and if they did, wouldn’t impact you anyway.
If you stay under the state guarantee limits, the insurance company going under won't impact you either.

https://www.nolhga.com/policyholderinfo ... ncyprocess
Most state governments are themselves barely solvent.

State insurance <> FDIC

How much you can trust this depends on what state you live in.
cshell2
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Re: Why do people buy annuities?

Post by cshell2 »

snic wrote: Tue Apr 02, 2024 7:38 am

immediateannuities.com is an agent. That is how they make money! They provide all that info on their website because some people will buy a SPIA or MYGA through them and they get a commission.
Ah, thank you for that. I am still 10 years out from getting one and have just been using them to get quotes from all the various companies.
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beyou
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Re: Why do people buy annuities?

Post by beyou »

cshell2 wrote: Tue Apr 02, 2024 7:20 am
beyou wrote: Tue Apr 02, 2024 6:38 am
I am quite happy my long time employer gave us cash bonuses and healthy 401k matches rather than a pension. I prefer to own and have control of my own assets, thank you.
At 55, I do to. Not so sure I'll feel the same when I'm 85 or if I'll even be mentally capable of doing so at that time so the idea of simplifying things as I age is appealing. Stick 20% in an annuity and leave the rest 100% in stocks. No sitting on years worth of cash and fixed income and having to re-balance and figure out what I can safely withdraw every year.
When cognitively challenged you may need someone to take that benefit and pay your bills. You can’t avoid the need for help just by having a “simple” portfolio. I have trained my son/successor trustee in boglehead ways, both to manage his investments for himself, and someday to be trustee for me and my spouse.
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Re: Why do people buy annuities?

Post by dcabler »

beyou wrote: Tue Apr 02, 2024 6:45 am
meowcat wrote: Tue Apr 02, 2024 4:52 am One of the biggest fears most retirees face is the very real risk of running out of money before they die. Well, what if you could transfer that risk to someone else? Wouldn't you sleep better at night? That is what an annuity is for. You can't put a price on knowing that you'll be taken care of financially for the rest of your life.
Is inflation protection commonly offered ? Without that I don’t see why this should help me sleep at night.

Is the insurer guaranteed to pay ? FDIC type insurance ? How do I know I am not buying from the next Executive Life ? Without federal gov protection I can get elsewhere, I wouldn’t sleep better at night.

I can get the above in a TIPS portfolio with little or no expenses. Not the same i know, no risk pooling, but we’re talking about what makes people sleep better, then it’s just which risks make you uncomfortable. Truthfully there are risks and costs either way, self funded or pooled insurance risk. But cost is easily quantified, and ownership of a portfolio is easier to understand than evaluate the long term health of an insurance company.
In the past, true inflation protection was offered. According to most, it stopped being offered due to lack of interest. I could believe that since it was discontinued before inflation flared up again. Initial payout for a non-inflation protected SPIA was quite a bit higher than for an inflation protected SPIA and a lot of folks weren't thinking in real terms at the time. Today, all you can purchase are fixed COLA options and they, too, are going to have the same reduced initial payout vs. a nominal annuity. They're not true inflation protection, though.

At any rate, SPIAs when they do make sense, tend to make more sense much later in retirement vs. earlier.

Cheers.
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simplesimon
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Re: Why do people buy annuities?

Post by simplesimon »

Claudia Whitten wrote: Tue Apr 02, 2024 7:21 am Also, aren't most annuities sold by agents and only by agents? If so, why? If not, which ones? Also, what are the commissions that the agents get? 100% of annual premiums? The insurance companies recoup that, right, plus make a healthy profit? How? Their investing brilliance?
Have you ever purchased other insurance products such as term life or disability? It's the same.
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Re: Why do people buy annuities?

Post by beyou »

Josh5000 wrote: Mon Apr 01, 2024 1:11 pm
dbr wrote: Mon Apr 01, 2024 9:58 am
Claudia Whitten wrote: Mon Apr 01, 2024 9:53 am I'm trying to understand this. Why do people buy annuities? A friend is planning to buy one. The company is promising her a 10 percent per year return. She's retirement age and deathly afraid of stock market volatility.

My default reaction to annuities has always been "no." I'm not saying they're scams, necessarily, but they always make me think of the saying "if it sounds too good to be true, it is." I also don't like the idea of giving my money to an insurance company.

Please help me understand (a) why people buy annuities and (b) why or when they might be a good idea.
The quip is that people don't buy annuities; they are sold annuities. This means that predatory salesmen convince people against their interest that they should buy the annuity. SPIAs and MYGAs are probably exceptions to this and there could be a small number of cases where someone in particular could conceivably take advantage of certain annuities, perhaps a variable annuity invested at low costs.
How do fund managers guarantee certain return? Or are positive returns even guaranteed? It seems like it is best to either pick an index or very carefully pick the right individual stocks when they are on sale. The later is much harder.
Guaranteed returns are
1) usually lower returns
2) not as safe as you think

Insurance firms highly rated will pay lower rates.
Insurance firms with higher rates are likely lower rated and more risk of default.

If guarantees make you sleep better at night, go for it.
For me, I dont buy extended warrantees, nor annuities, and I sleep better knowing I didn’t spend $ that go to commissions rather than for my family’s benefit. I dont want to think about the insurer going under and whether i may or may not recover.

For the same reasons we buy index funds, diversification and low fees, this is why I dont want insurance products (high fees and non-diversified risk).
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Re: Why do people buy annuities?

Post by cshell2 »

Claudia Whitten wrote: Tue Apr 02, 2024 7:21 am
Also, what are the commissions that the agents get? 100% of annual premiums? The insurance companies recoup that, right, plus make a healthy profit? How? Their investing brilliance?
100%? LOL The ones I've been looking at are 1-3%
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Re: Why do people buy annuities?

Post by cshell2 »

beyou wrote: Tue Apr 02, 2024 7:55 am
If guarantees make you sleep better at night, go for it.
For me, I dont buy extended warrantees, nor annuities, and I sleep better knowing I didn’t spend $ that go to commissions rather than for my family’s benefit. I dont want to think about the insurer going under and whether i may or may not recover.

