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Re: annuities?
Old 06-30-2006, 08:44 PM   #41
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Re: annuities?

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Originally Posted by Cute Fuzzy Bunny
I was considering the long life. ...
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.
Nice balanced post, CFB.

No miracles in annuities, but also not a bad thing at certain times for certain folks. Take into account the fact that you pocket $7400 a year forever on a 100K investment (65 year-older today) and it starts to look pretty sensible for some.

Let's compare notes next time this discussion recycles, say in 3-4 days or so .
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Re: annuities?
Old 07-01-2006, 06:24 AM   #42
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Re: annuities?

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who are you, and what did you do with the real CFB!?
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Re: annuities?
Old 07-01-2006, 07:11 AM   #43
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Re: annuities?

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Originally Posted by d
who are you, and what did you do with the real CFB!?
Check the time. The merlot was probably especially good so everything was wonderful. The real CFB will be back today. : :
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Re: annuities?
Old 07-01-2006, 10:50 AM   #44
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Re: annuities?

Nah, no merlot for me. A nice cape codder about three hours later.

This aint rocket science folks. With few exceptions most reasonable investments are fair game for inclusion into our portfolios. But what we buy and how we buy it is often done without a whole lot of factual bias. We're already wired to like or avoid specific investments just because they push good and bad buttons in our heads. And when we've decided we like something or dislike something, all you have to do is utter a word or make an inference and you get 20-80 years worth of complex programming dumped in your lap.

Just try to get the average Depression era baby who's in their 70's or 80's now to buy equities. You'll see what I mean.

I really and truly and honestly looked at annuities more than once, knowing both the up and downsides quite well.

I can get 40-45k per mil per year from a boring, low volatility, stodgy Wellesley investment and if the future performance is 80% of the past performance, the principal appreciation will more than keep up with MY personal rate of inflation.

A vanguard annuity would me about $33K per mil per year with survivorship and $37k per mil per year without, both CPI adjusted. CPI is lower than my personal rate of inflation, so I'd lose buying power at a 1-2% clip per year. Over my anticipated 40-50 year remaining life span...well...do the math.

And then after milking the dividends for 40+ years, I can pass off financial independence to my son, whether he's achieved it himself or not. Annuity goes poof!

I know even a small steady income stream, even one that hasnt shown up yet but is somewhat predictable for the future, like social security, can have an immediate and positive effect on SWR's. In my case, I already have a small steady income stream for the forseeable future, probably a couples social security and probably a couple of small pensions. None of which are necessary for my financial plan to succeed.

I just like to make sure that the whole story gets told. Some people tell quite a story about annuities and write some really fine and convincing "papers" on it. I just prairie dog it and see what its going to pay and what flexibility does it give me.

Closest I came was putting $5K in a 12.4% deferred annuity with consumers union, which included a free consumer reports subscription for life. I found myself seeing the free subscription as the biggest benefit and decided I'd gone a little too far down the road of diversity in investing
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Re: annuities?
Old 07-01-2006, 11:46 AM   #45
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Re: annuities?

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Originally Posted by 2B
The CD and bond interest rates will still be higher!*
The key is that if you buy the annuity you lock in the "rate" for life where as your CD and bond rates will fluctuate.* As an example of the higher "rate" I am talking about; about a month and a half ago I provided an example of a retirement plan for a 60 yro couple using an inflation (CPI) adjusted immediate annuity on the thread FYI: Ben Stein's views on asset allocation.
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Originally Posted by jdw_fire
OK let me try from another angle, an example.* The facts for this example are a couple (both 60 years old) wants to retire with $100,000 of assets that can be used for income production (this number is arbitrary as the numbers in this example are scalable, if its size troubles you multiply it by 10 or 100 or whatever, just remember that all the dollar values in this example need to be multiplied by the same number).* Reading an article by Henry Hebeler dated 3/8/05 entitled "An Appeal for Better Planning” we would be foolish to use less than 40 years (and this may not even be long enough) for our FIRECalc calculation.* Also, I have read several posts here that suggest planning for a long life.* With a 50/50 portfolio split, a starting W/D of $3386 gets us a success rate of 100%.* If now we go to Vanguard’s site and look at inflation protected immediate annuities we need to spend $65,424.64 to get the same starting income rate from said annuities, leaving $34575.36 for you to invest however you see fit.* (I should note I would actually propose buying 2 individual life annuities each providing half the W/D amount stated above, one for each member of the couple.* This technique actually provides the income for a smaller initial payment then a single annuity with a 50% spousal benefit.* When one of the couple dies the other will only have half of the inflation adjusted income from an annuity, but 1) it shouldn’t cost as much for a single person to live as the couple and 2) remember that there is still the $34575.36 that has been invested from the date of retirement until the first spouses death without a need for withdraw up to this point.* If additional income is needed at this point that money is then used to buy another inflation protected immediate annuity for the surviving spouse or if the surviving spouse has the capability and inclination to manage the assets for additional withdraw s/he can do so.* Please note that the longer the time between their retirement and the death of the first spouse the larger the payment stream will be on a newly purchased inflation protected immediate annuity for any given purchase price.)*

