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Re: annuities?
Old 07-01-2006, 09:46 PM   #61
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Re: annuities?

Quote:
Originally Posted by jdw_fire
I just hope he didn't scare off the people that might benefit from using an annuity in their retirement plans.
I think getting less money, having no flexibility, having to deal with frequently scummy sales people, giving up your principal at the end and possibly losing ground to inflation will do that nicely for most people. I dont need to add much 'scare'.

But if you're happy with the house of cards you laid out, by all means. Hope it works out for you!
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Re: annuities?
Old 07-02-2006, 08:15 AM   #62
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Re: annuities?

For those who desire an almost sure-thing income stream for life, the sensible alternatives are self-annuitizing with something like treasuries or an immediate annuity.

If you don't feel such an income stream is wise or desirable, do not consider an annuity.

If you do, do-it-yourself solutions require that you assume a very long life span just in case you live that long, like 30 years if you're age 65. Insurance companies can use the population average life expectancy of 15-20 years and thus spread the risk. That is why the payouts from an annuity often solidly beat a sensible (read very long term) self-annuity plan -- they assume a much shorter amortization time. Yes, net of fees; you get something like 7.5% of your investment every year as a payout (some yours, some interest, some taxable as income, some not if after-tax purchase).

You end up behind if you die before your time and your estate loses the invested amount either way. But you get what you paid for in terms of a plump payout well in excess of SWR, the reduced longevity risk, whatever reassurance this brings you, and the resulting ability to have your remaining investment portfolio with a higher volatility tolerance (and, thus, probable higher returns over the long haul). All this in either case does not get inflation adjusted.



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Re: annuities?
Old 07-02-2006, 08:47 AM   #63
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Re: annuities?

Quote:
Originally Posted by Rich_in_Tampa
if you're age 65 ...
Yes, net of fees; you get something like 7.5% of your investment every year as a payout (some yours, some interest, some taxable as income, some not if after-tax purchase).
...
All this in either case does not get inflation adjusted.
Or ~ 6.3% if you choose a CPI adjusted immediate annuity
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Re: annuities?
Old 07-02-2006, 09:51 AM   #64
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Re: annuities?

Quote:
Originally Posted by jdw_fire
Or ~ 6.3% if you choose a CPI adjusted immediate annuity
Right. I've never seen an inflation-adjusted annuity that made sense when I ran the numbers.

Seems to me a better strategy to keep up with inflation is buying a small additional non-adjusted IA from time to time - you only do it if you need it, you buy only what you feel you need, and they pay more the older you are when you purchase.
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Re: annuities?
Old 07-04-2006, 02:01 PM   #65
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Re: annuities?

All of this annuity talk got me curious to see what the Federal Thrift Savings Plan would offer since they will always attempt to negotiate the best deal for their clients with minimal admin costs and no profit (to them). Kind of a useful benchmark about what is fair.

I ran the numbers for a CPI inflated annuity for a 60 year old with a 56 year old spouse payable until the last partner dies (that will be my situation in two years). The payout is 4.896% of the investment per year. That compares with a quote on a similar product from Vanguard that would pay at 4.296% of the invested amount per year. The Federal annuity inflates by CPI BUT ONLY to 3%/yr. I am not sure about Vanguard, but I think someone here mentioned that it goes significantly higher.

I ran a single only for the Fed program and got 5.964%.

I only looked at CPI adjusted annuities because that more closely compares with Firecalc SWR estimates.

I don't really need one of these because I already have a substantial CPI adjusted Fed pension. But it still appears that these devices have some appeal for a risk averse person who wants to use a portion of his or her portfolio to insure an income stream to cover survival expenses not handled by Social Security. Then they can be a bit more agressive with the rest of their portfolio in the hopes of some fun and a nice estate for the kids or whatever.
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Re: annuities?
Old 07-04-2006, 02:14 PM   #66
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Re: annuities?

Quote:
Originally Posted by donheff
I ran the numbers for a CPI inflated annuity for a 60 year old with a 56 year old spouse payable until the last partner dies (that will be my situation in two years).
My experience is that CPI or other "inflation" adjusted annuities are not such a good deal and vary a lot among companies in their details. Simple single life or joint life annuities are the best way to compare companies. A better strategy for me is to buy a straight IA, then if inflation starts to whittle it a bit too much, simply add another small immediate annuity at that time (plus you get more per dollar invested being older).

You may also find, like I did, that if you wait until you approach 65, the payouts go up to the 7-7.5% range. In your 50s, payout is low and inflation exposure is high.