For the same reasons we buy index funds, diversification and low fees, this is why I dont want insurance products (high fees and non-diversified risk).
This is just one of those why personal finance is personal things. We all have different wants, needs and concerns. Some people like having 10 years of expenses in cash in their portfolio which is a huge hell no to me, but to each his own.
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Re: Why do people buy annuities?

Post by Johm221122 »

cshell2 wrote: Tue Apr 02, 2024 6:10 am
Claudia Whitten wrote: Tue Apr 02, 2024 2:07 am
I appreciate hearing your view from the kitchen. Even without the culinary insights, the fact that there are a lot of multilevel marketing companies--aka pyramid schemes "with a product"--pushing annuities tells me all that I need to know.
There are many kinds of annuities and you're lumping them all together and proclaiming them bad.

Its no different than life insurance. There are products that are expensive and only a good deal for the insurance agent, but most would agree that term life has its place. SPIAs are the term life of annuities in my opinion.
+1

And if we are wrong tell us why you think a MYGA isn't a substitute for a CD
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Re: Why do people buy annuities?

Post by Claudia Whitten »

I read a few pages of BBB complaints about the insurance company that my friend was going to buy the annuity from. Scared the heck out of me.
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Re: Why do people buy annuities?

Post by Claudia Whitten »

beyou wrote: Tue Apr 02, 2024 7:55 am I dont want to think about the insurer going under
Or the policy holder going under as she tries to reach customer support at the insurance company.

"We are experiencing higher than normal call volumes."
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Re: Why do people buy annuities?

Post by Claudia Whitten »

cshell2 wrote: Tue Apr 02, 2024 8:05 am
Claudia Whitten wrote: Tue Apr 02, 2024 7:21 am
Also, what are the commissions that the agents get? 100% of annual premiums? The insurance companies recoup that, right, plus make a healthy profit? How? Their investing brilliance?
100%? LOL The ones I've been looking at are 1-3%
Presumably this is an annual fee and not the sales commission, which you as buyer are unlikely to know.
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Re: Why do people buy annuities?

Post by cshell2 »

Claudia Whitten wrote: Tue Apr 02, 2024 8:43 am
cshell2 wrote: Tue Apr 02, 2024 8:05 am
Claudia Whitten wrote: Tue Apr 02, 2024 7:21 am
Also, what are the commissions that the agents get? 100% of annual premiums? The insurance companies recoup that, right, plus make a healthy profit? How? Their investing brilliance?
100%? LOL The ones I've been looking at are 1-3%
Presumably this is an annual fee and not the sales commission, which you as buyer are unlikely to know.

1. Multi-Year Guaranteed Annuity (MYGA)

A multi-year guaranteed annuity (MYGA) takes the lead as the most straight-forward annuity product out there. Like a certificate of deposit (CD), you pay a lump sum to an insurance company and let it sit for a certain period of time.

In exchange, your insurance company guarantees you a fixed crediting rate, which your annuity earns every year. Once your contract is up, you get your payouts (premium plus earnings), either in a lump sum or a series of payments. Because of this simplicity, MYGAs have lower commissions (usually 1% – 3%) and no annual fees. Like other deferred annuities, MYGAs have a surrender period.

However, you can usually withdraw 10% of your account value penalty-free every year. Some annuity providers, like Canvas Annuity, sell MYGAs directly online.

By bypassing commissioned agents, they help you secure an even higher interest rate.


https://canvasannuity.com/blog/annuity-commissions
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Re: Why do people buy annuities?

Post by Stinky »

Claudia Whitten wrote: Tue Apr 02, 2024 8:43 am
cshell2 wrote: Tue Apr 02, 2024 8:05 am
Claudia Whitten wrote: Tue Apr 02, 2024 7:21 am
Also, what are the commissions that the agents get? 100% of annual premiums? The insurance companies recoup that, right, plus make a healthy profit? How? Their investing brilliance?
100%? LOL The ones I've been looking at are 1-3%
Presumably this is an annual fee and not the sales commission, which you as buyer are unlikely to know.
Let me clear up some of the misinformation you’ve picked up somewhere about the kinds of annuities that many Bogleheads view as good - multi year guaranteed annuities (MYGAs) and single premium immediate annuities (SPIAs).

Both of these products pay a commission, generally in the range of 1-3% of premium, at time of policy issue.

There are no additional commissions in renewal years to the agent.

There are no annual fees to the annuitant.

What you are quoted (be it guaranteed interest rate or guaranteed monthly payment) is what you get. Period.

It’s clear from the tone of your posts that you don’t like annuities. That’s just fine. To each his own.

Best to you.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Why do people buy annuities?

Post by Rex66 »

beyou wrote: Tue Apr 02, 2024 7:41 am
cshell2 wrote: Tue Apr 02, 2024 7:25 am
beyou wrote: Tue Apr 02, 2024 6:57 am
AlwaysLearningMore wrote: Mon Apr 01, 2024 8:34 pm As an insider you have perspective most of us will never have. Trying to square your statements with the AM Best ratings, and longevity in business of NY Life and Penn Mutual. (Our extended family have had long, good experiences with both.)
Just a question but I wonder who pays for AM best ratings ? S&P / Moody’s are paid for ratings by bond issuers themselves, creating a conflict of interest. This was exposed for everyone during the GFC, when previously AAA rated bonds defaulted. To me relative ratings are somewhat useful, but even AAA rated institutions have failed.

Executive Life was highly rated…until it wasn’t.
If you buy lifetime protection, you are counting on the current rating being valid many years in the future, but things can change. Here is a list of insurance firms that went bankrupt.

https://www.atlas-mag.net/en/article/ba ... in-the-usa

Not sure I ever heard of any mutual fund manager going bankrupt, and if they did, wouldn’t impact you anyway.
If you stay under the state guarantee limits, the insurance company going under won't impact you either.

https://www.nolhga.com/policyholderinfo ... ncyprocess
Most state governments are themselves barely solvent.

State insurance <> FDIC

How much you can trust this depends on what state you live in.
That has nothing to do with it

The state just runs the guaranteed association

Zero state dollars back this up

They level fees against other insurance companies or transfer to such insurance companies up to the limits to make you whole. Unfortunately it can take years.
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beyou
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Re: Why do people buy annuities?

