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Thanks for the article link. Timely too as more boomers are retiring. Many of them have 401k's etc that are invested with insurance companies. When they retire , those companies push to have those assets transferred into annuities. Good business for the insurance companies but are they good for retirees?
Thanks. My Mom had one that paid for a specific period, now it's done. These things just make me itch. And the fees. And the fine print. And the tiny print. And the ins-and-outs. I'm steering clear. I can get one via my denomination, anyhow. I MIGHT trust a "denominational annuity" (via one of the big recognized names) moreso than from somewhere else, but all the while, I keep telling myself--- like that escaped convict told "H.I." in "Raising Arizona:" "H.I., you're YOUNG, and you've got yer HEALTH; what do you want with a JOB?!"
Reply to @MaxBialystock: Thanks. I decided to handle my own retirement assets rather than having an insurance company do it which my 403b was attached to. Most workers like the idea of having that steady check each month but circumstances change and the payout choice you made at 62 or whatever might not work later on.
Yep, the fees are killer. I charge myself zero percent.
I also think anyone who thinks he/she thinks he/she can give up the flexibility needs to think long and hard about the life scenarios being planned for.
A lifetime fixed annuity is a great deal if you outlive your life expectancy in good health. Not so much if you have serious health issues leading you to need a higher income for a shorter period of time.
A joint annuity with reduced survivor benefits has surface appeal and apparent fairness, but works best when life expectancies and project health status of partners are symmetrical.
These are not fun issues to talk about, but they are important things to delve into with your planner, your partner in life and any successor trustees in your living trust. All before you even consider the role of an annuity.
The worst possible time to buy an annuity is when interest rates are low and likely to increase (like right now). On the surface, the sales pitch sounds good - portfolio risk and uncertainty can be reduced. But, locking in a low rate annuity could be a mistake.
People complain about the "loss of flexibility" by annuitizing. But if you have to self insure against running out of cash, you are similarly boxing yourself in. You have to be more conservative with your investments, and likely underspend. Use an annuity to provide the minimum level of support you'll need, and you get more flexibility with the rest of your portfolio. Social security (IMHO the best annuity going) helps in that respect, but if you anticipate greater needs, a well-calculated annuity can help.
With respect to the article's suggestion that GMWB's beat GMIB's for flexibility, I suggest that this is an illusion. As noted elsewhere in the article, if you're not using the benefit you pay for (e.g. GMWB), you're wasting your money. And most GWMBs seem designed to lock you into making those guaranteed withdrawals (virtually annuitizing, except without the tax benefits). That is, given the cost of the rider and the restrictions on investments (more on that below) it is quite likely that you'll draw the cash value down well below the value of the withdrawal stream. That makes selling the annuity a nonstarter. Thus no real world flexibility.
The article also suggests investing aggressively if you have purchased a guarantee. But almost always that guarantee comes with limits on what you can invest in - typically balanced funds or bonds only. (Someone recently pointed out to me that Schwab's annuity does not come with such a severe restriction.)
The bottom line is that annuities, when used judiciously, in limited doses, can increase security and flexibility, albeit at a cost. Don't expect to make a killing, and recognize the real insurance value.
Reply to @SlowLane: There are at least three different issues you might be raising:
1) Rates on a an immediate fixed annuity - here I agree with you; one is really locked in forever.
2) Rates on a deferred fixed annuity. Not as much of a problem. Insurance companies generally raise their rates as market rates rise. For example, if you purchase an deferred fixed rate annuity with a two year rate guarantee, you're stuck with that rate for the first two years, but then the insurance company will reset the rate (usually on an annual basis). One problem is that they set a floor when you first purchase, and that floor now is very low. So if rates were to drop down again, you'd have no protection on your yield. Purchase an annuity with no surrender policy (or a fairly short surrender period) and you can swap into a higher rate annuity once rates rise.
3) Guaranteed rates on later annuitization. I view this as a non-issue. First, because no one (only about 2% of people) actually annuitize. (As I posted in this thread, I think that's a mistake, but also a reality.) But more importantly, because one has the ability to swap annuities when ready to annuitize. As you noted, by then (whenever "then" is), rates are likely to be higher. You're not locked into whatever you initially purchased (unless you're annuitizing now, and that's #1 above).
Facinating discussion. Topic about which I know little, but am trying to learn more. (1) When I run through the math - Ouch! While I couldn't get most of John's article to load, looked at a few other sources. I get a "break-even" point of about 14 years for a 65 year old man buying a fixed mmediate today. While payouts vary, that's a rough calculation from some of the better rated companies. 14 years just to get back essentially the dollars you paid up-front. Now, a fixed monthly payout of of $500, $1,000, $2000 or whatever sounds like alot today. But, in 14 years when the accrued "insurance" benefit actually kicks in, that monthly sum might seem only a pittance (depending on inflation). On the surface, it seems you'd be a lot farther ahead keeping the bulk of money invested while making periodic withdrawals.
