40 comments

Guest Posting: Annuities – a Solution for the Cautious Retiree?

The Following is a guest article submitted by a long-time Mustachian named Gerard. In the past, he has worked in the annuities department of a financial firm, but now he’s a university professor on Canada’s East coast in a completely different field. Many thanks for the free lesson, Gerard!


Get possibly slightly less poor with… Annuities



Mustachians often deal with our nemesis, Complainy Pants, but less with CP’s sibling Scaredy Pants. CP says “I can’t,” while SP asks, “What if?” Many of us probably have more sympathy for SP, as our courage and optimism is tempered by some caution. We are planners, after all.

Today I’d like to borrow a little room to talk about two SP what-ifs that might be more relevant to MMM readers than to other people:

“What if the so-called Safe Withdrawal Rate doesn’t hold up for me?” After all, the classic safe-withdrawal models are based on making your money last for thirty years, and many of us are looking at far longer “retirement” spans than that. The longer the span, the greater the odds of a really bad spell that leaves us in a pinch. In our earlier years, we’ll have greater opportunities to make up the difference with extra work or mobility, but that option declines as we do.

“What if I live for a very very very long time?” Same concern, really: a longer retirement span than people usually plan for. There are an awful lot of long-lived cyclists and dancers and nature-lovers and gardeners and healthy eaters and optimists out there. People like us. Again, we need our money to last and last… or we might, at any rate.

The simple answer to this two-headed question, of course, is to save a whole lot more money and aim for a lower withdrawal rate. This is the money equivalent of over-engineering, when you reinforce buildings for the strongest possible winds, or build levees for the highest possible hurricane waves.

The problem with this simple answer is that it isn’t easy, and perhaps not even sensible. It puts us back in the “I need millions to retire” category, and financial independence then moves farther out of reach of many lower- and middle-income people.

Another solution would be to spread the risk. It’s foolish for every one of us to save far more than we’ll likely need, just in case we live to be 110. One or two of us might, but all of us won’t. What if we pooled our savings? We could then each take a higher percent of our money out of the pool every month. Over time, some of us would die, thus reducing the amount withdrawn. Eventually there’d be only a couple of us left, but there’d be enough money left too. We’d all die broke, but we’d never live broke.

Ideally, we’d figure out our safe withdrawal rate by having our combined likely lifespan calculated by somebody with experience at that. An insurance company, maybe. These actuarial calculations let defined benefit pension plans make reasonable payouts despite smallish contributions. What we need is the equivalent for private citizens.
Of course, such products already exist, and they’re called annuities. You give insurers a pile of cash; they invest it; every month, they pay you much of the earnings and some principal. They hope you die soon; you hope you don’t. Basically, it’s life insurance in reverse (in fact, insurance companies sell annuities to offset some of the risks of life insurance). Because their risk is spread across many recipients, and because they’re basically giving you back your own money, annuity issuers can afford to give you more per month. Right now, a 65-year-old Canadian male would get about 7% returns…. taxed at a very low rate, as some of the money is yours anyway. This is not great, but it’s much better than current returns from other super-guaranteed sources of passive income. If you plan well, you buy annuities during times of higher interest rates, and get high rates of return locked in for the rest of your life.

For 70-year-olds, it’s about 8%, for 75-year-olds, it’s about 9.5%.
Historically, I don’t know, but the Telegraph says rates are at a 20-year low:
http://www.telegraph.co.uk/finance/personalfinance/pensions/7827237/Pensioners-hit-as-annuity-rates-tumble-to-20-year-low.html

…and that returns would have been about 15% in the 1990s.

So, should everybody reading this jump into annuities? Probably not. In fact, some people probably aren’t even reading this paragraph, because they’ve jumped to the end to comment on how bad these things are. For the rest of you, let’s look at some problems:

1. Annuities are often sold by high-pressure sleazebags. Well, yes. Just like whole life insurance. In fact, it’s the same sleazebags! But that doesn’t mean that nobody needs insurance. Shop carefully. Research your potential providers. Different jurisdictions have different legal requirements for issuers. Remember, you’re talking about handing over a huge whack of your money.

