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John A Mitchell profile picture
Nice article. However, the QLAC limit is now $135K, not $125K.
Are there any annuity calculators (spreadsheets) available that let you play around with the initial investment and future cash flows?
Bruce Miller profile picture
Sure...I've built many.

I begin with assumptions, to include...

- Beginning amount

- Initial withdrawal rate

- Expected annual inflation for variable withdrawals

- Expected annual rate of return for variable products

- Expected expense rate

I then show the monthly cash flows and valuations based on these assumptions, going forward X number of years. By using absolute cell addressing to these assumption values, you can then change any of these variables and see the change in the entire sheet.

I don't know where you can find such a spread sheet on a public forum. Just easier, I think, to build it yourself.

Cuip99 profile picture
I have three annuities. I converted two of them into more modern versions with the built in floor. They are option oriented. I have not annuitized any of them. I do not need the income stream at the moment, so I let them grow. They represent less than 10% of my portfolio. I also have some mineral production and real estate holdings (farm property and one rent house). That represents less than 5% of my portfolio. The remainder of my portfolio is in stocks and bonds, mutual funds, ETFs, REITs, MLPs, and CEFs. So I am very diversified.
Namron Damron profile picture
Cuip99, excellent spread of assets. Annuity in this case is OK with me if you can rationalize their costs.
Cuip99 profile picture
Yes, I understand the cost but I have held these since 1994, they have essentially tripled in size. I have an annuity guy I trust, he is an independent operator and offers many products. He says times change, insurance companies want bulk up and make good offers. When they are satisfied, they stop making the good offers. So in a sense it is a very cyclic business.
Jbgoose profile picture
Cuip99 - exactly right about what many know as the rotating 'rider wars'- Every firm has financials that are cyclical, if/when they want to bulk up assets in a particular business line; it's because they can afford the reserve requirements and grow AUM. So they will offer a 'better' product for consumers, at a given moment in time. Usually it's a rider provision or rate they can offer at that moment, and take the pole position a while.

Any honest 'annuity guy' would explain in more simple language; but that's why it's crucially important to shop for the best products and riders. Numerous online resources compare products, and it's part of every FA's compliance and product availability systems.

Sometimes, in an annuity or other product, it can prove better to lay out an extra 5-10 bps in fees for a specific provision rider that happens to provide a best scenario solution, is most beneficial for the particular clients unique circumstances. One must fill out paperwork stating exactly why you have offered a product that has a slightly higher fee or provision and the reason needs to be solid.

Example is GE Genworth LTC... They will honor their contracts...

As an industry vet I educated my mom re: LTC way back. Her policy is of course far better and less expensive than most anything found today. As we live longer than the tables actuaries used just 5/10 yrs back.... as an example. Passed the 'Mom Test' 100% truthfully.
relentlessly awesome profile picture
Is there any way to avoid the annuity commission thereby increasing the yield over time?
Bruce Miller profile picture
Yes. Try Vanguard's life annuity finder for direct purchase, and shop for the best monthly benefit.


relentlessly awesome profile picture
So, there is a 2% transaction fee but that is it - no broker fees?

Do you believe that the commission "savings" are wrapped up into the payments?
Post Flight profile picture
From Vanguard's annuity brochure.

"If you purchase an annuity, you’ll pay a onetime transaction fee of
2% that’s based on your annuity purchase amount. The price you’re quoted includes this onetime fee. It also reflects costs from the issuing insurance company."
To Namron Damron and Calico Cat and all the others who plan to manage their investments to the end, or set them on auto-pilot and never touch them again, I can only say “Sh*t happens.” My father had an MBA from Cal, played chess and walked daily, read philosophy and mathematics, and died at 80 with intermediate-stage Alzheimer’s (we had a brain biopsy to confirm). He spent the last year of his life in a wheelchair in a nursing home. He also had early Parkinson’s and had fallen in assisted living and broken his hip. The hip replacement was successful but he couldn’t remember how to walk with his walker. The annuity he’d had purchased was a POS but it gave him income that couldn’t be as f*d up as the rest of his life.
Namron Damron profile picture
Lawgrrl, s**t happens, agree. Hopefully my plan will cover this possibility and I plan for it accordingly. However, that said, sometimes disasters occur and can't be planned for very well. MBA's from Cal, MIT, or Stanford is no guarantee that someone knows more about investing than another. I will underscore this point I have made along the way: annuities are excellent for someone who can't manage cash flow (and if you don't have it you can't manage it); excellent if someone else is buying it for you (i.e. company, relative, otherwise). If toward the end I can't see or think straight, I will allow my kids/wife make a prudent decision for me. Wife and I have agreements on DPOA for each other.