Post by beyou »

Claudia Whitten wrote: Tue Apr 02, 2024 8:35 am
beyou wrote: Tue Apr 02, 2024 7:55 am I dont want to think about the insurer going under
Or the policy holder going under as she tries to reach customer support at the insurance company.

"We are experiencing higher than normal call volumes."
Why do you need to call them ?
Don't they just auto deposit your fixed payment each month into your checking account ?

Don't they have online self service to change something like your bank deposit instructions ?
If not, then the posts about keeping things simple when elderly and in cognitive decline need to think about this.
Yet another company for you or your adult children to deal with.

From my personal consumer and financial industry IT experience, I would not be surprised if many insurance companies had poor online and customer support. My former long time employer was a subsidiary of one of the largest US life insurers. I worked for their acquired mutual fund subsidiary, but did lots of work for the parent insurer. Why did I do work for them, because despite being huge, they had minimal IT budget and their employees had to "hire" my subsidiary to do many things for them.

Personally I just changed some private home/auto insurance because my long time major insurer was unable to provide me any service at all (unable implement quoted policy change, unable to answer phone and chat online). OTOH, the fund industry generally has much better IT. When I read all the Vanguard IT complaints, it's sad because while they do have gaps, compared to many industries Vanguard tech is much better, certainly better than what insurers often have. As an IT guy, seems the insurance industry is stuck in the past technologically. Banks, brokers and mutual funds MUST invest in IT to survive and compete. I guess insurance firms don't see this as a competitive issue.
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Re: Why do people buy annuities?

Post by beyou »

Rex66 wrote: Tue Apr 02, 2024 9:16 am
beyou wrote: Tue Apr 02, 2024 7:41 am
cshell2 wrote: Tue Apr 02, 2024 7:25 am
beyou wrote: Tue Apr 02, 2024 6:57 am
AlwaysLearningMore wrote: Mon Apr 01, 2024 8:34 pm As an insider you have perspective most of us will never have. Trying to square your statements with the AM Best ratings, and longevity in business of NY Life and Penn Mutual. (Our extended family have had long, good experiences with both.)
Just a question but I wonder who pays for AM best ratings ? S&P / Moody’s are paid for ratings by bond issuers themselves, creating a conflict of interest. This was exposed for everyone during the GFC, when previously AAA rated bonds defaulted. To me relative ratings are somewhat useful, but even AAA rated institutions have failed.

Executive Life was highly rated…until it wasn’t.
If you buy lifetime protection, you are counting on the current rating being valid many years in the future, but things can change. Here is a list of insurance firms that went bankrupt.

https://www.atlas-mag.net/en/article/ba ... in-the-usa

Not sure I ever heard of any mutual fund manager going bankrupt, and if they did, wouldn’t impact you anyway.
If you stay under the state guarantee limits, the insurance company going under won't impact you either.

https://www.nolhga.com/policyholderinfo ... ncyprocess
Most state governments are themselves barely solvent.

State insurance <> FDIC

How much you can trust this depends on what state you live in.
That has nothing to do with it

The state just runs the guaranteed association

Zero state dollars back this up

They level fees against other insurance companies or transfer to such insurance companies up to the limits to make you whole. Unfortunately it can take years.
Well then the limit would vary per state then I assume.
So depends what state you live in how much you can safely buy ?
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Stinky
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Re: Why do people buy annuities?

Post by Stinky »

beyou wrote: Tue Apr 02, 2024 9:20 am
Well then the limit would vary per state then I assume.
So depends what state you live in how much you can safely buy?
Look up your state of residence to see the information about your guaranty fund provisions and coverage.

https://www.nolhga.com/policyholderinfo ... ocation/ga
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Rex66
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Re: Why do people buy annuities?

Post by Rex66 »

This has been studied when a company goes under 94% of time people are made whole for annuities and 96% for insurance. It appears that below limits it’s near 100%. Few go under so it’s not like a 6% risk. Problem is that it can take years
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beyou
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Re: Why do people buy annuities?

Post by beyou »

Stinky wrote: Tue Apr 02, 2024 9:23 am
beyou wrote: Tue Apr 02, 2024 9:20 am
Well then the limit would vary per state then I assume.
So depends what state you live in how much you can safely buy?
Look up your state of residence to see the information about your guaranty fund provisions and coverage.

https://www.nolhga.com/policyholderinfo ... ocation/ga
Thanks. Checked a couple of states of relevance to my family.

In my case it was a total aggregate across even multiple insurers, so I am limited to a modest % of my retirement savings in my state.
If I wanted to make this a supplement to my retirement portfolio would be fine, but to replace my fixed income portfolio it is insufficient coverage.

in another state (where close family lives), the limit was per insurer, and happened to be same as FDIC amount. So in that case, one could break up their annuities across many insurers for a larger amount. Sort of like buying CDs at multiple banks. That said, this is a good reason I do NOT use CDs as part of my fixed income, don't want to be bothered with opening accounts at multiple institutions. I guess brokered CDs solve that issue, is there a brokered annuity where you can hold them all in a brokerage like account and get all your payments and service in one place (and if so is such broker regulated and safe such as with SIPC at your SEC regulated broker) ?
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Re: Why do people buy annuities?

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beyou wrote: Tue Apr 02, 2024 10:25 am
In my case it was a total aggregate across even multiple insurers, so I am limited to a modest % of my retirement savings in my state.

If I wanted to make this a supplement to my retirement portfolio would be fine, but to replace my fixed income portfolio it is insufficient coverage.
To my knowledge, life and health guaranty fund coverage in every state is “per individual, per insurer”.

So if the guaranty fund limit were $250k in your state, you would be covered fully even if multiple insurers with which you had policies went insolvent, so long as your exposure to each insurer was less than $250k.

Of course, if you had two $150k policies with the same insurer, your coverage would be capped at $250k for that insurer.

If you disagree with my explanation above, please let me know which state you believe limits your coverage to just ($250k) across all insurers in the state.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Why do people buy annuities?

