54 ry old looking to ER and wondering about annuities

[heeyy_joe]

To the OP: Congrats on your asset total. Avoid annuities until rates rise, and if you do purchase an immediate annuity, build a ladder of smaller annuities over several months or years, but certainly no more than 50% of your total assets when finished.

[Palimpsest]

Quote:

Originally Posted by MBMiner Think of it however you like. I like the idea that I have essentially bought a pension, and now have a fixed base of guaranteed income regardless of the performance of my portfolio. If I die before I've received an adequate return, so be it. I will have had the peace of mind during my lifetime that I won't run out of money no matter how long I live. Bruce

I do think of annuities as I like, as a luxury buffer. For all practical purposes, you have bought a pension -- an expensive one that you use in conjunction with your enviable "seven figure portfolio." That may very well have been a good decision for you but that's not close to the question posed by the OP, who did not have a seven figure portfolio and was asking about wading into the current low interest rate annuity market at age 54 with a threadbare budget. Not every retiree is able to lop off a 25, 35, 45 percent of his retirement savings and say "so be it" if things dont work out. There is no PBGC for annuities, so it's not quite a pension, and a flat annuity is a pricy gamble (inflation protection makes it even pricier) for someone looking at a 30-40 year retirement (and this discussion has not even ventured into a discussion of inflation.) I think the takeaway is that different retirees will have different solutions. I think it's worth looking at which MAINSREAM providers would even offer a lifetime immediate annuity to a 54 year old, and at what cost.

The good thing about annuitizing income is that you dont have to do it all at once. I certainly would not advise a 54 year old to devote any significant amount of a finite portfolio to such a pricy endeavor. In 10 years, maybe, but at 54 it's a pretty clear "no."

[MichaelB]

I was under the impression that States provided some guarantees to insurance sponsored annuities, something like the PBGC.

[Palimpsest]

Quote:

Originally Posted by MichaelB I was under the impression that States provided some guarantees to insurance sponsored annuities, something like the PBGC.

Such as? How does it compare to the PBGC? I think you'll find it falls short.

[REWahoo]

Here's a link to state guarantee funds: nolhga.com :: Policyholder Information

[brewer12345]

Wow, there is a lot of hot air on this thread.

Before we all lift off and blow away, let's acknowledge something: a plain vanilla SPIA underwritten in a competitive market is nothing more than a tool, like a hammer or a shotgun. The hammer and shotgun can be used to kill someone, or they can be used to build a house (hammer) or bring home dinner (shotgun). The SPIA can be used to hedge longevity risk and ensure floor income, or it can be a way to get a truckload of inflation risk in your lap. Whether the outcome from the use of the tool is good or bad has nothing to do with the tool, but with the user of the tool.

Before the doctor slapped Wade Pfau on the ass to get him to start breathing, Prof. Moishe Milevsky was doing scholarly work that strongly suggested that annuitizing 25 to 30% of one's portfolio with a SPIA resulted in much more favorable outcomes over the length of a retirement than just withdrawing from a portfolio. This isn't that hard to fathom, and if you want ample backup financial scholarship just google Professor Milevsky and start reading.

I would not be eager to buy a SPIA now unless I were 70 or better. The low interest rate environment makes the purchase a real push unless you are old enough that mortality credits make more of a difference than interest rates. Better to kick the can for a few years, IMO. That said, I am very likely to annuitize a portion of my portfolio when I am 60 or so. I find the research compelling and DW is likely to live past 90, so a joint life annuity will make a lot of sense for us especially if I can buy one that is inflation adjusted.

What long term equity returns might be is largely irrelevant to the would be annuitant. That is more of a concern to those in the accumulation phase. What the potential annuitant cares about is the volatility and sequence of returns. As a new retiree, I don't feel like I can fully pull the plug since I am too young for annuities to make a difference and fully exposed to sequence of returns risk. If you are older, SPIAs let you deal with these problems pretty effectively.

Of course, you should be careful who you buy this stuff from. As is the case for all long term insurance products, you ideally want to buy such things from a large, highly-rated (AA-/Aa3 or better) insurer and always prefer a mutual or fraternal company. If you are parting with a material sum, consider diversifying with a few such companies. I am lucky in this respect. I have a cash balance pension with my former employer. I left my 401k funds in place rather than rolling them over because I have the option to use the qualified money to purchase additional pension credit and buy more inflation-adjusted payout when I start the base pension. Due to the nature of my former employer, such pension and any additional purchase has zero default risk.

[Palimpsest]

I think you'll find that coverage varies from state to state, but the common factor is that it is capped somewhere in the low to mid six figure range. I think someone earlier posted that they found a roughly 5% payout for a 54 year old male. 5% of 250k is roughly 1000 a month, double that for 500k. If that's the limit of coverage then it is not a PBGC equivalent and may raise the question of why are states not willing to protect more?

[brewer12345]

Quote:

Originally Posted by MichaelB I was under the impression that States provided some guarantees to insurance sponsored annuities, something like the PBGC.

