Annuities

[John Galt]

Hello LEX. I basically agree with you about annuities,
but believe that the "insurance behemoths" are not really
doing anything wrong. They are selling a product. Lots of deals are poor deals.
And.......lots of ways to get into trouble. No one is
forcing these people to buy annuities. Let the buyer
beware....................

JG

 

[charlie]

OTHO, there is something very seductive about
never running out of money.   For those of us
in a marginal situation (my total income producing
financial assets are about $630k) I have considered
committing some of it to an annuity .... maybe just
enough to cover bare bones expenses.  Currently,
long rates are too low to take annuities seriously.

But if they ever go up .......

Cheers,

Charlie

 

[Tony2002]

Part 1
:I think that you all are not approaching this topic in the right way.

Let me tell you all what I did with my portfolio to generate retirement income.

I had a portfolio of approx $1.2 Million of non IRA money and $240,000 of IRA Money when I retired at the age of 60 in May of 2004. I have no pension and will start Social Security at age 62. I am currently single. I have 2 working children. My home is paid off.

My objectives are to travel and enjoy the remainder of my life for as long as possible. I am not concerned about leaving an estate to my children. I planned for that several years ago.

Here is what I did:

When I was 47 I created a trust for the benefit of my 2 children. In this trust I purchased a joint life insurance policy that would pay $1,000,000 upon the death of my wife & I. My wife passed away so this amount will be paid at my death. The smartest thing I did here was pay a premium amount that would pay this policy off in 13 years. I made my final payment and I never have to make another one. My children will receive $1,000,000 when I die. To pay the premium on the policy that the trust purchased we made gifts to the trust each year that equaled the amount of the premium. Since this is in a trust this $1,000,000 is not subject to estate taxes.

What will my children inherit in a worst case? $1,000,000 plus the value of my home when I die. Currently my home is valued at about $600,000.

So when I made the statement that "I am not concerned about leaving an estate to my children". You see why I think $1.6 Million minimum is plenty. My portfolio is for me alone. If any part of my portfolio remains after I live the remainder of my life to its fullest then my children will get some more. I expect to live into my 90's God willing! I also expect to enjoy myself. To protect my home, I purchased longterm care insurance with a strong home care benefit. If I need care I would prefer having the care at home instead of going into a nursing home. Yea, this isn't cheap, but at least with this I can control my situation.

The most important thing, as I see it, is to make sure that I do not outlive my assets or ability to generate income.

I see a lot of posts here about withdrawal calculations. I don't agree with any of it. Because any calculation you do, you always at some point run out of money. When your asset runs out, you no longer can receive income. Remember, I expect to live into my 90's. I can not trust any of these withdrawal models. They can NOT guarantee that I will receive the income that I want for the remainder of my life.

I purchased an immediate annuity with all of my IRA money. The $240,000 pays me a monthly payment of $1,475.42 or $17,705.04 per year for as long a I live.

With $649,287.49 on my non IRA money I purchased an immediate annuity that pays me a monthly payment of $4,000.00 or $48,000 per year for as long as I live.

Is this a good investment? I say YES! These assets are to pay me the most monthly guaranteed cash flow possible. Remember I said cash flow. Cash Flow is what you feel or can hold in your hand if you choose (what I receive every month. NOT that fictional rate of return that everyone talks about. One point in time its there and the next its gone along with some of your initial investment). These assets are for my benefit only not for my children. My children are already taken care of to my satisfaction.

So I invested $889,287.49 into immediate annuities that pays me $5,475.42 per month or $65,705.04 per year for as long as I live guaranteed. What is the cash flow rate that I receive? 7.3885% This is in a world where a 10 US Treasury Bond pays 4.53% and a 30 Year pays 4.81%. See part 2

 

[Tony2002]

: Part 2
If I say this another way, I would have to buy a US Treasury Bond that pays 7.3885% in interest each and every month for entire life to match this cash flow. Well we all know that this is impossible.

