# A question about retitement insurance **URL:** \ **Category:** Factual Questions\ **Created:** [March 3, 2019, 1:37pm UTC](https://boards.straightdope.com/t/a-question-about-retitement-insurance/830479 "2019-03-03T13:37:41Z")\ **Posts on this page:** 7\ **Page:** 2
**Author:** ![Tired\_and\_Cranky](https://avatars.discourse-cdn.com/v4/letter/t/a87d85/32.png) [@Tired\_and\_Cranky](https://boards.straightdope.com/u/Tired_and_Cranky)\ **Post date:** [March 4, 2019, 5:44pm UTC](https://boards.straightdope.com/t/a-question-about-retitement-insurance/830479/21 "2019-03-04T17:44:15Z")
> [@Bill\_Door](#): > > An annuity might be a good investment for a person who might not have enough money saved to last for the rest of their life. The old four percent rule isn’t precisely accurate, but a certain level of savings and withdrawal rate will ensure that you’ll never run out of money no matter how long you live. Most people don’t have enough for this to be true, so they face longevity risk. I think you are misinterpreting the “4% rule” and you might be misleading people about what it means. The 4% rule says that if you start retirement at a normal retirement age, you begin withdrawing 4% of your retirement portfolio the first year, and thereafter you increase the amount you withdraw each year by the rate of inflation, you can still maintain a reasonable expectation (let’s say 90% confidence) that you won’t run out of money before you die. What makes people believe this works is that they expect: to receive a reasonable rate of return with a portfolio that is not too risky, they expect to die within 25 or 30 years of retiring, and they accept that this might mean that they leave nothing in their estate. The FIRE enthusiasts seem to be interpreting the 4% rule to mean that 4% is a safe rate of withdrawal starting at any age with no risk of ever running out of money. That’s just ignorant bullshit. If you just mean that you can withdraw 4% of your portfolio each year with without ever running out of money, that’s true but it’s also trivial. Zeno’s paradox means you could also withdraw 98% of your money each year without ever running out of money. The problem is that a 98% rate of withdrawal will just mean a continually declining standard of living as your portfolio shrinks in real terms. A constant 4% withdrawal rate may mean the same thing unless your portfolio grows, after withdrawals, at a rate that exceeds the rate of inflation. That’s actually very tough to maintain in the real world year in and year out. > [@Bill\_Door](#): > > Yes, as a group annuity purchasers lose money. They have to; the sellers of annuities pay salaries, comissions, and make profits, but some individual purchasers get back much more than they pay in. That’s pretty much how all insurance works, some large percentage of people pay thousands in, for example, fire insurance so that a small percentage of people get back much more than they paid in or will ever pay in over a lifetime. An annuity is longevity insurance; you’re paying a premium to protect against living longer than your money. Fixed annuity purchasers generally make money, in the sense that on average, annuitants collectively receive more in annuity payments than they pay in annuity premiums. The insurance companies make money paying out more than they collect by investing the premiums in various instruments that are expected to earn even more than the payments to annuitants. The insurance company takes on the risk of those investments and they are the first to lose if the investments don’t pan out. > [@rbroome](#): > > I am no expert, but the OPs description is pretty old school. Does anyone actually sell/buy such an annuity any more? Yes, lots of companies do. Generally, however, insurance companies don’t make a lot of money selling these annuities because it’s a very competitive market. It’s pretty easy to understand if you are getting a good fixed annuity deal. First, pick a bunch of insurers that are financially stable so they are likely to be able to pay out their commitments. “AAA” rated insurers are a generally safe bet. Second, pick the insurer that promises you the highest annuity payment for whatever amount of money you want to invest. That’s it. It’s not much harder than shopping for the best price on milk. Accordingly, insurers are competing on price, so they don’t make much money on the sales of these annuities. Other annuities are more complex, offer various payout structures and features, and are very hard to comparison shop. The result is that the insurance company can