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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Re: annuities 101 please Date: 1/30/2009 6:45 PM
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... we need some very basic input on annuities....

The bottom line is that LOTS if not most people who are sold annuities would have been better off having not bought them. Yes they can sometimes be a good choice but most people that buy them made a mistake.


Here are some points to study as you research them.

1) Types of annuities: There are lots of financial products that are called “annuities” but they are really totally different products. Sort of like saying you have a “bank account” can mean a lot of things. Annuities are sometimes marketed as being simple investments but in truth they are some of the most complex investments most people will ever see. Some day what is written (by the insurance companies lawyers) on page 900 of the master annuity contract may make a lot of difference.

2) How to buy an annuity; You should have a fee only financial advisor who charges you by the hour and gives you a written statement that that is the only compensation he receives. 1% of your million dollars is $10,000 and you can buy a lot of an expert’s time by the hour for that even at a couple of hundred dollars per hour. Having a fee only financial advisor is a must; don’t even consider buying an annuity without one.

3) Who to buy one from: If things get worse a major problem with annuities is that they are only as good as the insurance company that issues it. AIG was at one time considered to be rock solid and one of the biggest annuity companies. Now they are a leading bailout basket case. I would not be sleeping well if my nest egg was in an AIG annuity.

4) Diversification: If an annuity is right for you, then there are lots of options and you will be tempted to try to decide on the best options for you. The problem is that what is best really depends on what happens in the future which is unknowable. An alternative is to buy several different annuities with different options so that you won’t be hurt as much with the wrong annuity options if the future is different than you expect. Buying them from several different companies and at several different ages is also a go idea.

5) When to buy an annuity; It is possible that buying a carefully selected low cost annuity might work for you but if so then you have to question when to buy it. If you could wait until you are say 75, then the payment would be MUCH higher and you could reevaluate if it still makes sense then for you.

6) Social Security as an annuity; Delaying when you start receiving social security will result in a larger social security check. This is basically buying an annuity from the government and may have a much higher payback than an annuity from an insurance company. If your “advisor” didn’t mention this and help your with the numbers, then you are dealing with an out and out salesman, RUN! You can also “reset” your social security up until the age of 70, for example if you start it now then when you are 69 and if you are still in good health, then you can pay back your social security benefits and get the higher benefits that you would have gotten if you had waited until the age of 70.

7) Don’t buy too large of an annuity; You already have social security, maybe a pension, likely some dividends and interest, so you may not need much more monthly income. For example if between these you have $5,000 per month in income, but you need $6,000 to spend each month, then buying an annuity that pays more than $1,000 per month would likely be inappropriate depending on the rest of your numbers.

8) Is now a favorable time to buy an annuity? I cannot predict the future but there are a few factors that make annuities look generally unfavorable right now. They are;

a) Low interest rate: Interest rates are lower than they have been in decades. The interest rate is a factor that helps determine the annunity payout so low interest rates mean a low payout.

b) The risk of inflation. If you buy an annuity that adjusts for inflation it will cost you a lot more. Even an inflation adjusted annunity may not keep with your real inflation rate since the CPI inflation rate calculation was changed a few years ago to understate inflation. Over the next 30 years it is almost certain that there will be some periods of high inflation which could really hurt you if you are living on an annuity. Note: if you wait ten years to buy an annunity in addition to getting a larger payout because of your age then, you will have eliminated ten years of inflation risk.

c) Financial risk. Now seems like a very risky time to give your money to an insurance company since if they go belly up you may very well loose everything. Some states have limited annuity insurance programs but they are very limited and do not have enough money to pay large claims if a major company defaults. An insurance company failing may seem unlikely but a major one in England failed a few years ago and the people with their annuities lost most of their money. Google “Equitable Life” for more information. Even if you select a good insurance company, it may one day be merged or bought by a less reliable or outright terrible company.


Greg
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