Does fixed immed inc annuity make sense?

Question

My broker pitched an fixed immediate income annuity to me in our last sit-down. (BTW, there are no fees on the sale. The management fees are factored into the quoted payout.)

I have many questions, which I will discuss with her when she returnes from vacation.

In the meantime, I would appreciate a reality-check on my thinking, if that is possible without discussing too many personal details.

She structured an FIIA with a lifetime payout of about $591/year per $10,000 invested and a guaranteed period of 17 years, based on an investment of 10% of my liquid assets (i.e. excluding my home).

At first, the 5.9% "return" sounded good as a guaranteed "return on investment" over the next 17 years. That is more than the expected average return for my asset model over the next 20 years.

Then I realized that was only returning the principal during the guaranteed period. If I died within 17 years, the investment would have gained 0%.

After the first 17 years, the time-valued return increases over time. It would be an average return of 4.6% over 34 years, my life expectancy. That is less than the expected average return for my asset model over the next 20 years.

Based on that, I would conclude that the FIIA is not a good investment for me at this time.

But of course, the potential benefit of the FIIA is the guaranteed lifetime income after 17 years. There is no guarantee that my asset model will meet expectations; and even it did, there is some non-zero probability of wide swings in income and losses in any given year.

I am retired, and my only income is from savings and investments now, and eventually also Soc Sec. Simulations suggest that with my current spending, adjusted for inflation, my resources should last well past my life expectancy without the FIIA, based on very conservative assumptions.

But there are no guarantees in life, and in simulations in particular. The FIIA would reduce my annual spending, thereby leaving more funds to work for me.

On the flipside, I am taking 10% away from those funds up-front. And with the FIIA, the simulations suggest only a small gain in my estate at the end of my life expectancy.

Moreover, the decision to invest 10% of my assets in a FIIA is irreversible. I tend to avoid long-term commitments because they are inflexible.

So, in conclusion, am I right to think that a FIIA is not the right investment for me at this time? Or am overlooking something or looking at this option incorrectly?

PS: I tend to be a conservative investor. I was more moderate before; but after 2008, I downgraded my risk tolerance ;-).

Rubaiyat of Omar Bradley · Accepted Answer

According to  at age 55, a 20 yearpayout annuity yeilding that monthly income amount should cost about$88,872. Your quoted $10,000 amount sounds too good to be true.

Elizabeth Richardson · Answer

The $591 was an annual payout per $10k, not monthly. Using the link above, it actually sounds a bit expensive, for a 55 year old male, but the OP may be closer to 60, so that it is right in line.

Elizabeth Richardson

ps56k · Answer

tnx for the topic - and link - friend recently acquired a variable annuity,and I've been reading up on annuities,along with tax-free mutual funds for our taxable account.I've been doing some CD laddering just to keep my handsoff the cash and away from my brokerage & mutual fund accounts.

rick++ · Answer

Maybe its a "1/3 solution", especially for the risk-adverse.1/3 in guaranteed fixed income - the minimum you could survive on1/3 in investment income, assuming historical returns - gives youcomfortable life1/3 cushion, in case there are market crashes, tax changes etc.

honda.lioness · Answer

On a fixed immediate income annuity --Did your broker say to you that this annuity was like getting a returnof 5.9%? Or is this just the first blush impression you yourself had?If the former, I do not think much of brokers selling an annuity inthis fashion.Unless you say otherwise, I will assume this is an annuity without adeath benefit. If it has no death benefit, then correct, your gain is0% or, depending on the terms, negative if you die before 17 years.Correct.Maybe consider that the average yield of 5-year Treasuries since theearly 1960s is something over or around 4.6%. One alternative to theFIIA would be a high grade bond/CD/Treasury ladder. Maybe this yeartake 2% of your portfolio and put it into a five-year bond/CD/Treasuryor mix of same. Next year do the same with another 2%. Continue until10% of your portfolio is in this ladder. After these mature, renew forfive years.Otherwise, I applaud your very well done and presented analysis.If you were a moderate investor before the...

honda.lioness · Answer

Re a fixed immediate income annuity with a lifetime payout of about$591/year per $10,000 invested and a guaranteed period of 17 yearsDid this broker say to you it was a 5.9% return? Or are yousummarizing what were your first notions about this annuity?If she used words suggesting it was a 5.9% return, then this broker isnot to be trusted further than you can throw her.Correct.Correct.I believe it is very close to the historical average of 5-yearTreasuries, going back to the 1960s. It is difficult to get lower riskthan Treasuries, as I am sure you know.I think a better choice would be to take the 10% of your liquid assetsand start building a high grade bond, treasury, and CD ladder, withthe maturities of each being about five years.Perfectly reasonable. I would examine other options, including thebond/CD ladder.Aside: Weren't you "moderate" before because you were invested for thelong term, meaning volatility was something you could psychologicallyweather? Thus when the going gets tough...

Ron Peterson · Answer

allows you to see what you would get at variousages.Don't buy an immediate lifetime annuity unless you are healthy.It's best to wait until age 70 before purchasing a lifetime annuity inorder to get a higher payout and accelerated amortization for a taxes.--   Ron

whatsup31415 · Answer

My first-blush impression, which is why I put the word "return" in quotes.

But the broker did not disagree; and yes, she seems a little pushy, which is why I do more than the usual due diligence in checking her suggestion.

Quite unlike my other broker (different company), with whom I share a very open and non-sales-like relationship. I still do my due diligence, of course; but it's more of an information sharing and educational experience.

Correct.

Interesting thought.

Thanks for the confirmation.

I am quite certain that no one was prepared for "such declines" as we saw in 2008 -- the 2nd or 3rd worst in the last 110 years. Before 2008, my asset model's worst one-year performance over 37 years was -12.9% in a year.

Yes, I still invest for the long term. But I have changed the assessment of my risk tolerance. The financial planners I work with understand this, and it necessarily changes what is the "right" asset allocation model for me.

honda.lioness · Answer

Re being psychologically prepared, as a long term investor, for theoccasional decline or even crash:Oh I do not know about that. For example, the Crash of 1929 and thedecline of 1987 are bandied about much ISTM when people talk aboutstock market risk. Or what happened in the Japanese stock market inthe last 20 years. I think those folks staying in the market weremostly braced for such madness as a worst case scenario. Madnessmeaning both the stupidity of mass over-leveraging and the ensuinghysteria when people realize it was a house of cards.I draw often on being a poor graduate student in 1987. My humble (andyet big bucks to me) life savings were mostly in stocks from severalyears of professional employment. I lost around 20% in a few days. Itwas kind of tough going psychologically but I tended to smile, since80% of a lot of money is still a lot of money, and I went in with eyesopen that such a correction could happen.Not trying to change your mind. As I think regular Don here...

Does fixed immed inc annuity make sense?

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