Income Ideas: Annuity Vs. Closed-End Funds

Summary

• Annuities are another option for a place to put your hard-earned money and can be almost guaranteed for fixed annuities.
• They offer monthly cash flow in the distribution phase of their life and this can be immediate or deferred.
• Closed-end funds are also an excellent way to produce cash flow - though with investment risk.
• This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »

Photo by Nuthawut Somsuk/iStock via Getty Images

Written by Nick Ackerman, co-produced by Stanford Chemist

Anyone spending enough time in the investing world will eventually come across annuities. It seems like there is an endless possibility of options from annuities, which is similar to investment choices that also have a barrage of choices. Annuities can be immediate or deferred - they can be fixed or variable. They can be single life, joint life or period certain.

They even have more complex fixed-index annuities that can be pegged to an index performance with participation rates and rate caps. Those are starting to get more into the investment field rather than an insurance product, however.

For simplicity's sake, we are going to be taking a look and comparing the more basic annuity. One that most individuals will probably be familiar with and is the fixed lifetime annuity. We will then weigh the pros and cons - then take a look at a basket of income-producing closed-end funds.

Annuity

The main benefit to a lifetime annuity is that the amount of monthly cash flow is basically guaranteed. Essentially there is no investment risk because you aren't investing in anything. That is, with a fixed lifetime annuity you aren't investing anything anyway. That is where a variable annuity can offer more options and where you can invest.

For an example of this, we can use Charles Schwab's "Income Annuity Estimator." We will use the single life only option, for a male individual that is 61 years old. We also are using a $100,000 investment and that we live in Michigan (my home state.) A 61-year-old means they are retiring early if we are to use the Social Security age of 67 for individuals born in 1960 or later.

Charles shows us that the monthly income would be estimated to be $452. This amount is if you select that there is no death benefit. Which is another important step to decide. In this case, with a smaller amount of only $100K - we are really only looking at $417 estimated for a single life with a cash refund. This means your beneficiaries will receive whatever portion of the cash wasn't paid out during your life - if any.

If we use the $452 amount that works out to an annual cash flow of $5,424. or around a 5.42% annually based on your $100K principal. It is important to note that this isn't an interest rate or a rate of return as it includes, essentially, your principal is paid back to you.

The one important thing here is that annuities are insurance products. They want you to give them money, and it is in their benefit to pay you as little as possible back. If you make a return, that means they have lost money. Though they still have to remain competitive due to other insurance companies also wanting your hard-earned capital. (Source - Author)

From the above, we are looking at the total amount paid out depending on the lifespan this individual would have lived. Remember, we put $100K in and there is no beneficiary benefit upon death. 17 years is included because the average U.S. life expectancy is 78.80 years. Though this was lower for individuals born in earlier years and males also live shorter lives.

However, again trying to illustrate the main point here this is sufficient. In fact, this will help out the annuity side considering that average life expectancies have now come up compared to those born in 1960.

What we can see is that even after 17 years that original $100K hasn't been recouped. Therefore, to see that principal come back and "earn" something you have to be around longer than the average life expectancy based on these figures. If you are incredibly unfortunate, you could walk away with nothing in return if you pass away before the first deposit is received. Hence, 0 years showing $0.

For our illustration above, let's say you do make it 25 years. That puts you at 86 years old which is a real possibility for most individuals. However, for all those years you have only "earned" $35,600 on your investment. That might not sound terrible when you figure that is a 35.6% return. Though annualized over 25 years you are looking at a return of ~1.42%.

Now let's run the figures again. However, this time we are going to say that we were born in 1955, putting us at 66 years old. This time, we are going to see a higher monthly estimate. The rest has remained the same - $100K, single life, immediate annuity and a Michigan resident.

This time, since the insurance company is anticipating you'll pass away sooner than the 61-year-old - they'll pay you a monthly amount of $506. This works out to $6,072 annually.

(Source - Author)

Once again we see that even if you live to the average life expectancy of a U.S. resident born today, you would not recoup your initial investment by that age. Though after 15 years you would. That is opposed to the previous 18.44 years you would have had to live in our previous example.