Post by beyou »

Stinky wrote: Tue Apr 02, 2024 10:35 am
beyou wrote: Tue Apr 02, 2024 10:25 am
In my case it was a total aggregate across even multiple insurers, so I am limited to a modest % of my retirement savings in my state.

If I wanted to make this a supplement to my retirement portfolio would be fine, but to replace my fixed income portfolio it is insufficient coverage.
To my knowledge, life and health guaranty fund coverage in every state is “per individual, per insurer”.

So if the guaranty fund limit were $250k in your state, you would be covered fully even if multiple insurers with which you had policies went insolvent, so long as your exposure to each insurer was less than $250k.

Of course, if you had two $150k policies with the same insurer, your coverage would be capped at $250k for that insurer.

If you disagree with my explanation above, please let me know which state you believe limits your coverage to just ($250k) across all insurers in the state.
Actually I re-read for my state and you are correct. The wording was different and a little less clear for my state than my son's state.
But they did say if you do a multiple annuities with same insurer, there is an aggregate limit. So ladders should be across multiple insurers with respect to the limits in your state. Messy to me.
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Re: Why do people buy annuities?

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Re: Why do people buy annuities?

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By member request, the discussion is still productive with helpful information.

This thread is now unlocked to continue the discussion. Please focus on helping the OP, which is:

Claudia Whitten wrote: Mon Apr 01, 2024 9:53 am I'm trying to understand this. Why do people buy annuities? A friend is planning to buy one. The company is promising her a 10 percent per year return. She's retirement age and deathly afraid of stock market volatility.

My default reaction to annuities has always been "no." I'm not saying they're scams, necessarily, but they always make me think of the saying "if it sounds too good to be true, it is." I also don't like the idea of giving my money to an insurance company.

Please help me understand (a) why people buy annuities and (b) why or when they might be a good idea.
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Re: Why do people buy annuities?

Post by GaryA505 »

Seems the basic problem, as I see it, stems from the following:
1. There are many kinds of annuities.
2. There are some really bad annuities.
3. Some people lump all annuities together.
4. There are some dishonest annuity salespeople.
5. Some annuities are difficult to understand and easy to misrepresent.
6. Some people think annuities are an investment that can be compared to the stock market.
7. Some people are easy to fool.

Anything else?

EDIT: In answer to the OP's original question, people buy annuities either because they get tricked into buying something they don't understand (the Fixed Index Annuity being one example), or because they buy something useful that they do understand (MYGA or SPIA). There is one other that might be useful for income tax reasons - the Investment-Only Variable Annuity (IOVA).
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: Why do people buy annuities?

Post by beyou »

Claudia Whitten wrote: Mon Apr 01, 2024 9:53 am She's retirement age and deathly afraid of stock market volatility.
Specially in answer to this concern, we all know there are risks but also benefits to stock markets.
Anyone who had no stock market exposure for the last 30 years has lost out to inflation and their buying power is diminished, that is a risk too.

I raised the concern about insurer default because often people only focus on the risk or only focus on the benefit.
One should learn about both to know the tradeoffs and make an informed decisions.
Annuities are NOT risk free and one needs to know the risks. I am not sure anything in life is risk free, just saying know what they are.
Claudia Whitten wrote: Mon Apr 01, 2024 9:53 am The company is promising her a 10 percent per year return.
The state insurance in New York (which was the first state to have such a guarantee for insurers) has a FAQ and this is worthy of note.

What is NOT protected by the guaranty corporation?

The New York Guaranty Corporation provides no protection for:

- interest rates found by a court to be clearly excessive;

To me 10% guaranteed rate seems a bit excessive so either this is not accurate (maybe return of capital as someone speculated)
OR they are making a claim that will be risky for them to sustain given bond rates are in the 4-5% range other than high yield junk bonds.
They would have to find a pool of people who die at a higher rate than normal OR invest in very speculative instruments to sustain this.
So in my state at least, a court could deem this excessive in case of default and NOT guarantee your investment. No way to know until there is a problem, since these things are subjective and would be decided in a courtroom, nothing we can resolve here today.
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Re: Why do people buy annuities?

Post by GaryA505 »

beyou wrote: Tue Apr 02, 2024 11:26 am
Claudia Whitten wrote: Mon Apr 01, 2024 9:53 am She's retirement age and deathly afraid of stock market volatility.
Specially in answer to this concern, we all know there are risks but also benefits to stock markets.
Anyone who had no stock market exposure for the last 30 years has lost out to inflation and their buying power is diminished, that is a risk too.

I raised the concern about insurer default because often people only focus on the risk or only focus on the benefit.
One should learn about both to know the tradeoffs and make an informed decisions.
Annuities are NOT risk free and one needs to know the risks. I am not sure anything in life is risk free, just saying know what they are.
Claudia Whitten wrote: Mon Apr 01, 2024 9:53 am The company is promising her a 10 percent per year return.
The state insurance in New York (which was the first state to have such a guarantee for insurers) has a FAQ and this is worthy of note.

What is NOT protected by the guaranty corporation?

The New York Guaranty Corporation provides no protection for:

- interest rates found by a court to be clearly excessive;

To me 10% guaranteed rate seems a bit excessive so either this is not accurate (maybe return of capital as someone speculated)
OR they are making a claim that will be risky for them to sustain given bond rates are in the 4-5% range other than high yield junk bonds.
They would have to find a pool of people who die at a higher rate than normal OR invest in very speculative instruments to sustain this.
So in my state at least, a court could deem this excessive in case of default and NOT guarantee your investment. No way to know until there is a problem, since these things are subjective and would be decided in a courtroom, nothing we can resolve here today.
The OP didn't say how old the friend is. The life-only SPIA payout for a 75-year-old female is about 10%/year. It's much lower for a 65-year-old.
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Cash is King
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Re: Why do people buy annuities?

Post by Cash is King »

cshell2 wrote: Tue Apr 02, 2024 7:20 am
beyou wrote: Tue Apr 02, 2024 6:38 am
I am quite happy my long time employer gave us cash bonuses and healthy 401k matches rather than a pension. I prefer to own and have control of my own assets, thank you.
At 55, I do to. Not so sure I'll feel the same when I'm 85 or if I'll even be mentally capable of doing so at that time so the idea of simplifying things as I age is appealing. Stick 20% in an annuity and leave the rest 100% in stocks. No sitting on years worth of cash and fixed income and having to re-balance and figure out what I can safely withdraw every year.
I think the part I bolded is the main reason why people buy annuities. People want another stream of income similar to SS where they don't have to make decisions on what to sell for withdrawals.
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Re: Why do people buy annuities?

