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Morningstar report suggests jiu-jitsu tactic for buying annuities: Game them right back by waiting

Seniors who pick their moment can save as much as 50% with patience as the key strategy

Author Lisa Shidler October 29, 2015 at 6:29 PM
no description available
David Blanchett: You may need significantly less of an annuity.

401(k) Stories

Robert Martorana

Robert Martorana

October 29, 2015 — 7:27 PM

This uses annuities as hedge longevity risk. Makes sense to me.

I believe a retiree should buy a deferred annuity to hedge the risk that they will outlive their money. If I understand correctly, that’s what David Blanchett is saying. If you’re 65, buy a deferred annuity that kicks in at 85. This helps ensure that you don’t outlive your money, and it requires a much smaller upfront investment by the retiree.


Jeff McClure

Jeff McClure

October 29, 2015 — 7:54 PM

There is an elephant in the annuity room that seems to be so largely ignored I sometimes think otherwise intelligent people think the elephant is just another wall. – Non-variable annuities are effectively bonds. They are effectively guaranteed by no one. More, they are not even inflation-protected bonds. – Back over thirty years ago when I entered the business of giving investment advice, there were many scarred representatives who had seen customers lose very, very substantial amounts of money when annuity companies went under. Some of those losses were finally realized recently when the Insurance Commissioner of New York finally finished liquidation of Executive Life of New York. Many annuity holders (or their beneficiaries) got back about thirty cents on the dollar they invested in the late 1970s. – Today there seems to be a fundamental assumption (the elephant in the room) that annuity companies are as stable and secure as the federal government’s bonds, and that inflation will never happen again. Huh? Last I looked, the cornerstone of the financial collapse in 2008 was not Lehman Brothers, but rather was AIG, a life insurance company that fundamentally took outsized risks in order to be competitive in the annuity interest rate business. During the crisis, The Hartford, AEGON, and other major annuity-issuing companies were literally within hours of insolvency and it was only the intervention of the Federal Reserve, the FDIC, and the U.S. Treasury in concert that prevented their failure. The Fed even loaned billions to the ECB to loan to the central banks of the Netherlands and Belgium so that they would have the funds to save the major insurance companies domiciled there. Had any one of them been allowed to fail, the interlinking risk dispersal instruments they have exchanged would have dragged literally every major annuity issuer in the world down. – Historically, following a major financial collapse as we had in 2008-2009, the key element in the collapse has managed to avoid major reform and regulation. The investment banks emerged from the great depression of the 1930s unregulated and unreformed as an example. In the Panic of 1907, the banks, through intense lobbying, managed to avoid federal regulation and remained largely regulated by the individual states. In our most recent meltdown, the insurance companies and insurance holding companies managed to avoid federal regulation and remain state regulated. Sound familiar? – If history is a guide, sometime about 15 years from now we will have another financial industry based crisis. History suggests that the element of the financial industry that avoided regulation and reform from the last crisis (2008) will be the source of the next one. – Fundamentally, insurance companies have investment portfolios that create sufficient return to provide for the annuity income plus overhead and profit margin for the insurance company. The apparent advantage is that the annuity owner cannot see the value of the underlying portfolio rise and fall. A lot of experience with insurance companies has led me to believe that a low-cost, conservative, balanced fund like Vanguard Wellesley has a better and more stable long-term performance than any insurance company’s portfolio I have been able to find. All the insurance company brings to the table is non-transparency and discipline.



October 29, 2015 — 7:56 PM

The biggest reason for waiting would be “mortality credits”, and, evidently, this author is unaware of the concept.
Nothing like a self-proclaimed expert to give advice to us mere mortals.

Ralph Gracie

Ralph Gracie

October 29, 2015 — 8:40 PM

Why the reference to jiu jitsu? You want to get put to sleep or something?

Brooke Southall

Brooke Southall

October 29, 2015 — 9:03 PM


Here was what I was going for by invoking jiu-jitsu:

Jui-Jitsu promotes the concept that a smaller, weaker person can successfully defend against a bigger, stronger assailant by using proper technique, leverage, and most notably, taking the fight to the ground — Wikipedia

In this case the investor is smaller and weaker than the teams of actuaries and lawyers who create these products and the salesforces who sell them.

But then again, the final phrase of the line I quoted reads: “... and then applying joint-locks and chokeholds to defeat the opponent.” I guess that’s the sleep you refer to.




April 3, 2017 — 2:26 PM
Even the experts have a hard time explaining how the various types of annuities work. The insurance companies are always adding more options (and taking some away), that the entire field gets very complicated to navigate. What happens when you own an annuity and want to get rid of it. The surrender fees are very high. I am having this problem with my parents. Everyone here seems to know a lot about this subject. Has anyone heard about Rising Capital Associates - <a href="http://www.rcapitalassociates.com/" rel="nofollow">here is their website</a>. They help you sell your annuities and it appears that they do know what they are doing. I just want to know if anyone has worked with them or has an opinion on their work. Thanks for your help.

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Mentioned in this article:

Morningstar, Inc.
Top Executive: Joe Mansueto

Consulting Firm
Top Executive: Michael Kitces

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