make much more money on these products so it can offer much higher commissions to sales people to sell them. Ergo, if an insurance salesman is telling you about a product, it’s likely a more profitable one for him to sell you and it’s probably worse for you to buy. > [@rbroome](#): > > Annuities are insurance, not investments. They are both. These categories aren’t mutually exclusive. Whether they are a good investment is a different question. > [@rbroome](#): > > I purchased a couple of annuities several years ago and we discussed the current state of the market. Annuities where one lost the balance at death were precisely the reason that annuities had gotten such a bad reputation. I would never have considered such a plan and none were offered. Indeed I got the impression that such annuities were not offered any more. The financial calculation makes them such a bad deal no one would buy them. They aren’t necessarily a bad deal but you should understand what you are getting. If you want your annuity to provide for other beneficiaries or heirs, fixed single-life annuities are the wrong choice. If you just want to maximize your own income, incur minimal risk, and you have no concern for anyone after you, fixed single-life annuities could be exactly the right decision. > [@Riemann](#): > > It’s worth noting, however, that I think people should be much more circumspect about the creditworthiness of the annuity seller. Remember that you are lending a private corporation your money for a very long period, potentially 30 or 40 years. Annuities are not insured by FDIC or any other Federal scheme. There may be some protection at state level, but it may be quite limited. Everything Riemann has said in this thread is excellent but I’m pointing this out in particular because no one else has mentioned it. You are taking on credit risk when you buy an annuity. Most insurance companies are good credit risks but that won’t mean much to you if yours is the company that shits the bed during your retirement. > [@ftg](#): > > If you don’t do the annuity option, then at age 70.5, you have to start taking out a required minimum distribution (RMD). It’s a percentage based on overall life expectancy. > > One problem with the RMD rules is that the percentage gets quite high in later years. You can easily drain the money out. Actually, it’s impossible to completely drain the money out of an IRA due solely to RMDs. See again, Zeno’s paradox. Using this chart as an indicator, you never have to withdraw more than 52.6% of your IRA in any given year and that doesn’t happen until you reach 115 years of age. If you are 95, your RMD is 11.6% of your portfolio. You also don’t have to spend all of your RMD. If you aren’t spending the RMD, you can pay the taxes and save or invest the remainder in taxable accounts. > [@filmore](#): > > On average, I wonder if annuities give better results to people who might not make the optimum investment choices. Let’s face it, a lot of people are not savvy investors. A lot of people make outright poor investment decisions that cause them to lose money. A lot of old people lose good decision making ability and get outright scammed out of their money. In a lot of cases, I can see having the money locked up and providing regular monthly income being the right choice. I know someone who retired and then lost 98% of his nearly seven-figure IRA balance with bad investment decisions before he was even required to start taking RMDs. No scams necessary. He certainly would have been better off just collecting an annuity. (He has a pension, social security, and investment property, so he’ll be okay.) ---
**Author:** ![rbroome](https://avatars.discourse-cdn.com/v4/letter/r/838e76/32.png) [@rbroome](https://boards.straightdope.com/u/rbroome)\ **Post date:** [March 4, 2019, 10:55pm UTC](https://boards.straightdope.com/t/a-question-about-retitement-insurance/830479/22 "2019-03-04T22:55:45Z")
Tired and Cranky, Thanks! Your explanations certainly help me understand the nuances. When I was working retirement was simple-save as much as I could and don’t mess with it. Now that I have to spend it financial life is more difficult. ---
