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Old 09-24-2012, 10:44 PM   #21
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Interesting article. There are pros and cons to every strategy. Earlier this year I put 20% of my assets into 4 different annuities. Two have an income doublers (one for nursing home and one for loss of activities of daily life - so you can still live at home). It took me a long time to get comfortable with the idea as I want to know how the companies could make the guarantees they do and all the details about the programs. As I studied the rates took a drop so then I had to decide whether to buy anyways. I decided to go ahead and do it. Between then (a few months ago and now) most of the programs I bought have either been dropped or the rates reduced again.

Although I think it was a great decision for my situation I think it is a hard place to get to due to the complexity of the products and that they aren't suitable for most people. We have no kids so don't need to leave the money to anyone. We also have no pensions so wanted to set up something that would be there no matter what. Were 45 and chose products that could accumulate for 20 yrs at about 7% and then we can withdrawal either 5% for single or 4.5% for two lives covered.

The annuity sales people in general were not particularly useful due to either not knowing their stuff or being intentionally deceitful. Finding the best products took alot of leg work as you have to plow through alot of materials because the sales people could not be counted on to bring things to your attention that will benefit you or conversely the things that aren't suitable for you. They just pitch 'whatever'. I can see why they have such a bad reputation.

None of what I bought is COLAd so I did my own calculations and assumed 3.3% inflation every year to decide how much to put in now to get our baseline expenses covered. Three of the annuities I bought are equity indexed and one is variable.

Now that I made the leap I'm tempted to put a little bit more in. However I may be better served by revisiting it in 5 years. But in the mean time I struggle to get safe returns so who knows what will be best in the long run.
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Old 09-24-2012, 10:52 PM   #22
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If that's the case, why not buy dividend stock, instead, get as much payout and keep a growing principal? I know that dividends are not 100% guaranteed, but neither is the survival of insurers...
That is basically my point. Articles like this point out a real issue, then suggest a fictional solution. Would have worked fine from time to time in the past, but it is pure fantasy under current conditions. And of course when it would have worked, you would have had to figure it out for yourself, because there would not have been any articles about it. At least none that got published.

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Old 09-25-2012, 12:01 AM   #23
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That is basically my point. Articles like this point out a real issue, then suggest a fictional solution. Would have worked fine from time to time in the past, but it is pure fantasy under current conditions. And of course when it would have worked, you would have had to figure it out for yourself, because there would not have been any articles about it. At least none that got published.

Ha
+1

It raises an important issue but the solution does not work for me.

I'm going with a mix of dividends and rental income to fund our retirement with a cash/near cash reserve to tide us over any rough patches.

Annuities are something of a non-starter at this time:

1. the pricing is currently awful due to low interest rates

2. they are low cost

3. I'll be 47 and my wife 40 when I retire. It will be a long wait before we are old enough to make an annuity a realistic option. If the portfolio gets through the intervening years in good shape, it's possible we wouldn't need to consider an annuity

4. since what passes for annuities out here in Hong Kong are seriously bad ways of destroying wealth I would have to look at a US product. As a non-resident of the US I might be subject to 30% non-recoverable withholding tax, which makes a questionable investment look even worse compared to many of the shares I can buy in HK or elsewhere which have either no taxes or much lower witholding tax rates depending on country of origin

5. even splitting the money and buying annuities from more than one provider still leaves me with more concentrated credit risk than other portfolio options

I'll revisit when the time comes, but if interest rates get high enough to make an annuity attractive, I'll have to wonder if very long term government bonds would be better.
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Old 09-25-2012, 02:28 AM   #24
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Hello - have you looked at deferred annuities ? I bought my first one this year, as discussed in other threads. To me it looks like a very good deal.
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+1

1. the pricing is currently awful due to low interest rates

2. they are low cost
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Old 09-25-2012, 08:38 AM   #25
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Are fully inflation protected immediate lifetime annuities no longer available? I have no idea. Vanguard used to have them listed on their website, IIRC, although they were costly. I don't know if they still have them.
I provided a link just a few months ago if someone wants to search for it. I have not found "inflation protected immediate lifetime annuities" based on CPI or a like metric. I can understand why no annuity provider would expose themselves to indexing based on CPI as it would be too hard to predict for a lifetime, and they'd have to hedge so much no customer would be willing to pay for that uncertainty.

But I have found immediate lifetime annuities with fixed/contractual annual increases. IIRC, an immediate annuity with an annual increase of 3% cost almost twice (initial purchase price) as much for the same starting income, as I'd expect. Or IOW an immediate annuity with a 3% annual increase would provide half the first year income of a fixed immediate annuity for the same initial purchase price.

And I think a fixed annual increase immediate annuity product is as close as we'll ever see to "inflation protected" - CPI doesn't make sense for the insurer or the recipient.
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Old 09-25-2012, 08:56 AM   #26
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From an earlier thread I looked around for a published annuity rate that included inflation adjustment. This is the only one I found ELM Income Annuity

No idea how representative the rates are nor how secure the company is. My reaction was a joint annuity, with survivors benefits, and inflation protection, for a 60 year old couple, provides a yield of 3% compared with the S&P which yields 2%. The survivors benefit is reduced but the amount is not published so the real annuity yield is less. The S&P dividend has increased faster than inflation and is taxed (currently) at a lower rate. For a younger couple < age 60, a broader market dividend yield could be a better choice.
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Old 09-25-2012, 10:08 AM   #27
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Hello - have you looked at deferred annuities ? I bought my first one this year, as discussed in other threads. To me it looks like a very good deal.
I looked at the New York Life (deferred) "Guaranteed" Income Annuity a few months back. This is the product introduced last year in which you give them a lump sum of cash and a date at least five years in the future in which payments will begin. The spreadsheet that was provided to me by the sales guy indicated that the return of principal and interest would be like 6.8%. Doing a little math, it appeared that the real interest rate was about 3.2%. I did not pull the trigger because the sales guy was not candid about the fees being charged. However, now I notice that the product is available through Fidelity. Anyone have more experience with it? In theory, this does provide a means to buying a floor of income to supplement SS. I have no pension coming.
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Old 09-25-2012, 10:10 AM   #28
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Apparently, even those Vanguard inflation protected annuities had (have?) a 10%/year cap on inflation protection. Here's a thread discussing them.

Vanguard Inflation-Indexed Annuities?
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Old 09-25-2012, 10:51 AM   #29
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Apparently, even those Vanguard inflation protected annuities had (have?) a 10%/year cap on inflation protection. Here's a thread discussing them.

Vanguard Inflation-Indexed Annuities?
Back at the time of this thread, I called Vanguard and got a quote or two. At least at that time, I had to speak to a rep, and she then followed up with me. The rates seemed reasonable and the 2 companies while not necessarily top drawer were likely OK. Nevertheless, few would have described this as an active, competitive market. At the time TIPS were available and what seem today to be fantastic yields, and there were some good stocks priced well around too, so I skipped the annuities and filed the topic away for my dotage.

I have not bothered to recheck, but I would imagine that if they still are offered, the terms would be horrendous, because of what has happened to interest rates, particularly TIPS.

Fixed annuities with low caps or just yearly bumps are IMO useless-essentially no better and in some ways worse than just buying a series of fixed annuities. My criticism is not of fixed annuities per se, but of this article setting up a very high hurdle-absolutely secure inflation protected income, and then trying to sell ordinary fixed annuities to fill the gap.

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