Annuity or Stocks for Retirement?
May 12, 2015 10:00 AM   Subscribe

We are approaching retirement and the Fidelity rep is recommending we put about half our nest egg into an annuity for peace of mind. Other people said not to buy an annuity. What do you say?

The people who are against annuities have not yet given their reasons. While being vaguely aware that annuities may have some drawbacks, we like the "peace of mind" that the Fidelity rep is selling us. All our investments our currently in mutual funds and we are fearful of losing twenty percent in the next downturn for an unknown period of time, or whatever. Our retirement funds total approximately $1.3 million, and we have some other money coming in via a pension and social security.

Without going into a full financial analysis, what can you recommend or tell me about with regard to this situation?

Thanks!
posted by Rad_Boy to Work & Money (11 answers total) 12 users marked this as a favorite
 
I had a lot less than you did when I retired, and a Fidelity rep persuaded me to put about a third of it into a Metlife annuity. After a lot of skeptical thinking and reading, I did so, and am very glad I did. It pretty much doubled my retirement income (previously just Social Security) and will keep on coming as long as I live. (Just like SS.) I felt that as long as I had other funds growing in various mutual funds accounts, and plenty of emergency money stashed, I'd be fine. And I have been. For me, a single guy with no concerns about heirs, etc, an excellent decision.
posted by fivesavagepalms at 10:09 AM on May 12, 2015


Buying an annuity is essentially betting on interest rates declining - which is not a good idea right now with rates extremely low. You can get the same protection from a 20% decline in the market by being in short term deposits and not be as exposed to interest rates going up, although you will have some exposure.

But buying an annuity isn't the same thing as reasonably reducing the equity exposure in your portfolio. They aren't the same decision.

If you are approaching retirement age you have less and less of your savings in equities.

The other issue with annuities is that they general embed high fees into what should be a very low cost fixed income product - which is the structural reason to avoid them.
posted by JPD at 10:09 AM on May 12, 2015 [6 favorites]


Unless there are tax/regulatory considerations in your jurisdiction, this boils down to the annuity rate, the return you expect to earn on mutual funds, and your risk tolerance. It's a tradeoff between higher expected returns (mutual funds) and certainty (annuities).

It's very likely that your Fidelity rep is a salesperson working on commission and not an advisor with a fiduciary duty to you. I would seek unbiased advice before following any of their recommendations.
posted by ripley_ at 10:20 AM on May 12, 2015 [4 favorites]


JPD nails my understanding, even if the lede is buried :) The fees/commissions for annuities are crazy for the product. That's why you have sales people pushing them so much.

Tax and inheritance wise, there are also a lot of pro/con to consider. (I'm hazy on specifics of this, but it's an issue to make sure you understand when buying one).
posted by k5.user at 10:21 AM on May 12, 2015 [2 favorites]


You have to be very careful with annuities because of the high fees and commissions that are often hidden from the consumer. But fundamentally, an annuity can be a great way to reduce the risk of running out of money in retirement (at the expense of leaving a larger inheritance). If you decide an annuity is what you want, you should probably stick to an immediate fixed annuity from a low-cost provider like Vanguard.
posted by Durin's Bane at 10:57 AM on May 12, 2015


Right now, interest rates ate so low that it's hard to find something to balance your equities. Annuities are a possibility. Personally, I can't warm up to the idea of tying up my !money, but I know people who are happy with annuities.
posted by SemiSalt at 12:58 PM on May 12, 2015


Fidelity has a retirement income calculator, which, according to the Fidelity rep I talked to recently, runs something like 250 simulations, throws out the bottom 25, and then shows you the lowest (worst case) one that's left. You can put in your current assets, plus things like social security and pensions, as well as your projected expenses, and it will tell you (based on stats, math, monte carlo somethings and other buzzwords) when and if you'll run out of money.

There are also various options for calculating retirement income on the Bogleheads wiki.

None of which answers your question, but might provide some worthwhile information to take into account.
posted by still_wears_a_hat at 1:43 PM on May 12, 2015


The thing about annuities is that you are paying a premium to get that security of level payments that will last your lifetime. You can get idea of how much you are paying by comparing the annuity to Vanguard Managed Payout Fund which is the closest thing to a one-stop do-it-yourself annuity

There are two big difference between the Managed Payout and real annuity. First, you have the risk, not them, that the market will substantially better or worse than expected. Second, the payout is level, so you aren't spending your principal, although you can alway opt to pull out more money as you get closer to your life expectancy. Finally, any money left in your account at the end of life (and there should be a lot) will go to your heirs instead of the annuity firm.


