Opinions on annuities?

[amandasfinances]

My banking advisor recently told me about annuities as an alternative to my 401k plan. She said annuities are good because they are more secure in the event of big losses (like we had recently) since they are insured unlike 401ks. Can anyone verify this information and generally give your opinion on annuities as a place to put your retirement money?

[atomicrc11]

Generally they are not a great idea. Run away from variable annuities. They are basically mutual funds that can lose or gain value and can be converted into fixed annuities at retirement.

A fixed annuity would pay you a set percent of interest. It is insured but if too many annuity companies fail, it could lose value. Basically with this type of annuity you would be paying the company to manage money you put in and they give you a fixed amount. If they market goes up more than they guarantee you, they keep all the extra earnings. Plus they many have higher fees than mutual funds.

You also may not be able to get any cash out if you need it, or may have to pay a hefty surrender fee if you take money out before a certain amount of time in the plan.

If you do go with an annuity stick to the low cost providers like Fidelity, Vanguard or TIAA-CREF.

Also, with a 401k you would get a tax deduction. You lose this with the annuity, you just get tax deferral on the earnings and they are taxed at your marginal rate when the money is withdrawn.

If you invest money in a taxable mutual fund and held the fund for many years, the capital gains rate is generally lower than your marginal tax rate. Right now it would be 15% for long term capital gains.

Most people recommended doing the 401k up to the match, then max a Roth, then continue to max out the 401k and then consider annuities if you are in a very high tax bracket.

[Scanner]

I always say this about annuities - "If you give me all your money, I promise to send you a monthly check when you turn 65."

Really, I promise

[GREENBACK]

Anyone who advises you to choose an annuity over your company's 401k is looking to make a buck. Be careful here.

[creditcardfree]

Unfortunately, many financial advisors suggest annuities, because they make the most money when they make a sale. Just look at the fees in the fine print, they are much higher than a typical mutual fund.

Annuities are an option for someone who has already maxed out their roth/ira and 401K or other savings plan. If that is you, then it is okay to consider it as option. But look at all the options. If the advisor cannot provide you other options, that is a sign of their own personal greed. Of course, that last statement is my personal opinion.

My own father in law, an accountant/financial advisor, recommended an annuity to my husband. I advised my husband against it for the reasons stated above. He did it anyway. It was a very bad investment and we had to wait years (I think 6 years) to get the money out without a penalty. Husband now admits it was a mistake.

[Scanner]

And that's the nature of the beast - the annuity industry brainwashes the salesmen that it's a good product so they actually beleive they are doing the best thing for their client. My cousin did the same thing with his own grandmother.

The financial industry needs a good kick in the derriere. THey have to stop marrying advice with the products they peddle.

No wonder 50% of Americans are going to be underwater with their mortgages - mortgage salemen, annuity salesmen. . .Wall Street has gotten everything it's deserved but still needs more.

[Ima saver]

I too, strongly advise against annuities.

[disneysteve]

I agree with everyone else. An annuity is not a replacement for your 401k.

The only type of annuity that I've read is okay in the right situation is an immediate annuity. That's where someone, most likely a retiree, hands over a lump sum of money and starts getting a guaranteed monthly check for the rest of his life. The rate is typically quite a bit higher than what you could get elsewhere for a fixed rate investment because when you die, the company keeps the principal. For folks who haven't saved enough for retirement or want the guaranteed income, it can be a good way to go.

That's not the kind of annuity you are referring to, though.

[Taxplanr]

An annuity may or may not be good for you. It really depends on your situation and circumstances. There just isn't a simple answer.

I strongly encourage you to read the proposed contract/perspectus for yourself and decide. And educate your self about fixed, indexed, variable and immediate annuities. I see a lot of bad advice and prejudice in online forums. No one knows your situation as good as you do.

Having a fixed rate of return or downside market protection can be very useful. Considering the poor returns that stock markets have given it can be very hard to justify the risk. An annuity may or may not be a good way for you to limit your risk.

[amedvedovski]

If you have a long time horizon then annuities in IRA/401K make no sense because time mitigates the risk. Based on Prof. Shiller study the minimum return of S&P 500 of any 25 years period since 1920s is ~7.9%

[jIM_Ohio]

There is more than one kind of annuity.

Fixed, variable, immediate.

Immediate annuities are the best of any type in my opinion. Pretty much means you hand over a sum of money, and the company turns this into a stream of payments to you.

Might be you turn over $100k and get payments of $7500 per year (7.5% return) for life.

Variable annuities offer a tax shelter (like 401k) and other features. Very tough to compare company 1 to company 2 because more often than not the features will be different.

Premise with a variable annuity is you invest in mutual fund xyz inside of an annuity. If market goes up 7% you get 7%, market goes up 25% you get 9%, market goes up 5% you get 5% (cap of increase is 9%), market goes down 50% you get 2% (there is part of contract which has minimum increase). Then on a given date and with given terms you turn the variable annuity into an immediate annuity.

