Annuities as an Investment

[RockOn]

Please help me out.

The question is: What internal rate of return on invested money is Vanguard SPIA allowing to calculate the payouts on their annuities?

I contend that if I buy an SPIA from Vanguard or invest in a mutual Fund that pays 6% annualized and take the same withdrawals each year from each investment, my annuity will be worth $0 when I die at age 86 and my Mutual Fund balance would also be $0. The investment outcome is the same.

Is that correct?

If anyone would like to help but needs the actual numbers to check it out, I will get the payout numbers from Vanguard.

 

[donheff]

The question doesn't make sense. It sounds like you found a specific time period during which an SPIA ending when you die will equal a steady 6% return of the same initial principal running down to zero at the same time you postulate your death -- so what? If you died sooner, your mutual fund would have outperformed. If you die later your SPIA would outperform.

 

[RockOn]

The question doesn't make sense. It sounds like you found a specific time period during which an SPIA ending when you die will equal a steady 6% return of the same initial principal running down to zero at the same time you postulate your death -- so what? If you died sooner, your mutual fund would have outperformed. If you die later your SPIA would outperform.

All I want is confirmation that the Vanguard SPIA (AIG) payout available at this time is an equivalent investment to investing in a 6% returning mutual fund. That is for someone around age 53, living to around age 86. That is all. Plug in your own numbers at Vanguard and see what you get. It's already been done but some continue to think 6% is grossly overstated.

 

[haha]

All I want is confirmation that the Vanguard SPIA (AIG) payout available at this time is an equivalent investment to investing in a 6% returning mutual fund. That is for someone around age 53, living to around age 86. That is all. Plug in your own numbers at Vanguard and see what you get. It's already been done but some continue to think 6% is grossly overstated.

Sometimes these hard to explain quests are just best done by oneself. Even if someone gives you an answer, you will never be sure he has understood it the same way that you intend. I know I have no idea what you are after, even though it seems clear to you

Ha

 

[RockOn]

Sometimes these hard to explain quests are just best done by oneself. Even if someone gives you an answer, you will never be sure he has understood it the same way that you intend. I know I have no idea what you are after, even though it seems clear to you

Ha

I guess I should give up. I am 100% confident in my calculations on annuities but what does it matter. I just put forth a few calculations about the viability of that investment and looked for reasonable input on those calculations. What I get is rude comments about how much of a stupid idiot I must be. I cannot show something to someone who isn't "open minded enough" (and I don't see how that can be argued) to look at some simple investment calculations and see what they say. Making arguements (insults included) that calculating an internal rate of return on a simple straight forward investment is meaningless (or somehow rigged to make annuities look better) seems to me to be beyond belief. Am I wrong?

In the end it doesn't matter, I'll do what is best for me. (I'm sure the first part will be quoted, another common insulting tactic)

How would you suggest I deal with insulting comments on this forum? Obviously I didn't handle the last one's very well. I thought personal insults were beyond the rules. Is this forum a fair exchange or just a forum for a few approved points of view?

 

[samclem]

You started this thread with "Please help me out" but it is obvious you want to make a point. In my opinion, the best thing to do is to just make your point without inviting us to go to a web site and input some numbers.

And, you can bet you'll get a better reception if you haven't already said the same thing 20 times before. If you have a novel way of presenting it this time, go ahead.

Another tip: Avoid peppering your post with insults. It doesn't add to the credibility of the information.

 

[Notmuchlonger]

YouTube - Frick 'n Frack - Understanding Annuities

I do what I can to help.

 

[RockOn]

You started this thread with "Please help me out" but it is obvious you want to make a point. In my opinion, the best thing to do is to just make your point without inviting us to go to a web site and input some numbers.

And, you can bet you'll get a better reception if you haven't already said the same thing 20 times before. If you have a novel way of presenting it this time, go ahead.

Another tip: Avoid peppering your post with insults. It doesn't add to the credibility of the information.

Good point, I did want to make my point to show that the insults I have been recieving are unfair. An emotional response.

Sorry for repeating it, but many tiime when I post, shortly after I get the "here's the stupid person who thinks annuities have a 6% IRR" response. If it was in jest that would be fine, but it is not. I want to prove to them they are wrong, sorry an emotional response.

I don't see where I pepper insults "except in response to issues involving the above", an emotional response. If you can, point out an example or two where you think I peppered an insult. I might do it in jest once in awhile but that seems pretty common. I have never meant to be mean spirited (it might be incorrectly interpretted that way sometimes), but others blatantly do it in an obviously mean spirited insulting manner.

 

[RockOn]

YouTube - Frick 'n Frack - Understanding Annuities

I do what I can to help.

See this is a prime example. What more can I say.

If any of the mods are following this, is this what this forum is about?

I received my point for bad behavior, how about one for this? It was intended as an obviously insulting comment. This person has a long track record of these.

