Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
I'm almost 81, so I'm long retired. I'm risk averse. Barring a severe hyperinflation (my father experienced the post-WW1 German experience) I should have enough capital to pay my expenses for the rest of my life span. I was pleased enough with the return from Treasury Direct until that disappeared.

An 'advisor' at my mutual fund company suggests that a 3-year NY Life single payment deferred income annuity will pay 1.7% whereas a 3 year CD will pay only 0.7%. I've learned that statements like this one are bound by a Catch-22. I can't see it. What am I missing? 1/1.7 is almost 60%, suggesting considerable risk.

Thanks,
BaumgrenzeJohn
Print the post Back To Top
No. of Recommendations: 0
I looked at these from NYLife a few years back. Went with a Bank deal instead. Just read the contract carefully. Giving NYLife a chunk of money for 3 years at 1.7% is ok for our current economics. But are there any conditions. Can NY Life get out of paying if certain things go badly in the markets? Are there any conditions that could cause a loss of capital or a return of capital with no gains. Some deals like these are contingent on external index's. Also these are not insured by FDIC.

I would ask if this is an ongoing option from NYLife. Do they offer different terms and interest based on how long you want to invest.

NYLife is a solid company, but they may be feeling pressure from their older Life Policies which are facing more redemptions or cash-outs as clients age.
Print the post Back To Top
No. of Recommendations: 10
After a career working in financial planning I've learned the following absolute immutable truths....

Insurance companies do NOT take risks that will benefit you and there is no way they are going to pay you more than the market will at a given level of risk. If they did, they'd go out of business.

What their products offer is convenience....expensive convenience.

BruceM
Print the post Back To Top
No. of Recommendations: 2
In other words if companies didn’t expect to make a profit off of it they wouldn’t be trying so hard to sell it to you.

Not just insurance companies. Also extended warranties and the like.

Just bought a car. For only $100/month I could have covered all mechanical parts and dings. 100x60 months = $6,000.
Print the post Back To Top
No. of Recommendations: 0
Thank you all for your replies. You confirmed my suspicions and increased my understanding for them.

Stay safe,
baumgrenze
Print the post Back To Top
No. of Recommendations: 4
Never have understood why people buy annuities. We've had AT&T stock for years. Pays a nice 5% or more every year, with quarterly payments, and not apt to go anywhere. I also like BGS (B&G Foods), which pays that and more.

There are also Fidelity (and other) mutual funds that pay very dependable dividends. You can always sell all or parts of these, or add more.

So why tie up money in an annuity? Wondering...

Vermonter
Print the post Back To Top
No. of Recommendations: 2
Never have understood why people buy annuities.

First define 'annuity'

Investopedia...and the classical definition....define an 'annuity' as a series of equal payments made at specific intervals over a specified period of time. This definition was later modified to include accounts with 'a promise to pay' at a future date from a retirement savings plan. Eventually, the term 'annuity' encompassed any savings plan offered by an insurer that could eventually be annuitized.

Using the strict definition of a series of equal payments over one's life expectancy through a contract with an insurer, this is the simplest form and is often used by retirees to provide long term reliable income from an initial lump sum payment. I have recommended these in the past to those retirees I determined have an 'annuity personality'. Now, I don't mean this in a patronizing or derogatory way, just a factual one. As an example, my oldest sister, when her husband died, needed reliable income from the life insurance she received. She had zero....that's ZERO! interest in investing in any form....she just wanted a deposit in her checking account at the beginning of each month. So I sat down with her and we looked through several direct-purchase life annuity options and finally selected for her the best fit. This is something I would NEVER do for myself, but it worked well for her.

As to savings vehicles, this is truly non-understandable. Why would anyone pay ongoing annual mortality expense fees on a savings plan where there is no obligation to eventually annuitize it? Why pay ANY on-going charges such as sub-account fees, rider fees, Admin/overhead fees or Fiduciary fees, along with (usually) much higher mutual fund fees than can be had just about anywhere else?

BruceM
Print the post Back To Top
No. of Recommendations: 0
RV: Never have understood why people buy annuities. We've had AT&T stock for years. Pays a nice 5% or more every year, with quarterly payments, and not apt to go anywhere. I also like BGS (B&G Foods), which pays that and more.

My annuity story goes like this: At one time in my career (Maybe 30 years ago) I changed jobs. There was an after tax savings plan which had about $40K. I asked our advisor (Read as mutual fund salesman) what to do with it and he suggested we buy a variable annuity. with Lincoln Financial Group. (The annuity is called American Legacy II) So I plunked down my $40K and let it soak. His advice was not to annuitize it, just let it soak. The money was invested in a number of portfolios - one was growth based, one income based and one was a mixture of growth and income. After while they wanted to send me money every month, so we started getting $480 a month of income. By now the cash value is $117K. We have enjoyed $63K of withdrawals, and the current value is $120K.

So, long story short, we are satisfied. My wife just turned 65 (She is the annuitant) and they want us to start annuitizing it. We are still trying to decide how to handle it. We don't need any more income right now, so we went back to our advisor. He is working up a plan for us. Meanwhile we get $480 a month.

