Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 07-18-2008, 09:28 PM   #121
Full time employment: Posting here.
 
Join Date: Apr 2008
Posts: 702
Anunities seem like a pension that you pay for. Hopefully it will be there when you need it. While you will be ahead if you live a long life, there is also more time for something to go wrong.
__________________

__________________
FreeAtLast 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!

Old 07-18-2008, 09:30 PM   #122
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
IRR Calculations:

Ok I think I have this ready, quick and dirty, it may have a few errors. I used Vanguard (AIG) payouts my age of 53 with and without a spouse age 53. I think Vanguards payouts are somewhat higher than most, so beware. I used no inflation protection and 3% inflation protection. I could have used the CPI-U, it's about same as the 3% option but the payouts are not known for the calculation. For the married person I assumed keeping the same payout after the death of the first spouse. The four numbers under the age are the IRR's.


Here it goes:
...............................................Age at death 70...78...86...94
Single Person, No infl prot, Payouts till death, 2.60 5.36 6.40 6.87
Single Person, 3% Infl Prot, Payouts till death, 1.37 4.99 6.49 7.23

Married Person, No infl Prot, Payout till last death 1.12 4.14 5.32 5.87
Married Person, 3% Inf Prot, Payout till last death 0.00 3.63 5.32 6.17

Single person, 30 years guaranteed, 3% infl 4.71 in all cases, the term was set at 30

Taken out at age 43
Single Person, No infl prot, Payouts till death, 1.32 4.30 5.47 6.00
Single Person, 3% Infl Prot, Payouts till death, 0.00 3.52 5.22 6.08

Taken out at age 63
Single Person, No infl prot, Payouts till death, 4.70 7.12 7.99 8.35
Single Person, 3% Infl Prot, Payouts till death, 4.08 7.20 8.42 8.99

Note these returns are IRR'sof the investment. I know it has been said IRR isn't valid. I disagree with that. It is valid in a simple investment like this.

IRR is the internal yield of the annuity. I've been talking about 6% which requires me to live to ~86. I think the clearest way to state this is that if I put $100,000 in an annuity and live to 86 I will end up with 33 years of payments and have $0.00 left at the end. If I put the same amount of money in a mutual fund that returns 6% and take out the same payments fom the mutual fund as I was getting from the annuity, I will also end up with 33 years of payments and have $0.00 left at the end. A 6% IRR investment has the same investment characteristics as investing in a mutual fund that returns 6% per year. Maybe there is a better way to say this.

A few things jump out. (If anyone wants to know a specific situation, I have the calcs on a spreadsheet and could fire up yours in minute or two, let me know. )

With that, I'm done. I'm sorry for some of stuff losing alignment.


Just for info, the following were the payment amounts on the above 9 examples based upon investing $1 Million.....$73514, $52342, $64936, $44578, $43843, $66078, $43937, $86741, and $66455 respectively. The following were the initial withdrawal percentages.....7.3%, 5.2%, 6.5%, 4.5%, 4.4%, 6.6%, 4.3%, 8.7%, and 6.6%.
__________________

__________________
RockOn is offline   Reply With Quote
Old 07-18-2008, 09:30 PM   #123
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,046
Quote:
Originally Posted by 2B View Post
If you go into a Medicaid facility they will take any asset you have including the monthly social security and annuity checks since it is for your care. They aren't a "creditor" that you are protected from.

