Barron's had an odd cover story this week which ranked the top 50 annuities. I have never been a fan of annuities because they are usually very expensive and I do not like the idea of relying on an insurance company to stay in business.
My mother had an insurance company fail on her (I had nothing to do with her buying an annuity) which contributes to my sentiment. There are of course some that are not that expensive.
One observation that I have shared in the past is that anecdotally I know a few people up here who have annuities and they absolutely love them. I have no idea whether they paid a fortune to get into them, I have no idea if they really understand what they own but they do understand the income stream and they do provide comfort without the worry of being in the stock market (talking end user perception).
To the extent any of these folks were with insurance companies that were on the brink in 2008 I don't know whether they knew they were on the brink or not but this is a big part of why I personally want no part of them. I do acknowledge the comfort they appear to provide.
Last night I started working on a regular post for today but got called out on a lengthy medical call so hopefully regular blogging will resume tomorrow but in the mean time please weigh in with what you think about annuities.
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7 comments:
In Jim Otar's "Unvieling the Retirement Myth" he demonstrates persuasively that for some annuities are the only way to mitigate longevity risk. For sure, it would be better to be in a position to not have to consider them, but for many who have failed to save adequately it seems to be a reasonable option. As you mention, costs and financial stability of the insurer matter.
Annuities as a primary investment vehicle don't make much sense.
Some ahem relatives (in-laws) I know have no financial discipline what so ever. They are withdrawing about 6% (excluding advisor fee) early in their retirement. In addition they impulsively buy things like fishing boats etc., all with the blessing of their financial advisor. I feel that in situations like this annuity would impose some much needed restraint. Can't spend what you don't have. In the end, they probably would be just as happy to spend each check as it is slowly meted out.
Just an alternate view.
Think about it, in a sense Social Security is government mandated annuity. How many retirees have no income other than SS?
I own and have sold annuities (fixed and variable)as a registered rep for many years '86-'04). My experience with variable annuities has been very favorable. I do believe my clients (I'm retired now) feel the same way. I also sought low fee's and high quality companies to fit my client's needs.
I was also a rep during the early '80's when several companies went belly up. They were pretty easy to avoid in the first place. For example, Baldwin United, when the stock dropped like a rock prior to bankruptcy proceedings.
My personal annuity is through Pacific Life. Total fees: 1.25% for mortality and expense risk and an admin fee of .15%. I've owned it since 2001. I'm totally in the fixed (3%) account where M&E fees do not apply and withdraw those earnings monthly. It's a great asset to own in these low interest rate times and is contractually guaranteed. Even Bill Gross didn't realize 3% would look huge someday!
Flexibility. I can move between variable accounts (mutual funds) at no cost with virtually no limits (they do limit exchanges to 25 per year I believe) and the choices are good. So when markets plummet like 2008/09 it's simple to reallocate to managers of my choice.
My heir will receive the annuity proceeds sans probate within 30 days. Structuring the owner, annuitant and beneficiary are critical issues to consider and offer substantial tax advantages.
Lastly, pick a long-lived, highly rated company that has been in the annuity biz for many years (understands the risks of the features they offer). Every company offers guarantees that it must honor. Mine says that each time I add money, I get a 4% bonus on up to a million dollars. Of course, that increases the surrender charge period on that piece, but I have no plans to move the money.
Sorry, this is long and I've only hit a few advantages...there are more. Because of their complexity, annuities have scared off many, but for some, the advantages are distinct. Buyers should seek out qualified advisors when choosing an investment.
I use annuities in two ways:
1) equities converted to an income stream using a fixed length, immediate fixed annuity* (usually in the range of 5 to 10 years depending on yield). Takes fewer dollars to establish a given income stream and avoids the need to convert more equity to bonds and/or move further out on the risk curve when quality bond yields are low (note I also maintain a bond ladder and have other sources of income so immediate annuities are mainly to establish a floor).
2) variable annuities to augment IRA's for tax deferred accumulation. Agree with previous poster's points WRT reliable company + low costs* (the industry average is well over 2%/yr which makes achieving a favorable ROI very difficult).
*I use Vanguard Group for most of this, immediate annuities and variable annuities (backed by Monumental Life); the latter has a 0.59% expense ratio (includes admin, mortality and expense risk fees) but a guaranteed lifetime withdrawal rider costs an additional 0.9%/yr.
RW,
That seems very reasonable. Thanks for sharing specifics.
NB: Barry Ritholtz posted the tables from the Barron's article for immediate and deferred annuity providers at http://www.ritholtz.com/blog/2012/05/barrons-top-50-annuities/
These are the strongest, most stable companies. Barrons may have missed a few, probably did, but not too many as far as I can tell.
Aren't the historic miserly interest rates a tell that it is a bad time to buy annuities?
To understand anything related to insurance, you MUST know the difference between Stock companies (the ones that took a nose dive in 2007-2008)and the Mutual companies (the companies that are actually financially strong and that have credit ratings second to none). Don't compare annuities or life insurance between those two broader classifications. The comparisons are not even close. Equity indexed annuities are GARBAGE...but fixed annuities, (some)variable annuities, and income annuities all have (or can have) a place in your portfolio. Because let's face it...the market just doesn't go up 8% - 10%/yr
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