Post by beyou »

GaryA505 wrote: Tue Apr 02, 2024 11:37 am
The OP didn't say how old the friend is. The life-only SPIA payout for a 75-year-old female is about 10%/year. It's much lower for a 65-year-old.
Good point, thank you !
Last edited by beyou on Tue Apr 02, 2024 11:48 am, edited 1 time in total.
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Claudia Whitten
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Re: Why do people buy annuities?

Post by Claudia Whitten »

GaryA505 wrote: Tue Apr 02, 2024 11:19 am Seems the basic problem, as I see it, stems from the following:
1. There are many kinds of annuities.
2. There are some really bad annuities.
3. Some people lump all annuities together.
4. There are some dishonest annuity salespeople.
5. Some annuities are difficult to understand and easy to misrepresent.
6. Some people think annuities are an investment that can be compared to the stock market.
And the consumer is supposed to sort out which is which when looking at an annuity? Sounds like an industry desperately in need of regulation and oversight. Certainly the "good" annuity companies have an interest in getting the "scammers selling annuities" out of the industry.
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Taylor Larimore
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Re: Why do people buy annuities?

Post by Taylor Larimore »

Bogleheads:

One reason people buy single premium immediate annuities (SPIAs) is that they provide the largest, worry-free, guaranteed, lifetime return of any investment.

I own two and they are my best investments.

Best wishes
Taylor (age 100)
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Re: Why do people buy annuities?

Post by Darth Vanguard »

Valuethinker wrote: Mon Apr 01, 2024 10:13 am
Claudia Whitten wrote: Mon Apr 01, 2024 9:53 am
The "10% return" is:
- confusing return of capital with investment income (deliberately), when an annuity pays out both OR
- only a forecast, based on an outright lie (cloaking a forecast as a promise) - the fine print will note market fluctuations & performance may vary


This isn't necessarily the case.

There are quite a few annuity carriers out there which offer a "10% increase per year". However, that 10% increase is only applied to the benefit base which is used to calculate the contract holder's guaranteed withdrawal amount (GLWB). It has no impact on the actual contract value itself.

And since the annuity carrier controls all the variables for what the GLWB is, they could offer a 30% return on the benefit base, and just slash the withdrawal percentage. The benefit base is largely a meaningless number.

Smoke and mirrors.

If there was an annuity carrier that offered a 10% return on the contract itself (the important value), that carrier would hold a significant portion of all investable assets.
May the Force be with you.
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Re: Why do people buy annuities?

Post by Chardo »

Claudia Whitten wrote: Tue Apr 02, 2024 11:48 am
GaryA505 wrote: Tue Apr 02, 2024 11:19 am Seems the basic problem, as I see it, stems from the following:
1. There are many kinds of annuities.
2. There are some really bad annuities.
3. Some people lump all annuities together.
4. There are some dishonest annuity salespeople.
5. Some annuities are difficult to understand and easy to misrepresent.
6. Some people think annuities are an investment that can be compared to the stock market.
And the consumer is supposed to sort out which is which when looking at an annuity? Sounds like an industry desperately in need of regulation and oversight. Certainly the "good" annuity companies have an interest in getting the "scammers selling annuities" out of the industry.
There is no industry more heavily regulated than the insurance industry. Every insurer is subject to both federal and state regulations, in every individual state, on every product they sell, every investment they make, and every calculation they perform. They even have international financial reporting regulations which must be met.
Last edited by Chardo on Tue Apr 02, 2024 12:34 pm, edited 1 time in total.
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Re: Why do people buy annuities?

Post by beyou »

Taylor Larimore wrote: Tue Apr 02, 2024 11:55 am Bogleheads:

One reason people buy single premium immediate annuities (SPIAs) is that they provide the largest, worry-free, guaranteed, lifetime return of any investment.

I own two and they are my best investments.

Best wishes
Taylor (age 100)
I think people need to separate the two different guarantees assumed/implied.
I agree, the payment amount is guaranteed to be what was promised, and not variable.
But the solvency guarantee is NOT backed by the full faith and credit of the US Govt, as would a tsy bond or FDIC insured deposit.
Backed by an industry consortium in your own state with a dollar limit on how much is protected from insolvency.
People should at least find out the equivalent to the FDIC limit in their state as posted by Stinky above, and limit any annuity contract to that amount. Even then, I don't think that quite as assured as full faith and credit of the US govt, but probably more than good enough when staying under the state limits.
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Re: Why do people buy annuities?

Post by aristotelian »

I'm not sure about 10% but typically annuities do pay more than the Safe Withdrawal Rate at the beginning of a 30 year retirement. So if you need more annual spending than your SWR, the annuity is the best way to guarantee that income. The problem is it is not inflation protected and you are guaranteed no legacy.
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Re: Why do people buy annuities?

Post by simplesimon »

Chardo wrote: Tue Apr 02, 2024 12:29 pm
Claudia Whitten wrote: Tue Apr 02, 2024 11:48 am
GaryA505 wrote: Tue Apr 02, 2024 11:19 am Seems the basic problem, as I see it, stems from the following:
1. There are many kinds of annuities.
2. There are some really bad annuities.
3. Some people lump all annuities together.
4. There are some dishonest annuity salespeople.
5. Some annuities are difficult to understand and easy to misrepresent.
6. Some people think annuities are an investment that can be compared to the stock market.
And the consumer is supposed to sort out which is which when looking at an annuity? Sounds like an industry desperately in need of regulation and oversight. Certainly the "good" annuity companies have an interest in getting the "scammers selling annuities" out of the industry.
There is no industry more heavily regulated than the insurance industry. Every insurer is subject to both federal and state regulations, in every individual state, on every product they sell, every investment they make, and every calculation they perform. They even have international financial reporting regulations which must be met.
Oh I don't know...retail banking with the CFPB come to mind. The days of overdraft fees are over. I don't know where to find a bad checking/savings account that is a significant detractor to wealth. Bad investments and annuities can still be sold.
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Re: Why do people buy annuities?