If you have a portfolio, you will get to spend it to avoid going into a Medicaid facility. I have seen a number of nursing facilities while dealing with my in-laws. They all are not places I want to go but I really don't want to go to a Medicaid facility. Personally, I'll be spending down my portfolio.
I know that...you missed my point. What I'm saying is that after you leave the nursing home, if you had an annuity you would still have income...whereas with a portfolio they may have already taken all of it.
__________________
Finance Dave is offline   Reply With Quote
Old 07-18-2008, 09:34 PM   #124
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,046
Quote:
Originally Posted by 2B View Post
Your money is as good as the credit rating of the company and the state insurance pool where you bought it.
You could say the same for your portfolio...it's only as good as the credit rating of where it's held/invested. If it's in stocks, it's only as good as the company. If it's in bonds, again only as good as the company's creditworthiness. If it's in a municipality, well...they go bankrupt too sometimes. If it's in a savings account at and FDIC bank, then you're at least safe up to $100,000.
__________________
Finance Dave is offline   Reply With Quote
Old 07-18-2008, 10:13 PM   #125
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,614
Quote:
Originally Posted by Finance Dave View Post
You could say the same for your portfolio...it's only as good as the credit rating of where it's held/invested. If it's in stocks, it's only as good as the company. If it's in bonds, again only as good as the company's creditworthiness. If it's in a municipality, well...they go bankrupt too sometimes. If it's in a savings account at and FDIC bank, then you're at least safe up to $100,000.
All those who have all their money in one stock, raise your hand. One bond?
Wouldn't it be more correct to say that investing in an annuity is like deliberately putting all your money in a bank with no FDIC insurance? In both cases all the money rests with the fate of a single company, and you stand in line ahead of the stockholders if things go south.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Old 07-19-2008, 06:14 AM   #126
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
I declare this thread beyond the point of a discussion.
__________________
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
Old 07-19-2008, 08:07 AM   #127
Full time employment: Posting here.
 
Join Date: Feb 2006
Posts: 987
Quote:
Originally Posted by samclem View Post
All those who have all their money in one stock, raise your hand. One bond?
Wouldn't it be more correct to say that investing in an annuity is like deliberately putting all your money in a bank with no FDIC insurance? In both cases all the money rests with the fate of a single company, and you stand in line ahead of the stockholders if things go south.
As part of my SPIA application process, I had to "attest" that the annuity (along with any currently existing annuities) did not represent more than 50% of my retirement assets (e.g. portfolio) at the time of application.

Conversion of more than 50% of assets is strongly dissuaded.

BTW, I only "converted" 10% of our then current retirement portfolio for the purchase of the SPIA. If/when we purchase more in the future, we will be purchasing through another company, in order to manage the "company risk". No different then investing in different funds, different companies (as stated by your indivudial AA).

- Ron
__________________
rs0460a is offline   Reply With Quote
Old 07-19-2008, 09:50 AM   #128
Recycles dryer sheets
ladypatriot's Avatar
 
Join Date: Jun 2008
Posts: 121
This is my first post on the forums, so I hope I'm doing this correctly!

I've been reading the friendly discussion about annuities, and many cogent arguments have been made on each side. My husband and I have a variable annuity with the Hartford Group. We make purchases into the annuity each month, in varying amounts, through the mutual funds available in the plan. There are over 20 funds to choose from, thus we can determine our asset allocation pursuant to our investment goals. By investing monthly, we have the advantage of dollar-cost-averaging. We also have the option of moving invested money from one fund to another within the plan.

The annuity is only a portion of our portfolio, and we plan to stop investing in the plan when it reaches a certain amount. Why an annuity? It's insurance. Everyone knows that, and we purchase the annuity acknowledging that it's insurance. The particular plan we selected has a feature that guarantees the amount we invested, but will pay out at the highest value the plan reached (the water mark).

Well, that's our experience with a variable annuity. As I said, it's only a portion of our portfolio so we're comfortable with it.

I can't wait to learn how to use the emoticons!

Ladypatriot
__________________
ladypatriot is offline   Reply With Quote
Old 07-19-2008, 10:01 AM   #129
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,614
Ladypatriot,
Welcome to the board, and thanks for the input. You've picked quite a thread to jump into.
I'm sure you did a lot of research before starting down the annuity path. Variable annuities have a particularly bad reputation, and I'll leave it at that. Still, the fact that you realize that this is insurance and that you are paying a premium for it, and that it only constitutes a portion of your portfolio, are all good things.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Old 07-19-2008, 10:07 AM   #130
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: 8,633
Oh no, LadyPatriot brought up variable annuities - now this thread is guaranteed to crash and burn or go to 15 pages.
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Old 07-19-2008, 02:10 PM   #131
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,330
I reserve my comments for those asking about purchasing SPIA or VAs. There's no point in telling someone the reasons they would be better off not doing what they've already done. ladypatriot is a newbie and gets even more courtesy than those falling into the "demonstrated troll" category.