Read the nolhga link, but the cliff's notes version is that the states do not stand behind the guarantees.

[MichaelB]

Quote:

Originally Posted by brewer12345 Read the nolhga link, but the cliff's notes version is that the states do not stand behind the guarantees.

Thanks for both posts. I'm no great fan of annuities but have read some of the Milevsky and Pfau work and see the potential benefit for select portfolios. For the OP of this thread I'm not sure enough information has been shared to judge the advantage of an annuity, but we all benefit from less hot air and more reasoned discussion.

[Brooks Saddle]

I'm not so sure I should enter the fray as it looks like maybe the point of beating a dead horse has come . States do not guarantee annuities or any other type of insurance product. States do require all admitted insurors to participate in a pool for the lines of business they write business in that provides some protection to policyholders. If I purchase an annuity from a company that goes under the other insurors in the state that provide annuities all of the other annuity providers have to participate in making me whole up to a certain limit which varies by state.

Annuities are neither evil nor excellent. They are a tool that is useful for some and not for others. They are not an investment so by comparing them to stock and bond returns is running off of the track. When one purchases an annuity one is purchasing an income stream to last the rest of their life regardless of what happens in the equity markets. One may purchase an annuity because while a mixed stock and bond portfolio may return 8%+ the market may also go down and it may do so for a long period of time. Then what? If I rely strictly on my portfolio I could conceivably run out of money but with an annuity I know I have an income stream coming in as long as I live.

For those that complain that one could die the day after purchasing one and lose their money, that's the nature of the beast. I could also purchase one and live way beyond my normal life span and then I would have made out like a bandit. You can't have it just one way as it works both ways. That's what insurance is; a pooling of risks. Besides there are workarounds for this issue if it really concerns one.

To the argument that the insurors make money. Of course they do as that's what the free enterprise system is about. Do the market makers for your stocks and bonds make money Do insurors make exorbitant money? I would say not because if they did their profits would be so high we wouldn't buy their annuities but would in fact buy their stock.

I probably will not buy an annuity in my lifetime but I can see where it is a distinct advantage to some to do so. The arguments I've read that say it is a bogus deal are specious and lacking an understanding of the product.

As for the OP, at your age, it most likely is not a good deal. Annuity payout are based upon a return of your premium, interest income (not stock gains) and survivor credits. From the reading I have done, survivor credits really don't start working until one hits their seventies.

If you want to know more about annuities there is an excellent book called annuities for dummies that I recommend. Also, google Larry Swedroe who knows more about investments and annuities than anyone on this forum. Also the recommendation of Dr Wade Pfau is a good suggestion as well.

With whatever you decide, good luck!

[ETFs_Rule]

Quote:

Originally Posted by Brooks Saddle States do require all admitted insurors to participate in a pool for the lines of business they write business in that provides some protection to policyholders. If I purchase an annuity from a company that goes under the other insurors in the state that provide annuities all of the other annuity providers have to participate in making me whole up to a certain limit which varies by state.

The argument is that in the event of an industry wide systemic failure the state's insurance guarantee fund may become tapped. The irony is that market crash (which could lead to systemic failure) is the exact thing that lures investors to annuities in the first place. So are you really protected by an annuity?

Quote:

They are not an investment so by comparing them to stock and bond returns is running off of the track.

But you must compare the annuity with normal investments. You want the most bang for the bucks that you have saved up. They have to ask, given the amount of risk that they want to take, which is likely to give them the highest return?

Quote:

One may purchase an annuity because while a mixed stock and bond portfolio may return 8%+ the market may also go down and it may do so for a long period of time. Then what?

But how likely is that over a long time period of 10, 15 or 20 years? After the insurance industry stacks the deck in their favor (through caps and participation, and doing so after they pay Mr. Annuity salesman his big commission, pay for all of their overhead, and STILL make a profit! They know it's a safe bet.

Quote:

To the argument that the insurors make money. Of course they do as that's what the free enterprise system is about.

That's not what deep discount brokerage firms like E Trade, AmeriTrade, Regal Securities, and ScottTrade are all about. No comparison. I can buy 100K of BND and 100K of VOO for less than $20! An annuity usually turns out to be the most expensive "free dinner" you will ever eat at some "free retirement seminar".

[brewer12345]

Quote:

Originally Posted by ETFs_Rule The argument is that in the event of an industry wide systemic failure the state's insurance guarantee fund may become tapped. The irony is that market crash (which could lead to systemic failure) is the exact thing that lures investors to annuities in the first place. So are you really protected by an annuity? But you must compare the annuity with normal investments. You want the most bang for the bucks that you have saved up. They have to ask, given the amount of risk that they want to take, which is likely to give them the highest return? But how likely is that over a long time period of 10, 15 or 20 years? After the insurance industry stacks the deck in their favor (through caps and participation, and doing so after they pay Mr. Annuity salesman his big commission, pay for all of their overhead, and STILL make a profit! They know it's a safe bet. That's not what deep discount brokerage firms like E Trade, AmeriTrade, Regal Securities, and ScottTrade are all about. No comparison. I can buy 100K of BND and 100K of VOO for less than $20! An annuity usually turns out to be the most expensive "free dinner" you will ever eat at some "free retirement seminar".

