3 ms·

There are two guaranteed downsides to annuities: 1) they generally fall into the "insurance" category, and as we know insurance companies can get in trouble and

by 09bjb 10y ago

There are two guaranteed downsides to annuities: 1) they generally fall into the "insurance" category, and as we know insurance companies can get in trouble and even go under, and 2) there is a 0% chance that your annuity will outlive you. If you had $1M and withdrew roughly 4% for the rest of your life, there's a decent chance it would be worth MORE than a $1M when all is said and done. The annuity takes advantage of that fact. Like other forms of insurance, they're probably going to make money on you. Unlike health/car insurance, this type isn't legally required or usually a good idea.

glutamate 10y ago
That's why annuity rates are higher than interest rates.
bryanlarsen 10y ago
1) In Canada, annuities are covered by Assuris, so that's not a concern. I imagine that Europe has similar protections. 2) Is balanced by the upside risk that I live to 117 and run out of money. And frankly, I'm much more worried about that than I am about stiffing my heirs (at least once college is paid for). 3) If you had $1M and withdrew roughly 4% for the rest of your life, there's also a decent chance it would be worth a lot less than $1M when all is said and done and you're eating capital. Remember, you're no longer a long term investor, you can't ride out ups and downs, you have to keep paying the bills during down periods, excaberating your losses. I'm firmly of the belief that annuities are one of the best types of insurance you can buy.
- AstralStorm 10y ago
  Canada might default too, or withdraw the protections.
- junker37 10y ago
  > Remember, you're no longer a long term investor, you can't ride out ups and downs, you have to keep paying the bills during down periods, excaberating your losses I don't know about you, but most people in my social circle intend to retire between 55-60 and that leaves 25-30 years of retirement, so definitely still in the long term investing range. When I retire, I don't plan to adjust my investments until I get past 80.
  - bryanlarsen 10y ago
    Doesn't matter what you call it, if you're withdrawing money every month your portfolio should be mostly bonds. Model it yourself, calculate what a 30% drop in the stock market next year would do to your portfolio. If you're a long term investor, an 80/20 stock/bond split makes sense. But if you regularly withdraw 4% of original capital inflation adjusted, a model that incorporates the possibility of a 30% drop will show you why you need more bonds. And show you why 4% is unrealistic and why a 5% annuity is a good deal.
mabbo 10y ago
Yep. That's the entire point. The company might make a lot of money off you. But, they might lose a lot of money if you live too long. The risk is transferred from you to them, and you live with a specific fixed income for the rest of your life, however long that may be. You don't worry about the economy going up and down or interest rates rising and falling. You don't worry about living too long and running out of money. You don't worry about living too little, and dying with most of your money still in the bank. You stop worrying about the future. Sure, the math may add up to "that company is making a bit of money that you might have made", but when I retire I want to not give a shit about the future anymore. That's why it's a good deal, to some people.
- AstralStorm 10y ago
  You do worry about economy as a big crash might wipe out whoever is paying out the annuity. You can probably also spend more windfall given 1M investment rather than 5k. With the annuity, you would be smart to reinvest any excess, but you also cannot overdraw if needed, e.g. for medical reasons. You would have to go for debt and lose money.
JauntTrooper 10y ago
I plan to buy an annuity at 80 years old, if I make it that far. My actuarial life at that point can't be very long, so it shouldn't be too expensive. It's a good way to manage tail risk in case I do live to 100+, and will allow me to spend the rest of my capital more freely knowing my base expenses are covered for life between the anuity and social security.
- Mvandenbergh 10y ago
  You can buy an annuity that only pays out from the age of 80 when you retire at 65. Much cheaper because many people won't make it to 80 from 65.

by 09bjb 10y ago

glutamate 10y ago

That's why annuity rates are higher than interest rates.

bryanlarsen 10y ago

1) In Canada, annuities are covered by Assuris, so that's not a concern. I imagine that Europe has similar protections. 2) Is balanced by the upside risk that I live to 117 and run out of money. And frankly, I'm much more worried about that than I am about stiffing my heirs (at least once college is paid for). 3) If you had $1M and withdrew roughly 4% for the rest of your life, there's also a decent chance it would be worth a lot less than $1M when all is said and done and you're eating capital. Remember, you're no longer a long term investor, you can't ride out ups and downs, you have to keep paying the bills during down periods, excaberating your losses. I'm firmly of the belief that annuities are one of the best types of insurance you can buy.

AstralStorm 10y ago
Canada might default too, or withdraw the protections.
junker37 10y ago
> Remember, you're no longer a long term investor, you can't ride out ups and downs, you have to keep paying the bills during down periods, excaberating your losses I don't know about you, but most people in my social circle intend to retire between 55-60 and that leaves 25-30 years of retirement, so definitely still in the long term investing range. When I retire, I don't plan to adjust my investments until I get past 80.
- bryanlarsen 10y ago
  Doesn't matter what you call it, if you're withdrawing money every month your portfolio should be mostly bonds. Model it yourself, calculate what a 30% drop in the stock market next year would do to your portfolio. If you're a long term investor, an 80/20 stock/bond split makes sense. But if you regularly withdraw 4% of original capital inflation adjusted, a model that incorporates the possibility of a 30% drop will show you why you need more bonds. And show you why 4% is unrealistic and why a 5% annuity is a good deal.

mabbo 10y ago

Yep. That's the entire point. The company might make a lot of money off you. But, they might lose a lot of money if you live too long. The risk is transferred from you to them, and you live with a specific fixed income for the rest of your life, however long that may be. You don't worry about the economy going up and down or interest rates rising and falling. You don't worry about living too long and running out of money. You don't worry about living too little, and dying with most of your money still in the bank. You stop worrying about the future. Sure, the math may add up to "that company is making a bit of money that you might have made", but when I retire I want to not give a shit about the future anymore. That's why it's a good deal, to some people.

AstralStorm 10y ago
You do worry about economy as a big crash might wipe out whoever is paying out the annuity. You can probably also spend more windfall given 1M investment rather than 5k. With the annuity, you would be smart to reinvest any excess, but you also cannot overdraw if needed, e.g. for medical reasons. You would have to go for debt and lose money.

JauntTrooper 10y ago

I plan to buy an annuity at 80 years old, if I make it that far. My actuarial life at that point can't be very long, so it shouldn't be too expensive. It's a good way to manage tail risk in case I do live to 100+, and will allow me to spend the rest of my capital more freely knowing my base expenses are covered for life between the anuity and social security.

Mvandenbergh 10y ago
You can buy an annuity that only pays out from the age of 80 when you retire at 65. Much cheaper because many people won't make it to 80 from 65.