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Thanks Ted, a timely article for me as I have been wondering why there aren't more discussions here on annuities. I've been thinking when the dreaded RMDs hit me around 70 and 1/2 about going with around 15% of my nest egg in an annuity. Based on what I conservatively feel my accounts should be when I am 71, that 15% in an annuity (plus my SS benefits) should alone cover all my future living expenses. Were I 71 today the annuity caluclator shows I would be getting an 8.47% rate of return for doing nothing (no trading/investing) My only concern as the article points out is the viability of the insurer. I recall back in 08 some of them were on the brink. Of course, there is the longevity factor. Although I have that in spades in my family, I never take that as a given.
J...my experience with a majority of folks on investment boards (present company excepted) is one where they believe their investing prowess negates the need or attractiveness of annuities.
Frankly, I have a sleeve of my pre-tax account which is off-limits to my tinkering (FPACX is the sole holding). This will accumulate for the next 15 years or so, triple in value, and then I will buy an annuity for a nice fat monthly kicker.
Hi Junkster, You noted: Were I 71 today the annuity caluclator shows I would be getting an 8.47% rate of return for doing nothing (no trading/investing).
>>>And what annuity calculator presents this 8.47% rate?
8.47% is a lot. I would wonder what the background investment vehicles are. I asked that question once and the rep from a big life insurance company couldn't (or wouldn't) answer. He said it changes all the time. That was not the answer I wanted to hear. Nothing against Junkster. The idea has some merit. He mentions it is only 15% of his portfolio. That rate of return is excellent compared to treasuries or other fixed income assets . Too excellent I fear.
Here's the link. Just plug in numbers and age and sex.
Obviously I haven't checked what insurer is offering that rate and their viability. But over 8% doesn't sound too outlandish to me considering at 71 a male's clock is ticking down.
At age 71, they are betting on a certain life expectancy and drawing into the principal to pay the higher rate. At 60, I think it was closer to 6%
Exactly! The older you are the higher the rate and all based on life expectancy. I went to a more reputable site, Fidelity, and it showed a 71 year old there also getting a tad over 8%. As I recall when I checked annuities out in my mid 60s it was close to a 7% return. The kicker of course is if you die a week or whenever after buying an annuity, what you put up is lost forever (unless you chose various other options but which lower your overall rate of return)
I can tell you that no-frills, low-costs, no mumbo-jumbo fixed annuities are nowhere near the 7-8% payout range for someone 70 years old. Any company who says they have something that pays that high is using some kind of indexed approach. There is nothing wrong with this, but people should be aware of the BIG difference between an immediate fixed annuity and other kinds of annuities, and I would caution all those who look at the indexed varieties to read the entire contract and be sure that every bit of it is understood. When the folks selling these cannot explain them (and I have never met one yet who could answer some simple questions without calling for help) consumers need to be very careful. Fidelity, Schwab and a few other companies have put a product or two together that have done ok, but in cases where there are commissions involved, I would probably say, "Run, Toto, run!" The incentive to push a product is very difficult for salespeople to avoid. My suggestion is to wait a few years, and then look at immediate fixed annuity rates, which will undoubtedly be much higher than they are today.
I stand by 8%. The largest and highest rated annuity providers are Principal, Pacific Life, American Life, Mutual of Omaha, Integra, and a few more. An immediate fixed annuity for a 71 year old male in my state per $100,000 range from $680 per month (that's $8160 annually) from Principal down to the $660 per month range. You can contact the companies directly or simply check with Vanguard or Fidelity. That's for the basic no frills plain vanilla immediate fixed annuity.
Both @junkster and @bobc can be right. Until one sees the complete provisions, it is difficult to see if there is a catch or not. Headline numbers for annuities don't always tell the whole story.