For ladies, it is worse since they are expected to live longer. If we run the same numbers that we did in our first example, Schwab says that a single life-only annuity will pay us $430 per month or $5,160 annually. Not a significant difference with the $100K example, but larger amounts would be more and more noticeable the higher it goes. It is also noticeable the further out the number of years goes.

(Source - Author)

There are many different types of annuities available out there. The above we went through detailed on immediate single life annuity. However, there are deferred fixed annuities available as well. They pay a fixed rate on the amount invested and can be set up for different periods of time. You don't receive income from these as it is "deferred." This can be an option for some individuals that want these guaranteed rates that are higher than CDs and high yield savings are offering lately. At this time, it seems like the going rate is around 3%. From what we will explore below, that is still quite a bit lower than what an investment portfolio would have been able to produce.

Closed-End Funds

Now, our goal is to come up with a portfolio that can beat what "returns" annuities can offer. This is actually quite easy, and we can do so by collecting a much higher monthly cash flow as well. The difficulty comes in selecting funds that don't have a lot of volatility.

The biggest difference here is going to be that CEFs are investments. They can and some will definitely lose money. So what we are going to be looking for primarily are funds that offer lower leverage. Though including some PIMCO names as they have offered "annuity-like" income streams with how steady their distributions have been historically on several of their funds.

We also know that CEFs can be more volatile overall due to premium/discount mechanics. The fact that the market price of the CEF often doesn't trade at the NAV price of the underlying investments.

For our CEF portfolio that we are going to construct we are going to be using Portfolio Visualizer. This will only be a backtest. Again, stressing that there is obviously investment risk in CEFs, whereas a single-life annuity is not going to have that risk.

We will once again be using the $100K investment amount and select 10 funds that have consistent distributions historically.

The portfolio that I came up with for example I made sure to all have inception dates pre-2007/08. Of course, this was a critical time and will give us our maximum drawdown for the portfolio.

(Source - Portfolio Visualizer)

Here is the portfolio and I went with an equal-weight across 10 different funds. I sorted them so the first 5 have no or minimal leverage. The bottom 5 funds do have leverage but have been consistent dividend payers since their inception.

The maximum drawdown does come in the year 2008, as expected. For last year's market selloff in 2020, the maximum drawdown came to around 20%.

(Source - Portfolio Visualizer)

The chart goes back as far as PIMCO Income Opportunity Fund's (PKO) inception in 2007. For the annualized returns, this portfolio has fared well. Though this was also in a period of a mostly bull market for equities and bonds too, so that should be factored. The truth is no one knows for an absolute what returns will be like going forward.

(Source - Portfolio Visualizer)

With this portfolio, we are leaning hard into a U.S. allocation of large-cap type investments according to the breakdown. We can see below that the cash amount is well into the negative figures assuming the leverage on the portfolio we constructed.

(Source - Portfolio Visualizer)

The sector breakdown of the equity portion of the portfolio does put us heaviest in healthcare. That is thanks to the BlackRock Health Sciences (BME) holding. A solid holding that has never cut its distribution since its inception in 2005.

We also have utilities at a fairly large allocation. This would be due to the also very solid fund; Reaves Utility Income Fund (UTG). That fund has likewise never cut its distribution since its inception either.

Tech and communication services are also carrying a meaningful exposure as well. This would be through the option-based equity funds; Eaton Vance Tax-Managed Diversified Equity Income (ETY) and Eaton Vance Tax-Managed Buy-Write Opportunity (ETV).

(Source - Portfolio Visualizer)

Finally, we have the breakdown of credit quality for the fixed-income portion of the portfolio. We see that it is pretty fairly split between investment grade and "junk." Utilizing funds like BlackRock Income Trust (BKT) and their agency MBS is going to give us quite a bit of exposure to AAA-rated securities.

On the opposite side of the credit quality spectrum, we have the AllianceBernstein Global High Income Fund (AWF) and Western High Income Opportunity (HIO). Though AWF is high-yield, the fund doesn't utilize a lot of leverage. HIO utilizes no leverage.