When she realizes the amount of lost return due to annualized fees and other charges, she will experience the buyers remorse my father did. What's done is done and she really can't get her money back now without paying a significant penalty. Now, in a weak market, the VA will probably look pretty good. As time goes on and the market moves up, she may notice that the great returns that she thought she'd get somehow don't show up due to the fine print in their contract. My father noticed all that but my FIL never did. He has Alzheimer's.

Welcome to the forum ladypatriot. I'm the resident anti-annuity troll but I freely disclose the reasons for my positions. Some people feel more secure with their future (to a certain extent) left to an insurance company even though simple math demonstrates the odds are greatly in the insurance company's favor. If you don't do math well, guesss where all the money came to pay for the friendly agents and build those fancy office buildings.

Please use the forum to educate yourself on taking charge of your own investing. There are many resources here and many helpful people. Just don't ask me to recommend an annuity for you.
__________________
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
Old 07-19-2008, 02:29 PM   #132
Full time employment: Posting here.
 
Join Date: Feb 2006
Posts: 987
Quote:
Originally Posted by 2B View Post
I reserve my comments for those asking about purchasing SPIA or VAs. Just don't ask me to recommend an annuity for you.
However, if you're interested in SPIA's, I'll give you factual information (based on actual use of the product) ...

- Ron
__________________
rs0460a is offline   Reply With Quote
Old 07-19-2008, 04:03 PM   #133
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
2B, I wonder if this would be more correct?

Some people feel more secure with their future (to a certain extent) left to an insurance company even though simple math demonstrates the odds are greatly in favor of those who invest on their own in a portfolio of well chosen diversified low cost investments and have the risk tolerance to accept the volatility while making those higher returns.

Isn't that what you really mean? After all brokers, mutual fund companies, hedge funds, commodity brokers, clearing houses, money managers, financial planners, M&A experts, and many, many, others also build those fancy office buildings.



And I said I was done.
__________________
RockOn is offline   Reply With Quote
Old 07-20-2008, 08:01 AM   #134
Recycles dryer sheets
gryffindor's Avatar
 
Join Date: Mar 2008
Posts: 51
Having read a number of these debates, would love to figure out the key assumptions on where people really disagree on this issue (seriously).

Not sure I see the difference between an annuity and a defined benefit pension (even adjusted for inflation). It seems the major difference is whether someone made an active decision. With pensions, people get them from their employer and don't make an active decision in many cases. If people had an option to take an actuarially equivalent lump sum payment it would be the same decision as investing in an annuity. It would be interesting for people who had a pension to defend their decision on not taking the lump sum payment and investing in it rather than keeping the cash flow.

I think a big issue is people's attitudes towards insurance. If you die early with an annuity the money goes to the insurance company. In the other situation, the money goes to your heirs. That's a very personal decision on legacy that doesn't have an mathematically correct answer.

I think another big issue is people's attitudes towards risk. Of course, mathematically the annuity will be a worse decision -- the insurance company is making money off these products. But the benefits of reducing risk and volatility may be worth it, if its not too expensive. Again another area on where people can legitimately disagree.

I am interesting in figuring out the right answer for myself, as I'll need to make the decision about either keeping a defined benefit plan or taking the lump sum in a few years when leaving my employer.

Cheers,
__________________
Gryffindor
gryffindor is offline   Reply With Quote
Old 07-20-2008, 09:02 AM   #135
Full time employment: Posting here.
 
Join Date: Feb 2006
Posts: 987
Quote:
Originally Posted by gryffindor View Post
Not sure I see the difference between an annuity and a defined benefit pension (even adjusted for inflation). It seems the major difference is whether someone made an active decision. With pensions, people get them from their employer and don't make an active decision in many cases. If people had an option to take an actuarially equivalent lump sum payment it would be the same decision as investing in an annuity. It would be interesting for people who had a pension to defend their decision on not taking the lump sum payment and investing in it rather than keeping the cash flow.
Exactly. In my case, I was required to take a lump sum (pension program "converted" to a cash balance plan years ago) and "split the proceeds". Part to an SPIA (which "mimics" a pension) and the remainder kept in investments (funds).

I could have taken the same money and "invested" it 100% in either an SPIA or 100% in funds. Like the game of roulette (or a well defined AA), I "split my bet".