Another advantage to me. Of the $5,475.42 per month of $65,705.04 per year, only $3,329.42 per month or $38,873.04 per year is considered taxable income. $2,146.00 per month or $26,832.00 per year is Tax Free (Considered a Tax Free return of initial investment).

All of my IRA money received each year taxable. Only 44.1% of the other payment is taxable income. So if you did this all with non-IRA money more of the payments would be tax free.

You say, these payments are fixed, what about inflation? Well, I will get an increase in monthly payments when my social security begins at age 62. This I think will start out in the $1,200 per month area. This portion will increase each year.

Part 2 to the inflation answer is the balance of my portfolio is to be invested and grow with some certainty so that when I feel the pinch of purchasing power loss, I can take some of that money and purchase a new immediate annuity that equals an increase in the monthly payments that I need.

What if I need ready cash? I set up a money market account with $75,000 in cash. I deposit money that I do not spend each month from the $5,475.42 per month I receive. I can not see any situation where I would need anywhere near that amount of money.

What did I invest my reaming portfolio of $475,000 in? All but $75,000 in Deferred Fixed Annuities.

I put $150,000 in a fixed annuity with a 10 year interest rate guarantee of 5.15%.

I put $100,000 in a fixed annuity with a 6 year interest rate guarantee of 4.20%

I put $150,000 in an equity index annuity. This is more long term 10 to 15 years. This gives an opportunity to earn higher interest rates than regular fixed annuities without risking your initial investment amount plus interest earned. This is NOT a variable annuity, I think variable annuities are expensive with the fees. Variable annuities are like a mutual funds, your initial investment can lose value. They have some guarantees against loss, but I just don't like them.

With these 3 annuities I am very well protected against inflation.

What am I doing with the last $75,000? This is my play money. I do some swing trading. Buy 3 or 4 stocks and hold them for 3 weeks to 6 months. If I am good at it, this $75,000 will grow nicely over time and will also provide additional inflation protection. If I suck at this, I will lose the $75,000 and I will never do this again. To this point, my $75,000 has grown to about $125,000. Can I be successful over several years? I don't yet know the answer to that. That is why I call this play money!

Who advised me on how to do this? I actually found this professional on the internet through www.jdsfinancialsolutions.com . This website has a great deal of information on it. He does business nationwide. We did everything over the phone, through emails and through the mail. We worked very well together, I gave him all the information he needed to thoroughly understand my needs and he gave me all the time I needed to understand what he was proposing that I do. He gave me all the time I needed to make a decision with no pressure at all. He gave me a plan that actually works, is flexible and guarantees that I will not outlive my income & assets. Not some hypothetical withdrawal calculation that if you take out beyond the time you expect to live runs out of assets and thus income. Not some hypothetical withdrawal calculation with a hypothetical rate of return that has a possibility to be less than zero! You should talk to people who started using these withdrawal calculations in the years 1997,1998, 1999 & 2000. They are very sorry that they did this. I bet they run out of money 10 to 15 years sooner than they expected when they started them. I wonder if then even know!

I am about one year into my retirement, traveling, having fun, spending about 75% of this $5,475.42 per month and I have no worries. This strategy works great for me. Live, Love & Enjoy Life! Tony

 

[Jarhead*]

Tony: Very professional. A little too Professional, could be, I"ll let other posters decide for themselves.

As Charlie had mentioned, probably not a bad idea to allocate a small portion of funds if interest rates increase to make annuities more competitive.

One thing for sure though. The agent that sold a $1,000,000. life policy at age 60, and close to a $l,000,000 annuity has gone up several rungs in his early retirement plan

 

[intercst]

Tony:  Very professional.  A little too Professional, could be, I"ll let other posters decide for themselves.

As Charlie had mentioned, probably not a bad idea to allocate a small portion of funds if interest rates increase to make annuities more competitive.

One thing for sure though.  The agent that sold a $1,000,000. life policy at age 60, and close to a $l,000,000 annuity has gone up several rungs in his early retirement plan

Imagine what all those insurance premiums would be worth if they'd been invested in the market over the past 13 years.

intercst

 

[Jarhead*]

Imagine what all those insurance premiums would be worth if they'd been invested in the market over the past 13 years.

intercst
[/quot

Intercst: Exactly.

