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Opinion: What is the value of annuities?

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As Americans retire with 401(k) balances as their only supplement to Social Security, the question is how they should draw down their accumulated assets. Lots of rules of thumb are available — some better than others. But the list includes 1) following the 4-percent rule; 2) spending the interest and dividends by preserving the capital; 3) spending down over one’s life expectancy; and 4) following the IRS’ required minimum distribution rules.

In theory, of course, the best option is to buy an annuity. It provides the highest level of income and insures against running out of money. But are annuities a “good deal?” This topic has not been addressed in two decades.

Read: Don’t stop investing in bonds

In a recent study, my colleagues and I look first at “money’s worth,” the ratio of expected lifetime benefits to cost, and then at “wealth equivalence,” a measure that takes into account the insurance value of annuities. We consider both “immediate annuities” that start payments upon purchase and “deferred annuities” bought at age 65 that start payments at age 85. We calculated not only today’s values of money’s worth and wealth equivalence but also the performance of these two metrics over the last 20 years.

The money’s worth of an annuity is the ratio of the expected present value of its payouts to its premium (generally quoted per $100,000). The expected present value depends on three factors: interest rates, survival probabilities, and annuity payment.

Read: Are annuities so bad? Why they can be the right thing — for some investors

On the one hand, interest rates have declined since 2000, which would increase the value of an annuity, all else equal. And life expectancy has increased, which would also increase annuity values. On the other hand, immediate annuity payouts for both men and women have declined since 2001 (see figure 1).

Figure 2 shows that lower monthly payments have offset falling interest rates and increasing life expectancy so that money’s worth for immediate annuities has remained stable over time. The expected payout is about 80 cents per premium dollar for immediate annuities and about 50 cents per dollar for deferred annuities.

“Money’s worth,” however, is only a partial measure of the value of an annuity, because it neglects the insurance that the product provides against outliving one’s assets. Wealth equivalence incorporates the value of that insurance. It measures the share of starting wealth an individual would require to be as well off with annuitization as without it, so a smaller wealth equivalence number indicates a more valuable product.

Read more retirement news and advice

Figure 3 shows that the wealth equivalence measure is less than 1 in all cases, indicating that annuities enhance welfare. Interestingly, while the money’s worth of deferred annuities is substantially lower than that of immediate annuities, their insurance value is greater because they protect more effectively against outliving one’s assets.

The bottom line is that everyone should gain from purchasing an annuity. Yet, for a number of reasons, resistance is high to actually going out and purchasing the product. It will be interesting to see how annuities fare as they are integrated into 401(k) plans.



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My husband doesn’t get along with my son. I brought most of the wealth into our marriage. How do I split my estate?

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Dear Quentin,

How do couples typically handle their estates in a second marriage? My husband and I have been married for seven years, and it is the second marriage for both of us. I have one adult child from my previous marriage; he has no children.

I brought the majority of our wealth to our marriage, including almost $1 million in my 401(k) and a nice home that is almost paid off; otherwise, we have no debt. My husband and I bought a second home together. We work hard to fund our new 401(k)s, and own a successful business together.

I am turning 65 this year, so estate planning is long overdue. My husband is five years younger than me, and we are both in very good health. We have two issues facing us: I see our retirement as living very comfortably on the monthly income generated by our 401(k)s, pension, Social Security, etc., and leaving whatever may be left to my son.


‘The other issue is that my husband no longer gets along with my dear son at all, and feels no obligation to get along with him.’

I am not interested in scrimping, but I want to be able to have enough money to last us until age 90 (or beyond) by not touching the principal. My husband is more interested in dipping deep into our savings, and living it up in retirement while we are young enough to enjoy it.

The other issue is that my husband no longer gets along with my dear son at all, and feels no obligation to get along with him, to the point that neither one wants anything to do with the other. As far as he is concerned, my son doesn’t meet his expectations, and so deserves nothing from me and certainly nothing from him.

I want my estate planning to be fair to both my new husband and my son. How do people typically handle this type of quandary? I think that I need to create some type of trust to pass on my share of our estate to my son. My pre-marriage assets involved my son as I pursued my graduate degree through night school and worked long hours throughout his childhood.

Second Wife

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com.

Dear Second Wife,

Don’t allow your husband’s feelings toward your son to influence your estate planning.

Your relationships with your husband and your son and your own plans for retirement are all fair game when making decisions about your estate, but your husband and son’s fractured relationship is their business, not yours. You worked hard for this money, and your son is your legal heir. Any effort by your husband to spend all of your savings and fritter away any inheritance that you intended to leave to your son should be resisted at all costs.

You have worked too hard your entire life to compromise your plans for a comfortable retirement where you have money set aside for long-term medical care insurance, unforeseen emergencies and/or your son. If you jointly own your home, you can leave your half to your son in your will, and specify it can only be sold after your husband passes away.

If you own the home, you can give your husband a life estate. Your son would pay capital-gains tax on the value of your home when he sells it, and not when you bought it. You could also make your son the beneficiary on your life-insurance policy, and/or gift him a certain amount of money per year to see how he manages and spends that money.

Figure out what is fair to yourself first before moving on to what is fair to your husband and your son. It’s OK to put your needs first. I caution against your dipping into savings at a rate that is beyond your own risk tolerance.

Ultimately, you are entitled to leave all other separate property to your son when you die — and, along with a financial adviser, set up a trust with that in mind for you, your husband and your son. Not necessarily in that order.

The Moneyist: ‘I cut his hair because he won’t pay for a haircut’: My multimillionaire husband is 90. I’ve looked after him for 41 years, but he won’t help my son

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 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

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These money and investing tips can help you make a place for crypto in your portfolio

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, can give you a better understanding of bitcoin and other cyrptocurrency, and help you figure out if digital currency has a place in your portfolio alongside stocks, bonds and other traditional assets.

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