Annuities

[Lewchuk]

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. Not sure though.

[Peter]

Quote:

I think the answer is Inflation.

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

[MooreBonds]

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)

[sgeeeee]

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.

Listen to Peter76, because he's made good points.

[brewer12345]

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.

[intercst]

Quote:

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.

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

[Peter]

Quote:

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

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

[intercst]

Quote:

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

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

[cute fuzzy bunny]

I'm going to live to 106. Maybe 107.

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

Quote:

I'm going to live to 106. *Maybe 107.

Not really sure why you'd want to! - Have you seen the Pope lately? - 84 is not looking to good to me

[cute fuzzy bunny]

Yeah but thats all that hard Pope livin'.

I've lived like a choirboy

[sgeeeee]

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.

[Lewchuk]

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?

[cute fuzzy bunny]

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

[cfcf]

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

[cfcf]

Oh, and here's some links for these kind of annuities:

Sierra Club
http://www.sierraclub.org/membership...lifeincome.asp

Nature Conservancy
http://nature.org/joinanddonate/gift...c/art2696.html

Natural Resource Defense Council
http://www.nrdc.org/joinGive/give/annuity.asp

Defenders Of Wildlife
http://www.defenders.org/donate/legacy/cgifts.html

Earth justice
http://64.233.167.104/search?q=cache...hl=en&ie=UTF-8

Audubon
http://64.233.167.104/search?q=cache...hl=en&ie=UTF-8

cfcf

[Craig]

Quote:

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

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.