Post by GaryA505 »

Claudia Whitten wrote: Tue Apr 02, 2024 11:48 am
GaryA505 wrote: Tue Apr 02, 2024 11:19 am Seems the basic problem, as I see it, stems from the following:
1. There are many kinds of annuities.
2. There are some really bad annuities.
3. Some people lump all annuities together.
4. There are some dishonest annuity salespeople.
5. Some annuities are difficult to understand and easy to misrepresent.
6. Some people think annuities are an investment that can be compared to the stock market.
And the consumer is supposed to sort out which is which when looking at an annuity? Sounds like an industry desperately in need of regulation and oversight. Certainly the "good" annuity companies have an interest in getting the "scammers selling annuities" out of the industry.
Yes, you need to "do your homework". Or you could watch the Stan the Annuity Man videos on YouTube.
The MYGA and SPIA are very simple products and a few minutes of reading is all you need to do to understand them.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: Why do people buy annuities?

Post by Cannoli »

I bought a QLAC last year at age 67 with a payout at age 80. It was through immediateannuites with Mass Mutual. The payout rate was 27.9 percent and it was only 6 percent of my investments.
I will probably buy a second to payout at age 85. People say you may not live that long but then they also plan their withdrawals to age 95( thirty years). If I make it to 85 I think the last thing I want to worry about is a market meltdown.
But the greatest mystery is that our very lives are governed by dead people.
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Re: Why do people buy annuities?

Post by LadyGeek »

I moved a discussion regarding AIG's bailout to a new thread. See: Why do people buy annuities? [AIG bailout side discussion]

Please stay on-topic, which is helping the OP. For example, Single Premium Immediate Annuity (SPIA) is mentioned as a possible solution.


(Thanks to the member who reported the post and explained what's wrong.)
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MathWizard
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Re: Why do people buy annuities?

Post by MathWizard »

It is longevity insurance. I won't get a large one, just enough to pay bare bones expenses when combined with my wife's small pension and our SS benefits.

Generally , planning at age 65 is for a 30 year retirement, though
using SSA mortality tables gives us only about a 15% chance of
at least one of us makes it 30 years. The insurance company
does not have to pay out for 30 years in 85% of the contracts, do it can pay out more than expected in 15% of the cases.
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Re: Why do people buy annuities?

Post by GreenLawn »

Claudia Whitten wrote: Mon Apr 01, 2024 11:25 am
Valuethinker wrote: Mon Apr 01, 2024 10:13 am 2. inflation. The US market does not, currently, offer inflation-linked annuities. Inflation is the big risk to retirees in the long run.
Correct me if I'm wrong, but my sense is that people tend to forget about the effect of inflation when purchasing an annuity. Inflation can really make an initially-high-looking payout seem pretty pathetic over time, especially if inflation runs higher than the long-term historical average (3.267 percent).

https://www.usinflationcalculator.com/i ... ion-rates/
The lack of inflation protection is the deal breaker for me. Having lived through the 1970's inflationary period I know inflation can last more than a couple of years. The national fiscal and political situation strikes me as potentially inflationary too, in addition to what we just went through with Covid.

My current plan is to wait until 70 for SS and I have a small inflation adjusted pension. Together they should cover most, if not all, of my routine monthly expenses with my investments kicking in for periodic expenses like expensive vacations, cars, roof replacement, etc. If you don't need the annuity for psychological reasons, I'd pass for now. You can always buy them later.
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Re: Why do people buy annuities?

Post by HarryEnz »

GaryA505 wrote: Tue Apr 02, 2024 2:02 pm
Yes, you need to "do your homework". Or you could watch the Stan the Annuity Man videos on YouTube.
The MYGA and SPIA are very simple products and a few minutes of reading is all you need to do to understand them.
Is Stan the Annuity Man a good resource?

I ask this question because although I do not want to purchase the Allianz 222 Fixed Indexed Annuity, which was marketed to my wife and I recently by an insurance salesman-retirement planner, I am interested in how this product actually works in reality compared to how it is marketed.

As I see it, and someone can correct me if I am wrong, the biggest pitfall in these Fixed Indexed Annuity products are that the insurance company can change the cap rate, participation rate and/or spread rate in the middle of the contract term. Basically, this allows the insurance company to change the rules in the middle of the game whenever the consumer seems to be winning to guarantee that the insurance company wins.

In another similar thread on this topic, someone called this "Calvinball," where the rules are constantly changing to benefit one side, in this case the insurance company. So, even if the initial terms seem attractive, where the consumer gets snookered is when the terms written in fine print come into play, terms that allow these rates to change if the insurance company decides they are giving the consumer too much money.

A state legislator should propose a simple regulation on these Fixed Indexed Annuities: Prohibit changes in cap rates, participation rates, spread rates and/or surrender rates during the contract term. In any case, avoid Fixed Indexed Annuities. If you want stock market returns with downside protection, purchase bonds to be held to maturity along with the Vanguard Total Stock Market Index Fund.
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Re: Why do people buy annuities?

Post by HarryEnz »

HarryEnz wrote: Wed Apr 03, 2024 4:34 am
GaryA505 wrote: Tue Apr 02, 2024 2:02 pm
Yes, you need to "do your homework". Or you could watch the Stan the Annuity Man videos on YouTube.
The MYGA and SPIA are very simple products and a few minutes of reading is all you need to do to understand them.
Is Stan the Annuity Man a good resource?

I ask this question because although I do not want to purchase the Allianz 222 Fixed Indexed Annuity, which was marketed to my wife and I recently by an insurance salesman-retirement planner, I am interested in how this product actually works in reality compared to how it is marketed.

As I see it, and someone can correct me if I am wrong, the biggest pitfall in these Fixed Indexed Annuity products are that the insurance company can change the cap rate, participation rate and/or spread rate in the middle of the contract term. Basically, this allows the insurance company to change the rules in the middle of the game whenever the consumer seems to be winning to guarantee that the insurance company wins.