Everyone's needs are different, of course. Just some observations to consider - buy late, by plain old IAs, and add a dollop more annuity every 8-10 years as needed if you want to keep payouts even with inflation, rather than buy an inflation-adjusted annuity right off the bat.
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Re: annuities?
Old 07-04-2006, 02:28 PM   #67
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Re: annuities?

...and just try looking at doing this for a 45 year old instead of a 60 year old...
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Re: annuities?
Old 07-04-2006, 02:36 PM   #68
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Re: annuities?

Quote:
Originally Posted by Rich_in_Tampa
My experience is that CPI or other "inflation" adjusted annuities are not such a good deal... A better strategy for me is to buy a straight IA, then if inflation starts to whittle it a bit too much, simply add another small immediate annuity at that time.
As I said, I don't need an annuity since I already have a pension. But, if I was considering one I would be doing so to cover myself in the event of a meltdown in my portfolio. Absent that, I agree with the other posters that you would be better off self annuitizing or just plan managing a diversified portfolio. Given the meltdown purposes I might not be able to buy a supplemental annuity if inflation ate up my purchasing power (the portfolio tanked) so I would want at least some degree of inflation protection - thus the CPI annuity.

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Re: annuities?
Old 07-04-2006, 02:43 PM   #69
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Re: annuities?

Yep, that 3% limit is sort of useless since CPI has averaged more than that for a while now. I checked and vanguards does limit to 10% in a single year as well.

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Re: annuities?
Old 07-04-2006, 05:16 PM   #70
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Re: annuities?

Quote:
Originally Posted by Cute Fuzzy Bunny
Yep, that 3% limit is sort of useless since CPI has averaged more than that for a while now.
The CPI has averaged 5%/year for the last 30 years (including the stagflation & high inflation of the '70s & '80s) and 3%/year over the last century.* (Dimson, Triumph of the Optimists)
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Re: annuities?
Old 07-04-2006, 05:30 PM   #71
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Re: annuities?

I started putting money into a Vanguard variable annuity in my late 40's because I was maxed out on 401(k)'s and IRA's and I could use it like a IRA picking fiuds and re-balancing etc as it is tax free until withdrawals. I had planned on using it from age 60 to 65 when my SS and a couple of pensions kick in. In recent years however the increased limits in contributions etc have made it less of a tax haven. I have found that the fees are low, plus I don't believe you actually have to annuitize, you can make withdrawals similar to an IRA.
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Re: annuities?
Old 07-04-2006, 06:20 PM   #72
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Re: annuities?



Flexible withdrawal options
Other annuities may charge surrender fees when you make withdrawals within the first several years of opening the contract. But the Vanguard Variable Annuity won't charge you any fees for withdrawing money (although you may be liable for income tax on earnings and a 10% federal tax penalty on investment earnings withdrawn before age 59½). You are not required to make minimum withdrawals from your annuity at age 70½ if it was purchased with nonqualified assets.

Individual withdrawals
You can make withdrawals of $250 or more at any time―with no surrender charges. Keep in mind, however, that you will owe income taxes on the earnings portion of your withdrawal. A 10% federal penalty tax may be imposed on withdrawals made before age 59½. For tax purposes, earnings are withdrawn first and nontaxable withdrawals of principal are made only when all earnings have been withdrawn.
I just checked the website to confirm that you can make withdrawals from a Vanguard cariable annuity, so you don't have to covert to annuity payments.

Systematic withdrawals—Set up a schedule to meet your needs
You can withdraw from the portfolios you specify or from all portfolios in your annuity (in which you have money) on a prorated basis. You can transfer money automatically from your annuity contract to your bank, savings and loan, or credit union account on a regular schedule. You may change the amount or frequency of your withdrawals at any time by mail or by phone. To be eligible for this service, your annuity must meet minimum balance requirements of $10,000 for the annuity and $1,000 per portfolio.

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Re: annuities?
Old 07-04-2006, 07:09 PM   #73
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Re: annuities?

Quote:
Originally Posted by Alan
I started putting money into a Vanguard variable annuity in my late 40's because I was maxed out on 401(k)'s and IRA's and I could use it like a IRA picking fiuds and re-balancing etc as it is tax free until withdrawals.* I had planned on using it from age 60 to 65 when my SS and a couple of pensions kick in.* In recent years however the increased limits in contributions etc have made it less of a tax haven.* I have found that the fees are low, plus I don't believe you actually have to annuitize, you can make withdrawals similar to an IRA.
Yeah, that's about the only kind of annuity I can stomach, personally. But if you are investing in tax efficient stuff, you generally come out ahead skipping the annuity.

BTW, if you choose to annuitize, you can do a tax-free transfer to whatever insurer you want to buy a payout annuity from. No need to stick with VG for that.
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Re: annuities?
Old 08-11-2006, 12:04 AM   #74
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Re: annuities?