 

[REWahoo]

I'm no longer a mod and don't presume to speak for them. But as a long term veteran of the board, I've seen many posters have problems when they focus on one subject over and over again (unless it is done tongue-in-cheek as in Unclemick's Norwegian widow). They set themselves up for ridicule and pay the price for not knowing when to give it a rest and move on.

Maybe that is what's going on here.

 

[Notmuchlonger]

See this is a prime example. What more can I say.

If any of the mods are following this, is this what this forum is about?

I received my point for bad behavior, how about one for this? It was intended as an obviously insulting comment. This person has a long track record of these.

Well it was in jest. But obviously you seem to be pretty fired up. Feel free to put me on ignore if your sense of humor has left the building

I apologize if my link upset you and caused you duress.

Ill avoid your threads from now on.

 

[Bestwifeever]

You need to lighten up a little, Rock--you don't realize getting a YouTube post from Notmuchlonger is like being knighted on this board or something like that....

 

[RockOn]

You need to lighten up a little, Rock--you don't realize getting a YouTube post from Notmuchlonger is like being knighted on this board or something like that....

Ok I'll accept that as a compliment

sorry, Notmuchlonger, I misunderstood

 

[RockOn]

I'm no longer a mod and don't presume to speak for them. But as a long term veteran of the board, I've seen many posters have problems when they focus on one subject over and over again (unless it is done tongue-in-cheek as in Unclemick's Norwegian widow). They set themselves up for ridicule and pay the price for not knowing when to give it a rest and move on.

Maybe that is what's going on here.

Yes, but I'm not the one who keeps bringing it up, it was settled awhile back

 

[haha]

Ill avoid your threads from now on.

I don't know much about these here ann-u-ities, but speaking of threads, I want some like Fric's.

Ha

 

[Independent]

All I want is confirmation that the Vanguard SPIA (AIG) payout available at this time is an equivalent investment to investing in a 6% returning mutual fund. That is for someone around age 53, living to around age 86. That is all. Plug in your own numbers at Vanguard and see what you get. It's already been done but some continue to think 6% is grossly overstated.

I haven't been following these annuity discussions, so I'll foolishly stumble in.

Suppose: you pay an someone $1,000 today,
and he pays you $70.27 one year from now, and annually as long as you live
and you live long enough to get exactly 33 payments
and you get absolutly nothing except the 33 payments....

Then, looking backward, your family will be able to say that you earned exactly 6.00% on your annuity. That's what the IRR calculation in Excel says, and it uses exactly the same method that I learned long before there was an Excel.

OTOH, looking forward, you can't say definitively what you will earn, because you don't know how long you are going to live. You can do some hypotheticals, and say "If I live long enough to collect exactly 33 payments, then I will have earned 6.00%. But, if I get ___ payments instead, then I will have earned ___ instead."

Does that simply repeat what everyone has been saying?

 

[haha]

I haven't been following these annuity discussions, so I'll foolishly stumble in.

Suppose: you pay an someone $1,000 today,
and he pays you $70.27 one year from now, and annually as long as you live
and you live long enough to get exactly 33 payments
and you get absolutly nothing except the 33 payments....

Then, looking backward, your family will be able to say that you earned exactly 6.00% on your annuity. That's what the IRR calculation in Excel says, and it uses exactly the same method that I learned long before there was an Excel.

OTOH, looking forward, you can't say definitively what you will earn, because you don't know how long you are going to live. You can do some hypotheticals, and say "If I live long enough to collect exactly 33 payments, then I will have earned 6.00%. But, if I get ___ payments instead, then I will have earned ___ instead."

Does that simply repeat what everyone has been saying?

This is true, but if you are an actuary you can go a step further and using suitable probailities for living 1,2,3,4,5,....i years and a known discount rate you can price an annuity. Or, knowing the price, you could reverse this process and extract a discount rate.

But it is hardly an exercise to ask people to volunteer to do.

Ha

 

[RockOn]

I haven't been following these annuity discussions, so I'll foolishly stumble in.

Suppose: you pay an someone $1,000 today,
and he pays you $70.27 one year from now, and annually as long as you live
and you live long enough to get exactly 33 payments
and you get absolutly nothing except the 33 payments....

Then, looking backward, your family will be able to say that you earned exactly 6.00% on your annuity. That's what the IRR calculation in Excel says, and it uses exactly the same method that I learned long before there was an Excel.

OTOH, looking forward, you can't say definitively what you will earn, because you don't know how long you are going to live. You can do some hypotheticals, and say "If I live long enough to collect exactly 33 payments, then I will have earned 6.00%. But, if I get ___ payments instead, then I will have earned ___ instead."

Does that simply repeat what everyone has been saying?

Heh Independent, a breath of fresh air.