BlackRock Credit Allocation Income Trust (BTZ) is also going to give us a pretty healthy mixture of various credit qualities up and down the spectrum as well. That is along with funds like PIMCO Income Opportunity (PKO) and PIMCO Corporate & Income Strategies (PCN) that also offer a multi-sector bond exposure. Though the PIMCO funds have never cut their distributions, they carry a large amount of leverage and that is worth noting.

(Source - Portfolio Visualizer)

Just as the investments of these funds fluctuate due to the value of the underlying portfolios - income also can fluctuate over the years. While trying to put together this mini portfolio that could take on the likes of an annuity, there was still some variance over the years. Specifically tied to the 2008 events that rocked several of these funds as it took the markets a while to recover more broadly as well. This is especially true as many of these CEFs have paid out year-end special dividends as well. That caused even more fluctuation - though should be seen as a positive.

For comparing the distributions paid now versus then, I am looking at what $10k invested on 01/01/2008 would have translated into for each of the funds. Then comparing with what the funds paid out last year on the same number of shares as if an investor had bought these funds in 2008 and then held them all the way through last year. I hope this helps make a fair comparison of what the funds would have been providing in cash flow for a period of time of over a decade.

Ticker	Shares	Distribution Amount 2008	Distribution Total	Distribution Amount 2020	Distribution Total
ETY	599	$1.85	$1,108.15	$1.01	$605.95
BME	370	$1.71	$632.22	$2.40	$888.00
HIO	1650	$0.58	$950.40	$0.39	$641.85
AWF	793	$1.42	$1,128.44	$0.79	$623.30
ETV	587	$1.89	$1,106.85	$1.33	$780.48
BKT	1642	$0.29	$472.90	$0.41	$677.82
BTZ	573	$1.67	$954.05	$1.01	$576.90
UTG	400	$1.48	$590.40	$2.16	$864.00
PKO	399	$2.12	$847.48	$2.28	$909.72
PCN	759	$1.28	$967.73	$1.35	$1,024.65
Total		$14.27	$8,758.60	$13.13	$7,592.66

Click to enlarge

(Source - CEFConnect, Seeking Alpha - Author Compiled)

What we can see is that income from 2008 to 2009 would have declined. The annual cash flow would have been down around 13.3% from 2008 to 2020. In which case, that would not have been the case if an individual went with an annuity.

Despite this, we would have still netted positive returns as we explored above with the annualized return figures. In fact, it wouldn't have taken much time after 2008 for the portfolio we modeled to recoup those losses and start making investor returns.

(Source - Portfolio Visualizer)

That is in contrast to an annuity, where you don't ultimately end up seeing a return for many years down the road - if you live long enough to get there.

Conclusion

At first, it might seem a bit unusual to try to compare annuities and closed-end funds. Since they are quite different on the surface. One is just about guaranteed monthly cash flow and the other is an investment. However, both can be utilized to achieve the same thing. That is to provide monthly income to an investor.

With annuities, you can't say absolutely guaranteed because it could be possible that the company offering you the annuity fails. States step up and fill some of the losses, though not in an unlimited amount.

Even though I find investing in closed-end funds more preferable, the purpose of this article wasn't necessarily to sway an individual one way or another. It was to lay out the figures using estimates and historical data that we could dig up. An individual looking at annuities is going to have the benefit of monthly cash flow that is unchanged for their life if they choose that option.

An investor in closed-end funds - while taking more risks - will have a much better chance of earning a return over a period of time. Whereas an annuity these days you might not ever see a return depending on your life span. Though even in our example of solid funds the income had declined from 2008 to 2020.

That decline could have easily been offset if an investor would have reinvested even a small portion of their income stream back into this portfolio. I could have even just cherry-picked funds I knew that never cut their distributions since then and only included those. I wanted to come up with a type of diversified portfolio that one might put together in today's environment though. Not something that could just be handcrafted with historical information.

Analyst’s Disclosure: I am/we are long BME, PKO, UTG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article was originally published for members of the CEF/ETF Income Laboratory on March 17th, 2021.

