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Income Ideas: Annuity Vs. Closed-End Funds

Apr. 04, 2021 1:13 PM ETAWF, BKT, BME, BTZ, ETV, ETY, HIO, PCN, PDI, UTG166 Comments


  • 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 »

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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

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This article was written by

Nick Ackerman profile picture
Nick Ackerman is an avid student of the markets and has been investing in his own accounts for over 14 years. He is a former Financial Advisor and has previously qualified for holding Series 7 and Series 66 licenses. These licenses also specifically qualified him for the role of Registered Investment Adviser (RIA), i.e., he was registered as a fiduciary and could manage assets for a fee and give advice. Since then he has continued with his passion for investing through writing for Seeking Alpha, providing his knowledge, opinions, and insights of the investing world. His specific focus is on closed-end funds as an attractive way to achieve income as well as general financial planning strategies towards achieving one’s long term financial goals.


I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.

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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (166)

scarp1952 profile picture
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 profile picture
@scarp1952 that is fantastic to hear! Thank you for sharing!
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.
hueyuh1 profile picture
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 profile picture
@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 profile picture
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 profile picture
@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 profile picture
@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 profile picture
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 profile picture
Annuities are for lazy ignorant losers......
Fred Swartz profile picture
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 profile picture
@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 profile picture
@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 profile picture
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 profile picture
@smurf not a bad deal then - thank you for sharing!
Tulip hoard profile picture
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 profile picture
@Tulip hoard thank you for sharing! Glad to hear you've been managing successfully!
Viking Investments profile picture
Interesting article, how many CEF every go back to their IPO price?
Nick Ackerman profile picture
@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 profile picture
@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 profile picture
@Viking Investments thank you - let me know if you see anything interesting that I haven't covered before. I'm happy to take suggestions!
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 profile picture
@61yanks thank you for the input! Always appreciative of other thoughts.
Fred Swartz profile picture
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 profile picture
@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!
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 profile picture
@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 profile picture
@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.
@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 profile picture
@hawkeyec you sound like you are set up really well! Thank you for all of your lengthy input here.
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 profile picture
@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 profile picture
@Jubal04 hi, which annuity did you purchase with 6% growth?
Nick Ackerman profile picture
@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!
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!
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 profile picture
@martinu excellent point! An investor needs to do what is right for their own situation!
tomp1111 profile picture
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 profile picture
@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!
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 profile picture
@jazznut exactly! Thank you for sharing your input!
Annuities made sense when interest rates were high. It was like locking in a long term bond. Now? Bad idea.
If anyone thinks any annuity is a good deal I have a bridge in Florida to sell the sucker.
Nick Ackerman profile picture
@motto5448 hah! Indeed. Thank you for sharing your thoughts!
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 profile picture
@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.
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 profile picture
@steve fishman that is great to hear! It is all about what works for each investor.
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