Terrible Investment Returns – Guaranteed for Life!
The next time you get pitched about the virtues of immediate annuities keep this article in mind. As a former USAF officer I have dealt with USAA insurance company for decades. They are a terrific firm for auto, renters and homeowners insurance. I’m assuming they are also much better than average in what they offer in other insurance products.
My latest issue of their monthly magazine for policy holders contained a full-page ad titled “A paycheck for life.” Their presentation noted that those nearing or living in retirement need to turn hard earned savings into income. The said that most people choose one of the following alternatives:
1) Rely on Social Security while spending down savings
2) Take their chances in the securities markets
3) Draw gains from CDs or other taxable accounts
None of the above is guaranteed to last your lifetime. USAA suggested a fourth solution that could provide “immediate guaranteed income that you can’t outlive.” The next paragraph noted these guaranteed income annuities had no market risk. It also noted that your guarantee would be tied to the strength of the insurer (meaning it wasn’t any more certain than the viability of the issuer.)
USAA listed an example of the income a 65 year old male could count on if you were now willing to part with $100,000 as your initial (one-time) premium.
· $100,000 today would get you $509.80 per month for life.
· The policy has a 15-year minimum payout period.
We’ll presume that USAA will be around and healthy enough to actually pay these promised amounts. Note: The higher priced policy provides income in exactly the same proportion as the $100K amount. The bigger monthly payment merely reflects the larger starting investment.
Are these annuities a good deal for investors? Decide for yourselves. Here are the latest life expectancy projections from the US Social Security system for people now 65 years old.
The man in USAA’s example has a 50-50 chance of living another 17.19 years to about age 82. At $509.80 per month he would have collected 206 payments totaling $105,019 on his original $100,000 policy by the time he is projected to die.
The average annuity buyer in the example would have made a net profit of
$5,098/$100,000 = 5.098% /17.19 years = 0.2966% per year (simple interest).
That is not a misprint. The projected average return is less than 3/10 of one percent per year!
Our hypothetical annuity buyer could have left his money in an FDIC insured bank and withdrawn $485.43 per month over that same 206-month period if he didn’t earn one penny of interest in the full 17.19 years.
Even the most conservative among us should reasonably expect to earn more than 0.3% per year on their money over the long term.
In the USAA example the annuity buyer’s heirs would get nothing upon his death (after the 15 years). The guaranteed payout would total $91,764 – 8.236% lower than the original premium paid. Even a pretty modest return would make it very likely that the non-annuity buyer would still have a substantial legacy to pass on to relatives or charity at death.
If you think you can beat the investment returns described you might do well to pass up any opportunities to purchase immediate annuities if they are presented to you by insurance agents.
Disclosure: I am a long-time USAA policy holder. I hold no annuity investments.