According to my solunar calculator website, the sun and moon will not be in position for all the critters to be hopping around and all the extra special people to be acting the way they do for a couple more days.

Yep, systemic crashes can hurt insurers. That is why you pick the very strongest ones rater than doing business with the fly by nights. There are several insurers that will still be around after the asteroid strike and it is not hard to figure out which ones they are.

You keep talking about participation rates and the like, which tells me you do not understand what a SPIA is. SPIAs are some of the simplest insurance products available. I slide a pile of ducats across the table to the insurer and they agree to pay me an agreed sum every month as long as I live. That is it. There are no caps, participation rates, etc. Anyone can compare the attractiveness of SPIAs from different insurers, as there is only one variable (how much do you get for a given lump sum).

Do some reading if you want to have these discussions.

[MRG]

Quote:

Originally Posted by ETFs_Rule ...... good stuff deleted..... That's not what deep discount brokerage firms like E Trade, AmeriTrade, Regal Securities, and ScottTrade are all about. No comparison. I can buy 100K of BND and 100K of VOO for less than $20! An annuity usually turns out to be the most expensive "free dinner" you will ever eat at some "free retirement seminar".

Not that I disagree with your points.
Yes you can do what you suggest.

Here's my question, if you're 85 or 90 with dementia, will you know what BND or VOO is, what AA is, or what's a broker? I can tell you from personal experiences that's a real situation.

I realize it's a context switch, but I believe some folks use decent annuities to balance when they need to put things on autopilot. Not for LTC, just living costs. YMMV.
MRG

[Ready]

Quote:

Originally Posted by MRG Here's my question, if you're 85 or 90 with dementia, will you know what BND or VOO is, what AA is, or what's a broker? I can tell you from personal experiences that's a real situation.

I definitely worry about that since I don't have any children to worry about me when I get old. It's an interesting way to think about annuities outside of the financial return analysis. I just wonder if I'll know when it's time to stop trying to manage my money and get some help, or if it will be too late to ask for help by the time I need it.

[Gill]

Brooks Saddle,

Thanks very much for entering this discussion and your well reasoned discussion of the issues. As is indicated by the subsequent comments, we'll never convince a certain group that SPIA's have merits for some individuals.
Bruce

[Gill]

Quote:

Originally Posted by brewer12345 You keep talking about participation rates and the like, which tells me you do not understand what a SPIA is. SPIAs are some of the simplest insurance products available. I slide a pile of ducats across the table to the insurer and they agree to pay me an agreed sum every month as long as I live. That is it. There are no caps, participation rates, etc. Anyone can compare the attractiveness of SPIAs from different insurers, as there is only one variable (how much do you get for a given lump sum). Do some reading if you want to have these discussions.

Thanks! This is what I tried to tell him yesterday. He clearly has no understanding of an SPIA.
Bruce

[ETFs_Rule]

Quote:

Originally Posted by brewer12345 Yep, systemic crashes can hurt insurers. That is why you pick the very strongest ones rater than doing business with the fly by nights. There are several insurers that will still be around after the asteroid strike and it is not hard to figure out which ones they are.

Executive Life was one of the world's largest insurers. Insolvent.
AIG was the world's largest insurer. Insolvent, but fortunately bailed out. Will there be a bail out next time something like this happens?

Quote:

You keep talking about participation rates and the like, which tells me you do not understand what a SPIA is..... Do some reading if you want to have these discussions.

No. I was speaking about indexed annuities in my previous post.
Back to SPIA's... You can't "rebalance" a SPIA. If the market crashes you can't weight more into stocks (when stocks are essentially "on sale"). A SPIA is over-taxed. Immediate annuity calculators offer false promises.

Quote:

Here's my question, if you're 85 or 90 with dementia, will you know what BND or VOO is, what AA is, or what's a broker? I can tell you from personal experiences that's a real situation.

They don't have to know what an index fund is or study earnings reports. Index funds are not trading vehicles. Buy and hold.

[Gill]

I'm afraid we have a troll on our hands. The username says it all. I've given up wasting my time.
Bruce

[ETFs_Rule]

Quote:

Originally Posted by MBMiner I'm afraid we have a troll on our hands. The username says it all. I've given up wasting my time. Bruce

All you've done is try to marginalize. When you don't want to debate the facts then just name call. That's when you're out of material.

[Gill]

Quote:

Originally Posted by ETFs_Rule All you've done is try to marginalize. When you don't want to debate the facts then just name call. That's when you're out of material.

I've stated my case above if you care to read it. Also, you might attempt to educate yourself on the nature of an SPIA and how it differs from other types of annuities. You have them confused.
Bruce