Ty
I do not have one…
My initial question was based on a couple of ideas/scenarios
-Assuming one has enough money to retire ( based on current assets, invested in equities/bonds/cash)
- Understanding that reducing equity exposure to minimal percentages ( based on 25 year asset draw) does not make sense ( inflation, etc)
- Believing that we are due for a 10-20% correction and not wanting to see portfolio drop
Is there such an Annuity that would allow me to earn a guaranteed 6-7% a year, returning full principal at death to estate, with the understanding that I could not touch proceeds for 5-10 years ( fees built in)
Do my thoughts make sense?
First and foremost an annuity is an insurance product. You will pay a premium to protect against an undesirable outcome.
No different than fire insurance on your house. You are willing to pay each year just incase the house burns down. If it doest burn down do you say to yourself damn I wasted money all those years? No because those premiums gave you comfort of knowing your protected and you only know they were not needed after the fact in hindsight .
What does the annuity insure against ? Longevity.. risk you live too long and run out of money. The annuity keeps on paying after all the money is gone. Just like the house burning this is highly unlikely ..
The best way to do this is by example.. The type of annuity you seem to be asking about is one with income benefits . A more appropriate name is deferred annuity.
Lets say you put 1mm in one which has a 7% "return" ...
Note there are 2 tracks .. the market value that fluctuates with market and the income base. The 7% refers to income base. Its not real money but its a metric to help determine how much income you'll get in future . The base rolls up at 7% each yr. SIMPLE interest not compounded. So in roughly 15 yrs its doubled.
Lets say in yr 15 you want to draw income. You will get 7% of the greater of the market value or income base.
So if the market did great and compounded net of high 3% fees at a rate of say 8% then the market value will be 3mm +
So you will get 7% of 3mm or 210k per yr until death. Note if market did poor and its value was only 500k in 15 yrs then you'd get 7% off the income base which rolled up to 2mm. So in this case 140k a yr. The income base serves no more purpose at this point. Again its not real money , just a metric to determine income .
Lets stop here to discuss market value. My example shows 8% net of 3% fees. Much of that 3% fee is the insurance premium embedded.
Lets say instead of annuity you put the 1mm in an index fund with no fee. Then you'd of gotten 11%. Your account would be 4.8mm.
So if you took the same 210k income from the 4.8mm each year it will last much longer than the annuities 3mm. Chances are you will die before the 4.88mm is gone so the annuity was a poor choice. You of been better in index fund.
Getting back to annuity.. your estate gets the better of original premium of 1mm LESS WITHDRAWALS or market value. So if you live 10 yrs and take 210k a yr estate gets whatever is left of market value. Those withdraws deplete the market value. If you live a long time then market value may be depleted and they get nothing.
Lets do am example of a poor market. Your 1mm annuity investment goes down to 500k in 15 yrs.. The income based has rolled up to the 2mm so your income is 7% of 2mm or 140k.. The 140k comes out of market value which in a poor market will get depleted soon enough.
But no worry since the insurance company will keep paying the 140k until death . This is why you paid those high fees which are high so the embedded insurance premium is paid.
So only buy the annuity if you want the insurance protection I discuss.
There are may permutations on different products but I covered the framework .
Note terms are much more generous outside of NYS since NYS regulators are very conservative.