(2) With an annuity you transfer risk and control from yourself (and your fiduciary institutions) to an insurance company - subject to the same uncertainties and human foibles that plague other businesses. Seems to me this is a less secure method of funding retirement. I guess it depends what you choose to invest in, but why surrender that control to them? The only answer I can think of is you might not be in a situation to continue to manage your own investments.
(3) Question: Are IRAs (both Roth and Traditional) easily annuitized? If so - do the same favorable tax incentives continue to apply - albeit modified to fit the new instrument and meet RMD requirements?
Immediate fixed annuities have some attraction, particularly for those people who do not participate in a federal, state, or local pension system. There is no question that the assurance of a check coming each month provides peace of mind. But with current interest rates in the tank right now, this is not the time to enter into a contract. And we would certainly not recommend putting all of your portfolio dollars in an immediate fixed annuity. Finally, it should be with a reputable company that offers a very plain-vanilla product, with no bells and whistles...just a guarantee of a certain interest rate/monthly payment for life and a period certain, or even for a joint life. Forget the index-linked products and all the variable annuity gotchas. And if you are lucky, you might find a no-load product to make it even better.
Reply to @BobC: Agree re: rates. Buying an annuity is a bit like buying a bond. I'm starting to wonder whether the flood of $$ into these (from boomers) may help explain why treasury rates got so low for so long. Many other reasons of course - but might these have contributed? (rhetorical)
Comments
Yep, the fees are killer. I charge myself zero percent.
I also think anyone who thinks he/she thinks he/she can give up the flexibility needs to think long and hard about the life scenarios being planned for.
A lifetime fixed annuity is a great deal if you outlive your life expectancy in good health. Not so much if you have serious health issues leading you to need a higher income for a shorter period of time.
A joint annuity with reduced survivor benefits has surface appeal and apparent fairness, but works best when life expectancies and project health status of partners are symmetrical.
These are not fun issues to talk about, but they are important things to delve into with your planner, your partner in life and any successor trustees in your living trust. All before you even consider the role of an annuity.
gfb
People complain about the "loss of flexibility" by annuitizing. But if you have to self insure against running out of cash, you are similarly boxing yourself in. You have to be more conservative with your investments, and likely underspend. Use an annuity to provide the minimum level of support you'll need, and you get more flexibility with the rest of your portfolio. Social security (IMHO the best annuity going) helps in that respect, but if you anticipate greater needs, a well-calculated annuity can help.
With respect to the article's suggestion that GMWB's beat GMIB's for flexibility, I suggest that this is an illusion. As noted elsewhere in the article, if you're not using the benefit you pay for (e.g. GMWB), you're wasting your money. And most GWMBs seem designed to lock you into making those guaranteed withdrawals (virtually annuitizing, except without the tax benefits). That is, given the cost of the rider and the restrictions on investments (more on that below) it is quite likely that you'll draw the cash value down well below the value of the withdrawal stream. That makes selling the annuity a nonstarter. Thus no real world flexibility.
The article also suggests investing aggressively if you have purchased a guarantee. But almost always that guarantee comes with limits on what you can invest in - typically balanced funds or bonds only. (Someone recently pointed out to me that Schwab's annuity does not come with such a severe restriction.)
The bottom line is that annuities, when used judiciously, in limited doses, can increase security and flexibility, albeit at a cost. Don't expect to make a killing, and recognize the real insurance value.
1) Rates on a an immediate fixed annuity - here I agree with you; one is really locked in forever.
2) Rates on a deferred fixed annuity. Not as much of a problem. Insurance companies generally raise their rates as market rates rise. For example, if you purchase an deferred fixed rate annuity with a two year rate guarantee, you're stuck with that rate for the first two years, but then the insurance company will reset the rate (usually on an annual basis). One problem is that they set a floor when you first purchase, and that floor now is very low. So if rates were to drop down again, you'd have no protection on your yield. Purchase an annuity with no surrender policy (or a fairly short surrender period) and you can swap into a higher rate annuity once rates rise.
3) Guaranteed rates on later annuitization. I view this as a non-issue. First, because no one (only about 2% of people) actually annuitize. (As I posted in this thread, I think that's a mistake, but also a reality.) But more importantly, because one has the ability to swap annuities when ready to annuitize. As you noted, by then (whenever "then" is), rates are likely to be higher. You're not locked into whatever you initially purchased (unless you're annuitizing now, and that's #1 above).
(2) With an annuity you transfer risk and control from yourself (and your fiduciary institutions) to an insurance company - subject to the same uncertainties and human foibles that plague other businesses. Seems to me this is a less secure method of funding retirement. I guess it depends what you choose to invest in, but why surrender that control to them? The only answer I can think of is you might not be in a situation to continue to manage your own investments.
(3) Question: Are IRAs (both Roth and Traditional) easily annuitized? If so - do the same favorable tax incentives continue to apply - albeit modified to fit the new instrument and meet RMD requirements?