Comments

[scarp1952]

Nick, what you describe is not unusual. It is exactly what I did with a lump sum offer from a previous employer many years past. I could either get an annuity payment for life or the lump sum. I did this at age 62. I accepted the lump sum and put it in 6 different CEF funds. The initial payout of distributions was about 80.00 per month less than the offered annuity payment. I continued to work for 3 more years and let the distributions drip. When I retired the distribution payment exceeded the offered annuity by over 250 per month. I was content with that. I do receive a pension from the employer where I retired and SS so that did factor into my situation. I now draw this “CEF” pension and am happy.

[Nick Ackerman]

@scarp1952 that is fantastic to hear! Thank you for sharing!

[growtheretirement]

If you want straight talk on Annuities I suggest Stan Haithcock. You can find him on a google search or his Videos on YouTube. He is an honest educator on Annuities, and he is in the business. Personally, I would never purchase a fixed index Annuity, the premiums are huge, and I can do better on my own. But, an Immediate Annuity is a different story. If the money comes out of an IRA, then you are reducing your taxable liability on that IRA. There are no fees with such an Annuity.

[Nick Ackerman]

@growtheretirement thanks for your thoughts!

[hueyuh1]

My relative traded his annuity in for a Midland National annuity when he was 76. The fast talking salesman, I want to assume, probably didn't tell him about the 20 year no withdrawal without a penalty clause. At least my relative came out very good in it when Midland was sued for the practice of selling 20 year contracts to seniors.

Having an annuity in an IRA makes no sense to me, unless that's the only place your cash is, since they are both tax free until withdrawal.

His policy, I'm sure there are other variations, let him invest in multiple stock indexes.
1. Gains, losses are not calendar years based but based on the anniversary of your policy.
2. Formulas!!! For example, the index goes up 1000 points but your gain does not. Why? a combination of gotchas in his case:

a. Take the Index % Gain (our case 1 year 26%) 2012-2013
b. Deduct the INDEX CAP, 12% (from you contract)
c. Deduct the PARTICIPATION RATE (whatever that is) 2.85%
And that 26% gain you had is now down to 9%.

The bummer side? You didn't make what you thought you were making. The plus side? If the index would have gone down 26% you would not have lost the cash.
The annuity salesman was still happy though.

[Nick Ackerman]

@hueyuh1 thank you for sharing! That is terrible with what that salesman did - and the whole company as well! Glad they were sued and hope they quit doing that.

Indeed - that is an index annuity. It can make some sense, for certain investors. I was never too interested personally in those types of arrangements.

[tjhoppe]

Here is an alternate option for the $100k example. As of 2019, AM Best A rated AIG is the #1 writer of annuities by direct premiums written, with about 7% market share. One could invest the $100k in AIG/PRA 5.85% perpetual preferred. After the next ex-dividend date in May the issue could probably be purchased for about $26.50 per share for a yield of 5.50% which would generate a similar monthly cash amount while keeping your principle in tact.

[Nick Ackerman]

@tjhoppe excellent potential alternative! Of course, still a market risk if you are the type of investor that panics and wants to sell in crashes. Though the chances of that going bust aren't significant - of course, with being A-rated and all. Great find for a more conservative investor!

[Mili21]

@Nick Ackerman
Chances of going bust are not there especially govt bail out schemes are always at play.
But can't trust AIG, which was terribly pushed during 2008/9 GFC which exposed their weaknesses as well.
Just a thought....

[Fred Swartz]

@Mili21
AIG looks ok now, but in 2008 it was doomed and had to be given a $150 BILLION US government bailout. In 2017 it was removed from the systemic risks companies so may not get a bailout in the future if something bad happens again. It's now half the size it was before 2008. Not sure what happened to their preferred back then. Good investment - perhaps; riskless - no.

[tjhoppe]

Annuities are for lazy ignorant losers......

[Fred Swartz]

@tjhoppe
Actually, annuities are a very good choice for some. Let's rule out those who wish to pass on that investment money as a legacy to family, charities, etc. This eliminates many (most?) people.

Two obvious categories annuities are suitable for are:
(2) Those who are extremely risk averse. Choose an annuity from a good insurance company. With a high rated insurance company and state insurance, there is basically no risk. When the best insurance companies and states fail, it's hard to imagine which investments, not to speak of your welfare, would be safe.
(3) Those who don't have the skills or ability to to invest.

