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Old 01-08-2011, 11:25 AM   #61
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FYI, Using FireCalc, cliffp's suggestion of 300k 50/50 portfolio, with a 15000/yr draw (inflation adjusted), has a success rate of 92.5% over 20 years and 73% over 25 years. (BTW, average life expectancy at 64 is ~17 years.) I think cliffp's advice is pretty decent ...
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Old 01-08-2011, 11:36 AM   #62
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I keep thinking, hmmm...moose in a china closet. TG for the ignore function.
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Old 01-08-2011, 11:57 AM   #63
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We agree on all points there Ziggy. As a financial planning "tool" if you actually DO believe that a contract with an insurance company is a pretty safe bet (I think you should, generally) SPIA's should not be overlooked, because for a lot of people they're exactly what is NEEDED. The key there is that I believe the contract is believable, they will stick by the good AND the bad, so read up.

That being said, I think, even today, there are great annuities, good annuities, and bad annuities. Also, back in the early 90s and such, there were good annuities, bad annuities, and TERRIBLE annuities which got lots of well-deserved attention. Today, many of the famously bad annuity characteristics have been outlawed. In my state, for example, an annuity cannot have longer than a 10 year surrender period or 10% percent surrender charge in the 1st year (10/10 state).

I think that many vanilla, normal EIA's are a perfectly reasonable investment for some of a retirees dollars. They could probably do BETTER, but for many investors, the most important thing is how BADLY could they possibly do. For those investors, limiting their downside potential is worth the sucky stuff (less than full participation, surrender charges). Also, no EIA has any sort of fee unless you're talking about a lifetime income rider being attached. (just talking about fixed based annuities, variables are a whole different monster).

But really, the lifetime income riders are really where these products can excel at filling a niche that no other product can. Like I mentioned in my previous post, if Ralph could find an indexed annuity with a 7 or 8% compounding income account roll-up rider similar to one available in my state, puts 200K in and let's it ratchet up for 10 years, he will be guaranteed a 25K annual payout (bout 2.1K/month) from 74-his death. Even in today's not great interest rate environment, with the other 100k Ralph could get a 10 year SPIA to pay him around 1K a month until then. There is no wiggle room in these numbers. If you do believe that insurance companies by and large have and will continue to pay their claims as promised, this is an excellent route to go if you want to simply maximize and guarantee your income stream (which it sounds like, for Ralph, is the exact purpose of this money, NOT stock market speculation hoping it pays off, etc).
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Old 01-08-2011, 12:00 PM   #64
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FYI, Using FireCalc, cliffp's suggestion of 300k 50/50 portfolio, with a 15000/yr draw (inflation adjusted), has a success rate of 92.5% over 20 years and 73% over 25 years. (BTW, average life expectancy at 64 is ~17 years.) I think cliffp's advice is pretty decent ...
I guess if Ralph had retired in 2000 he'd fall into that 8.75%? After a decade his equity holdings are about where they were when he started, plus he's been drawing down 12K a year from them. Look him in the face when he runs out of money and tell him that it works "most of the time."

Financial planning should not only work if the market goes up. That is not a bulletproof plan, that is hoping.
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Old 01-08-2011, 12:24 PM   #65
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Let's see: aggressive tone, ignores quite clear counter-arguments, talks up complex products which are quite expensive. A this point I am just waiting for the link to whatever this poster is selling.
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Old 01-08-2011, 12:56 PM   #66
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Great, Good and Bad being based on the commission and fees? Anything that has 40 pages attached to it is not something old Ralph should be involved in.
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Old 01-08-2011, 02:54 PM   #67
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I guess if Ralph had retired in 2000 he'd fall into that 8.75%? After a decade his equity holdings are about where they were when he started, plus he's been drawing down 12K a year from them. Look him in the face when he runs out of money and tell him that it works "most of the time."

Financial planning should not only work if the market goes up. That is not a bulletproof plan, that is hoping.
OK, Here's a spreadsheet of the returns of the cliffp portfolio suggestion for the last 10 years starting in 2000, including an inflation adjusted 15k draw. Doesn't look too bad to me, portfolio value is down to 215k. At a burn rate of 85k for 10 years, doesn't seem catastrophic at all for a 64 year old.

