Annuities and things to think about

[CBtoo]

Many people look to annuities to help with having a guaranteed income when they don't have pensions (which would be most boomers). 

With annuities you give a lump sum to a company (this is actually in many respects insurance). They give you a monthly benefit for the terms of the agreement, sometimes only the first 5 or 10 years is a guaranteed rate that is high and after that the guaranteed rate is pretty low (although what you can get can be higher based on how they invested your money).

Pay attention to this kind of fine print. If the company that has your annuity money goes bankrupt the amount of protection you have varies depending on where your money is. If the company makes risky investments and loses money you may find your annuity payments at risk.

Here are some issues: 

1) Inflation - one rule of thumb is that costs double every 11 years. Will your annuity be inflation adjusted? And yes you pay more for that.

2) Where exactly is your money? The growing trend is to transfer your money to an off shore (often Bermuda where regulations are far weaker) to either another company or a subsidiary. Check into this. Gven a choice you want your money to stay in the USA either with the company you paid for your annuity or if they off load it to a highly rated insurance company who will keep your money in the USA.

3) The growing trend is to have Venture Capital (VC) invest in annuity companies. The problem is that the VC company is interested in their best financial interests and not yours. They stay invested, typically no more than 10 years and then sell the company. Usually they do some good things like get rid of inefficiencies but they are only interested in short term profit for themselves and not you, the one with the annuity. When they sell the company usually the buyer has to take on debt which increases your risk as an annuity holder. Ask detailed questions about the company who you are buying the annuity from and whether orn ot VC's are involved or will be involved in the future.

4) We boomers break everything we touch and annuities (and retirement) will be no exception. Our population bubble with the population bust of the millennial generation is the problem. Here is a canary in the mine about this.

There is a lawsuit (that AARP has joined) against TIAA (a very big teacher/faculty retirement company) that they rigged the investments that Morningstar (reputable) suggested a TIAA customer buy with their retirement money to include 1 to 2 proprietary investments (which usually means, amonst other things,  you can't transfer that money to another company without cashing it out and then paying tax on any money invested that was pretax and the capital gains). With proprietary funds the profits for the company that owns it is higher than if your money is used to invest in non proprietary funds due to the fees those funds charge.

The key thing here is WHY they said they are doing this. They stated why they are doing this is because they are LOOSING MONEY WITH BOOMER ANNUITIES  BECAUSE THERE ARE NOT ENOUGH MILLENNIALS. That is not a fixable problem because babies aren't born at, for example, age 50. The only way to grow the millennial generation is legal immigration. 

This is a canary in the mine for what we boomers are up against with annuities, not just with TIAA but with all annuity companies. And to make a bad situation worse a big chunk of boomers aren't even close to retiring yet, are too young for medicare, etc. and we already have this problem. This means unless something changes the problems will only grow.

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In my opinion after looking into this further (I have a PhD in business) one solution the annuity companies will use is that what you get in monthly payouts with annuities will drop or you will have to give the annuity company more money for the same payouts people are getting now. 

And it will be more likely that annuity companies will go bankrupt unless something changes. If the annuity company is off shore your risks are higher. If VC's are investing in your annuity company the risks are higher. 

As a result don't just blindly buy annuities. Read the fine print. Ask about where your money will be and with whom. Ask who is investing in the annuity subsidiary and where the subsidiary is located. Are they then packaging your annuity (the way they do with mortgages) and selling them to another company? What is the rating of the company that will, in the end, "own" your annuity money? Where is that company located, who owns that company, are VC's involved, etc.

Annuities have a place in many retirement plans. The problem is risks are higher than they used to be because of the population bubble the boomers created (though no fault of our own). Do your research and don't just blindly buy.