Certainly SeekingAlpha members wouldn't be candidates for annuities? There are several reasons they (we) might be.

It might fit an investment plan to have a certain guaranteed annuity income, much like your Social Security (annuity) income so you can sleep well at night.

Another aspect is incompetence, and yes, this even applies to SeekingAlpha members. Statistically speaking 25% of people over 65 will be at least mildly cognitively impaired and 10% will become demented. A very wealthy and competent investor friend of my sister became demented. He was living alone and by the time distant relatives intervened, the money was gone. Where? He couldn't tell them - swindled, bad investments, forgotten in some tax haven, ...? They couldn't even find the accounts. There are plenty of people who will manage your money, as Fidelity has reminded me, but annuities seem like one plausible choice.

[Nick Ackerman]

@tjhoppe I know you are quite an active commenter and reader - always appreciate the input so thank you! However, this was a bit out of line - hopefully just a bad day?...

[tjhoppe]

@Nick Ackerman @Fred Swartz - OK I withdraw my rather harsh statement. I will just add that anyone considering purchasing an annuity, please take the time to educate yourself....please review Ken Fisher's website at the very least.

[smurf]

A long time SA author, Regarded Solutions, once said that an annuity is an investment where you give an insurance company a big chunk of money, they give it back to you in little pieces, and keep the rest when you die. To be fair, there are better annuity plans available now.

I inherited one from my mother...she had bought one a long time ago in my name. It has a floor of 3% interest/year which floats higher as rates rise. Not too shabby these days where banks are almost charging the investor for CDs. I've left it alone and it's now a tidy sum. I call it my 'nursing home' money.

[Nick Ackerman]

@smurf not a bad deal then - thank you for sharing!

[Tulip hoard]

Nick thanks again for another fine piece. I have owned AWF in my IRA for many years. It's been looking toppy here in the last couple months like most of my other positions noting it"s traditional discount to NAV (i.e. 8-10 percent), however I earn more than twice the yield that I get in my traditional annuity in my 403b of course both accounts are tax free in real time. When the unit price takes a hit like it did last year I simply add to my position so that's where the Juice or capital appreciation comes in which in the long run improves my overall performance that much more as compared to my annuity.

[Nick Ackerman]

@Tulip hoard thank you for sharing! Glad to hear you've been managing successfully!

[Viking Investments]

Interesting article, how many CEF every go back to their IPO price?

[Nick Ackerman]

@Viking Investments I don't have a full list. Though the last time I was digging into it, there was more than most would probably think. Then that also depends on how far back you want to go. It is much easier for a fund to be over inception price if they launched a couple of years ago.

I went back and dug up the old comment where I had talked about this in the past.

"I believe there are more than people realize. They typically are lower-yielding or less-held ones, to your point! I won't include the whole list as I would have to decipher through it further first. However, here are several:

BST, BSTZ, BME, BMEZ, GAM, CET, ACV, CHN, BCV, ECF, TWN, BTO, CCD, NIE, STK, UTG, UTF, BUI and [TY and ADX (probably but they were incepted or convert to CEFs back in 1929...)]
As I said, not the whole list. You get the idea though! There are probably 50 or so that are above their inception price now. Then beyond that, there are plenty more like PKO that after a decade is essentially flat. Inception NAV of $23.83 and NAV now is $23.69 - about a 1 cent decline for each year since inception. I can live with that!"

[Viking Investments]

@Nick Ackerman Thanks Nick, that has been one of the issues that has left me out of CEF. I have bought a few and sold them, and just a bit tough for me. However, I will relook at the list you put together, and I appreciate you doing this.

[Nick Ackerman]

@Viking Investments thank you - let me know if you see anything interesting that I haven't covered before. I'm happy to take suggestions!

[61yanks]

A single premium immediate annuity provides a hedge against living too long. As a result, I think your example would be more helpful by using age 71 instead of 61 as the annuity start date.

[Nick Ackerman]

@61yanks thank you for the input! Always appreciative of other thoughts.

