Annuities

[D.V.]

I am seeking opinion on annuities. Are they worth it or not? What are the pitfalls to avoid? Which are the companies worth considering for buying annuities? Opinions would helpful readers of this forum towards retirement planning. Thanks.

[Anonymous]

Im in the annuity industry, generally speaking they can be good if you are close to taking distributions in retirement during a correction phase and this pool of money is terribly important to you. Otherwise be careful of being sold on bells and whistles when you dont really need them

[Chuck]

Hi DV,
Allow me to offer a detailed response as an actuary who works with annuities.

They come in different flavors:
Fixed deferred annuity – fixed income, maybe a 2% guarantee.
Indexed deferred annuity – a fixed annuity with an index “rider” attached to it that takes the 2% and buys call spread options on some index, often $SPX.
Variable annuity – your funds are invested in a fixed account or any combination of mutual funds. Putting guaranteed minimum benefits on it is expensive, but in 2008 it was worth it.
If you are looking for monthly income in retirement that you can’t outlive then you can get a payout annuity = immediate annuity = SPIA (same thing).
It can also run to a second death, so the later of you or your spouse’s death.

Generally speaking, if you are pre-retirement they are a low risk, low return, principal protected way to roll up funds for retirement.
If you are close to retirement the timing may not work well.
If you are 45-58 you’ll be ok, at 58 you can get a 7 year product.
If you are post-retirement and looking to pass assets to your heirs, if you are in good health I’d go with a life insurance policy.

You will probably be able to withdraw 10% each year without paying the surrender charge. They call this a “free partial withdrawal”. Otherwise these are not liquid.

Watch for: crappy guaranteed withdrawal rates. Some insurers offer a guaranteed payout annuity options to you but the rates priced in are a bad deal.
High fees for guarantees.
Complexity. You don’t want arcane rules and miss an option date that messes up your retirement planning.

I’ve worked inside way too many companies. The stock companies are focused on this quarter’s earnings and can be shameless about harvesting extra from the policyholders to hit targets (and then pay big executive bonuses for brilliant financial management). The big old mutuals talk about 50 year promises to widows and orphans. Really.

Therefore, I would only buy an annuity from a highly rated mutual. I have a policy from Northwestern Mutual. Also excellent are New York Life, Pacific Life, and Mass Mutual.

Hope that helps. Happy to discuss more, perhaps off line.

Best wishes,

ERM Charlie

[D.V.]

Charles
You have provided me with a dizzying array of information in one short post. Thanks. Yes, I would love to discuss this off line. You may respond to me on usa_92@yahoo.com. Thanks.

[Author]

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