2. The house always wins. In other words, the issuer is very good at calculating your likely life expectancy, then scraping off a generous profit and paying you the rest. This is presumably true… unless you win and live for a very long time, which you might remember is the problem that brought us here in the first place. Issuers may ask you about pre-existing health conditions and smoking history before giving you a quote, but they don’t know that you’ve spent decades cycling 150 miles a week and playing with your family and breathing clean air and avoiding workplace stress. This is your one chance to really stick it to an insurance company without dying or cheating.

3. I’m not 65. This is a major issue. Annuities, after all, are designed as income for the great majority of people who retire late. It’s hard to get an annuity to pay out if you’re younger than about 55, and your return will suck. As it should – even extremely unhealthy people are likely to live well past that age, and the issuer can’t be doling out big gobs of your principal for that many years. Young retirees should almost certainly avoid annuities. But once you hit an age where you don’t really want to head back to work if things go wrong, annuities start to make more sense.

4. I’m very smart. Mustachians are by nature researchers. Many of us know a lot about how to get reasonable returns on our capital. And we’re rational and contrarian enough to be willing to buy when stuff is cheap and people are scared. That high-dividend stock or rental-worthy house we bought when we were thirty is going to be paying crazy returns after 40 years or so. Probably. On the other hand, we may hit the point where we don’t want to be dealing with tenants, or we can’t manage our own affairs all that well, and we need something that’s completely idiot-proof. Especially when we’re 110. The very old clueless know-it-all landlord is a menace to society and often to himself.

So really, most MMM readers shouldn’t be rushing out to buy one of these things tomorrow. But there will come a time when that might change. (Funnily enough, planning for later life seems to be a blind spot for many in the Financial Independence / Retire Early community. Many of us are too young to want to think about those years, and once we’ve re-imagined retirement as an active, agentive thing, it’s hard to remember that we’ll also need to account for the Depends years.)

With a little extra work or frugality to cover a lean year or two, your little green employees should get you through the first long stage of your retired life. But then they might need to ease back a little, too. That’s when annuities start to make sense.

* Reference materials: these numbers were pulled from Canadian-based annuity quote-finding websites like http://www.lifeannuities.com/articles/2012/annuity-rates-canada-2012.html, but the same principles apply in most other countries as well.

  • Joy April 14, 2012, 2:40 pm

    MMM,

    Does everything called an “annuity” fit this description?

    My FIL keeps telling me to look into annuities. He said “It is a fairly
    safe investment, in that your principle is always secure?

    Hmmm?

    He is well off. Retired military. Retired civil service too. Also,
    received a nice inheritance. I don’t think he would need the type
    of service you are writing about. But, I never looked into “annuities.”

    He has this policy with his bank. He is sick with Emphysema. He has
    an agent that comes to his house to discuss his portfolio.

    Now you have me wondering if he has been taken?

    Reply
  • Mr. Money Mustache April 14, 2012, 3:07 pm

    Hi Joy,

    It does sound like we’re talking about the same thing. But I don’t know how suitable or unsuitable annuities would be for a guy in that situation. I think it mostly just depends on your comfort level with various types of investments.

    The other thing not yet addressed by this article is how the annuities take inflation into account. Perhaps indexed annuities are pretty common. But I would feel far less safe having a fixed-dollar-amount annuity locked in for 30 or more years.

    Today’s interest rates and long-term bond yields are basically only useful if inflation remains at almost zero for decades into the future. This doesn’t seem likely, so I feel better having my capital invested in something that will tend to inflate along with inflation: stocks and real estate are two examples. There are also inflation-protected bonds and other income things out there as well.

    Reply
    • Art April 15, 2012, 12:15 am

      Absolutely right to worry about inflation. Annuities make the most sense when your life expectancy is short – single figures. In that case, inflation won’t erode your annual income too much, and the return-of-capital element is a significant boost. For long periods, the inflation-linked annuity rate is very close to the return you’d get on the same type of ‘safe’ assets that the insurance company will use to back your annuity, so just cut out the middleman.

      Reply
  • eva April 14, 2012, 3:15 pm

    For some who believe strongly in diversification, might there be an objection that you’re giving everything to one company?

    (On the other hand, following ‘the house always wins’, it’s going to be the sort of company that doesn’t typically go out of business, right!)

    Reply
    • MooseOutFront November 22, 2013, 5:57 am

      On the flip side of that you can use an annuity to effectively diversify. Maybe only buy enough of one to provide cash flow to cover your living expenses rather than putting your whole amount of savings in there. And then of course there’s the option to buy them from different companies.