Decisions, decisions.

CNC
Print the post Back To Top
No. of Recommendations: 1
"We've had AT&T stock for years. Pays a nice 5% or more every year, with quarterly payments, and not apt to go anywhere."

If you had a 300 shares of AT&T back in the 1960s, it paid a nice dividend. Ma Bell.


Then divestiture hit. Suddenly you wound up with , what, 8 new stocks - the Baby Bells and Bell Labs. Then from that, over the next decades, the Baby Bells spun off wireless business and white pages. The white pages stocks headed to zero. Bell Labs stock - went down, merged with Alcatel I think, they went BK along with most of the white page stocks.

US West hit the skids....

then the Baby Bells consolidate - at first there were 7(?) then it's down to a couple, then AT&T gobbles some of them up......

So...owning AT&T for 50 years would NOT have been a great idea. Half the spin offs went BK or down to single digits.

Things like Verizon spun off Frontier (a loser).....for home phone service and FIOS in some markets.

Yeah, AT&T and Verizon wireless doing great.... but half the other stuff isn't even around any longer..and you would have wound up owning it too...


t.
Print the post Back To Top
No. of Recommendations: 6
CNC

Now, don't misunderstand me, if you are happy with your arrangement, then that is what really matters. And 30 years ago, I'm sure it was the right thing to do.

But let's do a little figuring just for comparison.

If you bought the DA 30 years ago, let's assume that's 1990. And at $480 per month for a total withdrawal of $63,000, that figures almost exactly to 11 years, beginning 2011, or $5,760/yr.

So I set up an Excel SS showing this initial invested amount of $40,000, with the $5,760 withdrawn at the beginning of each year beginning 2011. The $40,000 were it invested in the Vanguard S&P 500 Index fund VFINX January 1, 1990 and all dividends reinvested at the end of each year, here is how it would look today:

1990 Beginning Value: $40,000
Total withdrawals $63,360
Balance of S&P 500 Fund (A/O Feb 1, 2021): $669,313

Current balance of DA: $120,000

Difference: $549,313

However, because this is a taxable account, this does not take into account taxes on any realized gains (dividends and capital gains) on the S&P 500 fund over this period. So to allow for that, if I use the long term median yield on the S&P 500 fund of 1.84% , which if the added tax was paid from cash before reinvested, would be lower than this amount. Assuming your Fed + State rate is 25%, this lowers the annual stated total return rate by 1.84 X .25 = .46%. So reducing each annual total return by this amount (note: I didn't include any capital gains as these would be unusual in an index fund), I get a value today of $570.375. However, for comparison to this, the $120,000 balance would also have to reduced for tax, as it is currently tax deferred. This would adjust to about $90,000....and this does not take into account the favorable tax treatment of the VFINX qualified dividends since 2003 over all DA distributions which will be ordinary income until all earnings are out.

In either case, the difference between what the insurer paid you in the DA net of taxes and what you would have gotten by just putting that initial amount in Vanguard's S&P 500 index fund and paying tax on distributions each year, is substantial. The difference is what you paid Lincoln Financial group for the DA.

Again, I'm not saying you should not have done what you did....only to point out there is a high cost for the ease and convenience of using an insurance company product.

https://finance.yahoo.com/quote/VFINX/performance/

BruceM
Print the post Back To Top
No. of Recommendations: 1
Again, I'm not saying you should not have done what you did....only to point out there is a high cost for the ease and convenience of using an insurance company product.

https://finance.yahoo.com/quote/VFINX/performance/

BruceM


Thanks for doing the math. Very convincing.

CNC
Print the post Back To Top
No. of Recommendations: 0
It is always hard to know the exact product someone is talking about, especially with annuities. Over the last 2 years I've bought two 3-yr annuities. They are paying me around 2.4% per year. One will come due when I turn 60 and the other when I'm 61.

I'm hoping to be retired around 60 so these will help cover my expenses for my first 3-5 years of retirement (along with a pension).

2.4% isn't great but with current CD rates it looked good. Since I don't invest much in bonds my money tends to be either in the stock market or sitting in cash waiting for opportunities to invest.

The amounts fit within the state insurance limits (not that I'm ever 100% sold on things being guaranteed) so that provides some security.

Some refer to these as MYGA (multi-year guaranteed annuity). Could I make more in the market or with a 60/40 portfolio? Maybe but I didn't see it worth taking that risk. The economy and the market are not particularly stable IMO.

As far as "catch" goes I think there are several reasons why many prefer the lower rate of CDs or want to avoid a MYGA:
1. Not insured by FDIC
2. Penalties for early withdrawal (CD penalties are pretty low)
3. More difficult to obtain
4. People are afraid of annuities (in many cases for good reasons)
5. Not all insurance companies are the same (i.e., some are rated A+ and others much lower)

The bogleheads website has had a number of threads over the last few years on the pros/cons of them.

Rich
Print the post Back To Top