I just noticed by the way, that annuity thread was started by Lewcheck, (his first and only post), and followed up by Tony on his first post.

Not exactly up to Robert Redford and Paul Newmann, in "The Sting" standards, but good try guys

 

[Tony2002]

The last 2 Posts missed what I was saying (Go Back and Reread my complete posts):

The most important thing, as I see it, is to make sure that I do not outlive my assets or ability to generate income.

I see a lot of posts here about withdrawal calculations. I don't agree with any of it. Because any calculation you do, you always at some point run out of money. When your asset runs out, you no longer can receive income. Remember, I expect to live into my 90's. I can not trust any of these withdrawal models. They can NOT guarantee that I will receive the income that I want for the remainder of my life.

I purchased an immediate annuity with all of my IRA money. The $240,000 pays me a monthly payment of $1,475.42 or $17,705.04 per year for as long a I live.

With $649,287.49 on my non IRA money I purchased an immediate annuity that pays me a monthly payment of $4,000.00 or $48,000 per year for as long as I live.

Is this a good investment? I say YES! These assets are to pay me the most monthly guaranteed cash flow possible. Remember I said cash flow. Cash Flow is what you feel or can hold in your hand if you choose (what I receive every month. NOT that fictional rate of return that everyone talks about. One point in time its there and the next its gone along with some of your initial investment). These assets are for my benefit only not for my children. My children are already taken care of to my satisfaction.

So I invested $889,287.49 into immediate annuities that pays me $5,475.42 per month or $65,705.04 per year for as long as I live guaranteed. What is the cash flow rate that I receive? 7.3885% This is in a world where a 10 US Treasury Bond pays 4.53% and a 30 Year pays 4.81%.

If I say this another way, I would have to buy a US Treasury Bond that pays 7.3885% in interest each and every month for entire life to match this cash flow. Well we all know that this is impossible.

Another advantage to me. Of the $5,475.42 per month of $65,705.04 per year, only $3,329.42 per month or $38,873.04 per year is considered taxable income. $2,146.00 per month or $26,832.00 per year is Tax Free (Considered a Tax Free return of initial investment).

All of my IRA money received each year taxable. Only 44.1% of the other payment is taxable income. So if you did this all with non-IRA money more of the payments would be tax free.

You say, these payments are fixed, what about inflation? Well, I will get an increase in monthly payments when my social security begins at age 62. This I think will start out in the $1,200 per month area. This portion will increase each year.

Part 2 to the inflation answer is the balance of my portfolio is to be invested and grow with some certainty so that when I feel the pinch of purchasing power loss, I can take some of that money and purchase a new immediate annuity that equals an increase in the monthly payments that I need.

 

[Hyperborea]

Annuities - at my age?

I purchased an immediate annuity with all of my IRA money. The $240,000 pays me a monthly payment of $1,475.42  or $17,705.04 per year for as long a I live.

With $649,287.49 on my non IRA money I purchased an immediate annuity that pays me a monthly payment of $4,000.00 or $48,000 per year for as long as I live.

So, at what age did you buy these annuities?  What would be the cost in your professional opinion for someone who is 45 or even 35? To extend that what if you're 35 or 45 and need it for both you and your spouse so a joint life annuity?

 

[intercst]

Re: Annuities - at my age?

So, at what age did you buy these annuities?  What would be the cost in your professional opinion for someone who is 45 or even 35?  To extend that what if you're 35 or 45 and need it for both you and your spouse so a joint life annuity?

I just got some quotes from Vanguard.

https://flagship5.vanguard.com/VGApp/hnw/content/AccountServ/Retirement/ATSAnnuitiesOVContent.jsp

Here are the annual payouts for a $1 million immediate life annuity. If you want an inflation-adjusted benefit, the annual payout is cut in half.

