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Despite Misleading Ads, Annuities Can Be Critical For Lifetime Income Planning
I posted my comment to the Investment News article itself. Briefly, this article strikes me as a bunch of excuses for the problems with most (but not all) annuities. There are good annuities, and these are the ones that should be written about, not ones with lots of bells and whistles that are designed to attract customers, not provide what they really need.
Much of the complexity arises from insurance companies' efforts to give people high-priced features that they think they want but don't need. Such as return of principal.
When I considered an annuity for myself a few years back (almost 8 years now) it was somewhat comforting to know that my lifetime income stream also had what I called a "cash value". This "cash value" has incrementally been drawn down with each annuity payment I have received (at a rate equal to 25% of all annuity payments). So, in a sense, each annuity payment consist of 75% return "on principal" and 25% return "of principle".
I have calculated that somewhere in my mid 80's I will have "drawn down" the cash value. Prior to that my beneficiaries will receive a death benefit equal to the annuities starting value minus 25% of the total payout over the life of the annuity.
What seemed missing in the article is the fact that we are in a very low interest rate environment and this could be a singular reason to not lock ones money up in an annuity product (whatever flavor) at such low rates.
Wade Pfau has an interesting analysis arguing that "Low interest rates strengthen, not weaken, the case for purchasing a SPIA" (Single Premium Immediate Annuity). (The argument is somewhat different if you're not annuitizing now.)
The basic idea is that as you get less from yield, the structure of an annuity becomes even more valuable. You're part of a pool of policy holders - some winners (live longer), some losers (live shorter).
Essentially your payout amount is subsidized by those who die early. You don't get that if you invest on your own instead. That lottery, if you will, isn't a big deal if yields are double digit. But in times of low rates, a good portion of the annuity payout comes from other policy holders dying early. You don't get that return if you don't annuitize, if you don't buy that lottery ticket.
Comments
I have calculated that somewhere in my mid 80's I will have "drawn down" the cash value. Prior to that my beneficiaries will receive a death benefit equal to the annuities starting value minus 25% of the total payout over the life of the annuity.
What seemed missing in the article is the fact that we are in a very low interest rate environment and this could be a singular reason to not lock ones money up in an annuity product (whatever flavor) at such low rates.
The basic idea is that as you get less from yield, the structure of an annuity becomes even more valuable. You're part of a pool of policy holders - some winners (live longer), some losers (live shorter).
Essentially your payout amount is subsidized by those who die early. You don't get that if you invest on your own instead. That lottery, if you will, isn't a big deal if yields are double digit. But in times of low rates, a good portion of the annuity payout comes from other policy holders dying early. You don't get that return if you don't annuitize, if you don't buy that lottery ticket.
https://retirementresearcher.com/are-annuities-spias-okay-when-interest-rates-are-low/