[Fred Swartz]

@61yanks
Single life immediate annuity for Michigan male starting at age 71 would pay 7.1% for life. Not too bad for something that is essentially risk free. And if you wait until age 78, it's almost 9.9%, which beats my current high income portfolio which returns about 8%.

This info is from Nick's link to the Schwab Income Annuity Estimator www.schwab.com/...

[Nick Ackerman]

@Fred Swartz thank you for looking into those figures a bit more. Though the increased payout rates are due to the even greater chance that the insurance companies will make a profit on the contract. I appreciate you bringing a lot of your input here! It is always good to see both sides of the story!

[growtheretirement]

An Annuity is a way to turn risk over to the insurance company. You can structure an Immediate Annuity anyway you want. It is a return of capital, of course, but so can be a CEF. Try imagining that you retired in 2007 or 2008 and had your money in the above Portfolio when the crash happened. How would you have responded to it. I like the idea of withdrawing $135,000 out of my IRA and into an Annuity. It protects that money from counting towards the RMD, thus lowering my taxes. It also allows me to be a little more aggressive with the remainder of the IRA, since I have the guaranteed income coming from the Annuity.

[Nick Ackerman]

@growtheretirement indeed! That is why I only included funds that could show 2008's results. Though hindsight is always hard to say how someone would react.

[hawkeyec]

@Nick Ackerman

Good comparison. I'm in both camps. I currently have five annuities, one being my SS (certainly an annuity). My wife passed a year or so ago so no more SS from her. The other four annuities were two-life annuities with no COLA specified, though two of the annuities (from TIAA) have voluntarily increased their payouts four times. The other two are also two-life immediate fixed annuities purchased with my wife's and my IRAs (Voya was the highest bidder for this money). The payment I get now from these two smaller plans just matches my net SS ($450/mo has been removed for Medicare). As two-life contracts, when my wife passed her payments immediately came to me. Together, all of this will cover me until my passing. I had also put ten years certain clauses in the four private annuities so If my wife and I had both died in the first ten years my daughter would have gotten a settlement. These features in our annuities did reduce the monthly payments compared to each being for a single life but those tweaks made certain the money would pay both of us for all of both of our lives

Just a bit of a comment on the article here. If one buys a fixed annuity and lives beyond his/her expected lifetime, it does not strictly mean the insurance company "loses money." Life insurance liabilities and payouts are carefully managed by company actuaries to determine premiums that will collectively cover all expected payouts over the spectrum of expectations for the company's covered lives. Life companies, good ones at least, match investments and liabilities as they are created. For example, there are payments in my TIAA annuity that were permanently matched to a five year tranche of investments earning in excess of nine percent. The company "wins" whenever its actuaries have designed a premium structure that properly balances all expected liabilities and returns, backed by regulatory reserves. If the actuarial tables are correct, the company will always see fifty percent of its covered lives exceed expectations and the other half die young. That's essentially the point of life insurance.

All that said, a close reading of any life insurance policy will reflect that the guaranteed rate of return on one's money in such a policy will most likely be from 2-3%. Most policies augment those guaranteed returns with "dividends" that arise from investments at higher rates than the guaranteed rate. The point, of course, is not to use any annuity as a spectacular investment. Its chief benefit is that it is guaranteed to pay as promised. No downdrafts, no guesswork about how much you can take out, and no minimum withdrawal, either. That is built in because your cash is gone into the annuity. For me, my annuities pay all my bills with an income in excess of my best year of salary. Use really good companies for this business and you'll be as safe as anything can be these days.

Now, that stuff is not everything I have. I have nice positions in fifty CEFs, of seven different types plus FI mutual funds, individual stocks and bonds, and other stuff. If I calculate the present value of my annuities, including SS, as fixed income investments (as suggested by John Bogle), their total value would represent less than 20% of my net worth. However, in spite of the other stuff and the freedom it affords me, it's the annuities I rely on for piece of mind. I don't care all that much about what they earn, only that they show up on the same day every month, in the same amount, until I'm gone.