This analysis is even better for a single person since the annuity costs only $62614.65 and the $37385.45 remaining portfolio after the initial purchase of an inflation protected immediate annuity will never have to be used to make up lost income when a spouse dies.

I used here an extreme example (i.e. a very large annuity) to try and show my point as clearly as possible however as I said in an earlier post maybe a better solution is to use the annuity to provide the bare bones amount necessary for retirement and let the success of the remaining portfolio provide for discretionary expenses.

Before anyone flames me please consider some of the benefits of this approach.*
* * *- potentially less need for management/monitoring of your portfolio (just put the $34575.36 remaining portfolio into an index fund for 40 years)
* * *- using FIRECalc the residual values after 40 years are higher with the annuity ($34,575 – $1,274,044 w/ avg $416,137) than w/o ($72 – $634,124 w/ avg $181,113)
* * *- if someone really couldn’t stand working any more they could actual retire with fewer assets without giving up safety or income

If you still don’t think this a financially viable solution please explain why?* In this explanation please remember that the past performance of the stock and bond markets is no guaranty of future performance.
Since then the rise in interest rates means that if this was implemented today instead of a month and a half ago the income stream produced by the annuity will be 4.6% higher for the same amount "invested" in the annuiity.
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Re: annuities?
Old 07-01-2006, 12:04 PM   #46
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Re: annuities?

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Originally Posted by jdw_fire
The key is that if you buy the annuity you lock in the "rate" for life where as your CD and bond rates will fluctuate.* As an example of the higher "rate" I am talking about; about a month and a half ago I provided an example of a retirement plan for a 60 yro couple using an inflation (CPI) adjusted immediate annuity on the thread FYI: Ben Stein's views on asset allocation. Since then the rise in interest rates means that if this was implemented today instead of a month and a half ago the income stream produced by the annuity will be 4.6% higher for the same amount "invested" in the annuiity.
CD and bond rates can be locked in for the next 30 years. If interest rates really shoot up, CDs can be cashed in for a 90 day interest penalty. Bonds can be sold but at a market loss.

Annuities can't be cashed in or sold if changes occur in peoples lives or situation. There are also upside limits on the Vanguard inflation protection.

In your prior post quoted, you neglect the fact that the 50% survivor benefit cut their income in half. That doesn't happen with laddered CDs or bonds.

Again, out of all of the annuity products I have looked at, none of them have a IRR that compares even close to what can be achieved by laddered bonds and CDs. The only attraction I can see people continuing to come back to is the "for the rest of your life" aspect. When I've looked at the numbers, you're betting you will live at least 15 years longer than your actuarial lifespan. If you are Duncan or Conner McCloud, go for it. If you just like knowing that the check is coming on the first of the month even though the rate of return is significantly lower than doing it yourself, go for it.

Long ago I decided to stop making the payment on my investment advisors Porche. I have managed to avoid paying for the annuity salesman's BMW. Unfortunately, both my father and FIL have made a number of his payments.
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Re: annuities?
Old 07-01-2006, 12:21 PM   #47
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Re: annuities?

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Originally Posted by 2B
CD and bond rates can be locked in for the next 30 years.