**Author:** ![Hari\_Seldon](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hari_seldon/32/5173_2.png) [@Hari\_Seldon](https://boards.straightdope.com/u/Hari_Seldon)\ **Post date:** [March 4, 2019, 11:20pm UTC](https://boards.straightdope.com/t/a-question-about-retitement-insurance/830479/23 "2019-03-04T23:20:56Z")
Peace of mind. I know that my annuity will keep on coming no matter how long I live. And if I die first, my wife will still get 60% of that. Also my annuity was given at an insanely high rate and I know they are taking a bath on it. But no one imagined 19 years ago that interest would go and stay so low. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [March 5, 2019, 6:20pm UTC](https://boards.straightdope.com/t/a-question-about-retitement-insurance/830479/24 "2019-03-05T18:20:09Z")
It’s worth noting that some people are just really bad with money, and an annuity ensures they will always have money to live on in the long term. ---
**Author:** ![Kent\_Clark](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kent_clark/32/105_2.png) [@Kent\_Clark](https://boards.straightdope.com/u/Kent_Clark)\ **Post date:** [March 5, 2019, 10:40pm UTC](https://boards.straightdope.com/t/a-question-about-retitement-insurance/830479/25 "2019-03-05T22:40:03Z")
Also, (and this is especially true with TIAA) many people who choose annuities work on a government or some other salary scale, where they know they’ll never make enough to put enough money in to get a big pool of money at retirement. If you’re a teacher in a rural public school district (at least in my state,) your scheduled salary increases probably haven’t kept up with inflation. Guaranteed monthly payments until you die sounds like a pretty sweet deal. Putting your life savings into a market that rises and falls, not so much. ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [March 6, 2019, 5:02am UTC](https://boards.straightdope.com/t/a-question-about-retitement-insurance/830479/26 "2019-03-06T05:02:05Z")
> [@kunilou](#): > > Also, (and this is especially true with TIAA) many people who choose annuities work on a government or some other salary scale, where they know they’ll never make enough to put enough money in to get a big pool of money at retirement. > > If you’re a teacher in a rural public school district (at least in my state,) your scheduled salary increases probably haven’t kept up with inflation. Guaranteed monthly payments until you die sounds like a pretty sweet deal. Putting your life savings into a market that rises and falls, not so much. And that’s the essence of the discussion - do you want a fixed income, which necessarily will be a relatively conservative rate of return, but as close to guaranteed as the real world gets? Or do you want to take a chance on an investment vehicle that can fluctuate with the market? Is your glass half empty or half full? Given the incredibly low interest rates and irrationally exuberant stock market of the last decade (now that 2008 is more than 10 years ago) it seems a no-brainer. But this is a decision for the next 30-plus years, not the next few quarters. If you had the answer as to what’s going to happen to the markets, you wouldn’t be worrying about your retirement savings. The general rule of thumb is that unless you’re Warren Buffet, invest your stock portfolio in mutual finds that track certain markets. OTOH, those are not immune from dead cat drops and bounces, but making your own stock guesses is usually a recipe for disaster. The read-the-book-repeat-the-guidelines advisors basically advise a mix of stocks and bonds (in mutual funds) with stocks predominating in the early years to enjoy growth opportunities, then bonds (fixed return) predominating as you get closer to retirement. General statistics IIRC say that stocks will always outperform bonds if you can wait for the right decade to pull it all out. Sometimes that is too long. ---
**Author:** ![ftg](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ftg/32/2801_2.png) [@ftg](https://boards.straightdope.com/u/ftg)\ **Post date:** [March 6, 2019, 6:13pm UTC](https://boards.straightdope.com/t/a-question-about-retitement-insurance/830479/27 "2019-03-06T18:13:37Z")
Yet another variation that TIAA provides: Some of their annuities are not “fixed” rates. I.e., they can go up and down based on the markets. (And you can have an annuity based on several markets: different stock classes, bonds, real estate, overseas stocks, etc. I remember scanning thru maybe 50 of these.) They have a calculator thing that allows you to choose options regarding which type of annuity, how the market does, how inflation goes, etc. and see how it works out in the long run. It gets mind-boggling pretty quickly to try out all these things. So a “fixed amount per month” is not necessarily what many of TIAA retirees have (nor other annuity holders). [Previous page](https://boards.straightdope.com/t/a-question-about-retitement-insurance/830479.md?page=1)