      Reply
  • Gerard April 14, 2012, 3:58 pm

    @MMM: There are inflation-indexed annuities out there, but for every additional layer of protection you want, the house takes a cut. People often deal with inflation fears by buying annuities when interest rates and inflation are high, so that there’s less upside risk (and potentially huge payoffs if/when rates decrease).
    @eva, it makes sense to go with a huge issuer (usually a bank or insurance company) — if they go under, annuity holders will be hit, but no worse than people holding policies, accounts, or shares. Also, unlike GICs or high-interest savings accounts, annuities rarely offer much of a bonus for bigger buys, so you could split (say) $300,000 between five or six companies.

    Reply
  • Jonathan April 14, 2012, 4:25 pm

    @Joy – The main focus here appears to be immediate annuities, where you swap a lump sum of cash (single premium) for guaranteed set of annual payments which is helpful for income in retirement. These tend to be the simplest form of annuities, the kind a normal human might actually wrap their head around.

    There are also a lot of equity-indexed/variable annuities where your value can fluctuate with the market. These are complicated and the agreements you sign are thicker than phone books. I’m not an expert but I would tread carefully.

    I love how even the guest posters write with the Mustachian attitude, it’s very unique.

    Reply
    • The Masked Investor April 16, 2012, 8:44 am

      This article is indeed about single premium immediate annuities (SPIAs, as they are known). If you get a slickster annuity salesman pitching you an equity-indexed or fixed-indexed annuity, walk away. The product is simply a bond with the coupons invested in a bull call spread and can be easily and cheaply done on your own in about 5 minutes in any brokerage account. I have explained hwo to do so here http://lifeinvestmentseverything.blogspot.com/2012/01/rolling-your-own.html although I think it is sort of a silly investment strategy.

      If a salesman pitches you a variable annuity, run for the hills (or kick his ass).

      Reply
  • mikenotspam April 14, 2012, 5:09 pm

    Thank you so much for this guest post. Besides a nice annuities education for someone otherwise ignorant to their usefulness/non-usefulness, I very much appreciate your speaking of the years when we are unable to take care of ourselves. Of course, there are many things to do to help prevent what’s essentially long-term infirmity when older, but seeing the bare minimum nest egg numbers thrown around is worrisome – this idea that we are ONLY individuals, separate from the paradigm of community and family helping us. (N.B., MMM, you certainly don’t advocate for that, but elsewhere FI seems strictly individualistic).

    Since we’re not all lovers, soldiers, and justices (in the words of Shakespeare) our entire lives, but must also at one point become that pantaloon and eventually slip into “mere oblivion”, well, it’s just nice to know that annuities will be there if I’m 90 and can’t walk to the supermarket all by myself :-)

    Reply
  • Reido April 14, 2012, 5:11 pm

    I believe there’s a state-guaranty or some other entity that insures a certain amount of the annuity payment. In New York, I believe it’s like 80% or so just in case your insurance company goes under. Of course, to minimize the risk, just diversify across a few companies…

    Keep in mind that Social Security is basically an inflation-indexed annuity… you may not need any more coverage if you’re going to receive Social security in the future anyway.

    Reply
    • Mike M April 15, 2012, 5:21 pm

      Right. SS, Ironically, could be the best annuity everybody owns by birthright and working a lot consistently. The only others who are lucky out there are public employees guaranteed cost of living raises in their pensions / “annuities” for life, and full compensation for rising health costs in their elder years. Such a deal.

      Reply
  • Joy April 14, 2012, 5:28 pm

    Statistics I am sure have changed since 1994.
    I was in Nursing school in 1994. We were studying geriatrics.
    The instructor stated that only 25% of the elderly were in need of
    medical care.
    The other 75% were living well. Our assignment was to meet and,
    interview an elderly person that was living well.
    My interviewee was 89 years old. He was in fantastic shape. He
    had never been to a doctor in his life. He and, his wife were retired.
    He chose to stay active by cleaning businesses after closing at night.
    I asked how his wife was doing. He said that when they retired she
    began sitting on the couch. He said, “I told her that if she kept sitting
    there she would not be able to get up.” “Now she can’t get up.”
    His advice for staying well. Stay away from doctors. :)

    Reply
    • Oh Yonghao August 27, 2014, 12:31 pm

      My grandmother, 94 this year, still walks around, cooks, and cleans while taking care of her youngest son, my dad. She worked until she was 70, biked up to that point too. Her eyesight is nearly gone, legally blind now but has enough to play cards, even if she does mix up green and blue.