I think a good question is how your retirement income matches your needs. Will you comfortable on the retirement income with the annuity? Would a little more money (which you would probably but not definitely have if you do it yourself) be worth a lot? If (less likely but still possible) you have to reduce your income 20%, how much would it hurt? If you can tolerate the drop but would really value having more if possible, then don't buy the annuity. If knowing for sure that you have what you have (but no upside) feels better, than go for the annuity. [I know I oversimplified - you are only putting half your money in the annuity, so adjust the argument accordingly)

The other big question is how much you value having money left over to give your heirs after you die. If you just want to make sure that you (and your spouse if you have one) don't run out of money then it worth the extra expense to get the safety of an annuity. If you really want to try to leave something in your estate to pass on, then the money you save NOT getting an annuity may be worth the additional uncertainty.
posted by metahawk at 4:26 PM on May 12, 2015


Like everything with retirement savings, it depends on your own situation and the annuity in question, and nothing can substitute for running your own numbers for the two scenarios. I'm assuming, since you're close to retirement, that you would be purchasing an immediate annuity, and if you find a product with low fees and fair rates, these can be a good solution for some people.

Some of the potential drawbacks include:

Lack of flexibility. If you happen to need the money earlier, you're SOL, losing far more to fees than you'd be likely to lose in the market. Likewise, with your pension and social security, you might not need the money during some years. This isn't as bad, but you say that the money that you would use to buy the annuity is currently in retirement accounts, getting all the tax benefits that entails. You can't put the money back in your 401k, so any accumulation of savings from the pension is going into regular old taxable accounts, which are not as favorable.

Along those lines, having the money outside of an annuity gives you the option of controlling, to some extent, your taxable income every year. That means that in years when your outside income from pension, SS, and other sources is low, you'd pull from taxable or traditional retirement accounts and only pay 0% or 15% marginal rates. In years when your outside income is high, you could pull from Roth accounts to keep your total taxable income manageable. An annuity doesn't give you this flexibility.

Inflation risk. If the annuity is not adjusted for inflation, you could find yourself with a much lower living standard later in life. If the annuity is adjusted for inflation, you're likely paying a premium for this insurance.

Risk that you'll pass away early.

Risk that in 20 years the company holding your annuity will go bankrupt.

Social security and pensions basically fill the same role in a portfolio as an annuity. Especially if your pension is substantial, you may be producing less diversity in your portfolio, not more. Also, depending on how much of your expenses will be covered by these other sources of fixed income, there may be no need for you to take on the disadvantages of an annuity for "peace of mind." Even with a 20% drop in the value of the stocks you hold (which, as JPD points out, should probably only be a minority of your total portfolio at retirement) you would still be able to cover your day-to-day expenses.
posted by exutima at 4:30 PM on May 12, 2015 [1 favorite]


First, you need to clarify exactly what the Fidelity rep is trying to sell you. There are many kinds of annuities -- deferred, variable, fixed, immediate. The only type of annuity you should be thinking about is know as Single Premium Immediate Annuity -- SPIA.

Beware because brokers are highly motivated to steer you into other types of high fee, high commission annuities. Insist on only a single premium fixed annuity.

The SPIA is a very low cost, low fee, uncomplicated annuity. You can get a good idea of the typical rates by going to:
https://www.immediateannuities.com/
SPIAs are very competitive so you shouldn't see a large difference in rates from different companies.

They are basically longevity insurance. They insure that you will never run out of money no matter how long you live because they pay you as long as you are alive.

The risk with most annuities is that they don't compensate for inflation. You get the same amount each month even if you live another 30 years. There are a few SPIAs that have an inflation adjustment, but there can be a steep price for that added feature.

A better strategy for inflation risk is to put off buying the annuity as long as you can -- into your 70s if possible. That way you don't have as many remaining years for possible inflation. Another strategy is to annuitize smaller portions of your total every five years or so in retirement so that your payment rates can adjust to whatever inflation and interest rate changes that might occur. Don't annuitize all your money in one shot.

One of the best annuities you get is Social Security, which is indexed for inflation. You can maximize the benefits of this excellent annuity by delaying your benefits until age 70 if you don't need it. As with any annuity, it only makes sense if you are reasonably healthy and expect to live an average lifespan.
posted by JackFlash at 5:03 PM on May 12, 2015 [1 favorite]


A woman I take care of just had an annuity pay out to the wnd, but I saw the paperwork, she invested 24K and got back 86K over time. Seemed pretty good to me, but this is one incomprehensible plate of beans, as far as I am concerned.
posted by Oyéah at 10:07 PM on May 12, 2015


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