Annuities

L

Lewchuk

Confused about dryer sheets
Joined
Feb 23, 2005
Messages
2
Aside from:
a) not having an estate to leave when you die
b) not having a "fund" for large expenses (e.g. car)

what are the disadvantages of converting a portfolio to life annuities instead of worrying about withdrawal rate.

Thanks
 
I think the answer is Inflation.
Click to expand...

I think so, too. But it depends how old you are. For example, I went to http://www.immediateannuities.com and entered as an 80 year old male, living in California. The monthly payment for an investment of $100k was $1064, or nearly 13% per annum.

That could look pretty attractive, especially if you think you're going to live into your 90s (or even longer).

Peter
 
One other consideration: straight-up cash flow.

While annuity quotes can vary greatly, just a few quick ones I did a while back out of curiosity to see how they compared yielded an interesting observation....you could almost get just as much (if not MORE money) by taking your money and buying the longest maturity gov't bond, and still retain control over your initial principal.

Do your own research by getting quotes from a variety of sources, and compare it to getting a fixed yield from selling your entire portfolio and going fixed.

Some will point out that you can get options with annuities for COLAs - but they all have a price (in the form of lower initial starting payments). If COLAs are a concern, simply invest 80% in the longest maturity gov't bond, with the remaining 20% in a ladder to mature in a way to supplement the fixed interest on the 80% to give you enough cash flow to live off of.

Also, one other advantage: if for some reason you needed the cash, you could always sell your fixed income assets. Sure, if rates rise the price will plummet....but at least you could sell your bonds relatively easily (hey, if someone needed the cash that badly, $.85 on the dollar is better than nothing)
 
A TIAA-CREF article that might address your question about annuity allocations. Go to:

www.tiaa-crefinstitute.org

click on "Pensions and Retirement"

click on "Published Articles"

The article is titled:
Making Retirement Income Last a Lifetime
John Ameriks, TIAA-CREF Institute, Robert Veres, Inside Information and Mark J. Warshawsky
December 2001

The article is about annuities as a component of a retirement portfolio and how it affects portfolio longevity risk, the authors use a Monte Carlo simulator that they attempt to calibrate with a historical simulator. They publish a number of detailed tables with the results from both simulators.
:D :D :D
 
The main reason annuities don't figure into most of our plans is cost. Insurers are not too eager to sell payout annuities to younger people because their risk is pretty high. If you are older, it may make sense to annuitize some of your portfolio, but you will need to shop around pretty carefully to make sure that A) you are getting a good deal and B) the insurer is sufficiently credit-worthy that you are not at risk. In general, I am not much of a fan of payout annuities simply because they are expensive and inflexible.

I need to poke around and look at immediate variable annuities. Anyone looked at these? Obviusly the high expense ones are a waste, but I am thinking about ones from TIAA-CREF and Vanguard.
 
The main reason annuities don't figure into most of our plans is cost.  Insurers are not too eager to sell payout annuities to younger people because their risk is pretty high.  If you are older, it may make sense to annuitize some of your portfolio, but you will need to shop around pretty carefully to make sure that A) you are getting a good deal and B) the insurer is sufficiently credit-worthy that you are not at risk.  In general, I am not much of a fan of payout annuities simply because they are expensive and inflexible.

I need to poke around and look at immediate variable annuities.  Anyone looked at these?  Obviusly the high expense ones are a waste, but I am thinking about ones from TIAA-CREF and Vanguard.
Click to expand...

A few years ago an actuary I know took the REHP safe withdrawal spreadsheet and compared the results against a Vanguard Immediate Variable Annuity with the same asset allocation (75% S&P500, 25% fixed income)

The annuity resulted in a better deal in only 1 or 2 of the 100 30-year pay out periods examined.

Vanguard may have decreased its annuity expenses a bit since then, but I don't know if it's enough to make a difference.

intercst
 
The annuity resulted in a better deal in only 1 or 2 of the 100 30-year pay out periods examined.
Click to expand...

Was the REHP analysis done on the basis that the portfolio reduced to zero over the 30 year period? In that case, a significant advantage of the annuity would be that payments would continue beyond 30 years.

Peter
 
Was the REHP analysis done on the basis that the portfolio reduced to zero over the 30 year period? In that case, a significant advantage of the annuity would be that payments would continue beyond 30 years.

Peter
Click to expand...

Yes. But the analysis used a starting age of 76 to ensure that everyone died in 30 years or less (i.e., the upper limit of the mortality table was age 105.)

intercst
 
Why not create your own "annuity"? There are plenty of calculators for the math. This way you do not loose control of the funds...VERY important, and NO fees!

Billy
website www.geocities.com/ba264
 
I'm going to live to 106.  Maybe 107.
Click to expand...

Not really sure why you'd want to! - Have you seen the Pope lately? - 84 is not looking to good to me :D
 
I don't have any interest in annuities myself since my DW and I have two small pensions each and (as long as Bush doesn't screw it up completely) should get some kind of social security payments. When all six of these benefits kick in, they should represent about a third of my annual expenses or more (depends on inflation between now and then). I have what should be plenty of funds and adding more annuity is not of interest to me.

But I think there is a reasonable argument for some annuity investment for some people. There are a lot of different kinds of risk that the retiree faces. It's not just investment variation and SWR risk. One risk is that you outlive your investments. If you live to be older than TH will live :), you run a serious risk of outliving that 30 year SWR plan you came up with. If you are concerned about that risk, an annuity is an investment that addresses it. You don't outlive an annuity. You might have to cut back your lifestyle when you reach 106 and we experience the Great Global Market Crash of 2058, but you will have some income if you have an annuity.