...

Again, out of all of the annuity products I have looked at, none of them have a IRR that compares even close to what can be achieved by laddered bonds and CDs.
These two statements are contradictary since laddered bonds/CD are not locked in for 30 yrs.* So either you ladder (and have to rebuy bonds/CDs at various interest rates) or you lock in and then how do you get the inflation adjustment w/o selling some of the assets (maybe at a loss or penalty) and consuming principle?

Quote:
Originally Posted by 2B
In your prior post quoted, you neglect the fact that the 50% survivor benefit cut their income in half.* That doesn't happen with laddered CDs or bonds.
Actually I did cover the survivorship issue in the post quoted and the posts that followed on that thread.* It is a pretty lenghty discussion which I will leave on that thread for your reading pleasure.
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Re: annuities?
Old 07-01-2006, 12:42 PM   #48
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Re: annuities?

Yeah, you covered it. Requires that a half dozen assumptions all fall in the right place at the right time. They wont.

I think everyone "gets" that you're going to buy an annuity and have a story that you feel supports that decision.
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Re: annuities?
Old 07-01-2006, 02:45 PM   #49
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Re: annuities?

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Since then the rise in interest rates means that if this was implemented today instead of a month and a half ago the income stream produced by the annuity will be 4.6% higher for the same amount "invested" in the annuiity.
... which also means that had you "invested" a month and a half ago you would have been screwed out of 4.6% ... for the duration of the annuity.
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Re: annuities?
Old 07-01-2006, 02:49 PM   #50
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Re: annuities?

Now you fellas quit pointing out the holes in the hull, or this boats gonna sink!
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Re: annuities?
Old 07-01-2006, 03:02 PM   #51
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Re: annuities?

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Originally Posted by d
... which also means that had you "invested" a month and a half ago you would have been screwed out of 4.6% ... for the duration of the annuity.
The smarter strategy is to DCA into annuities by purchasing portions as separate contracts over a year or two. No different from equities - rarely pays to try timing the market. If you DCA among several different companies, it also minimized the risk of business failure.
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Re: annuities?
Old 07-01-2006, 03:29 PM   #52
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Re: annuities?

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The smarter strategy is to DCA into annuities
... but only if rates are rising ... even then it would have been smarter to wait ... i'll let you borrow my cystal ball
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Re: annuities?
Old 07-01-2006, 04:42 PM   #53
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Re: annuities?

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Originally Posted by Cute Fuzzy Bunny
Yeah, you covered it.* Requires that a half dozen assumptions all fall in the right place at the right time.* They wont.

I think everyone "gets" that you're going to buy an annuity and have a story that you feel supports that decision.
Actually I have not yet decided to buy an annuity and I've been retired (@47 yrs old) for over 2 years.** If sometime in the future I decide that I don't want*to monitor my investments anymore I might purchase one.*

The reason I started posting on the subject was that I noticed that many posters seemed to think that people that retired with a pension had an easier time of it and were at less financial risk in retirement.* A pension pegged to CPI was even better.* Wanting to assist anyone who wants to RE I decided to do some number crunching.* I made up a set of circumstances (retiree's age, portfolio size, porfolio life) to run an annuity against in an attempt to find a way for anyone to have a pension (thinking this would help them retire easier, with less risk).* What I noticed was that under those circumstances the annuity produced an equal cash flow and a larger residual value than a FIRECalc analysis of the same portfolio size/life at a stock/FI mix of 50/50.* What was interesting was that I hadn't had to hunt up the circumstances that worked in the annuity's favor, the first set I used worked.*

Then once I posted them CFB's posts made me look even closer at my example and his concerns (mainly survivorship, insurance co survivability, income produced and residual remaining for heirs) and the annuity example held up pretty well (however, not in CFB's mind).* Unfortunately when it came to the income and the residual CFB didn't compare the annuity to FIRECalc, he compared it to his investment ability or a single MF that "averaged" better (as an aside; if picking one MF that "averages" better than FIRECalc results is an acceptable method of retirement planning what is the point of using FIRECalc?).* He also got hung up on the terminology that I used when I called the annuity "inflation adjusted" instead of "CPI adjusted".*

I just hope he didn't scare off the people that might benefit from using an annuity in their retirement plans.
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Re: annuities?
Old 07-01-2006, 05:09 PM   #54
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Re: annuities?

