4 ms·

those annuities are, unfortunately, very expensive in terms of fees paid to the person who sells and manages it, and you are also exposed to credit risk if the

those annuities are, unfortunately, very expensive in terms of fees paid to the person who sells and manages it, and you are also exposed to credit risk if the counterparty goes belly-up during your (long) retirement, which seems crazy now, but it would have seemed crazy to worry about AIG counterparty risk pre-2008.

bradleyjg 10y ago
You may be thinking of variable annuities, which aren't really annuities and are something close to an outright scam. Immediate annuities are a vanilla product offered by almost every life insurance company. There's a competitive market for them and they don't have particularly high embedded fees. That said, they are priced based on a very conservative model--in part because their regulators require them to invest that way--and so you may well be disappointed with what you can get for your money. The only wrinkle is the is inflation rider which can vary in the details from company to company, so is not as easy to compare, and therefore tends to be less of an efficient market (i.e. has fairly high costs for the protection you get). One interesting thing you can do with annuities is buy a deferred annuity, again a fairly vanilla, competitive product. If you set the deferred date to well into your old age (usually 85) and no death benefit you can get a relatively large monthly payout. This then acts as a sort of insurance policy (along with social security) that insures you won't outlive your money and allows you to be more aggressive in spending the rest of it.
- RockyMcNuts 10y ago
  I'd be interested to see a good in-depth analysis. If you get a vanilla annuity, you have significant inflation risk over decades. The guys who bought annuities in e.g. late 60s saw them destroyed by inflation. It's not a great fit for a 30-year retirement. You should be able to get an inflation-adjusted annuity at the TIPS rate plus a credit spread. But right now that TIPS rate is effectively nothing. And I don't know whether the credit spread plus the insurance company tax benefit is a good deal. Packaging e.g. an S&P index fund in an insurance product, so you don't pay taxes until you get payouts, would be a really good idea, but typically insurance companies tack on sales commissions and fees far in excess of e.g. SPY or VFINX. If Fidelity or Vanguard offered that, it would be a good deal, but I hadn't seen that... looking at that Fidelity product now https://www.fidelity.com/annuities/FPRA-variable-annuity/overview https://www.fidelity.com/annuities/FPRA-variable-annuity/ove...
peter303 10y ago
Wrong. Fidelity sells a variable annuity with no penalty other than the federal less-than-five-years penalty. And a 1/4% insurance overhead. And it has no RMD.

bradleyjg 10y ago

You may be thinking of variable annuities, which aren't really annuities and are something close to an outright scam. Immediate annuities are a vanilla product offered by almost every life insurance company. There's a competitive market for them and they don't have particularly high embedded fees. That said, they are priced based on a very conservative model--in part because their regulators require them to invest that way--and so you may well be disappointed with what you can get for your money. The only wrinkle is the is inflation rider which can vary in the details from company to company, so is not as easy to compare, and therefore tends to be less of an efficient market (i.e. has fairly high costs for the protection you get). One interesting thing you can do with annuities is buy a deferred annuity, again a fairly vanilla, competitive product. If you set the deferred date to well into your old age (usually 85) and no death benefit you can get a relatively large monthly payout. This then acts as a sort of insurance policy (along with social security) that insures you won't outlive your money and allows you to be more aggressive in spending the rest of it.

RockyMcNuts 10y ago
I'd be interested to see a good in-depth analysis. If you get a vanilla annuity, you have significant inflation risk over decades. The guys who bought annuities in e.g. late 60s saw them destroyed by inflation. It's not a great fit for a 30-year retirement. You should be able to get an inflation-adjusted annuity at the TIPS rate plus a credit spread. But right now that TIPS rate is effectively nothing. And I don't know whether the credit spread plus the insurance company tax benefit is a good deal. Packaging e.g. an S&P index fund in an insurance product, so you don't pay taxes until you get payouts, would be a really good idea, but typically insurance companies tack on sales commissions and fees far in excess of e.g. SPY or VFINX. If Fidelity or Vanguard offered that, it would be a good deal, but I hadn't seen that... looking at that Fidelity product now https://www.fidelity.com/annuities/FPRA-variable-annuity/overview https://www.fidelity.com/annuities/FPRA-variable-annuity/ove...

peter303 10y ago

Wrong. Fidelity sells a variable annuity with no penalty other than the federal less-than-five-years penalty. And a 1/4% insurance overhead. And it has no RMD.