Annuities as an Investment

[REWahoo]

Rock, it appears you are playing a game with members of this forum entitled "How long can I keep the annuity discussion going and how many people's buttons can I push while doing so." It is nothing more than a form of trolling.

I don't make this accusation lightly. If you care to examine my posting history you will find few if any other complaints of trolling, but your pervasive harping on this subject with repeated, "just one more thing and I'm through" claims is clearly a ruse.

I'm hoping other members will see your tactics and stop feeding the troll. Better yet the mods will agree with my lament and give you a vacation from the forum.

[2B]

Originally Posted by REWahoo

It is nothing more than a form of trolling.

I always knew you were a bigot. What do you have against the trolls?

I totally agree with you. RockOn has become a pain-in-the-forum. He has gone beyond the reasonable amount of questioning for even the dullest of posters. If he isn't a troll, he's probably not going to get any benefit from those that will reply to him.

Almost all of his posts have been SPIA related and all repeating the same beaten to death themes.

[Dawg52]

Originally Posted by 2B

Almost all of his posts have been SPIA related and all repeating the same beaten to death themes.

That's true. Basically that is what most topics become on a forum board. Just re-styled asking the same old same old. Let's just shut the whole board down in fear of the troll!

[HFWR]

While sometimes annoying, I have no particular objection to one-trick trolls ponies. I just wonder why, if they don't want to talk about anything but X, that they hang around on an er board. There are financial boards and political boards galore, if those are your only interests...

[2B]

Originally Posted by Dawg52

That's true. Basically that is what most topics become on a forum board. Just re-styled asking the same old same old. Let's just shut the whole board down in fear of the troll!

I agree and disagree at the same time.

It's true we "plow the same field" with many posts but they are usually started by a newbie. On the subject of annuities you can expect me to make my normal post listing their deficiencies. Others will defend them with their same arguments.

There are a lot of new topics that come up. Some are more novel and interesting than others.

When someone clearly is guilty of "trolling," a swift and sure limit on their access to the forum is reasonable.

[rs0460a]

Originally Posted by 2B

On the subject of annuities you can expect me to make my normal post listing their deficiencies. Others will defend them with their same arguments.

Talking about me, again?

- Ron

[haha]

If trolls seem to have a sense of humor, which I would say that Rock does, what's not to like?

If nothing else it is a somewhat off to the side behavior that can be diverting. Not to mention the joke set-ups that trolls provide.

Ha

[REWahoo]

Originally Posted by Dawg52

That's true. Basically that is what most topics become on a forum board. Just re-styled asking the same old same old.

True. But when the same poster asks the same old same old, on and on and on, I catch a whiff of disingenuousness.

[HFWR]

Originally Posted by REWahoo

True. But when the same poster asks the same old same old, on and on and on, I catch a whiff of disingenuousness.

A whiff of something...

[unclemick]

Originally Posted by HFWR

A whiff of something...

Psssst - Wellesley?



Just could not resist.

heh heh heh - "Never apologize Mr Cahill, it's a sign of weakness."

John Wayne for those who don't remember

[RockOn]

Originally Posted by FIREdreamer

So when you contribute money to SS and/or a pension, do you consider them "investments"? Because they do meet the criteria you described above. I am not trying to pick a fight, just trying to understand your POV.

Yes I do, however in those cases they might be thought of as non-discretionary investments. They all add to reaching a goal, a funded retirement in my case.

[RockOn]

Originally Posted by donheff

Rock -- quit trying to justify SPIAs as an investment. People have clearly demonstrated it is not a good investment relative to other simple approaches. It is longevity insurance and a source of guaranteed income. You have said you want to "lock in" your retirement plan. OK - that doesn't sound like you are evaluating investments - you are looking for guarantees. Look at the SPIAs from that perspective. Are you single or married? How much income do you need? What will the SPIA give you versus what are you comfortable pulling from your nest egg? For example, you can get a Vanguard inflation protected annuity with 100% spousal coverage for a pair of 60 Y/O today paying out 4.55% the first year. If you simply want more spending now vs. a nest egg to pass on in the future, is 4.55% a better initial SWR than you would be willing to pull on your own? If so, buy the SPIA. A single 60 Y/O male buying the same annuity could start with a 5.487% SWR. Again, if all he wanted was a higher spending rate now that probably compares favorably to what he would risk pulling from his portfolio. Check your state guarantees to see how large an annuity they cover -- also verify whether the state would guarantee several individual annuities, or one for you and one for your spouse. That may help you think through how much you could put into an SPIA and be "guaranteed."

Thanks for the response. An annuity actually pays out both principle and a payment based on the IRR. Because of that I don't see how I have lost my nest egg, I can reinvest my principle if I so choose. Looking at it that way the nest egg is not gone. The question is whether the payment based on the IRR is sufficient to be reasonable. I think 5, 6, or 7% might meet that test for some of us.

On the state guarantee, I would be looking into and considering that.

[RockOn]

Originally Posted by REWahoo

Rock, it appears you are playing a game with members of this forum entitled "How long can I keep the annuity discussion going and how many people's buttons can I push while doing so." It is nothing more than a form of trolling.

I don't make this accusation lightly. If you care to examine my posting history you will find few if any other complaints of trolling, but your pervasive harping on this subject with repeated, "just one more thing and I'm through" claims is clearly a ruse.

I'm hoping other members will see your tactics and stop feeding the troll. Better yet the mods will agree with my lament and give you a vacation from the forum.

I was asked to take this to a seperate annuity thread so others don't have to put up with another annuity discussion if they so choose. I did. I will no longer even mention annuities in any other thread. I might defend someone who is ridiculed for bringing them up though as that is unfair. I am just exploring the possibilities they provide. Sorry if it seems trollish to you but I think there are still some valid points and some good information being posted. By that, I don't mean by me. This thread will end when it ends, don't let it worry you.