Quote:
Originally Posted by donheff
All of this annuity talk got me curious to see what the Federal Thrift Savings Plan would offer since they will always attempt to negotiate the best deal for their clients with minimal admin costs and no profit (to them).* Kind of a useful benchmark about what is fair.
Love this thread.........hope somebody is still watching.* Denhoff's scenario is similar to mine.* Wife just became federal employee a few years ago and annual statement listed the Annuity Option which struck me as pretty decent (esp since projected estimate for my private pension just got reduced by 20%).
Question: How did you come up with those TSP annuity estimates? Is there a calculator on a TSP website or did you use some other calculator?.........thanks
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Old 08-11-2006, 08:24 AM   #75
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Re: annuities?

jazz4cash

There is an annuity calculator on the www.tsp.gov website. You can run a variety of what-ifs to satisfy your heart's content.

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Re: annuities?
Old 08-11-2006, 08:58 PM   #76
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Re: annuities?

Anti-Annuity Troll here -- I am not familiar with the TSP options. The key is to look at their effective interest rate. Don't get seduced with "income for life." In 15 or 20 years what looks like a good amount of cash will be a pittance due to inflation.

Compare whatever is offered against current CD/bond rates. The annuity competition is a laddered CD/bond "self-annuity" that goes on forever and always has an available cash value. Put your money into an income-stream annuity and it all goes away when you die and you can never get your principle back.

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Old 08-11-2006, 10:59 PM   #77
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Re: annuities?

Quote:
Originally Posted by 2B
Compare whatever is offered against current CD/bond rates. The annuity competition is a laddered CD/bond "self-annuity" that goes on forever and always has an available cash value. Put your money into an income-stream annuity and it all goes away when you die and you can never get your principle back.
This is an oft-repeated topic here, and you are right about the competing strategy. At least in the context of an immediate annuity, usually the annuity wins as far as monthly cash flow (offset by kissing your money goodbye the day you open the annuity).

The reason is that insurance carriers can do this prudently by anchoring it to your expected survival since group volumes will follow that path very closely (i.e. longevity mean). For every one who lives longer, there are those who die prematurely.

Comparing it to a bond ladder, you have to count on doing the ladder for your maximum expected age, say 95 or older. You don't have the luxury of playing for the mean. Long time to tie up 10% money in a 5% investment. Annuities after age 65 or so might pay the equivalent of a 7% return or more per annum.

None of this says whether an IMMEDIATE annuity is right or wrong -- that depends on your circumstances. But for those who want increased cash flow and longevity insurance in return for taking a sizable chunk off the table for your heirs, it is a viable option. Most would agree that you should not tie up your whole portfolio in annuities, but 20% or so is OK for some folks who understand the trade-offs.
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Old 08-11-2006, 11:23 PM   #78
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Re: annuities?

Quote:
Originally Posted by Rich_in_Tampa
Long time to tie up 10% money in a 5% investment. Annuities after age 65 or so might pay the equivalent of a 7% return or more per annum.
Current annuities may payout 7% of the initial investment but that is a long way from the calculated rate of return (IRR). The 7% is simply a calculated cash flow calculated on the initial payment. The actual IRR is probably about 3%.

Of course, living to be 100 changes everything. Then you'll get 7%.
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Old 08-12-2006, 04:59 AM   #79
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Re: annuities?

the nice thing about immeadiate annuties is they allow a larger monthly withdrawl than a bond ladder does....putting 100,000 into a bond ladder may provide someone with about 2.000 a year to withdraw for life figuring 5% and 3% inflation....an immeadiate annuity at 7% allows the same person a 3,000 a year income for life ..a 50% increase for life......by removing the uncertainty of making the money last it allows someone who may be struggling to pay bills a greater income
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Old 08-30-2006, 07:24 PM   #80
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Re: annuities?

I just went to the advanced FIRECALC and plugged in:

40 yrs expected retirement life
$1,000,000 invested
.5% expense ratio
50/50 mix of stocks/5 yr treasuries
95% success ratio allows $35,107 per year, increasing with CPI

Then I went to the Vanguard annuity website and plugged in:
Same $1,000,000 invested in their inflation-indexed annuity
Man 61/Woman 59 yrs old, 100% survivor option
Annual payout $41,520 per year, increasing with CPI

Please feel free to run these numbers for yourself and see if i made any errors.

There are things you can do to make the FIRECALC results better, like beating down the expense ratio and tweaking the investment choices. On the other hand, you could make some bad investments and come out much worse.

For those who have the desire, knowledge and emotional control to "do it yerself", individual investing makes sense. For the rest of the herd...
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