In another similar thread on this topic, someone called this "Calvinball," where the rules are constantly changing to benefit one side, in this case the insurance company. So, even if the initial terms seem attractive, where the consumer gets snookered is when the terms written in fine print come into play, terms that allow these rates to change if the insurance company decides they are giving the consumer too much money.

Imagine purchasing a bond that allows the borrower to lower the interest rate, at will, at any time before the bond's maturity date.

A state legislator should propose a simple regulation on these Fixed Indexed Annuities: Prohibit changes in cap rates, participation rates, spread rates and/or surrender rates during the contract term. In any case, avoid Fixed Indexed Annuities. If you want stock market returns with downside protection, purchase bonds to be held to maturity along with the Vanguard Total Stock Market Index Fund.
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Re: Why do people buy annuities?

Post by Stinky »

HarryEnz wrote: Wed Apr 03, 2024 4:34 am
GaryA505 wrote: Tue Apr 02, 2024 2:02 pm
Yes, you need to "do your homework". Or you could watch the Stan the Annuity Man videos on YouTube.
The MYGA and SPIA are very simple products and a few minutes of reading is all you need to do to understand them.
Is Stan the Annuity Man a good resource?

I ask this question because although I do not want to purchase the Allianz 222 Fixed Indexed Annuity, which was marketed to my wife and I recently by an insurance salesman-retirement planner, I am interested in how this product actually works in reality compared to how it is marketed.

As I see it, and someone can correct me if I am wrong, the biggest pitfall in these Fixed Indexed Annuity products are that the insurance company can change the cap rate, participation rate and/or spread rate in the middle of the contract term. Basically, this allows the insurance company to change the rules in the middle of the game whenever the consumer seems to be winning to guarantee that the insurance company wins.
Yes, Stan the Annuity Man is a good resource.

I’ve listened to his podcasts and watched his videos. He stresses “buy an annuity for what it WILL do, not what it MIGHT do”. He looks to annuities for their guarantees, touts the “good” types of annuities (MYGAs, SPIAs, DIAs, etc), and sells indexed annuities only when a guaranteed withdrawal benefit rider on the annuity provides a better consumer value than an equivalent DIA. He does not sell variable annuities.

As to the Allianz product you mention, you’ve pretty well for it pegged. The caps, spreads, and participation rates are all adjustable on most products.

It’s not so much that the insurance company is pulling back on its indexed products when the consumer “wins”. It’s more like the insurer has a profit target for each policy year, and sets the aforenamed variables in such a way as to hit its profit target for the year.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Why do people buy annuities?

Post by simplesimon »

Stinky wrote: Wed Apr 03, 2024 4:46 am Yes, Stan the Annuity Man is a good resource.

I’ve listened to his podcasts and watched his videos. He stresses “buy an annuity for what it WILL do, not what it MIGHT do”. He looks to annuities for their guarantees, touts the “good” types of annuities (MYGAs, SPIAs, DIAs, etc), and sells indexed annuities only when a guaranteed withdrawal benefit rider on the annuity provides a better consumer value than an equivalent DIA. He does not sell variable annuities.
I just started looking at this resource - his books might be what the OP and her friend needs.
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Re: Why do people buy annuities?

Post by Valuethinker »

dcabler wrote: Tue Apr 02, 2024 7:51 am
beyou wrote: Tue Apr 02, 2024 6:45 am
meowcat wrote: Tue Apr 02, 2024 4:52 am One of the biggest fears most retirees face is the very real risk of running out of money before they die. Well, what if you could transfer that risk to someone else? Wouldn't you sleep better at night? That is what an annuity is for. You can't put a price on knowing that you'll be taken care of financially for the rest of your life.
Is inflation protection commonly offered ? Without that I don’t see why this should help me sleep at night.

Is the insurer guaranteed to pay ? FDIC type insurance ? How do I know I am not buying from the next Executive Life ? Without federal gov protection I can get elsewhere, I wouldn’t sleep better at night.

I can get the above in a TIPS portfolio with little or no expenses. Not the same i know, no risk pooling, but we’re talking about what makes people sleep better, then it’s just which risks make you uncomfortable. Truthfully there are risks and costs either way, self funded or pooled insurance risk. But cost is easily quantified, and ownership of a portfolio is easier to understand than evaluate the long term health of an insurance company.
In the past, true inflation protection was offered. According to most, it stopped being offered due to lack of interest. I could believe that since it was discontinued before inflation flared up again.
Timing wise, I think it happened before then?

The problem from an insurer perspective was TIPS went to a negative real yield. The investment side of the policy was guaranteed to lose money, in effect.

Insurance is a classic "sold, not bought" product market. And so unless the sales channel has a vested interest in such products, they won't push them.

Buyers have money illusion - accepting a benefit say half of what it would be for a level payment annuity, because inflation (which is uncertain) might pose a risk to standard of living in the long run - isn't something most of us are hard -wired to understand or accept.

US Social Security is quite generous (relative to UK State Pension) and so provides a good degree of inflation protection to most retirees.
Initial payout for a non-inflation protected SPIA was quite a bit higher than for an inflation protected SPIA and a lot of folks weren't thinking in real terms at the time. Today, all you can purchase are fixed COLA options and they, too, are going to have the same reduced initial payout vs. a nominal annuity. They're not true inflation protection, though.

At any rate, SPIAs when they do make sense, tend to make more sense much later in retirement vs. earlier.

Cheers.
Humans fall for money illusion. We are not good at projecting geometric or exponential growth. In other words, 3 or 4% pa inflation is a lot worse than 2% inflation, over a 30-35 year retirement period.
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Re: Why do people buy annuities?

Post by dknightd »

I bought annuities. Simple SPIA. I bought one when I retired. Then another a few years later. Probably will buy one more (if needed).

I bought them because Social Security would likely not support a comfortable life. We wanted more income. I wanted it to never run out. I've always liked the concept of a pension.

I did not have a pension. So essentially I'm buying a pension.

Some people cash out their pension. I'm buying a pension.

It makes me happy. Odds are one of us will live longer than average. I'm buying dual life annuities.

I know it will lose buying power as we get older. I'm OK with that. Likely we'll spend less as we age. SS is somewhat inflation adjusted. And we'll have to take RMD.