Age      Fixed            Inflation-Adj (CPI)

35        $52,110            $24,060
45        $56,430            $29,140

I think I'll save the sales commission and just stick with my stock/fixed income portoflio.

intercst

 

[Nords]

Annuities schmanuities

It's interesting to note, Tony, that your annuity numbers are given down to the penny.

Until the part where you say, in two separate posts yet with the exact same sentence, "This I think will start out in the $1,200 per month area."

So you know to the penny how much money you're getting right now, but you can't predict the inflation adjustment? You can't say whether it's in today's dollars or likely to keep up with the CPI? How did you compare plans or decide whether they were even cost-effective?

Not only that, you can't take the time to write the ad copy to say it with different words? Oh, sorry, I forgot-- you're just a disinterested poster excited about a great sleep-at-night product.

Annuities serve a legitimate purpose for some retirees. However investor-fooling money-grubbing unethical salespeople like you give the entire industry a slimy appearance.

Lemme point out that not all withdrawal plans run out of money. Social Security is one example (so far). Defined-benefit pensions are another. Living within your stock dividends or bond payments is a third. Living below a 4% withdrawal may prove to be a fourth. Since almost all of us have some combination of the above, we find it hard to agree with your claims.

Another withdrawal plan that doesn't run out of money is at Bud Hebeler's website and in a library copy of his "J.K. Lasser's Your Winning Retirement Plan". How much do your annuities cost you to implement?

We've seen some very subtle pitches here. Yours is better than most but I ain't buyin'. Why don't you go try it over at the Vanguard Diehards board and see what kind of reception they give you!

 

[Tony2002]

:Nords What are you talking about?

1st of all I do not have a fixed pension plan from my former employer. It was based on contributions and is I got the $240,000 in my IRA.

The $1,200 per month is for my social security that begins at age 62. I don't yet know the exact payment because it did not begin yet. I turn 61 next month so the payment will not start for 14 months..

My cost for the immediate annuities which I bought in May of 2004. Well I payed $889,287.49 and receive $5,475.42 per month or $65,705.04 per year for the remainder of my life. $2,146.00 per month or $26,832.00 per year is Tax Free.

That is a cash flow rate of 7.3885% ($65,705.04/$889,287.49).

These amount are exact because $5,475.42 is deposited into my checking account each month.

You live with a 4% withdrawal on your entire portfolio. I prefer to receive a 7.3885% amount for my entire life on a portion of my portfolio and let the balance of my portfolio grow for when I need a higher monthly payment to offset inflation.

7.3885% cash flow on some of my portfolio is better that 4% my entire portfolio any day.

My way is easier and it will Never ever go to zero even if I live to age 200!

Tony

 

[intercst]

:Nords What are you talking about?

1st of all I do not have a fixed pension plan from my former employer. It was based on contributions and is I got the $240,000 in my IRA.

The $1,200 per month is for my social security that begins at age 62. I don't yet know the exact payment because it did not begin yet. I turn 61 next month so the payment will not start for 14 months..

My cost for the immediate annuities which I bought in May of 2004. Well I payed $889,287.49 and receive $5,475.42 per month or $65,705.04 per year for the remainder of my life. $2,146.00 per month or $26,832.00 per year is Tax Free.

That is a cash flow rate of 7.3885% ($65,705.04/$889,287.49).

These amount are exact because $5,475.42 is deposited into my checking account each month.

You live with a 4% withdrawal on your entire portfolio. I prefer to receive a 7.3885% amount for my entire life on a portion of my portfolio and let the balance of my portfolio grow for when I need a higher monthly payment to offset inflation.

7.3885% cash flow on some of my portfolio is better that 4% my entire portfolio any day.

My way is easier and it will Never ever go to zero even if I live to age 200!

Tony

Only if you ignore inflation. Your 7.3885% is a fixed benefit that will lose half of it's spending power in 30 years if inflation averages 3% per annum.

