Annuity or guaranteed income for life: Which would you rather buy?

[scagnt83]

Thanks for the comments. Useful perspective.

Dont take this as me being snarky. But its not a perspective.

I was stating facts that are technically accurate from an investment analysis perspective.

Stocks. Any stock. Carries an extremely higher amount of risk vs. a MYGA.

If your 5y MYGA pays 3%, at the end of 5 years you will have annualized 3%. For a total return of 15% over 5 years. No variables. Thats what you get, guaranteed, no matter what.

If your NatGas stock pays a 3% dividend over 5 years, you get the same 15% cumulative gain from dividends. However, your stock price could be down by 15%. Meaning you have a 0% net gain.

Even with Dividends, even if that Dividend were somehow guaranteed, there is still no guarantee of a positive return on your investment.

Assuming for a second that the old saying holds true about "stocks always rise eventually"... eventually is the key word. A MYGA guarantees a gain in a certain number of years. If you plan on utilizing those funds in 5 years, and the market takes a drop like in 08/09, suddenly your 5y time frame is forced to be extended to an 8 year timeframe.

 

[scagnt83]

(I'll take the spirit of the post and not argue about specific stocks. )

Doesnt matter what stock or stocks you pick. The risk is exponentially more with stocks vs. a MYGA annuity. Its literally a question on the securities exam....

And again.. timeframe. Go look at some of the top NatGas stocks and see the ups and downs they have had over the years. When the end of your 5 year timeline falls on one of those major down years, you are looking at a negative total return despite dividends.

Then, to realize any gain, you are forced to hold your investment longer than planned... which exposes you to more risk from both a "time value of money" standpoint, and risk of holding a stock that has taken a hit in the hopes it goes back up (bagholding).

The difference from a risk perspective is like night and day. They are literally on opposite ends of the chart. However, from a reward perspective, the stock has the ability to give you a much higher potential return.

The two are dynamically different. What is right for you depends on your personal goals and tolerance for investment risk.

 

[LostDollar]

Dont take this as me being snarky. But its not a perspective.

Perspective = concept of incorporating the idea of risk into thinking about savings.

I am having lots of vocabulary issues in trying to think about these things. One of the first ones is the "correct" definition of "annuity". I think my definition is right. Ray thinks his definition is right. That is not a productive conversation to continue.

But I am still left with a problem. Before I can talk to you and ray about annuities, I have to understand Ray's definitions. I can't. After rereading some Oxford Life MYGA literature several times, the closest I can get is this:

(Taking my passbook and $2.00 to Mr Carlson at the Building and Loan (age 12) ) + ("Annuity" is a lifetime monthly income in retirement) = (well sorta =) (some of Ray's definitions of "annuity")

Extending from that, my simplified thought processes went to:

(Taking my passbook and $2.00 to Mr. Carlson at the Building and Loan) = (Getting an annual return on an MYGA premium) OR ( Buying a natural gas stock and letting the money ride in a dividend reinvestment program).

Then (again in my simplified thought processes) you came back and said "NO, you can't do that." "You have forgotten about risk in 2 forms, the possibilities of loss of principal and fluctuation of interest (dividends) in the stock investment over the same period as the MYGA covers." (And you forgot to mention those pesky selling fees) (And yes, I am very much guilty of trying to make a 40 year return on a natural gas stock match a 5 year return. )

Your short answer was (I think); LD, you MUST include the concept of risk when you are trying to compare other actions to "the savings process of taking your passbook and $2 down to Mr Carlson at the Building and Loan".

Useful perspective (as in standing place to view things from). Thank you.

 

[scagnt83]

Perspective = concept of incorporating the idea of risk into thinking about savings.

I am having lots of vocabulary issues in trying to think about these things. One of the first ones is the "correct" definition of "annuity". I think my definition is right. Ray thinks his definition is right. That is not a productive conversation to continue.

But I am still left with a problem. Before I can talk to you and ray about annuities, I have to understand Ray's definitions. I can't. After rereading some Oxford Life MYGA literature several times, the closest I can get is this:

(Taking my passbook and $2.00 to Mr Carlson at the Building and Loan (age 12) ) + ("Annuity" is a lifetime monthly income in retirement) = (well sorta =) (some of Ray's definitions of "annuity")

Extending from that, my simplified thought processes went to:

(Taking my passbook and $2.00 to Mr. Carlson at the Building and Loan) = (Getting an annual return on an MYGA premium) OR ( Buying a natural gas stock and letting the money ride in a dividend reinvestment program).

Then (again in my simplified thought processes) you came back and said "NO, you can't do that." "You have forgotten about risk in 2 forms, the possibilities of loss of principal and fluctuation of interest (dividends) in the stock investment over the same period as the MYGA covers." (And you forgot to mention those pesky selling fees) (And yes, I am very much guilty of trying to make a 40 year return on a natural gas stock match a 5 year return. )

Your short answer was (I think); LD, you MUST include the concept of risk when you are trying to compare other actions to "the savings process of taking your passbook and $2 down to Mr Carlson at the Building and Loan".

