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All good points. Except I'd say that a major problem with annuities is one of bargaining power and purchaser sophistication, similar to why employer-based healt

by wahern 5y ago

All good points. Except I'd say that a major problem with annuities is one of bargaining power and purchaser sophistication, similar to why employer-based health insurance plans are better deals then open market plans even after Obamacare reforms. (Though HMOs like Kaiser seem to have a smaller gap.) Annuity return rates suck relative to pensions and especially stock market returns (ignoring potential long-term risk). But I have the impression that if you're rich or if you're part of a group effort, the returns get better, much like any other class of financial instrument. But I don't actually know if that's true; never looked into it. Similarly, if your annuity terms are bargained by a sophisticated party on your behalf, you'll likely end up with a more optimal cash vs future benefit balance. Whereas if the decision is left up to you, you'll do what the vast majority of people do, which is favor cash. And favoring cash is something even a financially conservative, risk-averse person might do, because to laymen "conservative" means cash in hand. Just a few weeks ago my dad explained to me that he wanted to cash out his old union-provided annuity and stuff the money in a mattress because he was concerned about Biden/Pelosi policies driving higher inflation. I wanted to be like, "WTF!?"[1], but I long ago learned not to argue with cranky old men, though I'm well on my way to becoming one. (It was a tiny annuity, anyhow, started only a few years before he retired. Definitely not worth lecturing anyone over.) [1] Because almost certainly the annuity was inflation adjusted.

lotsofpulp 5y ago
> Except I'd say that a major problem with annuities is one of bargaining power and purchaser sophistication, similar to why employer-based health insurance plans are better deals then open market plans even after Obamacare reforms. Health insurance, like life insurance and annuities, is pretty efficient already with low single digit profit margins. Average annual employer sponsored insurance is $7,675 for single PPO coverage in 2019: https://www.kff.org/report-section/ehbs-2019-summary-of-findings/ https://www.kff.org/report-section/ehbs-2019-summary-of-find... And average lowest cost monthly gold premium on healthcare.gov is $516 ($6k annual) in 2019: https://www.kff.org/health-reform/state-indicator/average-marketplace-premiums-by-metal-tier/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D https://www.kff.org/health-reform/state-indicator/average-ma... > Annuity return rates suck relative to pensions and especially stock market returns (ignoring potential long-term risk). Ignoring the main risk of an investment certainly makes it cheaper. That is what we have been discussing these past few comments. Once those risks are taken into account, by legislation like PPA 2006, the time shifting of costs into the future becomes more difficult and is one big reason why DB pensions are not tenable. Although, at this point, I would argue an even bigger reason is that they simply have been obviated (same for annuities by insurance companies). Why pay an insurance company a cut of your investment returns when you can get rock bottom expense ratios on target date funds from Vanguard or buy VOO? That is what all these DB pension fund managers and insurance companies are doing anyway. Same reason why whole life insurance is a scam. All of these products have been automated and their middlemen bypassed.
- seshagiric 5y ago
  "...Same reason why whole life insurance is a scam. All of these products have been automated and their middlemen bypassed..." What are the DIY alternatives to whole life?

by wahern 5y ago

lotsofpulp 5y ago

> Except I'd say that a major problem with annuities is one of bargaining power and purchaser sophistication, similar to why employer-based health insurance plans are better deals then open market plans even after Obamacare reforms. Health insurance, like life insurance and annuities, is pretty efficient already with low single digit profit margins. Average annual employer sponsored insurance is $7,675 for single PPO coverage in 2019: https://www.kff.org/report-section/ehbs-2019-summary-of-findings/ https://www.kff.org/report-section/ehbs-2019-summary-of-find... And average lowest cost monthly gold premium on healthcare.gov is $516 ($6k annual) in 2019: https://www.kff.org/health-reform/state-indicator/average-marketplace-premiums-by-metal-tier/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D https://www.kff.org/health-reform/state-indicator/average-ma... > Annuity return rates suck relative to pensions and especially stock market returns (ignoring potential long-term risk). Ignoring the main risk of an investment certainly makes it cheaper. That is what we have been discussing these past few comments. Once those risks are taken into account, by legislation like PPA 2006, the time shifting of costs into the future becomes more difficult and is one big reason why DB pensions are not tenable. Although, at this point, I would argue an even bigger reason is that they simply have been obviated (same for annuities by insurance companies). Why pay an insurance company a cut of your investment returns when you can get rock bottom expense ratios on target date funds from Vanguard or buy VOO? That is what all these DB pension fund managers and insurance companies are doing anyway. Same reason why whole life insurance is a scam. All of these products have been automated and their middlemen bypassed.

seshagiric 5y ago
"...Same reason why whole life insurance is a scam. All of these products have been automated and their middlemen bypassed..." What are the DIY alternatives to whole life?