Only counterpoint here: if someone, or your dad, had invested that lump sum in something other than an annuity, would it have been as good or better than what occurred?
My dad was born in 1930 and was scarred by the Depression. He bought 2 shares of GE in the early 50s through the ESOP, and held them until his death, when they had split to about 400 shares. The only stock he ever owned. Some salesman in the lobby of the late Washington Mutual sold him the annuity when a CD matured. Early surrender fees made it impossible to get out of.
The point of my comment is that we never know what may come. I agree that for those who are inexperienced, timid, or incapacitated, an annuity COULD be a good thing.
I may be one of those "annuity personalities" and have allocated part of my retirement funds to an annuity. With advances in medicine and biology, a number of futurists state that if you can live another 20-30 years, treatments may have advanced to the point we can live at least to 200 (rather than the generally accepted upper limit of 120). Below is a link to a Google Ventures guy who takes the more extreme opinion of 500 years.
Calico Cat profile picture
My observation: people wilt away when they no longer have a useful life. Yes, I do plan to manage my finances straight through to the end, and I'll bet many SA readers are planning the same. I don't like crossword puzzles, they cause me to drink too much coffee. I like growing my money. I like reading, learning, a bit of study, and a bit of homework. I like that I have a very useful life, with plenty of life left to contribute to my family. I don't expect to make 96, but if I do, I will have a set amount of time to check the portfolio, feed the cats, and check out the latest trend in stock investing. I will resist any and all "asstd living" centers, unless, of course, I'm buying stock in same. And I would suggest all seniors stay strong, stay involved, stay busy, stay happy.
fixed annuities have been a life saver for my widowed mother in law , now 96, and in asstd living. she would have otherwise run out of money years ago . generally speaking people in their 80's and up are in no position to monitor investments.... and it can be precarious to leave that responsibility to children or other family members. .
realize too that since pensions have largely disappeared that annuity contracts may come more into play for the next generation. some 401k plans are offering this option,
anyway , just my practical observation .
Bruce Miller profile picture
Having retired from this industry, I've had considerable experience with both deferred and immediate annuities.

As a fee-only planner, I generally never recommended them...and no, its not because it would remove assets under management and my annual AUM fee...its because the client could do much better with a passively managed, asset allocated retirement account. Remember, when the annuitant gives the insurer a pile of money to annuitize, the insurer must go out into the equities and bond market just like anyone else to invest these dollars and the insurer has no more idea what these markets will do in the future than does anyone else and so must asset allocate and hedge to control risk just like any other investment manager...and the insurer has a lot of overhead to pay for. In short, there is no free lunch.

Having said that, I have occasioned clients whom I refer to as "annuity personalities". These are individuals who are overtly risk averse, suspicious of everything and require a great deal of hand-holding. For them, a SPIA can be an appropriate fit.

And FWIW, Wade Phau is a professor at the American College which is funded almost entirely by grants from the insurance industry. I don't think Wade has ever evaluated an insurance product he didn't recommend.

I did an article on annuity vs. a portfolio of preferred stock a few years ago others may be interested in, as I spend a good deal of time describing SPIAs...their pros and cons.


LarryMelman profile picture
If you check the author's SA profile, you'll see that he's never posted a comment here. So don't bother addressing comments to him, because he'lll never see them. SA admits that it simply copies in articles from his external blog, and SA also agrees with me that they really ought to post a notice to that effect, out of respect for us readers. But they don't. Take that for what it's worth.

All that said, annuities are "products" sold on high commissions. I tell my elderly parents this over and over again, but they continue to be suckered in by deceptive (disguised as kindly) sales pitches from a man in a nice suit who tells them what they want to hear. I tell them that their commissions paid for his suit, but they don't get the message. Annuities are therefore Evil.
phaedruscj profile picture
My 88 year old father in law on railroad retirement has also been victimized by an annuity salesman.
Namron Damron profile picture
Dirk, I am not a fan of annuities but you laid out pros and cons very well. Those considering annuities need to understand how much an annuity salesman makes on the sale. If folks understood this and agreed to it, I will be ok with annuities. Annuities can be an effective tool for the right person but I have never found an annuity do better than what a reasonably good investor/saver can do on his own.
ND, will your investment skills still be as sharp at age 85 and 90 as they are today? Will your spouses if you are no longer able?
Namron Damron profile picture
fludolph, by then I will have them on auto pilot and if my skills diminish, I move into a less active/mutual fund environment. If I die, my wife knows what to do.