[jasonjones]

@hawkeyec I think you did well. I have my life insurance with TIAA. Great company for stability. When interest rates were normal it was a good move. Now? Not so much. Good ideas about tax reduction for your RMD. These money printing by both political parties is killing us.

[Nick Ackerman]

@hawkeyec you sound like you are set up really well! Thank you for all of your lengthy input here.

[Jubal04]

I have both. Back in 2011 I moved about a third of the funds in my old 401K into an IRA and purchased an annuity. It was guaranteed to grow at 6% until I activated it. I don't need the $13,700 a year income, so I re-invest it,,,,,,in the IRA. It also has a death benefit and cash surrender value.

The other 2/3rds of my old 401K are about 90% invested in CEFs. I somehow stumbled across BME in 2012. I currently have around 20 different CEFs in that IRA. They average about 7.5% distributions each year. The other 10% varies.

[Nick Ackerman]

@Jubal04 sounds like it has been working out in your situation! I'm glad to hear that, and thank you for taking the time to provide your input too.

[2live4divs]

@Jubal04 hi, which annuity did you purchase with 6% growth?

[Nick Ackerman]

@2live4divs I'd be curious too. Even in 2011 rates were set to target 0%. There wasn't anything I could find today that could match that. I went to several different websites while putting this article together. Though I am not doubting the 6% rate - more curious where that was available!

[Ksaintd]

great points @martinu. peace and peace of mind cannot usually be purchased at any price. for a buck-twenty-five, your friend got a bargain!

[Nick Ackerman]

@Ksaintd indeed!

[martinu]

People ask why buy an annuity? Let me answer this. I don't sell them or invest in them. But a friend tells me his wife wants them to roll over their CD of about $125,000. She makes it clear that she will not sleep at night if he puts it into stocks (in any form). He makes it clear to me in private that his life will be a living hell if he puts it in stocks (which he knows nothing about) and they go down. At the time there was a fixed 5 year annuity paying 3.5% a year from an A rated company. Our state guarantees annuities for up to $250K. He bought it. His wife is happy, he is happy and you just can't put a price on this. :-)

[Nick Ackerman]

@martinu excellent point! An investor needs to do what is right for their own situation!

[tomp1111]

Thanks for a great article, Nick!

I've considered getting an immediate annuity (with say a 2% COLA) from time to time, where the annuity would be sized so that it plus SS would cover monthly expenses. The (perceived) income security of doing that is tempting on the surface, especially during a nasty patch in the market like last Feb/March.

But every time, I've ended up turning away. As it turns out, it is a good deal........for the insurance company. In return, I get less income, and lose control of a portion of my invested assets. Nah...

[Nick Ackerman]

@tomp1111 thank you for sharing your thoughts! Sounds like you made the smarter decision. As long as you can handle some volatility, depending on where you put the cash to work, then over the longer-term you should be rewarded!

[jazznut]

At least with a portfolio of CEFs you still possess and control the money invested, unlike annuities unless you eat the surrender fees to get out.

[Nick Ackerman]

@jazznut exactly! Thank you for sharing your input!

[jasonjones]

Annuities made sense when interest rates were high. It was like locking in a long term bond. Now? Bad idea.

[Nick Ackerman]

@jasonjones well said! Thank you.

[motto5448]

If anyone thinks any annuity is a good deal I have a bridge in Florida to sell the sucker.

[Nick Ackerman]

@motto5448 hah! Indeed. Thank you for sharing your thoughts!

[15714222]

Nice piece. Informative.

Note: never understand why this kind of construction is used> "the fund doesn't utilize a lot of leverage..." Why not say what something is, or does, not what it doesn't? (Is it a guessing game of some kind?) As you do in the immediate following sentence!

[Nick Ackerman]

@15714222 Interesting! Thank you for the feedback. I think because the majority of CEFs utilize leverage - I like the emphasis and draw attention to when a fund doesn't.

[steve fishman]

My wife asks me everyday about our stocks we own with this one word is it guaranteed so a few hundred thousand into an 8% payback makes her happy and the rest in the market she’s happy which makes me happy

[Nick Ackerman]

@steve fishman that is great to hear! It is all about what works for each investor.