The 4% withdrawal is increased each year for the amount of inflation and is "safe" for someone retiring on the eve of the Crash of 1929 and the Great Depression. If you don't happen to retire just before the next Great Depression, you'll be able to increase your withdrawals in excess of inflation if you like.

I'd hate to think how poor I'd be today if I'd bought an annuity back in 1994 when I retired at age 38.

intercst

 

[cute fuzzy bunny]

I wonder if they sell annuities in Bulgaria?

I mean, wouldnt that be the best of both worlds?

 

[Tony2002]

: intercst - You are picking apart 1 piece of what I did and trashing it. That is not fair and part of the problem with message boards.

If you read my 1st two posts they completely explain what I did. Every base is covered including inflation.

I have $550,000 remaining after I purchased the immediate annuity. This is the amount that I invest to protect my fixed payments from inflation.
-----------------------------------------------------
My cost for the immediate annuities which I bought in May of 2004. Well I payed $889,287.49 and receive $5,475.42 per month or $65,705.04 per year for the remainder of my life. $2,146.00 per month or $26,832.00 per year is Tax Free.

That is a cash flow rate of 7.3885% ($65,705.04/$889,287.49).
-----------------------------------------------------------------

$75,000 I keep in a money market account ING Direct

What did I invest my reaming portfolio of $475,000 in? All but $75,000 in Deferred Fixed Annuities.

I put $150,000 in a fixed annuity with a 10 year interest rate guarantee of 5.15%.

I put $100,000 in a fixed annuity with a 6 year interest rate guarantee of 4.20%

I put $150,000 in an equity index annuity. This is more long term 10 to 15 years. This gives an opportunity to earn higher interest rates than regular fixed annuities without risking your initial investment amount plus interest earned. This is NOT a variable annuity, I think variable annuities are expensive with the fees. Variable annuities are like a mutual funds, your initial investment can lose value. They have some guarantees against loss, but I just don't like them.

With these 3 annuities I am very well protected against inflation.

What am I doing with the last $75,000? This is my play money. I do some swing trading. Buy 3 or 4 stocks and hold them for 3 weeks to 6 months. If I am good at it, this $75,000 will grow nicely over time and will also provide additional inflation protection. If I suck at this, I will lose the $75,000 and I will never do this again. To this point, my $75,000 has grown to about $125,000. Can I be successful over several years? I don't yet know the answer to that. That is why I call this play money!

The point is that you can invest the $550,000 any way you want, I chose to do the above.


*****
What you don't get is that it will be 5 years before I convert some of the $550,000 plus growth into an additional immediate annuity to provide me the bump up in monthy payment to offset inflation. I will also be 5 years older so montly payments will be higher per dollar invested. I will only use a small portion of my portfolio to get the increase in monly payment that I will need. I will do this every 5 years.

The cash flow rate will be higher than the 7.3885% I currently receive and will be higher in each subsequent 5 year period.

Tony

 

[Hyperborea]

Re: Annuities - at my age?

Here are the annual payouts for a $1 million immediate life annuity. If you want an inflation-adjusted benefit, the annual payout is cut in half.

Age      Fixed            Inflation-Adj (CPI)

35        $52,110            $24,060
45        $56,430            $29,140

It gets worse if you want joint life with a spouse. I put in a 45 year old with a wife 2 years younger and for CPI inflation adjusted you'll only get $23,479. Now on top of the meager returns you're still trusting that CPI will mirror the inflation that you experience and that the annuity provider will be around for 60 years. So, why again is this better?

 

[Jarhead*]

: intercst - You are picking apart 1 piece of what I did and trashing it. That is not fair and part of the problem with message boards.

Picking an opinion apart is part and parcel of exchange on message boards. It is really only a problem if you have a vested interest in trying to "sell" somebody an idea.
This message board has always discouraged the forum to be used by salesman. (One of the reasons I enjoy it).
You're not going to get a warm reception here, so best for you to pack up your "annuities kit", and try for more fertile grounds.

 

[Tony2002]

: Hyperborea - I did this at age 60 without buying the CPI option. You don't need the CPI option if you do what I did.