Is this a stupid idea - please let me know.

My two sons are soon to graduate from college aged 21 and 19, - one has had a good job to help pay for expenses and the other, no job, but has a great athletic scholarship - actually he works harder for his scholarship than son number one. We have matched their earned incomes for years to bolster their Roth IRAs. And to even out the score, I am considering buying my son number 2 a variable IRA for it's deferred tax qualities in order to even out their bottom lines. I've thought of other investements, but a deferred variable annuity has the "benefit" of severe surrunder fees and hopefully this would keep my kid from cashing it in at an early age. I know, I know, what about good old blue-chip stocks - but again I want to even out their tax deferred accounts and son number 2 hasn't been making earned income lately. And son number 2 would be prone to cashing out any investemnt that doesn't have an early-out penalty.

Ideas?

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Old 07-01-2006, 05:50 PM   #55
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Re: annuities?

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Originally Posted by region2
...
Ideas?
Why not open an IRA in your name and make your son the beneficiary? When you die, he gets it and can have a so-called stretch IRA. Or if he cashes it in, then he pays big taxes all at once.

OTOH, kids tend to resent it if they are not treated exactly the same as their siblings.
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Old 07-01-2006, 06:06 PM   #56
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Re: annuities?

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Is this a stupid idea - please let me know... a deferred variable annuity
There is consensus here and elsewhere (even among those of us who see a role for IMMEDIATE annuities) that VARIABLE annuities are usually unwise: severe restrictions on liquidity, big hit from insurance company fees, bad choice of investment funds, etc. etc.

Maybe yours is one of those few situations where it sorta makes sense, but I bet there are preferable workarounds.
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Re: annuities?
Old 07-01-2006, 06:12 PM   #57
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Re: annuities?

Thanks for the advice. I agree, in general, I would never buy a variable annuity for myself. I can contribute to IRAs of several types.

But from what I know, there are only 3 types of tax-deferred vehicles - IRAs, annuities, and life insurance. My younger son does not qualify for the first, and he doesn't need the last as he has no dependents and hopefully won't for awhile. So that leaves annuities.

Are there any other types of tax-deferred investments that I am missing.

I will leave all of my estate to my sons split 50-50.
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Old 07-01-2006, 06:43 PM   #58
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Re: annuities?

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Originally Posted by region2
Thanks for the advice. I agree, in general, I would never buy a variable annuity for myself. I can contribute to IRAs of several types.

But from what I know, there are only 3 types of tax-deferred vehicles - IRAs, annuities, and life insurance. My younger son does not qualify for the first, and he doesn't need the last as he has no dependents and hopefully won't for awhile. So that leaves annuities.

Are there any other types of tax-deferred investments that I am missing.

I will leave all of my estate to my sons split 50-50.
Hmmm, how about you establish a trust for each son that invests solely in the vanguard tax managed balanced fund (or similar). Tax efficient and you could specify pretty much any restrictions you like on accessing trust income and principal.
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Old 07-01-2006, 07:45 PM   #59
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Re: annuities?

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Originally Posted by region2
But from what I know, there are only 3 types of tax-deferred vehicles - ...
Are there any other types of tax-deferred investments that I am missing.

I will leave all of my estate to my sons split 50-50.
You are missing plenty of tax-deferred investments.* If you simply purchase stock or ETFs that have little to no dividends and hold, then you pay no taxes until the stock or ETF is sold and gains realized.* You even pay the lower long term capital gains tax rate.* Of course, if you die, the gains become tax-free to your heirs because of the stepped up basis that capital assets get.

As for equal treatment of sons, why not make sons equal beneficiaries in one of your IRAs as well, rather than fund their own IRAs as gifts? At least in those years where one son does not have earned income for an IRA.
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Old 07-01-2006, 08:37 PM   #60
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Re: annuities?

Buy them each a house. Its a great tool for delaying taxes.

I still dont get annuities
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