# Annuities - HUH - what are they good for?



## StayThirstyMyFriends (Jul 29, 2016)

So... my accountant is passing on a sales pitch on insured annuities to his customers including me. 

The elevator story (that I expect most CMF'ers don't need but I include here because maybe I got it all wrong - I only heard about these things last week) on insured annuities. You invest your principal with an insurance corp that provides you with an annuity in return. The annuity pays out a monthly income. The annuity also pays for a life insurance policy on you that pays the same as the capital invested. So, when you die, your estate "gets the principal back" in the insurance proceeds. Before you die, you keep getting your monthly income regardless of how long you live. The amount determined in the annuity is made up of various factors but a big part of it is your life expectancy - if you are expected to live a long time, the annuity payout is lower (as they are paying out principal as part of the annuity return). You have no control over how the annuity principal is invested, once you hand it over to the insurance corp, its effectively their money, except for the obligation to pay out monthly.... you can never get out of this investment, but also barring meteor strikes there is almost zero risk that it will ever stop paying out (until you die). Annuities have tax advantages over regular investments... but they also have the burden of paying the insurance premiums.

My wife and I are in our early 50's. We can both be on the annuity so we both have to die before the annuity gets wound up. For our particular case, I am told that our after-tax income (based on the highest marginal tax rate) would be 2.45%. The pitch says to get the same return from a GIC or Savings Bond type of investment, it would have to have a before-tax guaranteed return of 4.65%.

Since my accountant knows I am planning to retire soon with a sizeable work buyout, he is suggesting investing a portion of my nest egg (like 10%) in this way to ensure I at least get some constant income in a vehicle that I can't mess up. There is some reason to do this now, rather than next year, because there are some changes to the rules happening in 2017 (that I don't understand) that will result in a reduction in the return (my calcs say down to about 2.3% rather than 2.45%). 

However... if I expect to live another 35 years... that is a long time to be committed to this investment. The good thing is the income is virtually no-risk. However... it isn't a lot of income, it isn't flexible, and who knows what the future may bring? Rampant inflation for example where hard assets may have a better chance to weather the storm? I guess if I had a guaranteed investment opportunity of 4.65% right now, I'd probably put 40% of my money in it... but not if I had to commit to that for life!

I've reviewed some of the discussions on this forum about annuities from a few years ago. (Seems like there were several discussions on annuities between 2010 and 2013 but they died away). The comments/suggestions/conclusions that I saw in those old threads were:

- its not a good time to buy annuities if interest rates are low
- annuities make most sense for people in their 60's and 70's
- annuities make most sense for people who are unsure whether they will out-live their retirement savings
- it is a good idea to "dollar cost average" annuities by purchasing multiple ones (from different organizations for robustness) over a period of time

Interest rates are low, I'm not over 60, and I actually expect to have enough that I will be able to leave a considerable estate to my kids. So my conclusion is that annuities are not for me. 

But I just thought I'd throw this out there in case anyone has a contrary opinion or observation to make.

Thanks
Thirsty


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## naysmitj (Sep 16, 2014)

I have not purchased annuities as the current low interest rates lock in a long term (remaining lifetime) provide a low return. With the life insurance addition, your monthly or quarterly payout will be reduced by the amount of the premium. So looking at this without any figures, you gotta believe that the life insurance company has a good built in rate of return for both the annuity as well as the life insurance. I think it s called "double dipping" and the commission for the agent on your purchase would likely reflect that "sales opportunity."


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## Beaver101 (Nov 14, 2011)

StayThirstyMyFriends said:


> So... *my accountant is passing on a sales pitch on insured annuities to his customers including me.
> *
> ....
> 
> ...


 ... wow, accountants are now pitching sales too? Is business that slow in that field?


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## StayThirstyMyFriends (Jul 29, 2016)

naysmitj said:


> ... So looking at this without any figures, you gotta believe that the life insurance company has a good built in rate of return for both the annuity as well as the life insurance. ...


The numbers in the pitch provided was, per $100K invested

monthly cash flow: $344
Amount taxable: $99
Tax payable: $46.50
Insurance premium: $92.40

Net cash flow per month: $205, or $2460/yr

So, yeah, you want $50K guaranteed "salary replacement" you gotta put down $2,000,000

The compare this to a 2% GIC and of course the GIC looks terrible with an after tax return of $88 / $100K. 

Don't get me wrong, I'm not convinced I can get a better return for no risk... it is really just the concept that you are locked in FOR LIFE that seems wrong to me. Removes all flexibility.