<edit: just noticed I used Investor shares, not Admiral as cliffp suggests, total return should be even slightly larger than what I show>
Attached Files
File Type: pdf RalphScenario.pdf (36.5 KB, 21 views)
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Old 01-08-2011, 10:00 PM   #68
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The combined ignorance in this, and the other linked thread is just astounding.
I can't even believe I need to explain why this is an absolutely awful idea (and for a LOT of reasons).
I'm too tired to go into the absurd skepticism these threads have displayed towards the "Claims paying ability of the issuing company."
Anonymoose, is there some part of the community rules, specifically the guideline "Don't be a jerk", that's causing confusion?

The strength of your logic does not appear to be enhanced by the manner in which you express yourself. But if you add more CAPITAL LETTERS then I might be able to understand it better.

You have a nice life now.
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Old 01-09-2011, 07:04 AM   #69
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The combined ignorance in this, and the other linked thread is just astounding. The internet continues to be a place run by lowest common denominator knowledge. God I hope you read this Ralph....

...

Hope you feel better after that...


It seemed to me that most people were warning Ralph about the potential pitfall of FIA (aka Equity Index Annuity) and warning him to not make an uninformed decision. He should spend some time educating himself first.

Ralph needs to grab Otar's book and read it. It is a very good treatment of the options, risks, possible outcomes, pitfalls, etc. It is pro-annuity in certain scenarios.


There are a number of posts that indicate that a SPIA might be appropriate.... but since it is a permanent decision... do the homework, do not rely solely on the insurance agents sales presentation.
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Old 01-09-2011, 07:23 AM   #70
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I just know that this belongs in here somewhere:

Disagree.JPG
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Old 01-09-2011, 07:54 AM   #71
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Sorry for the "bad packaging" but it kinda pisses me off to see someone talk a 64 year old out of a guaranteed, relatively safe, and for all intents and purposes (having to see actual contract details) suitable investment and then cavalierly suggest he dump half his only money into the stock market. Sorry for not being "nicer" to the message board, but that advice could have some real consequences.

Also, it kinda pisses me off that you all have probably ruined any chance of him ever using any products from an insurance company, which would severely limit him of some excellent tools in his retirement years (annuities are the ONLY way to get a guaranteed income stream, life insurance is an excellent wealth transfer tool at death, and often can provide LTC protection on the same dollar). You all act like getting money from an insurance company is like getting back that 40 bucks you loaned your cousin. These companies aren't run from treehouses - every state has very specific rules for what insurers can and can't do with their balance sheets. AIG? Their insurance wing (American General) had plenty of cash through that whole crisis, and in fact, when AIG (parent company) tried to siphon some out, they got blocked by the state's insurance commissioner. They had to keep their reserve requirements for paying claims.

Through the worst recession in 75 years, how many people had their monthly annuity deposit not show up? You can disagree, and that's fine, but for MY due diligence, that right there passes the test. Even the badly rated companies did fine, stick with the well rated and... even better.

Finally I don't disagree at all that Ralph should probably wait and take a deep breath and do some research... when did I say THAT was bad advice? I specifically directed my criticism at the 50% equity index advice, and blanket bashing of insurance companies, annuities, etc.

And what are the combined FEES on these products... broken out by fee to run, fee to agent, hidden fees..


Quote:
But he's half in bonds, which can't lose value (sorta). But remember, that face value can go down too. In November alone, 30 year US treasuries lost 8% of their current face value, and that's about the only security you're allowed to say is "risk-free." Sure you will get all your money back in 30 years, but if you wanted to sell today, you're out 8%, bud. So bonds don't pass the smell test for something that can't lose value.

A true stmt that just does not make sense.... lets say you have two options with the money you want to spend for an annuity

Option A... invest in an annuity and have NO money, only an income stream... and guess what, you can not sell it even at a loss... and there is nothing when you die to leave to anybody

Option B... buy a 30 year bond that pays interest... get that income stream.. and guess what, IF you need money you can sell it.. even if you take a loss... and if you live off the income, there is the principal to leave someone when you die...


So that is a false argument designed by salesmen to scare people that do not know any better...