There is always a way around annuities unless:
-someone else is buying if for you
-you are a complete disaster with saving and managing cash flow
dolson profile picture
Good article. With an annuity you get a return on your money, but you don't get your money (original investment) back. But an annuity does allow one to develop a dependable income stream that maybe more than the income one can generate on their own investments. A former employer of mine offers me the chance to buy 5 more years seniority in their retirement program, which will pay a 7.8% return rate until I die. I might consider doing this with a small part of my savings to "juice" my retirement income just a bit and add some more income security (former employer has a well funded retirement program). But let's face it, financial advisors make a lot of money selling annuities so I'm afraid that in many instances their clients are not being given good advice (would you trust a used car salesman?).
You can also buy a death benefit rider that will return the premium you have paid to your beneficiaries as long as there is some money left within the DIA contract.
Tipswatch profile picture
Good job in explaining a complex subject. Most people are exposed to all sorts of horrible annuities in radio infomercial shows all weekend. Those annuities seem designed to benefit the insurance salesperson first, and the recipient second. Immediate annuities and deferred annuities are never mentioned on those shows, and I assume there's not much profit in them for the 'financial adviser.'

My concern about annuities is how they might expose an investor to higher income taxes in the future, from the flow of income. I don't understand the tax consequences at all. For example, if the initial lump sum comes from taxed money, is the payout then partially tax free? How is that calculated? Also, if it comes from tax-deferred money, does it then reduce the amount subject to RMD, even if the payout won't start for 15 years?

I look forward to reading your articles!
Hi Tipswatch,

I too wonder about the tax questions you raised regarding annuities.

Also, I have a friend who says he has an annuity in his IRA (or is it an IRA in his annuity???). Not sure how that works, or if it could be some sort of solution to some of the concerns you raised. He doesn't know either, so little point in asking him;-)
Jbgoose profile picture
Hey tips watch; One factor to recall before reading the rest is in retirement your tax rate will typically be far lower than your accumulation years. That said... there is a tabled ratio used for taxation, much like a traditional annuity (consult tax expert I must say or IRS.gov for self research).

Only 'qualified' (tax deferred) money typically go towards your RMD calculations, and certain products only allow qualified or non qualified, depending. Some tax advantaged deferred comp plans, 457 per example, have specific rules, or the 'untaxed' gains portion from a non qual annuity, is proportionally taxed. (The gains). No double taxation ....

Simpler way: For RMD, Its the same rules if your money was in a vanguard wrap account if labeled as qualified. Also, there are strict rules in deferred annuity products based on both firm rules & IRS meaning their are financial requirements and safeguards in order to be allowed to purchase a 'deferred income annuity' to start with. It would be very rare that more than 20-25% of assets would be allowed to go into most any such product.

SPIA is different but also subject to strict compliance. The 'smell of death' is a brave phrase to use.. What it means is that any advisor who makes a living from fee based / overall AUM - will lose the lump sum assets to bill, that goes to the deferred annuity, it takes assets away from the advisors overal AUM that provides compensation; compounded over the years. One reason why the commissions are higher, this is intended to help offset the impact of this loss. Also... other Assets normally subject to these fees, when in any annuity product but invested in cash, or perhaps a fixed bucket, are not included in the overall products fee calculation (And yes, thus is contract depending yet... very meaningful to ask about). I will say I found a workaround, that was patched, around 2k where one could DCA from a higher rate promotional DCA bucket, to the cash bucket; DCA account at 6-8% - with no fees ! This strategy made for many Fire sales and upset product development departments across the industry.....

I have worked in the industry for a long time, family runs a record keeping firm that's @ 60 years old. In the Corp world, I was the exec/manager for about 100 client firms, in banking and Independent channels. So on SA boards I'm and evil person who 'sold' annuity products, (although it was any good product, MF, 401k, insurance, I worked on the riders, product development, helped product teams with fund selections and modeling, compliance, legal. More than evil sales! ) .. I worked for the largest of the firms in both fixed and variable products, and small biz insurance. And always honestly like 99.9% of professionals - unlike the stereotypes as described.

Well, responded knowing many may attack me simply because of the topic.... but I hope that helps answer your question. There are many more details based upon everyone with a unique situation. One problem with these products right now - the low rate environment. If you go in today, and rates go up 100 bps in 9 months... well... you would be ticked off at whoever 'sold you' the solution. Perhaps there are products now that will adjust for rates not just inflation- I am not in that world right now so don't know off the tip of my head - but it's Simple to research. I think inflation riders and any protection for rates (MVA or no MVA a prime example) are 2 most crucial factors of any policy. I also think that there are positives and negatives to any financial solution. If you can free your mind with such a product ensuring your retirement & livelihood to sleep at night is a huge one; and all these product can help you be far more aggressive with your remaining assets because you are creating an income stream plus SS and any pensions, if so lucky ... other facts to think about. Best, JB
al_chemyst profile picture
Current retirees might benefit from a DIA that converts in 2033 in order to replace the 20%-25% expected reduction in Soc. Sec. benefits at that time. Just a thought.
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