Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: annuities?
Old 06-29-2006, 06:23 PM   #21
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: annuities?

Quote:
Originally Posted by New Thinking
Dr. Brown at U of Ill-Champaign
A fake name if I ever heard one...



So does the wellesley funds payout of 10.6% annually over the last 36 years, with an income component almost always exceeding 4.5% not a contender because its not a pure 'fixed income fund'?
__________________

__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: annuities?
Old 06-29-2006, 09:05 PM   #22
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Re: annuities?

Quote:
Originally Posted by Cute n Fuzzy Bunnay
So does the wellesley funds payout of 10.6% annually over the last 36 years, with an income component almost always exceeding 4.5% not a contender because its not a pure 'fixed income fund'?
With 35-40% in stocks I'd say probably more like a conservative blended fund. Pretty good one at that, but the volatility, while low compared to standard index funds, isn't like treasuries which is what I think the original analogy implied (hypothetical straight 5% per year).

It has ranged from 4.79 to 8.67% on 1 and 10 year returns, probably more on year-to-year numbers (too lazy to find them).
__________________

__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Re: annuities?
Old 06-29-2006, 09:22 PM   #23
Recycles dryer sheets
 
Join Date: Jun 2006
Posts: 322
Re: annuities?

Hi
It still confuses me why one wants an annuity . My sister that is able to retire on friday at 55 is putting a small portion of her funds in one. Now that you guys menion it the description was the same as a bond. I dont think I got an answer why its better than a cd since the rates arent that much better and your locking yourself into a fixed rate. She will be able to get her money back out. I believe that she has to wait 5 yrs or there is some penalties.
I did consider it to be a compromise since she is putting more money into the family real estate business and a good portion of the money will go into equities.
__________________
spideyrdpd is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 06:29 AM   #24
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: annuities?

Quote:
Originally Posted by spideyrdpd
Hi
* *It still confuses me why one wants an annuity . My sister that is able to retire on friday at 55 is putting a small portion of her funds in one. Now that you guys menion it the description was the same as a bond. I dont think I got an answer why its better than a cd since the rates arent that much better and your locking yourself into a fixed rate. She will be able to get her money back out. I believe that she has to wait 5 yrs or there is some penalties.
I did consider it to be a compromise since she is putting more money into the family real estate business and a good portion of the money will go into equities.
Um, I think you have signals crossed. Most of the posts on this thread are referring to a payout annuity. Payout annuities involve the buyer giving the insurer a pile of cash in exchange for a stream of payments that can go for a specified time period or life. Once you buy a payout annuity, you are locked in and you cannot get your money out.

It sounds like your sister purchased what is known as a deferred annuity, which is a bit of a misnomer. A deferred annuity works like a CD: you put money in, and in the future you get the money plus a return back. It is still considered an annuity because you technically have the right to annuitize the value of your annuity, but almost nobody does so. The deferred fixed annuity your sister bought is essentially a tax advantaged CD with high fees.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 06:48 AM   #25
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,644
Re: annuities?

Quote:
Originally Posted by spideyrdpd
Hi
It still confuses me why one wants an annuity .
It is all about certainty. People worry about a "black swann event," something extremelly unusual that blows all the bets away. An annuity, for example, could address circumstances that result in a collapse that continues unabated for twenty years right after you retired. That is why some people put everything in CDs and Treasuries - they want risk to be a close to zero as possible.

Of course, if the ice fields melt and seas rise twenty feet in 10 years instead of 100, and the gulf stream shuts down, nothing will work
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 06:52 AM   #26
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: annuities?

Quote:
Originally Posted by donheff
It is all about certainty.* People worry about a "black swann event," something extremelly unusual that blows all the bets away.* An annuity, for example, could address circumstances that result in a collapse that continues unabated for twenty years right after you retired.* That is why some people put everything in CDs and Treasuries - they want risk to be a close to zero as possible.

Of course, if the ice fields melt and seas rise twenty feet in 10 years instead of 100, and the gulf stream shuts down, nothing will work*
And if we end up in an inflationary environment like 1966 to 1982, anyone who bought payout annuities will be very sorry.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 06:57 AM   #27
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Re: annuities?

Quote:
Originally Posted by Rich_in_Tampa
Short version: some feel it provides valuable longevity and volatility insurance when used carefully and selectively. Others feel you can always do better by self-annuitizing if you have the discipline, since the insurance company fees can be avoided. Both agree that variable (as opposed to immediate) annuities are worthless. Both agree that if you do this, use only a relatively small portion of your nest egg for it, like 20-25% max. There are cogent arguments on both sides.
I second RIT's post. *First off, I am the self-proclaimed anti-annuity troll. *With that disclaimer, let me say why. *In the many annuities I have looked at, the internal rate of return (IRR) is always lower on fixed term annuities than is available on CDs or longterm bonds -- due to the higher fees and commissions. *Buying laddered CDs or individual bonds (not bond funds) can create a self-annuity by timing the maturity of these fixed investments. *Lifetime annuities use the same IRR as their fixed term counterparts but they have an insurance portion added to provide the potentially longer payout. *I have only analyzed one of these and I concluded that the buyer (age 60) would have to live 15 years beyond his life expectancy to equal laddered CDs.

