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.
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.
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.
They are both. These categories aren’t mutually exclusive. Whether they are a good investment is a different question.
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.
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.
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.
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.)