For retirement, as an adjunct to a pension.


Approximately a 50k lump sum.


 

PLACEHOLDER

ETA:  guess I goofed that up.

Generally speaking:  bad (and IN before the annuity salespeople).

Bottomline on how an annuity works:  a company takes your $, invests it, gives you a agreed upon (and small enough that they can probably make the payment for the life of the annuity) fraction of the gains they make and they keep the rest.  In reality, they are insurance contracts.

Example:  you "buy"* an annuity that is "guaranteed" to pay you 2%** per year for the life of the annuity.  Company X takes your $, invests it in the stock market, earns 12%, keeps 10% and gives you your 2%.

That's the simplified version.  There are annuities where you can pick and choose investments, but if you are confident and skilled enough to be comfortable doing that, you probably wouldn't be asking what an annuity is in the first place.  Like anything else in life, if you study, do the nug work to figure out which type is right for you based on your financial status, tax bracket, age/life expectancy, etc., do everything you can to minimize your costs and you turn out to be a good stock picker and market timer, they can be worthwhile.

Most (non-annuity) advisors will tell you that annuities should be used as a last resort after you've exhausted every other investment avenue (i.e. maxed out your 401(k), IRA, etc.).

Annuities can be had in many different versions, but that's how they work...and as you might have already figured, their "guarantee" is only as good as a) the company behind it and b) how well they do at picking stocks and bonds (or whatever they invest in).  If the company loses $ and/or goes out of business, your "guarantee" and most likely all/most of your $ goes with it.

Financially speaking, annuities are inefficient since they are basically mutual funds (for which you pay a management fee) coupled with the annuity's fees and costs yet your gains (depending on type) are capped (but reduced in any case).

The only advantage to annuities is that in some variants the earnings grow tax-deferred (similar to an IRA/401(k)).

The bottomline that's at the bottom:  nothing's free.

*  Lump sum or in installments but as stated, it's really a contract similar to a 401(k) or IRA.
** Can be fixed, variable % or indexed.PLACEHOLDER

And a final bottom bottomline from

I like the idea of a fixed payment as insurance in case you live longer than expected and out live your savings. My problem with them is what if the company goes bankrupt. It can happen even to big companies with a long history like it did in 2008. The other negative is expenses.  

Exactly.

You can do the same thing for yourself with treasuries, especially zero coupon bonds...just buy them with the desired successive maturity dates (called a bond ladder).  Much simpler and guaranteed by the .gov.

And that's why people get hosed. Because it sounds good.
Annuities sell because they tickle people's FSA receptors.
"I can has something (income) for nothing (no risk)."
In reality you've simply PAID the insurance company to assume the risk for you.
Why do you think they are so happy to do this?




Exactly.

And you bring up a couple of good points I didn't mention in my original post.

Annuities generally bad (in that you could easily do better) unless you are very risk averse and/or a novice (or very experienced) investor.  Some people are willing to trade potential gains to avoid potential losses.

And yes, you are transferring some but no where near all of the risk to the insurance company...and nearly all of the gains.

And they are happy to do it because they've done the math and set it up way in their favor.

Great replies.

Thanks.

If you are going to employ fixed income strategy, it's a good idea to get started early so that compounding is on your side.  The problem with starting today is that interest rates are low.

One common approach to producing a desired income flow in the future is to create a zero coupon bond ladder.  Zeros are actually fairly complex but can be reduced to this:  instead of paying quarterly interest payment (the "coupon") throughout the life of the bond, zeros are sold at a discount (less than face value which is $1,000) and when the bond reaches maturity, the government (if it's a treasury bond) gives you $1,000.  The "interest rate" or more correctly yield is a function of the difference between face value and the discounted price.  They are called zero coupon bonds because the coupon is zero.

Example:  a 30-year zero would cost about $411 today and give you $1,000 in 30 years, giving you a yield of about 2.86% at maturity.  Decide how much income you need in a particular year, then purchase enough zeros to provide that income.

Assume you would like $12,000 paid quarterly starting 30 years from now.  You would buy 3 zeros with a maturity in August of 2035, 3 more that mature in November, etc.  Cost today would be about $411 each.  In August of 2035 the first 3 would mature and The Treasury will give you $3,000.