Since the person wants
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Old 01-09-2011, 08:39 AM   #72
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Interesting that Ralph hasn't been on the forum for a week. Wonder what happened? You think maybe he bought an annuity from some anonymous moose?
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Old 01-09-2011, 08:44 AM   #73
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Interesting that Ralph hasn't been on the forum for a week. Wonder what happened? You think maybe he bought an annuity from some anonymous moose?

Poor guy.... He was dealing with a personal crisis, I think the whole thing was overwhelming.
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Old 01-09-2011, 09:17 AM   #74
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I doubt if he'll be back to tell us he bought an annuity. Chinaco is right, in Ralph's mind he is between a rock and a hard place. Oh well!
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Old 01-09-2011, 12:03 PM   #75
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I just want to propose that we have a signal when somebody new comes along that will be popcorn material... (where IS that popcorn icon)...


I mean... I had not come to this thread in awhile and low and behold there was entertainment hiding here... and nobody told me

I just happened to hit it because there was traffic going on and I was bored...
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Old 01-09-2011, 12:17 PM   #76
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You mean we need a radio button indicating the presence of an obstreperous douchebag? Maybe make a uggestion on the forum admin board...
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Old 01-09-2011, 01:28 PM   #77
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You mean we need a radio button indicating the presence of an obstreperous douchebag?
The tricky part would be avoiding an overwhelming number of false positives...

"Karma" and "chiclet" buttons on user names always seem too easy to manipulate.
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Old 01-21-2011, 07:31 PM   #78
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Ralph

Should you return, here is an article that might give you additional information about indexed annuities

.
Indexed Annuities Cap Gains, Obscure Fees as Sellers Earn Trip to Disney - Bloomberg
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Old 01-22-2011, 12:58 AM   #79
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Just as a coda to this thread, Money magazine put together a short overview of annuities and a more in-depth analysis of the costs & marketing of index annuities:

The safety trap: Protect yourself against index annuities - Jan. 17, 2011

Quote:
According to data that 16 states provided to MONEY, index annuities accounted for 30% of annuity-related complaints to regulators in 2009, even though they represent just 13% of annuity sales. In senior-heavy Florida, it was 55% of complaints.
...
A typical index annuity would have lagged an investment portfolio with equivalent risk -- 85% one-month Treasury bills, 15% U.S. large-cap stocks -- by nearly two percentage points annually, on average, over the past 44 years. That's according to recent analysis by Baylor's Reichenstein, who has been an expert plaintiff's witness in a lawsuit involving these products.
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Old 01-22-2011, 03:53 AM   #80
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We agree on all points there Ziggy. As a financial planning "tool" if you actually DO believe that a contract with an insurance company is a pretty safe bet (I think you should, generally) SPIA's should not be overlooked, because for a lot of people they're exactly what is NEEDED. The key there is that I believe the contract is believable, they will stick by the good AND the bad, so read up.
Guess what SPIA aren't generally hated by the forum, especially when the person actually goes out and does some price shopping and buys an SPIA as opposed to have sold to him by their friendly insurance agent.

Fundamentally, I understand how an SPIA works. The insurance company has a pool of people and why they don't know how long an individual will live as group; they do know 5% will die by 60 and 3% will live to over 100. They also know the current interest rates, historical default rates of various types of bonds. They can invest the money and earn enough money in the investments to pay the people their life income and still make a profit. Life expectancies and interest rates may change but they historically have been able to adjust payout rates to account for the changes.

Quote:
That being said, I think, even today, there are great annuities, good annuities, and bad annuities. Also, back in the early 90s and such, there were good annuities, bad annuities, and TERRIBLE annuities which got lots of well-deserved attention. Today, many of the famously bad annuity characteristics have been outlawed. In my state, for example, an annuity cannot have longer than a 10 year surrender period or 10% percent surrender charge in the 1st year (10/10 state).

I think that many vanilla, normal EIA's are a perfectly reasonable investment for some of a retirees dollars. They could probably do BETTER, but for many investors, the most important thing is how BADLY could they possibly do. For those investors, limiting their downside potential is worth the sucky stuff (less than full participation, surrender charges).
So the argument is just ignore the fact that insurance companies sold bad annuities in the past, the new ones are good, trust us?