No, the issue is that when I calculate the IRR of a Vanguard (AIG) annuity, assuming I take it out at 53 and live to 86, I get ~6% (a little less actually, like 5.94 or something like that).

I get ridiculed for that, others claim it's just has to be less than 4%, maybe only 2 or 3%. Also I hear that IRR is a meaningless calculation because it is not a good way to compare one investment against another.

I want to compare the annuity option to investing the same amount in a Mutual Fund that pays a 6% return and withdrawing the same amount each year as the annuity. I contend at age 86 I will have a zero balance on both and have made the same withdrawals with each investment. Essentially they were equal investments.

I don't see that as rocket science, what are your thoughts on that?

I can get you my numbers for the payout if you care to take a look.

 

[harley]

Heh Independent, a breath of fresh air.

No, the issue is that when I calculate the IRR of a Vanguard (AIG) annuity, assuming I take it out at 53 and live to 86, I get ~6% (a little less actually, like 5.94 or something like that).

I get ridiculed for that, others claim it's just has to be less than 4%, maybe only 2 or 3%. Also I hear that IRR is a meaningless calculation because it is not a good way to compare one investment against another.

I want to compare the annuity option to investing the same amount in a Mutual Fund that pays a 6% return and withdrawing the same amount each year as the annuity. I contend at age 86 I will have a zero balance on both and have made the same withdrawals with each investment. Essentially they were equal investments.

I don't see that as rocket science, what are your thoughts on that?

I can get you my numbers for the payout if you care to take a look.

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

 

[RockOn]

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

After the beating I have taken about this, I'd like to finish this one off for good. Then I'll be done. Sorry for wanting to do that. You'll never hear me start a discussion about the 6% IRR annuities that were available from Vanguard in July of 2008 again. That's worth it, isn't it?

I'm not trying to sway anyone. I'd just like facts to remain as facts.

 

[harley]

After the beating I have taken about this, I'd like to finish this one off for good. Then I'll be done. Sorry for wanting to do that. You'll never hear me start a discussion about 6% IRR annuities again. That's worth it, isn't it?

I'm not trying to sway anyone. I'd just like facts to remain as facts.

OK. Facts is facts. All done. How 'bout them Redskins?

 

[RockOn]

OK. Facts is facts. All done. How 'bout them Redskins?

Maybe, they putting in a bid on Favre?

 

[ERD50]

Please help me out.

The question doesn't make sense.

-- so what? If you died sooner, your mutual fund would have outperformed. If you die later your SPIA would outperform.

RockOn, you tell me when I'm gonna die, and you tell me if the annuity company will be solvent until that date, and then I'll tell you if any specific annuity makes financial sense. But I bet you can do that w/o any help.

Without those numbers, it's a crap-shoot.

And the market is a crap-shoot, too - but I won't tie it all up with one company.

And I *like* the *idea* of an annuity. I don't like the idea of getting wrapped up with a 30, 40 or 50 year promise from a company today.

-ERD50

edit - excuse me, I didn't see that another bunch of posts were added from the time I first looked at this thread - darn multi-tasking!

 

[donheff]

Wow, I just stopped by after a whole boatload of posts and can't believe my comment was so offensive. Rock - if you look back you will see that you started complaining about insults after my comment and Ha's suggestion that he also didn't understand the post. I was not trying to insult you -- heck, I am one of the relatively pro SPIA posters. I just didn't think your question made sense. You simply asked for confirmation that VG's annuity has a 6% IRR - no other information to determine what period you were talking about. The question didn't make sense. No insult in pointing that out.

 

[Independent]

This is true, but if you are an actuary you can go a step further and using suitable probailities for living 1,2,3,4,5,....i years and a known discount rate you can price an annuity. Or, knowing the price, you could reverse this process and extract a discount rate.

But it is hardly an exercise to ask people to volunteer to do.

Ha

I don't think you need to be an actuary to do the calculation.

Many people on this board are very comfortable with the method I used. I set up a one-column spreadsheet where the first entry was negative 1,000, then the next 33 entries were all the same number. I used the built in IRR function on those 34 entries to get a percentage return. I simply did trial-and-error on the payments until I got 6.00%.

Call that column A. It seems I could add the mortality adjustment by putting the probability of collecting each payment in column B. That would be the probability of living to each age. I can get the probability of dying from a table like this http://www.cdc.gov/nchs/data/nvsr/nvsr56/nvsr56_09.pdf
so I should be able to calculate the probability of living.

(Of course the table will give me probabilities of living beyond 33 years, so I need to extend my worksheet.)

Then column C is just A times B, and the same IRR function on C gives the result.

So the math seems manageable. The tricky part is deciding which table to use. Should I use Total US Population? Or Total Male Population? or White Male Population? Should I adjust for the fact that I'm healthy today, and the mortality table includes people who are terminally ill today? Should I adjust for the expected improvement in mortality rates in the future? That seems more challenging to me.