Putting $411 away to get (just) $1,000 back in 30 years may not sound like a great deal, and it's not.  But it's a reality of our (artificially) low interest rate environment.  If interest rates were to go to 6%, the cost/bond drops to about $175.  At 8% a zero would cost less than $100.  For that kind of return, you can see how you can start to put away a pretty healthy income stream that is completely backed by the U.S. Government (commonly known as "risk free" but I know how that statement would go down on ARFCOM).

The least expensive (as in "free") way to purchase treasuries is through The Treasury itself:  Treasury Direct.  The advantage of using TD is that there are not commissions and you get the same prices as the big banks get:  whatever that particular auction yielded.  The primary disadvantage of TD is that your money is in a separate government account but in order to buy from TD you have to link a checking account...and that checking account could also be linked to your brokerage firm providing a way to move money between TD and your brokerage.

Note:  the technical term for zero coupon bonds is S.T.R.I.P.S.:  Separate Trading of of Registered Interest and Principal of Securities.  What they have done is "stripped" the quarterly interest payments from the principal so that they trade as separate entities.

Based on the above posts, they sound like a terrible investment scam for those who are financially illiterate.......

Unfortunately, they often are.

 




Well. I haven't done it, so there's that.






 

I wouldn't get one.  to many better options,

My parents bought one as a part of their retirement portfolio. I have no idea what they paid for it but my mom is getting around $350-400 a month. I think they bought it when they used an old school sales guy for an investment advisor and then changed advisors when they realized they were getting hosed. I only met the old guy a couple times and he was the "fast talker/sell ice to an eskimo" type.

He was really pushy about selling my Mom LTC insurance after my Dad passed.

Learned something today. Nice post.

I'm going to dig into these a bit more. May buy a couple hundred bucks worth a month.

My grandad had three annuity funds that he left. One to me one to my sister and one to my mom. Each was about 90k.

I sold mine after a few months - took a hit.

Company started going under.  Sis sold hers and got 30k. Mom held on.  Got 6k from a settlement.

Buyer beware.

I had a guy on another forum that was really talking annuities up...

It went like this:
I posted a thread re: investing in child's 529 plan...
He subtly hints that I didn't do the wise thing, because of the short-term a 529 carried too much risk and that annuities would have been better
I asked him for a more detailed explanation
He took it to PM's because I'm sure what he said would have been quickly refuted on an open forum
He "educated me" on how great annuities were and why they were the right choice...
And at the end of the "education" he said, "If you are interested in purchasing an annuity here is my contact info..."

It's quite simple: if these people are pushing something like this so hard there is money to be made by them (commission). If there is "wiggle room" for the company to make a profit, pay people to market to you, sell to you, etc. clearly they are getting that money from somewhere. Money doesn't grow on trees: it comes to them via suckers that hear their sales pitch, believe every word they say, think "How could I lose on that?", and then they "buy-in"...

Anyone know the current average rate on an annuity?  I've often read the rate can be used to figure out the cash value of a military retirement.

For example, if I'm getting $2K a month (or $24K a year), I can divide my annual income by the annuity rate and determine the value of my retirement. This factors into the "million in assets" often suggested before retirement.

I only know what I have looked up. I don't think at 50k you would get much a month. Seems they only recommend them if you maybe do not have a whole lot to invest or so you can get something that will cover your fixed costs. You would of course have to factor in inflation. I don't like anything that starts getting overly complicated, inflation adjusted, step up, stock market tied, blah, blah, fees and crossing investment vehicles.

Maybe if longevity runs in your family it would be a good deal? I have not run the math.

There are circumstances where fixed annuities can be a good idea.  They’re not for making your money grow and not good for income unless you dump in a ton of cash.  If you have a ton of cash and want income, there are better ways to get it.  
Some annuities have features like long-term care expense riders which may be valuable for older people who don’t really need more money, but want to protect their assets from certain types of catastrophes.  
You have to be very careful about the fees a broker might tack on.  If an annuity meets your needs, shop around.  

The state of Georgia does not back annuities up to a certain amount of dollars?

LTC can be a useful tool, you just need to know when and how to use it.

Just keep in mind zero's are hit the hardest by duration since they lack a coupon.

The math behind why

I thought some of the less expensive options he was suggesting might have been a good bit of extra insurance, but he wanted my Mom (who is on a fixed income of around $3k per month) to fork out almost $1k per month for an LTC premium. One of the smaller policies might have been helpful.

Is he an insurance only guy?