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Any opinions on 5 10 or 15 ear annuities? Seems like a good guaranteed income to get someone into old age if social security is delayed or plan on selling your primary residence when in your 70s.
I also understand in many states they are asset protected as well.
They are really not annuities. They are like buying a cd from an insurance company. Just a slight difference. Usually no mortality credits beefing up payments on these.
I have never owned an annuity and likely won't. For one thing I don't need additional monthly cash flow, my pension and SS and income from rental property is plenty. Why should I give a large chunk of cash to an insurance company to invest on my behalf so they could give me a portion of the income while capping the top amount I can earn ? If I invest myself I take all the risk and keep all the profit. If I hire an advisor I pay them less than the insurance company will be skimming from my investment. Why would I give a large chunk of cash to an insurance company which sets limits on how much, if, and when I can get it back ? If my daughter were to need a heart transplant and I were willing to wreck my retirement for that purpose I don't want an insurance company stopping me from spending the money. I don't want an insurance company standing between my heirs and my money after I pass away.
There are Multi Year Rate Guaranteed annuities called MYGA's, They function like a CD and are meant to compete with CD's. They offer a specific percentage yield for a contractually guaranteed amount of time. Typically they are purchased (like a CD) with a single premium payment.
The biggest difference between a MYGA and a CD is that with a CD the interest becomes taxable annually as it is earned. With the MYGA the interest compounds tax deferred as income tax isn't due until money is withdrawn from the MYGA. So you have to do some tax planning to see what effect that will have.
There aren't any annual fees and the commission is built into the product cost (the same with bank CD's) so all the money that you deposit earns interest.
Generally the MYGA pays a higher interest rate than a CD (I don't know how much more), but the MYGA is really intended for longer periods of deposit. Unlike a CD, they generally allow about a 10% penalty-free withdrawal annually.
On the negative side, the MYGA does have a penalty if you close the MYGA before the maturity date. CD's have a penalty too.
Sownman ,The answer is because trying to spend down the cash and bond portion today of a portfolio to live on will not last very long before it is depleted and investments in other assets have to be sold to refill cash and bonds .
Cash is at negative real returns and bonds are at zero real returns. They will be spent down to zero early on in a retirement. Then stocks have to be sold to refill.
The higher cash flow that annuities provide vs your own cash and bonds is not only much higher but goes on forever at the same level reducing the need to sell equities.
In the end trying to do it on your own has a higher amount of equities needed to be sold off to match the cash flow of the annuity.
To match the cash flow on your own each year would require the sale of both principal and interest of bonds and cash generating even less next year.
There is no reduction year after year in the annuity so less stocks are needed to be sold to refill as often.
It isn't a case of annuity or investing on your own ,it is a case of investing on your own and replacing some or all of the cash and bond portion with the annuity.
Immediate annuity's are like buying a cd. There are no other fees or expenses. If you like the draw rate that is your deal.
Last edited by mathjak107; 04-23-2015 at 06:23 PM..
Some people, heck, most people in this life have not been so fortunate/smart/financially savvy/educated/lucky as you have been in financial dealings and investing. For some portion of the populace, an annuity might make sense. As with the field of quantum mechanics that most of us couldn't never hope to fully understand, some people don't have very good financial minds. To say that "there really is no reason to buy an annuity" is a disservice to those who have come here in an attempt to try and educate themselves about such things. Annuities might not good for you. That doesn't mean they are not good for everyone. If they are that 'bad', they would have been outlawed a long time ago.
p.s. I'm glad that you have done well. Some of us have also done well, or 'okay', despite our own stupidity and ignorance.
annuities other than immediate can be very complex to figure out and the insurer will never give you the tools to do it ,especially variable annuities .
many give you a minimum guaranteed growth rate and then focus on how well you can do hitting high water marks in the variable part. but those variable parts are very skillfully planned out so odds are the minimum guaranteed amount is what you will likely see and so that is what you should plan on getting.
most index linked annuities do not give you the dividends. so right of the bat throw in the fact you loose 1/3 of the market gains and expenses run 2-3% and odds are you you will never do better than the min guaranteed growth rate.
we were at a dinner last week for a financial house when they introduced the prudential variable income annuity.
looking at the prudential defined income variable annuity you see starting the annuity at 55 and deferring to 65 gives a single about 9k a year based on 100k.
it has a 5.50% guaranteed minimum growth on the money you give them up until you draw an income. it also has a variable sub account in the ast bond index.
with 2.90% in fees the bond index will likely never be higher than the minimum guaranteed growth rate.
you cannot get access to that money that is given via the growth rate. you get 1/10% a year of it for every year you delay drawing .
assuming a 50/50 mix of cash and bonds , you can see drawing 9k a year from 100k in cash and bonds would be down to zero in just a bunch of years needing refilling from stocks.
the annuity income is never reduced by the years prior spending and goes on forever requiring less equities to be sold for inflation adjusting.
that is the power in using these annuity products.
they provide higher rates of cash flow even if not a roi.
I have to admit I didn't really look into annuities before reading this thread. Just figured as a poster pointed out they pay you less then they make on YOUR money and that, along with fees, didn't lot of sense to me. I also assumed they paid a very conservative rate. But if they really pay out 6% or close to it, I can absolutely see it making sense for someone like us I don't care about the size of our estate, we have no kids, and we will be downsizing and using that additional $200,000 to supplement our retirement funds of stocks and bonds. If you are set as the other poster said and don't have to worry about monthly income then yeah these aren't a good deal. But for others I can see it working while combined with stocks/bonds and SS.
How could they not take a person's health into consideration when determining a rate? That hardly seems fair. A 300 pound smoker certainly should receive a higher rate then a 150 pound marathon runner.
After looking at it a bit I understand the monthly payments MAY be taxed. Any ideas how that works if you are spending post tax money from the sale of a house, personal savings or maybe from a Roth?
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