      My family grew up sitting on a sofa watching TV, most of us are overweight, and the ones with the crazy metabolisms when younger are now starting to see the weight gain from decades of bad habits. I’m the only one to change, participate in 5k’s, ride every day to work, and have lost 7kg this year. Hopefully I can follow my grandmothers example with a couple Mustachian twists (not “working” until I’m 70).

      Reply
  • Alan Jackson April 14, 2012, 9:00 pm

    I have always wondered why private no profit annuity funds don’t exist. Shouldn’t a group be able to get together and pool their money to do the same thing with a small fund management fee?

    Reply
  • lurker April 15, 2012, 5:46 am

    Vanguard used to have annuities that I always assumed would be the lowest fee takers the way their funds are….I would look there?
    I have problems assuming the insurance companies are always safe. Look at the idiotic things AIG was doing with derivatives….truly insane. Perhaps a large index portfolio has a better payout expectancy than any annuity.

    Reply
  • poorplayer April 15, 2012, 6:24 am

    As someone in the 60+ category and not yet retired, I have been eyeing annuities a bit lately. One thing I think it’s important to say is that not all of your stash need be turned into an annuity – you can take a certain portion of it and buy an annuity, while another percentage can remain in a well-diversified portfolio. Additionally, people should be aware that some annuities do not pay survivor benefits. Say you buy an annuity for $250K,and you die two years after that (because you got hit by a bus). The annuity company walks away with the rest of your principal, and your family/heirs get nothing. There are annuities, though, that do provide survivor payouts for a given number of years.

    If you live a Mustachian lifestyle, then annuities can become part of a three-pronged plan for a fairly secure retirement: your portfolio for growth and passive income, and your annuity and Social Security for “guaranteed” income at an amount a Mustachian can live on. I’m thinking on it.

    Reply
  • JJ April 15, 2012, 6:27 am

    @lurker. The AIG debacle is what may have scared me away from annuities for life. I think they were one of the largest issuers of annuities in the country. And they almost went under. I really wonder if the reason they didn’t go under WAS the fact that they were the largest annuity issuer. Uncle Sam didn’t want the heat if banks were bailed out but grandma’s check didn’t show up in the mailbox.

    I wish there were 30 year CDs that paid interest monthly and that added some principal to each interest payment (such that the monthly payment stayed consistent but the balance slowly dropped… like a reverse mortgage without the house). These would be like annuities but FDIC insured, and with no counter-party risk. Maybe this makes not sense but still, I like the idea. You give them cash, they pay you interest PLUS principal over time (instead of all the principal back at the end).

    Reply
  • MacGyverIt April 15, 2012, 6:45 am

    Thanks for this post, annuities are an investment vehicle I’ve heard a lot about but never really understood. Now I can put this in the back of my financial planning brain.

    The post is very timely as I spent yesterday with friends who’re caring for their elderly parents *and* aunts/uncles. Listening to their various concerns, I’m continually amazed at the cost of at home care or care at a reputable elder care facility. Many times more a month than I plan to life on in ER – that is what gets me. 2k a month now? Easy! Down the road? Not so much. My friends were quoting costs of $250 a day minimum for two shifts of health care professionals for full time stay at care or 5-6k a month minimum for an elder care facility with a great reputation. (And that doesn’t take into account medical care, mind you….)

    This Suze Orman page explains a lot to include different types of annuities (not my favorite financial advisor but this page is helpful):
    http://www.suzeorman.com/igsbase/igstemplate.cfm?SRC=MD012&SRCN=aoedetails&GnavID=84&SnavID=29&TnavID&AreasofExpertiseID=107

    DIFFERENT KINDS OF ANNUITIES

    Today, for all practical purposes, there are five main kinds of annuities: a single premium deferred annuity, an immediate annuity, a variable annuity, an index annuity, and a tax-sheltered annuity.

    Reply
  • Another Reader April 15, 2012, 7:06 am

    An annuity is a contract with an insurance company. The payout depends on the financial health of the insurance company. In the 2008 financial crisis, several of the larger annuity-issuing insurance companies came within inches of failure. Do you honestly think Washington is going to bail out your annuity if insurance companies fail? Heck, no. They will point the annuity recipients to the various state annuity guarantee agencies. They are about as useful as the PBGC in recovering your income.