For example if you invested 6.25k, and over 30 years it reaches a value of 100k you have sheltered all the gains from taxes thus far. At the 30 year mark you annuitize the whole amount and get 7500 per year income (same 7.5% return as above).

There is a fixed annuity which allows you to invest that same 6.25k and always have it earn a fixed amount (inside the tax shelter). Will probably be a fixed amount around 3-5%. Meaming 6250 investment grows to 25k in about 30 years. You could then annuitize that 25k with same 7.5% return ($1875/year).

Annuities have phases, most investors would be best off investing on their own, then buying/purchasing an immediate annuity when they retire.

If you use an immediate annuity when you retire for a portion of your income stream, most retirement calculations become more favorable (allows you to retire earlier with less saved). This is because the type of risks you take with your money go down, and portfolio volatility goes way down.

[sgfinancialfreedom]

Payouts from annuities are usually very low. I won't do annuities..maybe just a small sum for lifelong income..

[atomicrc11]

My parents are getting close to retirement and I do think there is a case for an annuity regardless of how much one has saved for retirement. Being a professor, my father has his retirement plan with TIAA-CREF. Most of it is in mutual funds with some in the TIAA Traditional account. Regardless of where the funds come from, an annuity makes a great planning tool. I wouldn't advocate using all of your money to buy an annuity, buy some percentage.

My parents plan on putting enough of their retirement money into an annuity so that the last 7 years of their mortgage, taxes, insurance, utilities, health care and other household expenses are covered. This way their retirement doesn't depend on how the market performs. They can still live in the home they want to retire in. Should the market do well, then they can travel and do more things they want to do in retirement. Since thier house was purchased long ago the expenses really are a small part of thier expenses as a whole. As a percentage of assets for retirement, I believe they will only need to annuitize 35% of their portfolio.

To ensure they have what they need without market fluctuations, I believe this is a good way to go. Especially with a highly rates insurance company.

[buildmybudget]

Based on the feedback, I would get a few more opinions from some qualified financial advisor about what you should do. In this case, I think the bank advisor is definitely pushing a product.

[atomicrc11]

I would agree. Annuities are best used when purchased right before retirement. I would not recommend them before, especially Variable Annuities. TIAA Traditional is different product and if you have it available to you it is worth considering.

[disneysteve]

Another thing to look into is a charitable gift annuity. With that, you make a lump sum donation to a charitable organization. You get a tax deduction for doing so. You then get a monthly check with an interest rate well above regular market rates (the older you are when you make the donation, the higher the rate, which is then fixed for the remainder of your life). Rather than the money going to line some insurance company's pockets, it goes to support the charity. This is how a lot of organizations' endowment funds get funded.

[momula]

Yep this is something I've wondered about for quite sometime.

[jIM_Ohio]

Originally Posted by amandasfinances

My banking advisor recently told me about annuities as an alternative to my 401k plan. She said annuities are good because they are more secure in the event of big losses (like we had recently) since they are insured unlike 401ks. Can anyone verify this information and generally give your opinion on annuities as a place to put your retirement money?

You received some half truths

401ks are subject to market risk. The reward for losing 40% in one year is the possibility of a 100% increase in another year. This is volatility, it is normal, and its the risk you take when investing in equities.

I did lose 40% in 2008 and I expect to gain around 50-100% this year. Really.

An annuity works like this ("probably"). When you put in a contribution, you lose X% to fees (so a $100 deposit might put $99 or $98 into account). For that fee, you are allowing company to say "you will never lose money" and give you the higher of market returns, capped at y% (such as 9%) or z% (fixed at 2% maybe).

So if market goes up 7%, you get 7%
if market goes up 11%, you get 9% (because that was cap the annuity set for maximum gains)
if market goes up 3% you get 3%
if market goes down 1%, you get 2% (because this was the minimum return the annuity was set at).

Every annuity is different, you need someone to explain the fine print to you.

You need to know:
capped increase
minimum guaranteed return
fees

[grand_canyon]

These products are usually real stinkers. They're sold to people of all ages as a "you'll retire with guaranteed income and if the value drops and you pass your heirs will get the full value".

The problem is the cost of insurance on giving your heirs full value is extremely high. Typically, the cost is 0.9% so on say a 100k annuity you're paying 900 bucks a year and the most you can ever gain is 100K. Usually, you can buy a much larger term life policy for the 900 bucks a year.

The pay for life is a joke as the payout it so low the life insurance company will never lose. I calculated one out before and you'd have to be 113 before you'd come out ahead. BTW, if you annuitize and die, the life insurance company keeps your principal. If you set it up to pay out for certain amount time after your death, you heirs still won't get the full amount of principal which BTW decrease the monthly payout to you. I guarantee if anyone is going to lose on these will be the policy holder and not the insurance company

[Saving_spree]

Fixed Annuities are safe because they are guaranteed by insurance companies, a great place to keep retirement money because they pay tax-deferred competitive returns, and all of your money is working 100% of the time...

Sometimes People coming to speak this may have fixed agenda, go through carefully...