Useful perspective (as in standing place to view things from). Thank you.

Yes. You must take both risk and timeframe into your perspective when choosing the right investment.

The 5% 5y MYGA returned 5% annualized, 100% of the time after 5 years.
So to compare it to a dice roll (a 5y dice roll), every time you roll the dice you get 5%, guaranteed.

The 5% dividend NatGas stock did not return 5% annualized 100% of the time after 5 years. Hypothetically, 20% of the time, its a negative return. 20% a 5% return, & 60% over a 5% return.
So each time you roll the dice, you have a 1 in 5 chance of losing money. 1 in 5 of making 5%. And 3 in 5 of making more than 5%.

Now. If you are on the casino floor and have that $10k in your pocket. Which option do you want to lay the money down on? 5 in 5 chance of 5%? Or 1 in 5 chance of losing money... with a chance of over 5%... ?

Im not saying the MYGA is better. Im just saying the risk is completely different. So what does that $10k "mean" to you? If you really did find it in the backyard, the riskier option might be fine with you. If it came from retirement savings needed to make ends meet... the riskier option probably isnt fine with you.

Risk is at the heart of investing. If you want greater return, you must take on greater risk. It could be the risk of losing a greater amount of money, or it could be the risk of being forced to hold an investment for longer than planned (or forced to liquidate when down and take a loss). Risk is why a junk bond (speculative grade) pays more than a AAA (investment grade) bond. And risk is why some companies pay much higher dividends on their stock than others.... especially in the energy sector... higher than average dividends can often mean a more speculative (riskier) company who's stock price is going to fluctuate much more than others.

 

[scagnt83]

Another major difference between the two strategies is that an annuity is a turn-key option that requires no maintenance on your part.

No need to research stocks and find the right one or ones.

No need to review those stocks quarterly to ensure they are still well positioned to do what you need. (if your not reviewing your portfolio quarterly you are taking a big risk)

No need to review your holdings to see if your principal is up or down.

No need to worry if market timing will be right to get your hands on that money in 5 years.

No need to pay extra fees to a stock broker to do all of this for you (you wont find one who will take just $10k unless you already have one... you might have luck at $100k with a run of the mill retail outlet like EJ or RJ or your local bank)

The portfolio of stocks takes 20x the amount of time and effort to start and maintain vs. the MYGA.

I take it you are familiar with a CD at the bank. MYGAs are essentially the CD of the annuity world. Or the Bond of the annuity world. It gives a guaranteed rate of return for a set period of time. After that time period you can take your money out and be done with it. Guaranteed is the key word there.

 

[scagnt83]

But I am still left with a problem. Before I can talk to you and ray about annuities, I have to understand Ray's definitions. I can't.

Ok. There are different types of annuities that do different things for you financially.

Income Annuities provide income and zero liquidity. These are often called "immediate annuities" because most pay the income immediately or sometime within the first year. Income is usually for life, but doesnt have to be. Some Income Annuities wait until after year 1 to pay income, these are called "deferred income annuities"... but they are basically a deferred annuity without liquidity... so they are seldom sold.

Deferred Annuities have 2 phases, growth & income. The income phase is optional, you can cash out your funds after the initially agreed upon growth phase is over. (called surrender period). Growth during the growth phase is what differentiates the various types of deferred annuities. Some (MYGA) guarantee a set rate over a set number of years. Others (Index Annuity) credit limited growth based on market indexes. Variable Annuities invest the funds directly into mutual funds and growth is based on that. A traditional "Fixed Annuity" credits a variable interest rate that varies based on carrier discretion. But all are the same in the fact that they grow funds, let you take out those funds free and clear after a certain number of years, and give you the option to create an income stream for life with those funds. Most, allow you to take 10% out per year regardless of early surrender charges. Most waive early surrender charges if you have a terminal illness.

Then, many Index and Variable Annuities offer an additional "Rider", usually at a cost, called a Lifetime Income Rider. This (usually) guarantees an even higher rate of return and an even higher payout rate for your lifetime income stream.... but you commit to the contract for life. You can still cash out, but you dont get the enhanced values of the income rider. (to make a long story short)

But all that is not for the consumer to really figure out to a large extent. As Ray mentioned, consumers go to an annuity expert and say "I want to accomplish this goal" and the expert fits them to the annuity that accomplishes that goal.

If you come to me and say "I want a guaranteed interest rate, but dont want to lock up my money for too long" ... I would show you a 5 year MYGA. If you said, "I need to create a retirement income"... I would likely show you an Index Annuity w/ Lifetime Income Rider. If you said you wanted higher growth than what guaranteed rates offer, Id show you an Index Annuity without the income rider, just for growth. Make sense?

 

[OhU812]

The heading was senseless to me.. Back in the dark ages when I sold annuities, we sold them to provide a guaranteed income for life.

Could not agree more !