The downsides of an annuity are real. You and your heirs get nothing when you die. So if you die early, all that annuity money is lost. The fees tend to be very high. But if you live to be very old, you could come out ahead. :D :D :D
 
Thanks to everyone for their posts,

It seems to me that annuities shift "life expectancy risk" to the insurance company.

The alternative is to "self insure" your life expectancy risk by keeping a large portfolio.

If you try to live in a healthy manner and your relatives tend to live long, it seems to me that shifting that risk to the insurance company would make sense.

Agree?
 
Pretty much.

Always remember that when someone offers a product, they at least intend to make a profit.

If you feel you can produce the product on your own without incurring increased risk due to your smaller 'pool' (IE, buying your own funds and stocks and eschewing the financial planner and the 2% annual charge fund managers), then in an average or better world you come out ahead.

Consider annuities the 'extended warranty' to a product with a reliability level known only to you. If your family is health and long lived and you feel pretty good and get good checkups, you might find a good annuity to be your best friend in your 90's and 100's...

On the other hand, steering your own boat might leave you pretty happy in your 40's-90's, and how much are ya gonna give a $^#%$ in your 100's... :p
 
If considering annuities, please check out a "charitable gift annuity", "charitable remainder trust", or "life income gift" as offered by The Sierra Club, The Nature Conservancy, and other beneficial organizations.

Given the recent and rapid decline of our earth's climate, habitat, species, water, air, and overall environment, and our current president's head-in-the-ass, er, sand attitude about it, you would be helping these organizations fight these battles just as it is needed most.

Time is of the essense!

cfcf
 
 
It seems to me that annuities shift "life expectancy risk" to the insurance company.
Click to expand...

Exactly. The big reason I would have concern about annuities is risk with the issuer. Most of us know someone who put too many eggs in one basket, and the company proved unreliable. Have an attorney friend in that boat ... insurance co., as I recall, went bust.

If I buy an annuity, will probably do so with at least a couple companies, just in case.
 
If considering annuities, please check out a "charitable gift annuity", "charitable remainder trust", or "life income gift" as offered by The Sierra Club, The Nature Conservancy, and other beneficial organizations.  

Given the recent and rapid decline of our earth's climate, habitat, species, water, air, and overall environment, and our current president's head-in-the-ass, er, sand attitude about it, you would be helping these organizations fight these battles just as it is needed most.

Time is of the essense!  

cfcf
Click to expand...

CAUTION! Here's an interesting article.

http://ezinearticles.com/?Love-The-Thrill-of-Risk?--Invest-in-an-Annuity!&id=13143

"A new type of annuity called a charitable gift annuity has come on the market recently. These are issued by charity organizations. You give your money to the charity, you receive a tax benefit, and in exchange the charity promises you a fixed payment for life. Unfortunately, this scheme has become a mode of operation for con artists.

The charitable gift annuity has been added to top ten scam list of the North American Securities Administrators Association. "
 
Understood. But realize that some of the orgaizations I listed have been in existance for at least 100 years and are repected world-wide for their work and for their forthrightness.

cfcf
 
Exactly.  The big reason I would have concern about annuities is risk with the issuer.  Most of us know someone who put too many eggs in one basket, and the company proved unreliable.  Have an attorney friend in that boat ... insurance co., as I recall, went bust.  

If I buy an annuity, will probably do so with at least a couple companies, just in case.
Click to expand...

Probably not a bad idea, although I think that you could reasonably expect to pick just one company that is almost certain to remain solvent through thick and thin. If you look at companies like Northwestern Mutual, MassMutual, New York Life, etc., they have been through the Depression, Stagflation, awful recessions, World Wars, etc. and remained standing and for the most part healthy. The other advantage to picking a mutual insurer is that you are a partial owner of the company and get a share of the profits. This tends to nicely tie the insurer's interests with the policyholder's.
 
I'm naturally wary of any investment that panders to (or is simply sympatico) with my likes or beliefs. I have lost more money investing in organizations that "I knew" or sympathized with.

Beware treehugging annuities, smokefree funds, low carb bonds, politically correct CDs... whatever. IMO unless you invented freon or something and feel the need to pay back I would look twice at "theme" investments. I'm cynical enough to believe that they are designed with your mind in mind.

BUM
 
I am biased. I do not like annuties.

I have my reasons. I was counsel-executor to a large estate, and saw how the likes of AIG, Met - Life and others had taken big bucks in commissions from the decedent and became the de-facto heir to about half the savings of a hard working and frugal lifetime of savings. I would have prefered the money be in T-Bills and went to those who helped the deceased during his declining years. Buy I-bonds or REITS for income (which is where the Insurance companies put it after they have contracted your rights away) and avoid being ripped off by some Insurance behemouth like MET-Life, AIG, Prudential or a thousand others that couldn't care less about anyone but their sales (con) men and their stock holders.

I treat annuities as but yet another insurance scam to con the public out of their hard earned money and then claim they are providing financial services!
 
You must log in or register to reply here.

Similar threads

erkevin
Advice on Inherited Qualified Annuity and Taxes
Replies
11
Views
541
all4j
A
B
Asset Allocation
Replies
12
Views
952
Brangus Baldies
B
5
Treasury vs annuity
Replies
5
Views
830
ShokWaveRider
ShokWaveRider
E
Estate Planning Nuances - Trusts, Probate, TIC, JTWROS, etc
Replies
6
Views
675
Sunset
Sunset
gcgang
Can you gift an annuity?
Replies
2
Views
632
gauss
gauss

Latest posts

Back
Top Bottom