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Beyond the Longevity Tables

Annuities: What You Need to Know

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Jul 07, 2010 12:55AM

Retirement Funds Duel With Annuities

Smart Money, July 6th, 2010

It?s the retirement dream for boomers: Turn all that money you diligently saved over the years into a steady income stream while you golf and bask by the pool. Traditionally, people turned to annuities, which saw a sales boom right after the crash, to help make this dream come true. But now mutual fund firms are counterpunching with their own breed of paycheck producer.

In recent months big firms like Vanguard and Charles Schwab have attracted a lot of new money to so-called retirement-income funds. In all, investors now hold $824 million in these funds?a speck, compared with the annuity business, but 41 percent more than they had in the funds a year ago. Like annuities, the funds promise to turn a shareholder?s savings into a stream of payments. And that monthly income has fewer strings attached: Unlike plain-vanilla annuities, retirement-income funds let customers move their money elsewhere without penalty, and the payments can rise if markets do. One other plus: They?re relatively cheap, with fees averaging $53 per year per $10,000 invested. Variable annuities, which offer similar flexibility, are typically four times as expensive.

Read more of this article.

Jun 04, 2010 02:20AM

Is This the Lamest Investment Ever?

The Motley Fool, June 3rd, 2010

What would you say if I told you there was an investment product that would solve your biggest retirement savings problems? A product that would give you a guaranteed income for life without any fuss or risk on your part, whether you live three years past retirement or 30?

You'd probably say, "What's the catch?" You might worry I was going to rant about annuities again and go on about the huge fees, the happy brokers in their Ferraris, the lousy performance, and all that stuff.

I am indeed going to talk about annuities. But "rant" is a little strong, and I've softened my stance on this investment vehicle.

It's true that there are a lot of reasons to be skeptical of annuities.

• High fees. Brokers and insurance sales agents love selling certain kinds of annuities, because the commissions can be huge. Guess who pays those commissions? You.
• Lousy returns. Annuity products that purport to track an index or an underlying pool of investments will almost always underperform a similar mutual fund or a stock portfolio you can build on your own, at minimal cost.
• Surrender charges. Buy an annuity and decide a year later that you want to "sell" and get your money back? Good luck: You may get hit with a giant "surrender charge."

But not all annuities are salesperson-enriching boondoggles. Some actually make a lot of sense, for certain folks in certain circumstances.

Annuities can be your friends
The simplest form of annuity is the lifetime income annuity, where you pay a lump sum to an insurance company, and get a guaranteed income for life in return. These products offer a couple of obvious benefits: Your income isn't dependent on Mr. Market's whims, and you won't outlive your money.

For a lot of people right now, those two benefits are a slam-dunk sales pitch. Many folks who were inclined to pooh-pooh annuities during the bull market a few years back (including, um, me) have reconsidered their position thanks to the market crash. It's true that many stocks have regained lost ground since the market bottomed in early 2009, but the tremendous volatility in recent years has caused many retirement-minded investors to rethink their risk tolerance.

Read more of this article.

Annuity Advice for Retirement:  There's really no easy way to tell if an annuity is going to work for you or not, beyond researching what it can provide and making the determination yourself.  Accordingly, you may wish to read up on the program at NewRetirement.com

Jun 03, 2010 02:31AM

What You Need to Know About Annuities

US News & World Report, June 2nd, 2010

Be honest. When you see the word "annuity," does your brain quickly look for an escape route to a more enjoyable topic? That's OK. I won't take it personally. And annuities can be tough sledding. But properly understood and used, annuities can be a great addition to a retirement plan. So, arm yourself with your favorite caffeinated beverage, and let' s take a tour of Annuityville. Much of the information here was obtained via reports and interviews from experts at the Insured Retirement Institute and another trade-supported organization called LIMRA.

With interest rates at historic lows and many people still recovering from steep investment losses, the safe and predictable returns of even a ho-hum fixed annuity can look enticing. In many respects, Social Security payments are like an annuity, although one that has very attractive cost of living increases. A lot of folks would like to have more retirement income that is that safe. So, annuities are receiving a lot of attention these days. What should you be looking for?

The first thing to understand is that annuities are essentially contractual obligations from insurance companies. In exchange for funds you provide to the insurer, which are paid into the product during what is called its build-up phrase, you are provided certain things that are spelled out in your annuity contract. The most basic promise is the insurer's commitment to make regular payments to you. This is known as the annuitization phase of the product. The payments begin at a specified time and usually last for the rest of your life or, depending on the specifics of your annuity, the rest of your spouse's life as well.

Second, money put into an annuity contract can grow tax-free until funds are withdrawn. If funds are withdrawn during the build-up phase, or because the annuity has been terminated early, it is assumed that any earnings that have accumulated in the annuity are withdrawn first, and taxed as ordinary income. Assuming the annuity was funded with post-tax dollars, the return of those initial funds is considered a return of principal (remember, this is an insurance product) and is not taxed. Once regular payments have begun in the annuitization phase, they are treated as a blend of earnings and return of principal, and taxed accordingly.

When you purchase an annuity, the size of the ultimate payments you will receive depend on several basic factors -- how much money you're putting into the contract, how old you are, and how far off the beginning date is for payments to begin. The insurer knows, on average, how long you're going to live. And it also knows how much money it expects to earn from the funds you've placed into the annuity contract. The amount of money it's willing to pay you is thus a calculated bet on its part. And, yes, it's a bet where the odds are tilted in favor of the insurer, which is trying to make a profit on the transaction.

Read more of this article.

Annuity Advice for Retirement:  Once you have an idea of how the basics work, you can go into details to determine if an Annuity is right for you.

May 15, 2010 12:30AM

Do you want annuities in your 401(k)?

Bankrate.com, May 14th, 2010

Our government is interested in promoting retirement security for American workers. In its recent Request for Information, the Treasury and Department of Labor solicited answers to 39 questions about "lifetime income options" from the financial community and the general public. As I mentioned in my most recent blog, it sure did get an earful from all these parties, with several hundred comments. Some members of the public said, in essence, "Don't mess with my retirement money!"

Lifetime income options can mean a number of things, but many people interpret the term to mean "annuities," since annuities come with guaranteed income for life.

I asked two members of the financial industry to share their opposing views with Bankrate's readers about including annuities in company retirement plans, and they graciously agreed to participate.

The insurance industry perspective

Neil McKay, chief actuary at Allianz Life Insurance Company of North America, says that over the next decade, 76 million Americans will be retiring, and they're going to have to have money to sustain themselves for 20 to 30 years.

In his words:

"These Americans can no longer rely on Social Security and employer pensions to act as the safety net for their retirement plans. This was made clear during the recent financial crisis, as the instability of individual retirement plans exposed consumers to a 40 percent market downturn -- a level of risk that few people can afford to bear.

"Current 401(k) plans are set up for the accumulation phase of retirement and fail to address the income phase, which determines the lifestyle the retiree can afford. An annuity is the only long-term investment option that provides guaranteed income for life, and offers retirees the flexibility to plan for expenses, including inflation or rising health care costs. The ability for insurance companies to pool risk means annuities are designed for stability, which is greatly needed in every retirement portfolio."

OK, that sounded like a commercial for annuities, and in effect that's what it is. The problem with annuities is that you pretty much have to surrender a big lump sum in exchange for a fixed income, and you generally lose access to that lump sum.

Read more of this article.

Annuity Advice for Retirement:  Annuties are being touted as the solution to many retirement worries.  Are they actually right for you however?  While Annuities offer more security than a stock-based retirement portfolio, they also offer much less in the way of average net returns.  Find out more at NewRetirement.com