- Ron
__________________
rs0460a is offline   Reply With Quote
Old 07-20-2008, 10:19 AM   #136
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,074
Quote:
Originally Posted by gryffindor View Post
Having read a number of these debates, would love to figure out the key assumptions on where people really disagree on this issue (seriously).

Not sure I see the difference between an annuity and a defined benefit pension (even adjusted for inflation). It seems the major difference is whether someone made an active decision. With pensions, people get them from their employer and don't make an active decision in many cases. If people had an option to take an actuarially equivalent lump sum payment it would be the same decision as investing in an annuity. It would be interesting for people who had a pension to defend their decision on not taking the lump sum payment and investing in it rather than keeping the cash flow.

I think a big issue is people's attitudes towards insurance. If you die early with an annuity the money goes to the insurance company. In the other situation, the money goes to your heirs. That's a very personal decision on legacy that doesn't have an mathematically correct answer.

I think another big issue is people's attitudes towards risk. Of course, mathematically the annuity will be a worse decision -- the insurance company is making money off these products. But the benefits of reducing risk and volatility may be worth it, if its not too expensive. Again another area on where people can legitimately disagree.

I am interesting in figuring out the right answer for myself, as I'll need to make the decision about either keeping a defined benefit plan or taking the lump sum in a few years when leaving my employer.

Cheers,
Tough choice and 90% choose the lump sum apparently, although I expect I will be choosing the pension for my main employee pension in 2010. A couple of years ago I started receiving a pension from a former employer. I had the choice of a lump sum or pension, and decided on the pension.

The best way to take a pension - Jul. 1, 2008


One thing these days is that a pension is insured up to a certain value following some big name pension catastrophies in recent years, and the pension funding is more tightly regulated than it used it be to also.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Old 07-20-2008, 11:17 AM   #137
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by gryffindor View Post
Having read a number of these debates, would love to figure out the key assumptions on where people really disagree on this issue (seriously).
I think the key assumptions on where people really disagree are:

1) What actual return does the investor get by buying an annuity?

2) Are insurance companies ripping me off more than other financial products or simply offering a fair return for taking on the risk of offering the non-volatile lifetime payout?

3) Maybe also this, is buying a single company product from an insurance company too risky and an accident waiting to happen?

4) Obviously this, but I don't think we disagree on it. Is a volatile diversified portfolio likely to give a better return than a non-volatile SPIA?

I might be wrong.
__________________
RockOn is offline   Reply With Quote
Old 07-21-2008, 08:43 PM   #138
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
OK, this is it! If we haven't conviced you that annuities are a reasonable investment option this is finally it:

In Bernanke's portfolio: annuities, and a bit of Canada | Money & Company | Los Angeles Times

All the FED and BLS supporters cannot argue with the facts now. Where is the FED chairmans money invested?

And at age 54.
__________________
RockOn is offline   Reply With Quote
Old 07-22-2008, 07:43 AM   #139
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by harley View Post
I don't quite understand why you care so much what others think. If you are convinced you have found an investing plan that satisfies you, sail on. It's not important nor even possible to sway others to agree with you if they are locked into other plans. You may be right, they may be right, we may all be wrong. Time will tell.

Old saying - don't try to teach a pig to sing. It wastes your time and annoys the pig.

Harley
Hint: don't respond to the resident annuity troll.
__________________
"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
Old 07-22-2008, 08:31 AM   #140
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by brewer12345 View Post
Hint: don't respond to the resident annuity troll.
Breaks your hearts to see Uncle Ben in annuities I know. But I am done, and Harley, I really don't care.
__________________

__________________
RockOn 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
So you don't like annuities? HobbyDave FIRE and Money 14 10-25-2007 03:44 PM
Annuities: Now, later, never? ats5g FIRE and Money 1 10-30-2006 12:02 PM
annuities? cyclone6 FIRE and Money 115 09-02-2006 12:57 PM
Annuities jug FIRE and Money 34 12-29-2005 02:08 PM
Annuities ? renferme FIRE and Money 21 12-23-2003 02:13 PM

 

 
All times are GMT -6. The time now is 08:37 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.