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I read/hear conflicting information re annuities and retirement. What are some basics to realize when considering an annuity when facing retirement - why not put the money into a savings account, HSA with investing benefits, etc? If one does not own property, would an annuity be the safer avenue rather than purchasing property once retired? Thank you.
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"I read/hear conflicting information re annuities and retirement. What are some basics to realize when considering an annuity when facing retirement - why not put the money into a savings account, HSA with investing benefits, etc? If one does not own property, would an annuity be the safer avenue rather than purchasing property once retired? Thank you."

I assume you must be talking about your company 401k or similar - and the funds in it when you retire.

You have a lot of self education to do about investing.

If you are a complete novice to investing, then you better start getting on board before you retire. Read !

If you don't currently own property, you probably don't want to buy it in retirement, and it doesn't pay you any monthly income to live on. It takes money to keep your property going - like taxes and utility bills for water, sewer, electricity, gas, oil for the furnace if that is what it has, insurance, taxes.

For most educated investors, an annuity is the first thing they run from. However, if you are completely in the dark, don't want to learn about investing and managing your investments, an 'immediate annuity' - one that starts paying monthly income, might be OK for you. You'll buy some annuity salesperson a new car, but that is the 'cost' of buying an annuity. He or she will be happy.

Now, if you'd like to share more information about your current situation, current investments, age, financial obligations, living situation, marital status, etc, we might be able to offer more suggestions.


t
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It depends on what you mean by "Annuity"

The formal definition of an "Annuity" is a stream of payments made to you over your lifetime or a guaranteed period, where each payment amount is identical (although there may be an inflation adjustment each year) and the interval between each payment is constant. Thus an annuity can be paid by an insurance company (most common), or a long term sales contract, an income trust, a pension or structured settlement, to name a few.

But as a carryover from the 1950/60s, insurance companies used to contract with school districts to have teachers defer part of their salary each month into a tax deferred savings plan as defined under the new Sec. 403(b), with a mandatory conversion to a life annuity at some predetermined retirement age. These were referred to as deferred annuities, as that's what they really were. This got shortened to just an 'annuity', a title which the insurance industry seemed to like as it is still used today when describing these tax favored savings accounts, although sometimes the insurance industry will add "tax sheltered" or "tax favored" or some other attractive sounding marketing term before the word "Annuity". Today, I don't think anyone still has a mandatory annuity conversion feature on their 403(b)....so what an insurance company continues to stubbornly refer to as an "Annuity" is really an EXPENSIVE tax deferred savings account.

Assuming you are referring to the former, a life annuity can be had with any number of bells and whistles added to it by the insurance company, with the most popular being a percent (usually 50% or 100%) spousal benefit should you die first, a guaranteed payment period such as the first 10 years the annuity will pay the benefit even if you die during that period (called a "period certain"), a guaranteed "Death Benefit" that will pay to your beneficiary at your death a fixed or declining % of the original amount paid for the life annuity, an annual inflation adjuster (there are many ways this is defined), and so forth. The important thing to remember about these bells-n-whistles is you will pay for each one through a reduced payment....so if you take the reduction to each monthly payment for adding, say, a "death benefit" rider, multiply that difference by 12 and then by the number of years left in your life expectancy and that's the cost to you for adding it. The insurance company often speaks about these add-ons as though they're throwing them in for free. Always remember and never forget....the insurance industry gives away NOTHING FOR FREE...you pay for it whether you know it or not.

If the latter, Fahgettaboudit! The advantage to tax deferred savings is the number of years you have to compound tax deferred growth...that is not what you're trying to do as you begin retirement.

Soooooo.............

Advantages:
1. Guaranteed payments for life plus any length of time you/surviving spouse (if you choose that extra) live.
2. You don't have to deal with the worst enemy for most who self-direct their own investments: themselves. The tendency an untrained and inexperienced self-investor has as they begin retirement is doing EXACTLY what they should NOT be doing: buying more when the market is at new highs or selling when the market has sold off and everybody feels like jumping off the nearest cliff. Holding an insurance product for income will prevent you from doing this.
3. Easy. Pay-it and Forget-it.

Disadvantages:
1. Expensive. Annuities are a costly way to generate reliable retirement years income. Employing the right asset allocation and having the discipline to stick with it regardless of what the market is doing, will provide a much better life income than a life annuity.
2. No inflation adjustment, thus purchasing power will decline year after year. Adding an inflation option to a life annuity is one of the most expensive add-ons. Depending on your age, it will reduce the benefit of a single life annuity by 25% to 40%...so adding this option will instantly reduce purchasing power.
3. You've lost the purchase price of the annuity. So if you pay the insurer $100,000 for a life annuity benefit of $400 per month and then die the next month, the full $100,000 will be lost, unless you've added one of the bells-n-whistles I spoke of earlier.
4. Inflexibility. Once you start it, you're poured in concrete. There are add-ons that allow you to access a % of the principal at some points along the way, but again, this will reduce the monthly benefit. But for most, once you start, that's what you'll have for the rest of your life.
5. Insurance company default. This is rare, but it has happened. So you're better to stick with the big name insurers with at least an A rating from A.M. Best. Each state requires an independent guaranty fund that provides insurance to holders of certain fixed insurance products should the insurer default, but this will usually mean a reduction in benefit should the insurer fail...but as I said, this is rare.