Beaver101: yeah, my accountant is a good guy but sometimes he surprises me... he's just trying to help


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## humble_pie (Jun 7, 2009)

StayThirstyMyFriends said:


> So... insured annuities ... you can never get out of this investment, but also barring meteor strikes there is almost zero risk that it will ever stop paying out (until you die) ...
> 
> The good thing is the income is virtually no-risk ...
> 
> I just thought I'd throw this out there in case anyone has a contrary opinion or observation to make.



may i start by picking out the first 2 sentences above & then i'll try to segue into your overall circumstances, at least what we know of them.

the particular sentences: i don't see it as a given that the annuity or its income is necessarily guaranteed for the rest of your life & your spouse's life. The insurance company itself could go under any time during the next quarter century or half century or howsoever long the both of you shall live.

this seems to be the reason why retirement/estate planners who know they want to go heavy with annuities will pick 2, 3 or more different insurance companies.

me, i wouldn't go annuities. However, i'd like to stray from the specific matter & return to your overall circumstances if i may. 

you arrived in cmf under a different username & said you were seeking to un-partner yourself, since you were by far the principal rainmaker in the partnership & the others - with whom you wanted to stay friendly - were not pulling their weight.

next, you reappeared as Thirsty & said you'd received $15 million as your share of the business breakup. Bravo! now that is really wonderful!

fairly soon after that, wise cmffer mukhang Pera said that you are truly in a unique category of your own on here, because none of us have $15M. He's right about that. You can see how right he is, from some of the inappropriate suggestions that were & still are being put forward to you (for example, i believe one earnest individual thought you should follow the kids' website Young & Thrifty) (!)

* * * * *​
the fact is your circumstances are special & never, never, never are you going to be like us poor peasants, quoth the raven.

turning now to the specific, i don't think your accountant is doing anything inappropriate. He probably feels a wee bit more positive about annuities than you do. He's probably reminding annuity-headed investors that looming changes in the law make it useful to buy now rather than post-law. Perhaps he thought he was easing your burden by suggesting you deposit a smallish amount in perpetual lockdown ... so that at least you'd have your hopefully-secure pittance for hopefully the rest of your life, provided the insurance company doesn't disappear ...

so far, it's not an hors-la-loi idea. Now we come to the kernel of the situation. What kind of investor are you going to be? will you play a more active role? or it be more like the other extreme? are you one who will want to play golf, lie on beaches & visit las vegas round the clock, while cash drips intravenously into the bank account every few seconds?

the late dr William Osler was always quoted as telling medical students to not consider what kind of disease a man had, but rather what kind of a man had a disease. Me i think the same idea applies to finance. In your case, it's a question of what kind of a man has this large portfolio.

i'm no dr Osler but - very tentatively - my working diagnosis is that you are more of a hands-on investor patient. I imagine you're going to approach your portfolio as if were a brand-new business challenge. You succeeded in the now-dissolved partnership; at 50 you are still a young middle-ager; there is no reason not to believe that you won't be successful at creating your own investment empire yourself, in a kind of 2nd career renaissance.

it's impossible for anyone in cmf forum to truly put himself or herself in your shoes though, because the magnitudes of your dollars are lightyears away from us poor plebs.

still, if it were myself, i believe i'd let that annuity opportunity slip past. If i might choose to revisit it a year hence - post downward revisions to the tax act - i'd be happily prepared to accept the infinitesimal reduction in return, which you've graphed as something like 2.3% vs 2.45%.

.


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## james4beach (Nov 15, 2012)

Don't we have an annuity expert around here, someone who wrote a book on them? Moneygal perhaps?



Beaver101 said:


> ... wow, accountants are now pitching sales too? Is business that slow in that field?


A family friend, an accountant, pitches mutual funds to people. :moody:


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## lonewolf :) (Sep 13, 2016)

To hit the sweet spot for age go with deferred annuity most likely will grow faster then GICs unless variable annuity is used which could lose money.

For safety I would put some money in Swiss Annuities using different currencies including gold. Accountant will most likely be against it because he wont be able to sell them to you.

Swiss insurance companies are not insured which makes them strong with sound banking practices will most likely be one of the last ones standing when banks & insurance companies go under in a deflationary crash. Unlike Canadian annuities you don't have to be locked in forever. Holding different currencies with your huge wealth is prudent protection in case of a currency crises in a single currency plus some bit coin as well silver & gold.

5000 year low in interest rates bonds are way over valued, Stocks are going to correct to 4th wave support in next decade or so around 1000 or so on the DJI no where to go except, cash for now then short when high is made in next several years gold, silver & India stock market


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## mordko (Jan 23, 2016)

If you don't have any guaranteed income then buying an annuity isn't a bad idea. 

Not sure about this particular product; it's hard to ensure you get a good deal when they mix and match. On the other hand I can see why this would have major tax advantages; presumably you are paying insurance premiums with before-tax dollars (?) 

Without doing any research... Does not look too bad.


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## ian (Jun 18, 2016)

Given your age and the current interest rate/cost of an annuity I would defer the purchase. Shop around when you are ready to buy and keep in mind the max. Amount that is insured/guaranteed by industry. I am not sure what that number is.


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## stantistic (Sep 19, 2015)

Choice on taxation 

I have just bought a life annuity with a guarantee period of five years. The company is now asking me to choose between two methods of taxation on the interest portion of my annual payments.
a) Decreasing taxation where the rate is highest in the early years and decreases in subsequent years.
b) Uniform taxation where interest portion is the same for all years. 
It is not clear to me which method is advantageous for me. BTW, I must make the choice before the end of the year. I am 82 years old.


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## Beaver101 (Nov 14, 2011)

james4beach said:


> Don't we have an annuity expert around here, someone who wrote a book on them? Moneygal perhaps?
> 
> A family friend, an accountant, pitches mutual funds to people. :moody:


 .... what would you do if that friend pitches mutual funds to you? Just curious here ...


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