Another discussion on retirement Annunuties

[cmg]

i'm a DoD Federal employee and after going to a few retirement seminars have been encouraged to get an Annuity. Talked to a investment advisor at local federal sounding provider. Here's the way it's presented to me. purchase $200K annuity, at retirement it pays out $1000 per month for however long I live, grows at a rate of 7.8% per year, they charge .0875% per yr to manage the funds. So it grows at a faster rate then i'm drawing out. here's the problem i'm having with it. How do they make money? if i withdraw $1K per month it runs out in 16.7 yrs or when 78 or so. It only is beneficial in my eyes if I live past 78, don't think so, males in the family barely make past 73. let the commenting begin...........

[BikeNY]

Disclaimer: I know nothing about annuities.

But your 16.7 year calculation is based on putting the money under your mattress(ie. no interest), correct? In reality, even if you invest the $200,000 in a very safe fund or something like that, it will earn some interest, and thus last much longer than your calculated 16.7 years.

I've seen the 4% rule thrown around a bit lately. Meaning that you can withdraw 4% of your investment every year without lowering the sum. Basically, you can withdraw 4% for as long as you live and never run out, and then leave the principal amount to your kids. There's lots of assumptions in that though.

So if you have $200,000 invested wisely, you could draw about $666 every month without touching the initial investment.

$300,000 invested would get you $1000 every month.

[rccardr]

They are assuming that enough purchasers will die before they come out even that they'll make money on what's left. And generally speaking, insurance number crunchers are a pretty talented bunch of folks. So yes, you might live long enough to pull out all of the money you put in, plus interest. On the other hand, $12K a year is not a lot to live on, even plus SS.

However, assuming an annual return of 4.5% and the same withdrawal rate of $1,000 per month, you could just have the money managed by a competent firm and still have $75,000 left at the end of 25 years. Here are some back of envelope (but pretty accurate) numbers:

Start of year Gain % Yield Start + Yield Spend End of year net
$200,000 0.045 $9,000 $209,000 $12,000 $197,000
$197,000 0.045 $8,865 $205,865 $12,000 $193,865
$193,865 0.045 $8,724 $202,589 $12,000 $190,589
$190,589 0.045 $8,577 $199,165 $12,000 $187,165
$187,165 0.045 $8,422 $195,588 $12,000 $183,588
$183,588 0.045 $8,261 $191,849 $12,000 $179,849
$179,849 0.045 $8,093 $187,943 $12,000 $175,943
$175,943 0.045 $7,917 $183,860 $12,000 $171,860
$171,860 0.045 $7,734 $179,594 $12,000 $167,594
$167,594 0.045 $7,542 $175,135 $12,000 $163,135
$163,135 0.045 $7,341 $170,476 $12,000 $158,476
$158,476 0.045 $7,131 $165,608 $12,000 $153,608
$153,608 0.045 $6,912 $160,520 $12,000 $148,520
$148,520 0.045 $6,683 $155,204 $12,000 $143,204
$143,204 0.045 $6,444 $149,648 $12,000 $137,648
$137,648 0.045 $6,194 $143,842 $12,000 $131,842
$131,842 0.045 $5,933 $137,775 $12,000 $125,775
$125,775 0.045 $5,660 $131,435 $12,000 $119,435
$119,435 0.045 $5,375 $124,809 $12,000 $112,809
$112,809 0.045 $5,076 $117,886 $12,000 $105,886
$105,886 0.045 $4,765 $110,651 $12,000 $98,651
$98,651 0.045 $4,439 $103,090 $12,000 $91,090
$91,090 0.045 $4,099 $95,189 $12,000 $83,189
$83,189 0.045 $3,744 $86,932 $12,000 $74,932

[MattTuck]

There are lots of better resources than a cycling forum to get the nitty gritty details.

The question isn't how they make money, but rather how would your returns/cash flows compare to you investing that same amount of money in a low cost globally diversified portfolio.

My hunch is that you'll come out ahead by doing it yourself. The biggest risk to doing it yourself is protecting yourself (especially in the first few years of retirement) from a big loss of your capital. You can prevent this by dollar cost averaging over the first 4 or 5 years if that is a concern.

[Bentley]

You show a lump sum withdrawl at the end of the year which is different than withdrawl every month, so close... of course if that is how the OP is doing it then I stand corrected

They are he'll make money on what's left. And generally speaking, insurance number crunchers are a pretty talented bunch of folks. So yes, you might live long enough to pull out all of the money you put in, plus interest. On the other hand, $12K a year is not a lot to live on, even plus SS.

