Anybody have any experience with these? Any recommendations on good financial companies to go through for these? Any reason not to do these? Could I say 'these' anymore'?

Thanks!

They are complicated, expensive, full of catches, and the only people that appear to really like them are the people that sell them.

Dylan speaketh the truth

I don't have experience with annuities. It's one of those words that I hear tossed around (like "leverage"), but have no idea what it means. While I do self-directed investing through Sharebuilder, my wife has her money in mutual funds and has a young man who calls her every six months to discuss financial matters. He's nice enough, and not pushy, but still his goal is to sell his products.

Anyhow, she just talked to him the other night and he mentioned putting money into an annuity. Neither Kris nor I know what that means, though, so she said we'd look into it. Something else to read up on in the next six months!

I'm sort of confused as to what they are myself. The fund options available to me in my TIAA-CREF 403(b) at work are mostly labeled by TIAA-CREF as "variable annuity accounts," but they seem to act more like mutual funds to me. They are "Equity Index," "Global Equities," "Bond Market," and "Inflation-linked Bond." They all have not-unreasonable expense ratios (mostly around .50%).

The thing that interested me so much was if the index you matched against fell, you didn't lose a dime and if the index rose you gained up to a predetermined amount. The example I was given is if I invested $1000 for a year and matched against the S&P 500 - if the S&P 500 tanked I would still have the $1000 and if it gained 20% then I would only get the largest percentage that was predetermined (Example: 7% even if the S&P performed better).

I am extremely risk adverse and this actually sounded like a pretty good deal. No one else thinks so, though (and I don't know much about investing period much less annuities).

Thanks for the heads up info, it gives me something to work off of.

A highly simplified definition-
To annuitize is to provide a series of payments based on an initial investment.

A coupon bond is a common example of an annuity, where the investor provides a lump sum up front and is guaranteed a series of payments over a set period of time that usually sum to more than the lump sum investment.

In the insurance world, annuities come in every size, shape, and flavor having various terms, conditions, and tax treatments. Instead of providing a lump sum investment, most annuities are paid into over a set period, then payed out over a future period. Given the amount of fine print, I wouldn't recommend an annuity for the average investor.

A fixed-annuity turns a lumpsum into a monthly payments -- but you lose the lumpsum permanently. So what this turns out to be is a simple bet -- the insurance company thinks you will live X more years. You live more than that, the insurance company keeps paying you even though your lumpsum has been exhausted. You croak sooner, they keep what's left over.

A variable-annuity uses an insurance contract to wrap around investments to give you tax-deferred status. What this means is if you put a VA into a retirement account that already has such status, you've wasted your money. Now, AFTER you've fully maxed out your 401K/IRA/Roth IRA/HSA/etc, it could be a fit for you but it depends on the numbers. If you are being charged a minimal fee (say 0.25% from Fidelity), that could be a decent deal for high yield investments. If you are being charged 1.5%, any possible tax savings goes to the insurance company.

An equity-index variable-annuity is a VA that gives you some of the upside of stock markets while capping the losses. An insurance company might offer you a minimum of 2% returns every year and all gains of the S&P500 up to 12%. This may be a good deal for those who are extremely risk adverse. Over a long period, unprotected equity positions will perform better -- unless we get stuck in a 20 year bear market like Japan is still in. The big problem is capping the upside really limits performance. Look at the history of the S&P500 -- in the last 30 years, 17 of them exceeded 12%. Which means volatility is what drives the long-term returns -- w/o the losses + big gains, we would not have 12% as the historic return.

If you are still interested in an EIA, SHOP AROUND! Performance totally depends on minimum, maximum and extra fees -- build a spreadsheet to model the possible performance. Your example of 0% - 7% with the 1.5% typical M/E would be absolutely decrepit. Testing that against the S&P500 history shows only 8 rolling 10-year periods where you would outperform stocks.