    Annuities were created for folks that organized their financial lives around their paychecks and can’t figure out how to create a replacement. Early retirees that followed some version of the MMM approach will have already figured out and acquired an income producing set of assets that provide an acceptable paycheck substitute. A lot of those folks won’t have much Social Security coming, as they did not “contribute” to the system for enough years to have the benefit formula work in their favor.

    The solution for the older retiree is to automate and delegate. Hire property management before you need it to make sure the rental income keeps coming. Give the paper asset management to someone with a long track record of decent returns and minimal losses. Automate the bills and have a plan for when you can no longer manage your financial affairs. That way, when you die, all those income producing assets can pass to your heirs or to people and organizations that will carry out your charitable wishes.

    Reply
  • Fawn April 15, 2012, 10:27 am

    I’m a little concerned that guest-poster Gerald has added fuel to the Scaredy-Pants’s concerns.While it’s true that many FI planners do not look realistically at what retirement costs are for the healthy and active, I think the same is true for the more fragile elderly.

    I spend a good portion of my work day with this population and while some of their costs are higher (medication, insurance co-pays) others are far less (groceries, travel, clothing.)

    Mustachians are far too clever to sign up for an Assisted Living Facility for themselves or a loved one. For the level of assistance that they provide you can pay for yardwork to be done, a private nurse to come once a week to fill medication boxes, Meals on Wheels to be delivered, cable television, and private nurses assistant twice a week to help with bathing. And have a take-out pizza sent once a week. And a personal shopper buy and mail the gifts for the grandkids. And still have money to spare.

    And as both Gerald and Joy point out, Mustachians are far less likely to have long-term chronic illness because of their life-long habits of walking everywhere and eating healthy.

    Reply
  • Joy April 15, 2012, 1:28 pm

    Anyone interested in aging well should check out this story.

    http://www.diseaseproof.com/

    I am not advocating the “Eat to Live” diet. I just enjoyed the story. :)

    While the diet is very healthy, I for one do not function well on a vegan
    diet. I tried it for 8 months. I ended up having to take B-12 shots twice
    a week for about 3 months to recover.
    That said, I don’t eat very much meat. Now maybe twice a week.
    That seems to be plenty to keep my B-12 levels up.

    Reply
  • Gerard April 15, 2012, 5:23 pm

    A lot of good advice and observations in the comments, as always in Mustache Land. DIY and “automate and delegate” will work as well as, or better than, annuities for many many people. But for the specific SP worries that I lay out early in the posting — extreme longevity and increased odds of a bad investment spell — those strategies require a much larger investment to safely return the same amount of money that an annuity would, because you can’t really dip into the principal.

    Reply
    • Another Reader April 15, 2012, 8:58 pm

      If you have multiple sources of income from a broad variety of income-producing assets, you really don’t need to worry about outliving your money. The idea is to live on the income these assets produce, not liquidate the assets to provide your income. Too many people are led down the Monte Carlo path of asset liquidation in retirement, leading to a constant nagging fear about not having enough money during what is already a more difficult phase of your life. Worrying about a “safe rate of withdrawal” is silly when your needs are more than met by your income, whatever the actual rate is.

      You leverage into real estate and let your tenants pay off the mortgages. You reinvest your interest and dividend income. Maybe you own a small business or do some part time work to allow you to invest more earlier. After awhile, your interest, dividend and real estate income will carry you through. Although I am unhappy about the decline in the value of my rental portfolio, the income has not dropped. Most of my dividend paying stocks still pay the same dividends, even if stock prices fall. Quality bonds held to maturity will likely pay interest and principal as agreed.

      A really bad investing spell that would destroy your assets will destroy the assets of the insurance company as well. Surprisingly, a MMM approach to wealth and income building has you owning many of the same asset types as the insurance company. You can be more flexible about reducing expenses than the insurance company can. They may be forced to sell assets to meet payment obligations long before you have to sell a paid for rental property.

      Need extra income in the last few years of your life? That’s the time to trade some of that appreciated stock or a rental property for the extra cash. If you have leveraged well and invested wisely, you and your family will be able to handle those extra expenses easily.