Also, a purchase of a fixed annuity is a final decision. *Once done the money is turned into a cash stream. *The principle can not be recovered if life's circumstances change. *With CDs or bonds, a lump sum can be recovered with some penalties and/or market fluctuations.

A deferred annuity is a cousin of the fixed annuity in that after the first year's teaser rate the interest rate will drop to well below current CD rates. *You can get your money back but it usually involves a penalty of a few per cent. *So with a fixed annuity you get low returns and have to pay a penalty to get your money back -- what a deal! *The salesman financial advisor still gets a great commission.

The best IRRs I've seen are at Vanguard but you still can do better on your own.

__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 10:39 AM   #28
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,644
Re: annuities?

Quote:
Originally Posted by brewer12345
And if we end up in an inflationary environment like 1966 to 1982, anyone who bought payout annuities will be very sorry.
What about inflation protected annuities. If I recall from an earlier thread Vanguard has one based on CPI.
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 10:49 AM   #29
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: annuities?

Two problems with those: they pay out a lot less and CPI may not equal your personal rate of inflation, unless of course you're an Urban Worker whose budget is closely aligned with the CPI-U's budget allocation.

Off the top of my head, you're looking at getting about two thirds of the payout of the non-inflation protected annuities.

TIPS may end up paying the same before too long.

The bottom line is there is no free lunch. You're surrendering your money and then paying a set of fees. You'd get upside vs self investment if we hit a Depression type event. Pretty much a loser unless that happens.

Nice idea to consider for older retirees for a portion of their portfolio. A little reliable income stream helps SWR's and portfolio survivability. Of course, most people have Social Security or a pension for that function.

Fairly useless for a younger ER with a long term investing horizon.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 10:51 AM   #30
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: annuities?

Quote:
Originally Posted by donheff
What about inflation protected annuities.* If I recall from an earlier thread Vanguard has one based on CPI.
Sure, inflation indexed annuities would be OK in that scenario, but the payouts per year are much lower per $1000 of principal you give the insurer. *
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 12:37 PM   #31
Recycles dryer sheets
 
Join Date: Feb 2004
Posts: 178
Re: annuities?

Quote:
Originally Posted by donheff
It is all about certainty. People worry about a "black swann event," something extremelly unusual that blows all the bets away. An annuity, for example, could address circumstances that result in a collapse that continues unabated for twenty years right after you retired. That is why some people put everything in CDs and Treasuries - they want risk to be a close to zero as possible.

Of course, if the ice fields melt and seas rise twenty feet in 10 years instead of 100, and the gulf stream shuts down, nothing will work
Brewer has already brought up the question of unanticipated inflation as one black swan. If you want another - and this isn't rare enough to even be called a black swan - what if the insurance company goes bust? If you're going to worry about a general financial collapse, then I think you have to worry about insurers being part of it.
__________________
I'd rather be sailing.
nfs is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 12:41 PM   #32
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: annuities?

Quote:
Originally Posted by nfs
Brewer has already brought up the question of unanticipated inflation as one black swan.* If you want another - and this isn't rare enough to even be called a black swan - what if the insurance company goes bust?* If you're going to worry about a general financial collapse, then I think you have to worry about insurers being part of it.
Yeah, but if you pick carefully who you buy from, it is unlikely to be a big issue.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 01:48 PM   #33
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Re: annuities?

From Vanguard - for a 35 year old getting a lifetime annuity, $500,000 principal would give an inflation adjusted $17,342.52 per year or a 3.46%+CPI payout for life. Similar to the SWR (based on FIREcalc) you would expect for a 35 year old. For non-inflation adjusted annuities - you'd get $29272/yr from the $500000 principal, or 5.85%. The CPI adjusted payment is 60% of the non-CPI adjusted payment.

Taking the CPI adjusted annuity would mean upon death, you get nothing. With a portfolio invested in fixed income and equity mutual funds, you'd expect to have a huge amount upon death, assuming you never increased your draw above the SWR of ~3.5-4%+CPI.

__________________
justin is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 02:00 PM   #34
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Re: annuities?

Quote:
Originally Posted by Cute Fuzzy Bunny
You'd get upside vs self investment if we hit a Depression type event. Pretty much a loser unless that happens.
To be complete, you also get an upside if you live a long time (compared to self-annuitizing for the worst (best?) case scenario of 40+ years of survival). Also, it wouldn't take a Depression scenario to also emphasize the upside, that is, and kind of a reasonably prolonged bear market would also increase the value of a fixed immediate annuity.