However, assuming an annual return of 4.5% and the same withdrawal rate of $1,000 per month, you could just have the money managed by a competent firm and still have $75,000 left at the end of 25 years. Here are some back of envelope (but pretty accurate) numbers:

Start of year Gain % Yield Start + Yield Spend End of year net
$200,000 0.045 $9,000 $209,000 $12,000 $197,000
$197,000 0.045 $8,865 $205,865 $12,000 $193,865
$193,865 0.045 $8,724 $202,589 $12,000 $190,589
$190,589 0.045 $8,577 $199,165 $12,000 $187,165
$187,165 0.045 $8,422 $195,588 $12,000 $183,588
$183,588 0.045 $8,261 $191,849 $12,000 $179,849
$179,849 0.045 $8,093 $187,943 $12,000 $175,943
$175,943 0.045 $7,917 $183,860 $12,000 $171,860
$171,860 0.045 $7,734 $179,594 $12,000 $167,594
$167,594 0.045 $7,542 $175,135 $12,000 $163,135
$163,135 0.045 $7,341 $170,476 $12,000 $158,476
$158,476 0.045 $7,131 $165,608 $12,000 $153,608
$153,608 0.045 $6,912 $160,520 $12,000 $148,520
$148,520 0.045 $6,683 $155,204 $12,000 $143,204
$143,204 0.045 $6,444 $149,648 $12,000 $137,648
$137,648 0.045 $6,194 $143,842 $12,000 $131,842
$131,842 0.045 $5,933 $137,775 $12,000 $125,775
$125,775 0.045 $5,660 $131,435 $12,000 $119,435
$119,435 0.045 $5,375 $124,809 $12,000 $112,809
$112,809 0.045 $5,076 $117,886 $12,000 $105,886
$105,886 0.045 $4,765 $110,651 $12,000 $98,651
$98,651 0.045 $4,439 $103,090 $12,000 $91,090
$91,090 0.045 $4,099 $95,189 $12,000 $83,189
$83,189 0.045 $3,744 $86,932 $12,000 $74,932

[cmg]

the $1k is in addition to SS and gov. retirement, along with whatever I have in bank account +$90k. been seeing this 20 years back. No house payment or car. whittled expenses down to around $1500 a month. I agree better forums to ask than cycling group but no one here has a stake in it. I might get an honest response. looking for the pit falls. don't believe the $1k forever line. thanks

[MattTuck]

the $1k is in addition to SS and gov. retirement, along with whatever I have in bank account +$90k. been seeing this 20 years back. No house payment or car. whittled expenses down to around $1500 a month. I agree better forums to ask than cycling group but no one here has a stake in it. I might get an honest response. looking for the pit falls. don't believe the $1k forever line. thanks

I didn't mean there were better places to ask, I meant there are real resources with more detailed analysis than what you're likely to get here.

Getting a low monthly nut is the most important thing in retirement, so if you've truly gotten down to around $1500, that is great. You can probably retire and not have to worry very much.

A fee based financial planner (with a fiduciary responsbility) might be worth it if you want to go that route. But if you're willing to learn a bit about investing and finance (which isn't hard), most intelligent people could probably do as well on their own.

[jumphigher]

Interesting and educational thread. What if you dont have kids or anyone you wish to leave money to, does that change how you might fund such a thing?

[Ken Robb]

We have had other threads on annuities with a lot of good comments so check the archives.

[Ralph]

I'm retired from the financial services business.....FWIW

I don't like annuities for myself. Just too many hidden fees and sales costs to suit me. Would much rather just invest my money (which I do....I'm retired), and take out a certain amount every month....and take my chances with the markets and future of the USA. Also...can change ownership and make any other investment changes I wish over the years. Estate planning, tax planning, etc. Not locked into any long term plans. Depending on where I think we are in a business cycle, sometimes a Vanguard Money fund is best for me (currently 1.9%) for peace of mind....and "they" say rates will be increasing in future. The world is a changing place. I need to be able to change with it.

However.....You can sleep well knowing the annuity will pay out exactly as the contract says. For as long as it says. Assuming it's from a reliable strong insurance company.

I have a 42 year old handicapped step daughter. Am considering purchasing an annuity for her with some funds. When I'm gone....I can rest easy knowing that Insurance product is doing exactly what it is supposed to do for her and providing for her remaining life. She can't make investment decisions by herself.

So I guess.....You just have to decide if the guarantee of the contract for peace of mind is worth the expenses, lousy investment return, and knowing at the end there will be nothing left of that particular contract for your heirs.

They have their place. As an insurance product to guarantee a certain income. I don't consider them an investment. IMHO

[54ny77]

Annuities are awesome. For the huckster selling them to you.

For you, not so much...

P.s. they make money hoping you die before full payout, meanwhile they get to play with your invested amount.

[dave thompson]

Annuities are awesome. For the huckster selling them to you.

For you, not so much...

P.s. they make money hoping you die before full payout, meanwhile they get to play with your invested amount.

Yup, folks that sell the annuities are making the money. Big front end load.

[54ny77]

Yo Dave I sure as HECK don't sell annuities I got nothin' to do with em! Let's be clear as day on that one amigo!!!

I think they're all a bunch of scumbags. I HATE financial crimes professionals i mean insurance salesmen. One put a family member of mine into an annuity vehicle INSIDE of a 401k rollover IRA, the core investment of which was non-traded REIT debt. That's madness on madness, plus fees.

You, folks that sell the annuities are making the money. Big front end load.

[dave thompson]

Yo Dave I sure as HECK don't sell annuities I got nothin' to do with em! Let's be clear as day on that one amigo!!!