It works!

Read my previous post on how I am protected for inflation.

I was told that it works great for 50 year olds & up. My wife passed away 7 years ago so I did not look at the joint immediate annuities.

Yes I can understand why the payments would be lower than mine if you include your wife. It is common sense, women live longer than men so the insurance companies woud by pure statistics have to make payments for a longer period of time. Thus the payments must be lower.

BTW - I looked at the vanguard immediate annuities and they did not have the best payments available when I made my purchase. The guy I used quoted me over 15 companies. See my 1st two posts.

Tony

 

[unclemick]

So now we have Tony the annuity cat to complement JG with fixed income(no common stocks) plus real estate.

Tony - I'm too lazy to run the numbers - but based on the tax free return numbers - did you ever try to swag when the annuity company is betting on your demise?

 

[intercst]

So now we have Tony the annuity cat to complement JG with fixed income(no common stocks) plus real estate.

Tony - I'm too lazy to run the numbers - but based on the tax free return numbers - did you ever try to swag when the annuity company is betting on your demise?

In general, the mortality tables that insurance companies use for annuities have life expectancies 3 or 4 years longer than the tables they use for life insurance policies. This results in lower annual payouts.

The reason for this is adverse selection. Annuity buyers tend to be in much better health than the average person of that age. No one with a significant health issue would buy a life annuity.

intercst

 

[laurence]

Honestly, I've thought about a small annuity for part of my portfolio when I retire, just enough to cover my known fixed expenses (property tax, etc.) so that I knew whatever happened I had that covered. But seriously, a million dollar annuity? No way, too much tied up, I'll take a 4 percent withdrawal rate...

 

[rapoole]

Tony-

I don't believe a word you said. It does not have the ring of truth. I don't know what your game is exactly (though it's easy to guess). I hope you go away soon.

rapoole

 

[haha]

: intercst - You are picking apart 1 piece of what I did and trashing it. That is not fair and part of the problem with message boards.

Tony, what I don't understand is why you care if a bunch of dumb clucks on an interenet bulletin board agree with your approach or not. For you , the die is cast. I don't think the insurance company is likely to refund your annuity premium if one of us convinces you that it was a bad idea.

It's too late for you, and maybe annuities don't seem attractive to most of us. Why do you care?

Mikey

 

[nfs]

What you don't get ...

What you don't get is that, using the techniques commonly discussed on this board, anyone who starts with $240k in an IRA plus $1200k taxable can comfortably take $57k per year, only $8k per year less than your annuities pay you.

That payout increases with inflation every year, which your annuities do not. You have those deferred annuities in reserve, but it's hard to see how they can add more than about $40k a year 20 years down the road, while SWR keeps plugging along, adding just as much in those 20 years and continuing to grow beyond that.

Your estate will net zero from the annuities at your death. With very high probability, the estates of the SWR users will be sizable.

You could be posting here for any number of reasons. You can see that some think you are trying to sell annuities, in which case you had better give up here. This is a tough crowd.

Maybe you're just trying to validate the decision you've already made. Good luck with that. Readers here are likely to believe that you have flushed a good portion of your net worth into the pockets of insurance companies and sales personnel. You won't get many pats on the back here.

Or you may just be trying to spread the word about something that you sincerely believe is a great idea. You're entitled to your opinion. Annuities can work for some people, especially if they are very risk-averse and/or old. You're not old but you may be very risk-averse, so maybe this works for you.

 

[Tony2002]

: NFS - Yes, I am very risk-averse about the amount of income I want to receive each and every month in my retirement for as long as I live. I do not want to risk any of the income.

I guess you people don't read very well!

The $550,000 can be invested to provide future montly income increases when needed.

I chose to invest this part the way I stated in my previous posts.

You can invest it all in one technology stock if that is what you prefer.

7.3885% cash flow is better than the 4% you guy's preach. My cash flow % will increace every 5 years when I buy a new immediate annuity. I have seen a cash flow % if I bought at age 75 that is about 9.66% for me.

Tony