The 401k and IRA accounts can be a great way to save money for retirement. They can also be a good way to lose a bunch of money. It is all dependent on which funds you pick for your investment choices. The problem is, most people are not good at picking funds–at least, not good enough to ensure there is enough money for retirement. Instead, I think many people would benefit from an investment where they put in a certain amount and be guaranteed of getting at least some money each month in retirement.
Would it be possible for the government to create a fund which would pay out as an annuity and make that fund available as an investment option in your retirement account? It could act like Social Security or a pension. Based on how much and when you put money in, you get a certain amount per month in retirement. I think something like that would be a much better choice for most people and provide more retirement income than they might otherwise get by picking traditional mutual funds.
By my calculations at least, annuities offered by private companies do not differ in their return too much from Social Security once you factor out the employer match and the effective subsidy given to lower income workers. Sure there may be a 10-20% leeway for a profit margin but if it were larger, another private annuity firm would undercut their rate.
The biggest problem I see with private annuity firms is that the returns are typically not guaranteed at all by the government, so if the company folds, you get jack. (As opposed to mutual funds where the entire economy would have to collapse in order for you to lose your entire investment.)
So, it would probably be a better use of government funds to guarantee private annuities and/or implement more tax advantages for them rather than to start one on its own. Unless you were talking about subsidizing investment into them rather than simply making them marginally better than current offerings, which is another story.
That’s the problem I see too. There’s no way I would put my money in a private annuity with the hope that the company is around and solvent in 40 years when I retire. Having a government annuity (like SS) is really the only way I could see this working.
The problem with traditional annuities is that you have to have the money to buy them in the first place. The wise investor could save up enough money to purchase one at retirement, but then they probably don’t need the annuity anyway. Joe Sixpack probably won’t save enough money so that he can buy an annuity. Instead, he would be better off having a % go into an annuity which would be guaranteed to provide at least some regular payment when he retires.
That’s true as well. If there are accounting requirements the government imposes that cause private firms not to offer similar annuities that you can accrue gradually and in small amounts, I’d favor relaxing them. Perhaps the government could provide free insurance, up to say $50,000, for those type of accounts, in order to generate more interest on the consumer side for the products so there could be efficiencies of volume which would make companies more likely to offer them. After all, many annuity companies are too big to fail so if they do fail we’d be in bigger problems than paying off $50K here and there.
We had something just like this once. They were called pensions. While in the good old days the employee didn’t have to contribute, there is no reason they shouldn’t be able to. And they have to for a lot of state employee pensions now.
The problem was that employers tended to shortchange the pension when the market was up and then couldn’t afford to make it up when the market was down.
A bigger problem is that annuities are typically a bit conservative if you are 40 years from retirement.
As for stability, the big life insurance companies offer them, and they are pretty stable.
In any case 401Ks usually offer very safe (and low yielding) investments which would be just as good. One can always take their 401K money and purchase an annuity with it when the time is right.
My impression in reading about annuities is that they are held in low repute in some circles. Maybe someone can explain the reasoning behind this.
You can always invest in government bonds (about as safe as possible for any financial instrument) and stagger the redemptions so you get a regular income stream.
I’m not sure if what you say about private annuity firms is 100% accurate. My understanding is that while there is no federal protection for these types of investments - there is some protection at the state level.
Here is a webpage that seems to break it down by state. I would certainly try to get verification from your particular states insurance commission (or whatever it is called in your state):
If memory serves - I think the big reason some are suspicious - is they are often pushed by sales people that can get very fat commissions on these.
Suze Orman is fairly well known for her stance on these. Many insurance sales associates take umbrage at her claims and have attacked her. There is a hilarious thread somewhere on the internet with a sales person doing just that - and trying to make it seem like annuities are the best thing ever and he has no bias, but makes himself out to be a complete idiot in doing so.
The can be good in some situations, but watch out - as people that are selling these often have a vested interest - and can be an easy vehicle to fleece grandma out of her nest egg (or at least a hefty portion thereof).
The other big problem was not enough people dying early. I agree that pension funds were raided for short-term gains, but they were also funded on pie-in-the-sky future assumptions regarding profitability, returns, and life expectancy.
While I think this applies to variable annuities, it does not apply to immediate annuities, which is what the OP is referring to. Immediate annuities are sold as a commodity (in much the same way that term life insurance is sold). They do not generate large commissions and they are fairly easy to compare to each other.
It’s been a while since I’ve looked at any of these - so thanks for the clarification - I don’t think I ever knew they got paid a different amount (makes sense though).
Whenever I’ve done the numbers on life insurance based investments - it usually been with a friend or business associate - we get a packet from someone who has convinced my friend or business associate that his/her product has some great tax advantages - or would otherwise be perfect for them - they have never worked out for me under scrutiny - or even come close - except in certain situations the insurance agent talks about - that usually isn’t of much interest to me.
I don’t recall if any were for immediate annuities (I’m pretty sure they weren’t), but I just tried an immediate annuity calculator on line to get an idea of what sort of return I’d be getting. So I didn’t have to do the actuarial calculations myself - I picked an option that gave me a guaranteed 10 year return. Multiplied that number by 120 and I didn’t even end up with 4% over what my original investment was. Now I don’t have much of a risk of dying in the next would years - so perhaps I’m not getting the full effect. I have a feeling though - that if I ran the numbers - I’d still be getting like 4% total - every 10 years PLUS the benefit their product obtains from people dying and them never having to pay off.
So - Even though they are only paying their agents 3% - I suspect the costs inherent in the product are probably also higher than a mutual fund. I’m not sure if there are any rules on what they have to pay out or such. With indexed mutual funds - I like the idea that you know what the company is making - it is easy to see. Perhaps there are better ways to invest your money, but there aren’t going to be many ways with less cost.
This type of risk - I believe they call it “longevity risk” - is of course more costly to administer - and more complicated than most other types investors run into.
I think there is probably some merit to governments being involved in some way above and beyond that of picking up the pieces when things go wrong, but I’m not really that knowledgable on the subject.
TSP is not an annuity. It is a vehicle (like a 401K, but only for .gov employees) where participants can invest in various stock/bond funds. There is no guarantee against loss of value.
That’s a really interesting idea. it would be no load, not much harder to administer than SS today, and if successful could take the wind out of the sails of the anti-SS fanatics. The market has spoken!