[REWahoo]

Originally Posted by RockOn

...I think there are still some valid points and some good information being posted. By that, I don't mean by me.

It's nice that we can find common ground on at least one point.

[RockOn]

Originally Posted by REWahoo

True. But when the same poster asks the same old same old, on and on and on, I catch a whiff of disingenuousness.

My only comment to the series of troll comments is....sorry for that. I really only want to talk about the viability of a SPIA but I'm glad I do provide entertainment for some of you.

Now let me think about what Independent said again. He always floors me with his thorough and calculated thinking.

[RockOn]

Originally Posted by REWahoo

It's nice that we can find common ground on at least one point.

I thought you might like that

[FIRE'd@51]

Despite all the hostility shown toward SPIA's on this forum, it is interesting to note that a large portion of folks here (including 2B) claim they are delaying SS until age 70 (or even repaying previously collected SS payments), which, of course, is an annuity paid for by forgoing 8 years of SS payments. Of course, the SS annuity is cheaper (higher withdrawal rate) than buying one from Vanguard and is guaranteed by the US government rather than AIG. So I would conclude that the objection to commercially sold SPIA's is the cost and safety, not the basic principle.

[RockOn]

Originally Posted by Independent

I thought I could put a response in a couple paragraphs. I was wrong. Sorry for the length. I probably mis-read you questions somewhere.

When I said "what people get on average" I meant the "expected value" as defined by Wiki:

Note that this is exactly what Ha suggested, and the calculation method I outlined.

Here's an example. You and I agree to buy a $3,000 CD. I put in $1,000 and you put in $2,000. We let the CD interest accrue inside the CD. Say it grows to $4,000. At maturity we flip a fair coin, the winner gets the entire proceeds. The expected value of the payoff is the same for both of us - $2,000. But notice that neither one of us can actually recieve $2,000. One of use will get $0 and the other will get $4,000.

If I ask the question "What is the game worth to me?", I'll discount the final payoff to today so I can fairly compare it to my cost. The present value of the expected value of the payoff is again the same for both of us, and is $1,500 if we discount at the CD interest rate. So the game is worth $500 to me, and -$500 to you. If we played it many times, that would be our average gains and losses, even though no single round can give either of us $500.

In words that you've used, if I wanted to get the expected value of this game ($2,000 at maturity) on my own, I would need to buy a CD for $1,500 - which is $500 more than I'm putting into the game. So the game looks like a good deal to me. Similarly, it's a bad deal for you.

I understand the bottom line of that to mean that the expected return has risk and is a better deal for some than for others. I think I knew that.


Again, it depends on the question. In the CD example above, the maximum payoff is $4,000 at maturity. That's an important number if you're trying to decide whether to play the game, but it's not the only number you should look at.

In an insurance policy, a couple important questions are "What's the most I could get out if this, if the really bad thing happens? And, how much will I get out of this if a kind of bad happens?" I think that's what you're doing with your live-to-86 example, calculating how the thing looks if a "kind of bad thing" (strictly in the financial sense) happens. I think that's a good question to ask and answer. But it's not the whole picture on a close decision.

I agree, I would either buy life insurance to hedge against the bad or maybe buy a 30 year guaranteed plan to handle the "what if the bad happens" question. Anything wrong with that?



Regarding bonds, let's suppose that you have a history of investing in Treasuries. But today, you're looking at a "B" rated bond. The Treasury has a 100% chance of paying each coupon and the principal on time. The B bond doesn't. It's coupon rate is higher, so if it pays off it's better than the Treasury. You can do the calculation and it might show that $900 invested in the B bond, if it pays in full, will provide as much cash as $1,000 invested in the Treasury. That's a good place to start your analysis. You now know your maximum upside. But, you also want to know the downside. Well, the issuer could go belly-up tomorrow, so the worst case is -$900. But, that's very unlikely.

Your gut tells you that there is some number between -$900 and +$100 which is some sort of average. To do that calculation, lay out a string of probabilities for the B bond paying each of it's coupons, and the maturity payment. (The probabilities are typically a decreasing string of numbers, since the issuer is probably in okay shape today, but your concern is that it will deteriorate over time.) You multiply the probabilities by the corresponding cash flows, discount to today at the Treasury rate, and that gives you a number that is somewhere between the best and worst case. If that number is less than the purchase price of the bond, then I would say you should expect to "get less than you put in (adjusted for the time value of money, which is the Treasury rate)"

In the annuity case, you do the same calculation, but the probabilities are based on a mortality table instead of the possibility of the insurer going under (because you've specified that risk is small enough to ignore). The discount rate may not be Treasuries, because you feel that you're a good enough investor to get something a little better than that. Assuming that you can get the same rate that the insurance company does, then you are using the same method that they use to price the annuity and you're using the same discount rate. If you happen to pick the same mortality table, then you will find that you're "expected loss" is exactly the present value of their expenses and profit.

So SamClem says that this method will always show a loss to you, unless you know something about your mortality that they don't (or they can get better investments than you can).

I think I understand, there are always risks. I could pick a bad company or die early. As far as the SamClem comment, I agree that I am giving up profit and expenses to the insurance company but they are providing a no volatility return and a 6% (or whatever) floor. If I am willing to accept that, that doesn't mean it "will always show as a loss" to me.

Think about this, no matter what the investment is there are costs, how much do brokers get when there is a MA deal? How much do brokers get in a new bond sale? What about stock options to employees diluting my shares? It goes on and on in the Finance Business. Why are insurance companies thought of as different?

That doesn't mean you should never buy insurance. It just means that you should understand that when you add up all the policyowners of an insurance company, their total dollars back will be less than their premiums (a