      I see no reason to add a fee-laden annuity that is dependent on the success of one insurance company to my assets. Leverage and compounding will do the necessary heavy lifting.

      Reply
      • Bryan in Tahoe April 15, 2012, 11:53 pm

        I think this is great wisdom and advise. I also like the idea of leveraging into real estate and letting tenants pay off the mortgage, so you are later left with a cash flow that you didn’t really “buy” like you have to “buy” stocks. I can put $10K down on a $100K house and in 30 years I own it outright, and get to keep all of its income. This alone could pay for the Depends years better than an annuity.

        The math of annuities isn’t what bothers me, its handing over my dough to a corrupt company and never having control of that money again. In a sense I become an infant with a nanny and I’m hoping and trusting that the nanny doesn’t abuse me. I don’t like that. I want to be in control of my money. Maybe when I’m an old codger, I’ll be too senile to do this… but hopefully by that point I’ll have enough income from a good portfolio to just sit back and maybe have my kids help push the buttons for me on Fidelity.com.

        Reply
      • Gerard April 16, 2012, 4:33 pm

        I think get what you’re saying, but I’m sometimes dense, so let me paraphrase: the problem of not having enough principal to generate the income you need (an annuity selling point, I think) is dealt with by leveraged investing early (e.g., in real estate) so that you have more principal (and thus more income) by the time you need it… or you just keep a steady course (e.g., let the rental income keep coming in).

        wrt evil and/or unstable insurance companies, I think my Canadian perspective (heavier regulation) makes me more blase about that than I would be in other jurisdictions.

        Reply
      • Leslie April 3, 2013, 5:54 pm

        Best post ever. Struggling with this idea right now, worrying about SWR. It seems to be a trend that most people who are FI have rental properties of some type. I have no desire to be a landlord. Are there alternatives?

        Reply
  • Dragline April 15, 2012, 7:26 pm

    The biggest issue with an annuity is counter-party risk, because you are relying on that counter-party to pay you for the rest of your life.

    I don’t see these as much use for an “early retirement”, but they are potentially useful for older people, not because they are a really a good deal, but because as we get older we get more foolish about money management. An annuity provides a safety valve against our own stupidity — once you have purchased one, you can’t lose that money elsewhere. Never underestimate your own stupidity.

    Reply
    • Mr. Money Mustache April 15, 2012, 8:04 pm

      Haha.. nice slogan.

      As for getting less wise with old age – I sure hope I can avoid that. Here’s a neat study on exactly that concept: financial acumen versus age, and the peak age for financial decision making is supposedly 58.5: http://www.economics.harvard.edu/faculty/laibson/files/IB_10-12.pdf

      Reply
    • The Masked Investor April 16, 2012, 8:39 am

      I agree that payout annuities are best suited for older people (60+). For the younger folks, there is a newer product known as “longevity insurance.” Basically, for a lump sum today, you are guaranteed a monthly payout at some point in the future for the rest of your life (but you have to be alive at that point to claim it). This might sound like an iffy deal, but if you can slide 5 or 10% of your portfolio to an insurer at age 50 and be guaranteed that you get a big, fat monthly check at age 75 it allows you to cut off the risk of very extended longevity at a modest cost. Of course, it would probably be wise to do this at a time of higher interest rates than we see today and you would want to be very picky about which insurer you bought this from.

      Reply
  • bogart April 15, 2012, 8:10 pm

    Thanks for writing about this; it’s very helpful. Another product I’ve seen a bit about, though not lots (I think it”s fairly new) is something labeled (at least colloquially) longevity insurance — basically, an annuity, but one that only kicks in pretty late, say 85. So as I understand it, if you’re 60 and you’re worried that if you live to 85, you’re likely to need more income, e.g. to pay for care in a skilled nursing facility (which is well beyond “assisted living”), you can pay relatively little (as compared to a conventional annuity) to buy a relatively generous (ditto) payout that starts at age 85. Not sure your opinion of that option, but it would seem it might be more consistent with Mustachian views and resources allocation approaches.

    Reply
  • PNW April 16, 2012, 12:04 pm

    Glad to see annuities mentioned, however I don’t see info on charitable gift annuities. I see them often in my work for a non-profit higher-ed org.