Early in thread I asked Dgoldenz for example of people who bought EIA/FIA that were currently retired. He could not do so because as he explained these product haven't been around long enough for more than a handful of people to actually be receiving payments. So these are new products and there is a real risk given there high levels of complexity that they wouldn't paying out the benefits that purchasers and perhaps even the agents believe. I think unless you personally have purchased one of these products for your own retirement, I am not sure you are qualified to give advice. I personally always make sure before giving financial advice on this forum to make a point of telling people if this is based on personal knowledge on a product or just what I've read.


Quote:
Also, it kinda pisses me off that you all have probably ruined any chance of him ever using any products from an insurance company, which would severely limit him of some excellent tools in his retirement years (annuities are the ONLY way to get a guaranteed income stream, life insurance is an excellent wealth transfer tool at death, and often can provide LTC protection on the same dollar). You all act like getting money from an insurance company is like getting back that 40 bucks you loaned your cousin. These companies aren't run from treehouses - every state has very specific rules for what insurers can and can't do with their balance sheets. AIG? Their insurance wing (American General) had plenty of cash through that whole crisis, and in fact, when AIG (parent company) tried to siphon some out, they got blocked by the state's insurance commissioner. They had to keep their reserve requirements for paying claims.
When we last left Ralph I believe he was inclined to buy an FIA.
I understand the benefits of life insurance as a tool to protect against the death of a family wager earner as retirement vehicle, I've not seen any data showing that is good, except for avoiding estate taxes.

I am glad you bring up AIG, cause it is actually a excellent example of what could happen in a future crisis.

First, yes you are right AIG policy holders were protected by state insurance regulators. Putting aside my concern about the effectiveness of state regulating complex financial products like EIA given how bad a job the Feds did with more resources lets look at the big picture.

Based on my reading of several accounts of the 2008 financial crisis, I believe that one of the major beneficiaries of AIG bailout was in fact mainline insurance companies. If we look at most of the products that AIG Financial Products got in trouble it was providing reinsurance (really writing puts) on a variety of things like CDS, MBS, CDO, etc. As it turns out AIG FP was collecting the premium for the puts without actually having the capital to pay of the puts if everything collapsed like actually happened. Now the popular press has made much (for understandable reasons) that one of the primary beneficiary of the AIG bailout was Goldman Sach, since GS had bought billions of puts from AIG FP and would really hurt if AIG didn't have the money to honor their contracts However, GS was simply making bets on the direction on market. Insurance companies bought plenty of CDS, MBS etc. and I am sure they were also large purchasers of reinsurances contracts from AIG FP. I suspect that AIG collapse would have led to catastrophic losses for all the insurance companies who bought reinsurance from AIG that wouldn't have been able to collect on. I believe Geithner, Bernake, Paulson etc. when they say an AIG collapse would have had catastrophic impact on financial industry. However, insurance companies are big part of the financial industry, more importantly by all accounts the majority of people managing insurance investment are in fact dumb money. The Goldman Sachs and JP Morgans of the world are going to get out in time, leaving the Travelers, AIG, Prudential etc. holding the bag in the next financial crisis.

My fundamental problem with FIA/EIA is really a very simple question.
If the stock market in fact remains flat for the next 10 or 20+years, and interest rate remain low, how do insurance companies make enough money to pay EIA purchases their promised benefits?

Fundamentally, buying an EIA is a bet with the insurance company. You are betting on two things. Number one that you are going to live a long time, and secondly that stock market isn't going to up much compared to what it has done in the past. The insurance companies are taking the opposite bet. Now if we assume that insurance companies understand mortality rates and price them properly we really have one bet. Where is the market going to be in 10, 20, 30 or 40 years?

So when a insurance companies promises an 8% guaranteed increase in your lifetime payouts like Ralph's contract. The obvious question is where is an insurance company getting a 8% guaranteed return? The majority of insurance companies profits are made by investing the float (the difference between premiums collected and benefits owed). Insurance companies have the same investment opportunities as other institutional investors, and frankly aren't much different than individual investors. Just like we should be skeptical of public pension funds being able to achieve 8% returns on their investment, we should also be skeptical of insurance companies selling investment products that make the same assumptions.

Public employers at least have option of raising taxes to pay for their pension obligations, insurance companies don't have that ability.
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