Vanguard ( a somewhat reliable institution ) has an offering via its INCOME SOLUTIONS annuity purchase program with Hueler Investment Services, Inc. They are currently quoting a monthly payment of $658.64 for a $100K annuity sponsored by either Mutual of Omaha or American General for a 70yo Male, DOB 02/02/1944, Massachusetts resident. That comes out to about 7.9% return for life.
Or for inflation adjustments, a CPI-U adjusted $100K annuity is quoted with an initial payment of $500/month or about 6%.
Remember that the 8% for a 71 year old is just the annual payout. It is NOT a rate of return since your heirs lose all of your initial investment at death. If you die in less than 10 years, the annualized rate of return is actually negative. I would like to see annuity companies be forced to provide a table giving the actual annualized rate of return the buyer receives based on the age at death.
Yes, if the 71 year old can live to 110, the annualized rate of return is pretty close to 8%.
Remember that the 8% for a 71 year old is just the annual payout. It is NOT a rate of return since your heirs lose all of your initial investment at death. If you die in less than 10 years, the annualized rate of return is actually negative. I would like to see annuity companies be forced to provide a table giving the actual annualized rate of return the buyer receives based on the age at death.
Yes, if the 71 year old can live to 110, the annualized rate of return is pretty close to 8%.
Valid point but it's the "annual" payout I am interested in.
A better way to insure against living too long if you are healthy is to use longevity insurance policies. These are deferred annuities that start to pay out when the buyer is 80 or older. Because of this they are cheaper and pay out much higher rates. (Of course, if you don't make it to age 80, you get nothing with the plain vanilla contracts. That is how they can pay so omuch to the survivors.)
Assuming you have such a policy you can afford to take more risks with the rest of your portfolio. This article summarizes the approach-
A better way to insure against living too long if you are healthy is to use longevity insurance policies. These are deferred annuities that start to pay out when the buyer is 80 or older. Because of this they are cheaper and pay out much higher rates. (Of course, if you don't make it to age 80, you get nothing with the plain vanilla contracts. That is how they can pay so omuch to the survivors.)
Assuming you have such a policy you can afford to take more risks with the rest of your portfolio. This article summarizes the approach-
I guess this annuity thing is like trading and investing - different strokes for different folks all in different situations. The longevity policies have no appeal to me.
To be honest, I feel a longevity insurance policy does fit my current situation, since it would only require a small portion of my portfolio but I keep finding excuses not to pull the trigger because I am too cheap to part with the money.
Comments
Frankly, I have a sleeve of my pre-tax account which is off-limits to my tinkering (FPACX is the sole holding). This will accumulate for the next 15 years or so, triple in value, and then I will buy an annuity for a nice fat monthly kicker.
You noted:
Were I 71 today the annuity caluclator shows I would be getting an 8.47% rate of return for doing nothing (no trading/investing).
>>>And what annuity calculator presents this 8.47% rate?
Thanks and take care,
Catch
Here's the link. Just plug in numbers and age and sex.
Obviously I haven't checked what insurer is offering that rate and their viability. But over 8% doesn't sound too outlandish to me considering at 71 a male's clock is ticking down.
INCOME SOLUTIONS annuity purchase program with Hueler Investment Services, Inc. They are currently quoting a monthly payment of $658.64 for a $100K annuity sponsored by either Mutual of Omaha or American General for a 70yo Male, DOB 02/02/1944, Massachusetts resident. That comes out to about 7.9% return for life.
Or for inflation adjustments, a CPI-U adjusted $100K annuity is quoted with an initial payment of $500/month or about 6%.
See: https://investor.vanguard.com/what-we-offer/annuities/annuities-through-vanguard and/or https://personal.vanguard.com/us/faces/whatweoffer/annuities/huelerlink?planid=IA18
I've got it on my review&to-do list for when I hit 69.5
Yes, if the 71 year old can live to 110, the annualized rate of return is pretty close to 8%.
Assuming you have such a policy you can afford to take more risks with the rest of your portfolio. This article summarizes the approach-
fa-mag.com/news/study-backs-longevity-insurance--9693.html