Hope that helps

BruceM
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One thing to consider is that it doesn't have to be "buy an annuity" versus "do something else." You can do both, which is what I did earlier this year.

As a retired professor, I had 40 years of contributions compounding in TIAA. After studying all the plusses and minuses, I decided to use about a third of it to buy a plain vanilla "single premium immediate annuity" (SPIA) with a 15 year payout guarantee to the last survivor (wife or myself), or to my daughter should we both depart before then. Together with our Social Security, this provides an adequate guaranteed annual income for life, even if we both end up incapacitated. (We're both in excellent health, but you never know.)

It's basically longevity insurance, and I bought it for that purpose (like any other kind of insurance). TIAA is as rock solid as anything can be in this world.

As others have noted, every extra bell or whistle on an annuity costs you, so keep it simple. Same goes for the "variable" annuities. I wasn't buying this as an investment vehicle, and so I didn't want or need that "feature."

With the other two-thirds (plus my non-TIAA investments), we can do what we want ... which is exactly what we're doing.
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MisterF,

I’ve been following your posts over the past couple of years about the decision whether or not to convert some of your TIAA funds to annuities. I am looking at that same decision and a number of variables of my situation echo yours.

Part of the conversation has been about how to assess the relative expense of annuities. And of course, compared to what? I believe that one thing relevant to the discussion, which I don’t think has surfaced as yet, is the fact that commonly TIAA retirement assets are divided into “ guaranteed/traditional” and something else I can never remember the name of. It wasn’t clear to me which type you were going to or did convert to annuities. (As you know, the guarranteed/traditional accounts can only be drawn down over a minimum of 10 years. I believe these guaranteed funds haven’t paid more than 4 1/2% return in their history and the minimum return promised is more or less 3%.) So, these funds are somewhat similar to annuities to start with.The single premium annuities comparisons that I have been able to locate assume that you have a pot of money to invest at your discretion.

My question is have you come accross tools/calculators/opinions that take these quirks of tiaa into account when trying to guage expense of these products?

Thanks,
gwh
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gwh, *all* of my TIAA money was in the "traditional" until 5 years before I retired. (I started in the mid-1970s, back in the days of double-digit returns on bonds. Over that long period, the returns ended up comparing favorably with equities, but with minimal risk.) In any event, I started moving funds out of the traditional in annual installments until the traditional account equalled the amount of the SPIA I wished to purchase, and then I bought the SPIA.

I have to admit: I like seeing a "paycheck" deposited in my bank account each month, knowing that it will continue for my wife should I be the first to croak (which I probably will be).

I found it more difficult to get simple things done at TIAA than at Schwab (where I have other accounts). That probably varies depending upon your TIAA advisor. For example, my wife and I opened up and funded Roth accounts at Schwab in a matter of minutes. The same process took weeks at TIAA.

My TIAA advisor also recommended higher-fee TIAA mutual funds/ETFs rather than the lower-fee virtually identical Vanguard funds that I selected instead (e.g., Total US Equities, Total International Equities). At some point, I may move the remaining accounts out of TIAA entirely, probably to Schwab -- although I prefer not having all my eggs in one basket.
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My question is have you come accross tools/calculators/opinions that take these quirks of tiaa into account when trying to guage expense of these products?

Oh, right. Sorry, no.
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Mr. fungi,

Thanks for getting back on the TIAA/annuity questions. That steady income stream would be a comfort and I’m sure it will be no surprise to hear that I’ve had the same difficulties interfacing with TIAA as you described for you. In fact, it’s one of the considerations for the annuity conversion. My fantasy being that after the conversion I wouldn’t have to deal with them much.

Anyway, I’ve done hand calculations to get at the “cost“ of these annuity conversions and bank rate.com has a calculator that I think is relevant as well. But it’s always nice to have a double or triple check on ones assumptions and calculations because as they say, this is one of those decisions that more or less locked in cement.

GWH
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My fantasy being that after the conversion I wouldn’t have to deal with them much.

Yup. Mine, too.

In defense (sort of) of TIAA:

1) I now recall checking their annuities relative to those of competitors and finding that TIAA's are a very good value (relatively speaking) and that TIAA is top-rated in terms of safety.

2) Ever since the annuity started (which involved some needless complications), the money has been showing up in my bank account on time every month; and thus your fantasy and mine appears to be coming true.
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