I think they're all a bunch of scumbags. I HATE financial crimes professionals i mean insurance salesmen. One put a family member of mine into an annuity vehicle INSIDE of a 401k rollover IRA, the core investment of which was non-traded REIT debt. That's madness on madness, plus fees.

Oh man so sorry, my iPad autocorrected. Meant to say Yup not You in my quoted reply. I’ll change the original.

I dislike those people as much as you do. They are more interested in selling high commissioned products contrary to their stated ‘serving the customers best interest’ public mantra.

[Louis]

OT: Wow - that's one of the best, most subtle yet real examples I've seen of an auto-correct program completely subverting the author's original intent.

Oh man so sorry, my iPad autocorrected. Meant to say Yup not You in my quoted reply. I’ll change the original.

I dislike those people as much as you do. They are more interested in selling high commissioned products contrary to their stated ‘serving the customers best interest’ public mantra.

[jumphigher]

We have had other threads on annuities with a lot of good comments so check the archives.

Thanks, I'll check them out.

[paulh]

Autocorrect is my worst enema.

[cua90]

Autocorrect is my worst enema.

Nominated for funniest post this year

[CNY rider]

So does anyone have experience (teachers, health care workers) with TIAA annuities in their retirement 403b?

[Gummee]

They have their place. As an insurance product to guarantee a certain income. I don't consider them an investment. IMHO

Military pensions. Govt pensions. etc are all annuities. You pay in (work) they pay out as long as you live and more if you choose your distributions correctly

You don't HAVE to annuitize to get your $ out. Once you annuitize, that money's no longer yours, it's the company's. That said, it's guaranteed $$ for as long as you choose.

Accumulation phase stuff: fixed and indexed annuities make for good 'rainy day, gotta be there' money. It won't grow very fast, but you won't lose any of it either

M

[fkelly]

You need to run some numbers for yourself.

For instance, at a fee of .0875% against a base of $200,000 the insurer is taking $1750 from your account per year.

Your calculated payout at $12000 per year over 16.7 years = $200,400.

Now, if your initial investment was $200,000 and that was guaranteed to make 7.8% a year, you should be able to withdraw a good deal more than $200,400.

You don't mention any initial fee or any other expenses than the $1750 (or .0875%) per year. Theoretically, once you start taking payouts your balance should decline. On the other hand at 7.8% investment return on $200,000 you should be making $15,600 per year to start with. So year two, with not taking any payouts, you should have 200,000 + 15,600 - 1750 which equals $213,850. You need a spreadsheet like this for the entire life span of the investment and get the salesman to initial it and make sure this covers all expenses, returns etc. I'd bet it doesn't.

Your initial question "How do they make money?" is spot on. In today's market place there is no way anyone can guarantee a return of 7.8% per year. If it sounds too good to be true it is.

Bogleheads.org is a good investment site, you'll need to register to use it and do some reading about their rules and suggestions for posting but you can find out a lot there.

[cnighbor1]

If you die early than where does your money go is a big ? to ask
Fees are normally up front so some how you have to make back that before your aheas
I prefer http://www.merriman.com/
Call them and ask about their great services The client comes first
I been with them since 1975 Return have been above all average market returns
Toll free (Seattle/Spokane) 800.423.4893

[SoCalSteve]

See if your state has double tax free muni bond funds. They pay about 5%. You’d make $10k a year tax free on the $200k... and, still have your $200k at the end ( assuming the bond fund doesn’t go up or down ). Even if it goes down, it’s pretty much a fixed income bond fund, may fluctuate a little.

[benb]

I've noticed "Certified Financial Planners" who do not charge for their services but work for insurance companies and get commisions on annuities always push annuities.

Certified Financial Planners who I pay with my own money or who take their commission out of the interest they make on my investments don't want to touch annuities with a 10 foot pole.

Just my experience. AFAICT they make sense for pension plans and they make sense for some weird cases where someone has a large lump sum of money that needs to handled in a novel way for some reason. They don't make sense for most of us, and they certainly don't make sense for young professionals who recently got out of college. I saw them sold aggressively to me and my friends when we were young as a vehicle to put monthly savings into annuities through complex insurance plans, really weird stuff.

[Gummee]

Certified Financial Planners who I pay with my own money or who take their commission out of the interest they make on my investments don't want to touch annuities with a 10 foot pole.
There's a reason for that. The guys that get a percentage of your earnings only get paid once on an annuity while they get paid monthly/yearly on your other investments

M

[NHAero]

Can you point me to those 5% munis please?

See if your state has double tax free muni bond funds. They pay about 5%. You’d make $10k a year tax free on the $200k... and, still have your $200k at the end ( assuming the bond fund doesn’t go up or down ). Even if it goes down, it’s pretty much a fixed income bond fund, may fluctuate a little.

[MattTuck]

Can you point me to those 5% munis please?

As part of a well diversified portfolio, maybe :) But putting your entire nest egg into municipal bonds given the abysmal fiscal situation that most municipalities are in.... well, caveat emptor.