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September 15, 2012


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I have always heard that annuities were not wise to have but I have never seen this explain in such simple terms.

Annuities are fixed and guaranteed. They remove the risk of outliving your savings. Thats the point. They aren't supposed to get you the highest return. For high returns you have to take risks. Like in the risky, volatile stock market. Putting ALL your money in the stock market at retirement has high risk and a reasonable chance you will outlive your funds even at the conservative 4% withdrawal rate.

"the S&P 500's return over the past 10 years was 6.34%"

Not much to brag about given the risks. When was that 10 years any way? From 2001 to 2011 the S&P 500 had annual returns of 3.4% and compound annual growth of 1.4%. And from 2000 to 2010 the S&P 500 had a compound annual growth rate of -2%.

Whats the return of having age appropriate bonds investment and 7 years of spending in safe assets over the past 10 years??

If you have a giant pile of money then theres no need for annuities. You can sit on your millions and take the risk in the stock market. For many retirees an annuity for a portion of your assets to guarantee a base level of income can make sense as it removes the risk of retirement planning and gives you a guaranteed fixed income for life.

Yes most annuity quotes are not inflation adjusted. Thats a good point many people don't realize. But you can of course buy an annuity with inflation adjustment and doing so can make sense. You pay around 20-30% more for that from what I've seen.

If the 'safe' withdrawal rate of 4% would turn your $100,000 into a $4000 annual income flow then an fixed annuity with guaranteed income of $4500 inflation adjusted for life of a married couple isn't a rip off.

Again if you're a multi-millionaire then theres no need. If you are a typical retiree with a limited retirement fund then it can make some sense.

I don't want to over hype annuities but fixed immediate annuities are not a rotten deal in general. The return on investment is not particularly high especially given todays low interest rate environment.

I have to disagree and I was a financial planner for 16 years. I sold MYSELF a deferrrd VARIABLE annuity with a large, high rated insurer. Why? To "guarantee a lifetime income" without annuitization. As a piece of MY portfolio (all the tax deferred monies that make up about 1/4-1/3 of my net worth) I will nevr lose a cent (principal guarantee), can get a stream of income at a 7% withdrawal rate FOREVER, even if the contract value goes to ZERO (!!), and I participate in market returns with the most aggressive portfolio the contract allows a 75/25 equity/income split. Are annuities expensive? YES. But, are some costs in life worth the products quality and peace of mind? I think so. Investing this money when the S&P was at 1525 has allowed me to not see any principal loss over 4 years and my income when I decide to use the lietimne guarantee rider can't drop. Only rise. Forever. I like that! Since tax deferred monies are ordinary income taxed anyway, it does make sense that IRA monies, etc., be invested in such a product at about middle age, if the product fits the situ! For many folks it does.

I agree, and understand most of the article here. I'm still curious what 10 year recent period showed 6%+ for the S&P. This a mistake or a typo?

Joetaxpayer: plug in 10 years (it's actually the default in the form) and look at the "Annualized S&P 500 Return (Dividends Reinvested)" field.

Well as of 8/31/2012 the 10 year return of the S & P has returned over 6%. Funny how we get so myopic about the "lost decade" that many fail to recognize when markets return to the mean.

Jeff in WesternWA timed the market pretty well and got in on one of the best riders available. Won't find one near that favorable today. His assertion that his income won't go down when he activates the rider is questionable at best. When you get a flat rate of return (whether it is 3% or 7%) you are faced with a loss of purchasing power due to inflation.

Also the likelihood of a market based rise in income once he turns it on is slim. Since they deduct the expenses, your distribution and you must overcome the 25% bond split you will need to do somewhere north of 11% in the market the first year to see any raise. Each year that goes by makes it even more unlikely.

The biggest issue with these annuities is that although you technically don't annuitize and lose control of your money, the insurance company drains your account pretty quickly with expenses and once your balance gets to zero who cares who has control.

Forgot to mention one other issue with these "market lock" or "step up" annuities. Many of them calculate the rider fee based on the "income credit base" rather than the account value. The "income credit base" is not real money but goes up every year prior to taking income. Thus, they drain the account value even quicker than most realize. Many of the people selling these products are unaware of this. Of the few who are aware of it, most don't disclose this issue.

The S&P500 return from 9/14/2002 to 9/14/2012 is now at ANN=5.11%.

Well now we have solved the great mystery of those fateful souls who invested on 9/14/2002 and liquidated on 9/14/2012. Always wondered what happened to them!!!

It is interesting to note the similarities with the UK annuity market. Over here we have seen annuity incomes plummet over the past 12 months, down by an average of 8.6% since January. It is true that as an investment opportunity, seniors are barely getting their money back when buying an annuity - and as you mention it takes 15 years just to get back what you invest (16 years 9 months in the UK btw).

However annuities DO provide a guaranteed income for life, so you will never run out of money in retirement. The problem is I think an increasing number of retirees will not be swayed by this argument. They save hard their whole lives only to presented with woeful returns from their annuity provider.

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