1928-1937 31.08% > -6.00%
1929-1938 31.08% > -15.49%
1930-1939 31.08% > -8.86%
1931-1940 31.08% > 8.73%
...
1974-1983 43.15% > 13.62%
1975-1984 43.15% > 38.49%
...
1977-1986 43.15% > 43.12%
1978-1987 40.48% > 37.56%

The years after the horrible 1928-1940 periods, the numbers inverts to:

1932-1941 31.05% < 68.88%
1933-1942 40.26% < 120.30%
1933-1943 40.26% < 83.69%
1934-1944 50.07% < 121.28%
1935-1945 50.07% < 104.82%

Overall, the S&P500 went from $1 to $1688.87 from 1928 to 2006. The EIA with the sample characteristics went from $1 to $30.81. The insurance company would pocket almost 55 times more than the policy holder!!!

Now if an AAA insurance company offered you 2% as the minimum, 20% as the max and only charged 0.5% M/E, it would outperform stocks easily. Obviously nobody can offer that -- if they do, it's a scam. However that does mean there might be something in between the two extremes that catches your fancy.

There are a few items that I don’t believe to be correct in MossySF’s explanation. If anyone wants the down and dirty on annuities in the US, Wikipedia has an accurate overview.

http://en.wikipedia.org/wiki/Annuity_%2 ... roducts%29

On the equity-indexed annuity, they are not that simple. Even if the index returns are between the floor and the cap, you do not fully participate in that return but rather some fraction of it based on a formula established in the annuity contract. Most equity-indexed annuities are NOT considered variable annuities; therefore, they are outside the jurisdiction, consumer protection, and disclosure requirements of government securities regulators.

You can find more info on equity-indexed annuities at the SEC website:

http://www.sec.gov/investor/pubs/equityidxannuity.htm

As tinyhands mentioned annuities in general are not appropriate for the average investor.

My explanation is roughly correct for my selected example. What insurance company A offers over B over C, that's details I have no idea about and have no interest in reading through a big prospectus to find out for others.

The point I was making was (1) capping the performance really makes a much bigger difference than capping the losses and (2) people need to learn Excel and run numbers themselves using the specifics of each situation.

@Upright

The funds you listed are mutual funds and you can reinvest those as you please (I think it's an $1000 minimum after you've been in the system for a while). Their traditional annuity is one that pays a fixed interest rate (and is very difficult to move money from once you've invested). It is strange that they call the funds variable annuity accounts--I can only reason that they're "variable" because they have no fixed interest rate. Perhaps they're annuities because they're already in tax-deferred shelters or they have some different classification? I can't say for sure.

But I know they act like mutual funds. I've had TIAA-CREF (403b) for about a year through my employer.

Annuities should only be considered after:

1) You have maxed out your 401k.
2) You have maxed out your Roth IRA
3) You have paid off your house
4) You have fully funded kids' college
5) You have enough money in your non-retirement accounts to retire and never work another day in your life.

OK, after taking care of these things, you still have money to invest?

Go look into annuities now.

Until you get 1-5 accomplished, it's a waste of your money and all you would accomplish is making the salesperson who sold it to you very, very happy.

I don't know if I'd go that far, since everyone has their own set of variables to contend with, but we are talking about the "average person".

Actually I would go that far. It underlines my point that annuities are not in the best interest of almost anyone, except those who have exhausted all investment opportunities and want a conservative, though expensive, vehicle for their latter years.

There is one very appropriate use for a variable annuity. When your kid is born, put $5K into a Vanguard VA and let it ride for 60-70 years for their retirement. A newborn would not qualify for any regular retirement plan (no income) and you wouldn't want to burden your children with decades of paying taxes on dividends + turnover. Plus the temptation of them cashing out a taxable account might be too great.

An immediate annuity is very useful for people heading to retirement and worried about outliving their nestegg. Take 10%-25% of your lumpsum and convert it to a guaranteed monthly payout. Obviously, shop around for the best deal -- although Vanguard also offers an IA which probably will be very competitive.