Agree, there are fees to consider, that it is usually a bad idea if you are young. I don't feel it is quite as cut and dried as you characterize it. It can be a good idea in specific situations.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 03:22 PM   #35
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 1,012
Re: annuities?

Also since the payment from an immediate annunity is related to the interest rates at the time you buy the annuity if you buy the annuity when interest rates are high you in essence lock in a high interest rate for life.
__________________
jdw_fire is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 04:40 PM   #36
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Re: annuities?

Quote:
Originally Posted by jdw_fire
Also since the payment from an immediate annunity is related to the interest rates at the time you buy the annuity if you buy the annuity when interest rates are high you in essence lock in a high interest rate for life.
Good point. And they don't vary day-to-day so you can time your purchase in a general sort of way (e.g. wait quite a while if rates are very low).
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 04:44 PM   #37
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
Re: annuities?

Quote:
Originally Posted by jdw_fire
Also since the payment from an immediate annunity is related to the interest rates at the time you buy the annuity if you buy the annuity when interest rates are high you in essence lock in a high interest rate for life.
The CD and bond interest rates will still be higher!
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 04:58 PM   #38
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 4,005
Re: annuities?

One thing to add - while I was looking at the Vanguard Annuities website, I noticed the CPI adjusted annuities only allow a maximum of 10% per year increase in payments. That could be a problem if we have a few years of inflation significantly over 10% such as late 1910's or ~1980. Buying power would be eaten away never to be replaced.
__________________
justin is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 05:52 PM   #39
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Re: annuities?

Quote:
Originally Posted by justin
One thing to add - while I was looking at the Vanguard Annuities website, I noticed the CPI adjusted annuities only allow a maximum of 10% per year increase in payments. That could be a problem if we have a few years of inflation significantly over 10% such as late 1910's or ~1980. Buying power would be eaten away never to be replaced.
True, Justin. But so might interest rates go down and the stock and bond markets sag long term, and then the annuity becomes the proverbial "best decision I ever made." We could "what if" as long as we want, but that's just speculation; an annuity is partially designed to reduce the need to do that.

There is no fundamental disagreement here: the immediate annuity buys volatility reduction and longevity insurance. It is not a high yield investment nor is it intended to be. It is not a COLA investment (though some buy periodic small additional annuities to offset that effect). It is not meant for an entire portfolio.

Most helpful to compare it to a self-annuitized one-time investment in rock solid treasury-type bonds designed to pay out for 30, 40 years or whatever. And with that or an IA, you will likely feel freer to be a bit more aggressive in the allocation of your non-annuity assets and be able to keep the SWR lower than otherwise.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Re: annuities?
Old 06-30-2006, 08:05 PM   #40
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: annuities?

Quote:
Originally Posted by Rich_in_Tampa
To be complete, you also get an upside if you live a long time (compared to self-annuitizing for the worst (best?) case scenario of 40+ years of survival). Also, it wouldn't take a Depression scenario to also emphasize the upside, that is, and kind of a reasonably prolonged bear market would also increase the value of a fixed immediate annuity.

Agree, there are fees to consider, that it is usually a bad idea if you are young. I don't feel it is quite as cut and dried as you characterize it. It can be a good idea in specific situations.
I was considering the long life. Put the principal in wellesley, take the 4.5% yield, live forever if you like, then pass the appreciated principal off to your heirs, friends or charities.

I agreed that it was a good idea in specific situations. Re-read what I said, which is pretty much what I always say. Despite some characterizations of my comments that i'm anti-annuity I seem to persistently break that mold by saying they're good things for some people in some situations, as long as they really, really understand the implications.

What they are not is a good long term investment for a large portion of an average early retirees portfolio.

If you have nobody to leave that money to, your rate of inflation matches or is exceeded by CPI-U and you like the comfort factor of a steady, reliable, reduced income stream from what you could probably do on your own, then they're a great idea.

Watch me say another positive thing: the insurer going broke is pretty unlikely if you choose well. Even in the depression a lot of insurers in the US kept paying.

Seems to me we've already had this discussion. Nobody's going to change their minds, and facts are most certainly not going to matter.

For your case Rich, I think you said you planned to put a smallish portion (less than 25%?) of a reasonably good sized portfolio into an annuity when you were in your sixties. Probably makes all the sense in the world given those parameters.
__________________

__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Financial dinners and Equity Indexed Annuities janeeyre FIRE and Money 20 04-02-2007 09:03 AM
Annuities: Now, later, never? ats5g FIRE and Money 1 10-30-2006 12:02 PM
Do annuities fit into an ER plan? (SWR-related) lwbarry FIRE and Money 68 02-19-2006 08:35 AM
Variable Annuities Craig FIRE and Money 8 01-13-2005 05:27 PM
Life only annuities GTM FIRE and Money 4 10-11-2004 02:44 PM

 

 
All times are GMT -6. The time now is 07:03 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.