I guess I'm old fashioned. I like the idea of a pension. I did not have one. So I bought one. This was always our plan.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: Why do people buy annuities?

Post by snic »

dknightd wrote: Wed Apr 03, 2024 7:40 am I bought annuities. Simple SPIA. I bought one when I retired. Then another a few years later. Probably will buy one more (if needed).

I bought them because Social Security would likely not support a comfortable life. We wanted more income. I wanted it to never run out. I've always liked the concept of a pension.

I did not have a pension. So essentially I'm buying a pension.

Some people cash out their pension. I'm buying a pension.

It makes me happy. Odds are one of us will live longer than average. I'm buying dual life annuities.

I know it will lose buying power as we get older. I'm OK with that. Likely we'll spend less as we age. SS is somewhat inflation adjusted. And we'll have to take RMD.

I guess I'm old fashioned. I like the idea of a pension. I did not have one. So I bought one. This was always our plan.
I see the sentiment I highlighted in bold pop up quite often, in this thread and generally. It strikes me as odd, because it's fairly well known that the graph of retirement expenses vs time often has a "barbell" shape - high expenses initially, lower for a few years as you become less able to go out and pursue your interests, and then higher towards the end when long-term care expenses kick in. My mother moved to an independent living facility soon after my father died (she was 80) and her expenses immediately increased to probably the highest point they had ever been in her life until then. Even my college education was less expensive (but that was a long time ago, before the crazy inflation in tuition kicked in). Now she is in her 90s and in assisted living, and her expenses are close to double what they were when she was in independent living. The moral of the story is that if you like the idea of a pension-like income to supplement SS in order to meet your anticipated retirement expenses, great - but don't assume those expenses will necessarily remain the same or become lower. The opposite could very well happen. You ought to have enough in reserve to cover those higher expenses as well.
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Re: Why do people buy annuities?

Post by GaryA505 »

snic wrote: Wed Apr 03, 2024 10:32 am
dknightd wrote: Wed Apr 03, 2024 7:40 am I bought annuities. Simple SPIA. I bought one when I retired. Then another a few years later. Probably will buy one more (if needed).

I bought them because Social Security would likely not support a comfortable life. We wanted more income. I wanted it to never run out. I've always liked the concept of a pension.

I did not have a pension. So essentially I'm buying a pension.

Some people cash out their pension. I'm buying a pension.

It makes me happy. Odds are one of us will live longer than average. I'm buying dual life annuities.

I know it will lose buying power as we get older. I'm OK with that. Likely we'll spend less as we age. SS is somewhat inflation adjusted. And we'll have to take RMD.

I guess I'm old fashioned. I like the idea of a pension. I did not have one. So I bought one. This was always our plan.
I see the sentiment I highlighted in bold pop up quite often, in this thread and generally. It strikes me as odd, because it's fairly well known that the graph of retirement expenses vs time often has a "barbell" shape - high expenses initially, lower for a few years as you become less able to go out and pursue your interests, and then higher towards the end when long-term care expenses kick in. My mother moved to an independent living facility soon after my father died (she was 80) and her expenses immediately increased to probably the highest point they had ever been in her life until then. Even my college education was less expensive (but that was a long time ago, before the crazy inflation in tuition kicked in). Now she is in her 90s and in assisted living, and her expenses are close to double what they were when she was in independent living. The moral of the story is that if you like the idea of a pension-like income to supplement SS in order to meet your anticipated retirement expenses, great - but don't assume those expenses will necessarily remain the same or become lower. The opposite could very well happen. You ought to have enough in reserve to cover those higher expenses as well.
Most people's expenses do decrease as they age. Despite the scare tactics from insurance companies peddling long-term care insurance, actually only a small percentage of people need long-term care, and when they do, they don't live very long anyway. If I need it I can sell my house to pay for it.

In any case, there is no investment that would provide for the "spending smile" expenses you described as a barbell.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: Why do people buy annuities?

Post by cshell2 »

snic wrote: Wed Apr 03, 2024 10:32 am
dknightd wrote: Wed Apr 03, 2024 7:40 am I bought annuities. Simple SPIA. I bought one when I retired. Then another a few years later. Probably will buy one more (if needed).

I bought them because Social Security would likely not support a comfortable life. We wanted more income. I wanted it to never run out. I've always liked the concept of a pension.

I did not have a pension. So essentially I'm buying a pension.

Some people cash out their pension. I'm buying a pension.

It makes me happy. Odds are one of us will live longer than average. I'm buying dual life annuities.

I know it will lose buying power as we get older. I'm OK with that. Likely we'll spend less as we age. SS is somewhat inflation adjusted. And we'll have to take RMD.

I guess I'm old fashioned. I like the idea of a pension. I did not have one. So I bought one. This was always our plan.
I see the sentiment I highlighted in bold pop up quite often, in this thread and generally. It strikes me as odd, because it's fairly well known that the graph of retirement expenses vs time often has a "barbell" shape - high expenses initially, lower for a few years as you become less able to go out and pursue your interests, and then higher towards the end when long-term care expenses kick in. My mother moved to an independent living facility soon after my father died (she was 80) and her expenses immediately increased to probably the highest point they had ever been in her life until then. Even my college education was less expensive (but that was a long time ago, before the crazy inflation in tuition kicked in). Now she is in her 90s and in assisted living, and her expenses are close to double what they were when she was in independent living. The moral of the story is that if you like the idea of a pension-like income to supplement SS in order to meet your anticipated retirement expenses, great - but don't assume those expenses will necessarily remain the same or become lower. The opposite could very well happen. You ought to have enough in reserve to cover those higher expenses as well.
I'm single, so no spouse to consider, but if I planned for my retirement using LTC cost for the 25X monthly expense I'd probably end up seriously over-saving and/or working longer than I would have needed to. In my family very few end up needing LTC at all and if they do it's for less than a year. I can only think of one in the prior two generations of a large family that was more than 5 years. I figure if it happens, the house will be sold since I won't need it anyhow and that would buy me a good 4-5 years worth of LTC on top of whatever is left in savings. Both sets of my grandparents and great grandparents lived at home basically right up to the end though and spent very little the last few years.
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