    – generally done with individuals who are over 65 yrs old, if under 65 a deferred annuity is recommended
    – rates are often a bit lower than an annuity through an insurance company or bank (Ex. 5.8 % for 75 yr old)
    – tax benefits are much better, especially when funding the annuity with real estate or an appreciated asset
    – you can select yourself and another beneficiary (called a 2-life annuity), this is usually a husband and wife
    – when you/the annuitant dies, funds pass to charity and are used as your directed
    – annuitants feel rewarded knowing they will be helping others/giving back

    Reply
  • Pachipres April 17, 2012, 12:35 pm

    Hi MMM,
    Did you know – is it Dirk Bendict or something- I think he is one of the good looking guys in your photo had prostate cancer and cured himself using Macrobitoics-this is the diet and lifestyle our family practices. You had some blogs about diets lately and just thought I would let you know about him and what he did to cure his cancer. He wrote a book about it too-The Kamakaze Cowboy I think is the name. Good read!!

    Reply
  • Carey L September 7, 2014, 5:46 am

    According to the New York Times there have been some changes in the US that now allow longevity insurance to be part of 401 K plans. Payout can be at 85 rather than 70.5.

    http://www.nytimes.com/2014/07/02/your-money/annuities/longevity-insurance-is-new-retirement-plan-option.html?_r=0

    Reply
  • kindoflost August 17, 2016, 7:47 am

    What if (complainy pants comment here) you buy the annuity and die the day after? You are screwed: out of your money and dead. With life insurance you pay for being alive and they pay you (your beneficiaries) if you die. With the annuity they pay you for being alive(!?), I am content with being alive why would I want to be paid for that? I don’t get it. A few months ago I read the “Die broke” book and I hated it just because of this. I must be missing something. Seems like the end of badassity.

    Reply
    • Ron Cameron August 22, 2017, 5:08 pm

      There are a lot of variations on annuities. The one you mentioned is available, but it’s just one of many. In addition to the “you die and everything stops” kind there are some that promise to get your principle back. or pay for ten years, or…you get the point. I also read Die Broke – a very interesting read!

      Annuities (and most insurance products) help fill an emotional need as much as a financial one. Which annuity might make you happiest depends on those needs. Talk with someone who you trust about different options. There are not many “bad annuities”, but most of them are incompatible with most people. Find one that’s right for you, if it exists. And to a previous commenter who said that Variable Annuities are bad: They’re one of the few that I’d personally own (but likely never will). Again, everyone has different needs and wants.

      Reply
  • Kristine August 15, 2017, 10:30 pm

    I’m totally new here and it’s because I was deaf dumb and blind before last year when I got hoodwinked into buying an annuity. We put $300K into it. Then one morning I woke up and it hit me, I needed to look into this. And wham! my intuition led me to the truth about annuities. My agent had lied by omission. I will spare you the gory details. So now my question is do I pull out $275,000 now (that’s my cash surrender value) and invest it elsewhere or wait? I cannot even get my full $300K back until 2026! Any advice would be much appreciated. And if I must say, getting hoodwinked led me to your blog and I’m already seeing the silver lining and blessing in disguise because I am not letting anyone ever manage my money ever again. Retiring early is our goal.

    Reply
  • Link July 26, 2018, 10:28 am

    New reader. Mid-40s. Interested in retiring ‘early’. So far to me, this means between 55-60 and I’m exploring ways to do that. This is a GREAT site to help me do this. My financial planner is recommending a Whole Life Insurance option as a way to have an alternate form of income not tied to stock market fluctuations so I can draw on it during down years. The idea is that you save enough to fund 3 or so years of income needs so that when the market is down you don’t have to draw out your 401k principal, but instead leave it in to recover when the market recovers. The booklet she shared with me shows the benefits of avoiding drawing on your stock market principal in down years, and suggested that some form of annuity would be a good alternate source of income.

    Of course her suggestion is based on the assumption that I will buy a 20 year policy (put money in for 20 years) and only start drawing on it when I’m around 65. But if I want to retire before 60, what makes sense for me? Start living an MMM lifestyle, retire early, then I can still wait to draw on this policy starting at 65? Or don’t bother with it?

    Reply
    • Mr. Money Mustache July 26, 2018, 3:13 pm

      Don’t bother at all! Whole Life insurance is an industry that probably shouldn’t exist because of fees and complications. Simply owning index funds will outperform every other option, on average.

      Reply

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