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Old 09-24-2010, 02:17 PM   #21
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Were there retired people who also got hit?
Sure; retired in early 2007, but I/DW have our cash buckets and SPIA. We can, and are waiting out the storm.

As to SPDA's (the article reference)? That's a different animal, under different circumstances.

I don't know if I would have taken advantage of one at the time of my employment (401k/IRA - no defined benefit plan). However the SPIA worked (and still does) for our situation; then again we only "converted" a small part (10%) of our holdings. I see from the article contents they are discussing converting much, much more to such a vehicle. I personally would have concerns about that.

While we converted a small portion of our retirement portfolio, we still have 90% invested in other areas.

Nothing more than spreading our risk over several retirement investment/income products. Same thing as we have always done...
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Old 09-24-2010, 02:29 PM   #22
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That is, in the meltdown of 2008, we heard about a lot of near-retirement folks seeing their balances go down by almost half. Were there retired people who also got hit?
I am not sure I am understanding your question corrrectly, but to answer what I think it is- sure, when you retire the only way to more or less put a floor on your 401k account balance is to put it all in short duration government bonds. The same is true if you are withdrawing from the account. Unless you annuitize, your allocation and the safety of your choices determines your return, your gain/loss, and your eventual balance to purchase an annuity should you wish to annuitize at a later date.

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Old 09-24-2010, 02:37 PM   #23
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In their empirical analysis, MITCHELL ET AL. (1999) use current yields of treasury and corporate bonds as well as cohort mortality tables which are adjusted for selection effects as interest and mortality rates, respectively. They find that in the US in 1995, the average annuity policy generally delivers payouts of less than 91 cents per unit of annuity premium. According to the authors, this transaction cost is mainly due to expenses, profit margins, and contingency funds.
You didn't quote the rest of the paragraph
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They find that this discount has declined over time. They conclude that "the fact that the differential has diminished over time suggests that potential imperfections in the annuity business of two dec-ades ago may be attenuated in today’s insurance market". The question of whether the remaining discount is adequate is, however, not addressed.
I read that to say if the load was 9 cents in 1995, it's probably lower today.

The paper says there have been four explanations given for the "annuity puzzle", but none of them is significant enough to explain the low sales. One of them is the "money's worth" argument which you are calling "fairly priced". You say "The major issue with annuities is whether they are "fairly priced". Most annuities in the current marketplace are overpriced and thus a bad deal. Pricing is however something which can be regulated."

The paper says the opposite. That's why the authors use the next section do describe their idea on a better explanation.

Regulation can be a good idea if "overpricing" is caused by some identifiable market failure - most likely monopoly or asymmetric information. There's no evidence of either for SPIAs.

The 9 cents, or whatever it is today, is the load that insurer's need to offset the risk they are assuming, to cover there expenses in writing and managing the business, and to provide a market based return on capital. You may wish it were lower, it may be that it's enough to offset the advantages of an SPIA for you, but it's not something that regulation can lower.

[PS My youngest also graduated from law school into this miserable environment. It's not pretty.]
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Old 09-24-2010, 06:49 PM   #24
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My father went to some seminar and they're pushing "10-year fixed index annuity" with some 8.5% "bonus" for signing up, I suppose.

Is it some kind of deferred annuity by another name, despite the "fixed" description?
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Old 09-24-2010, 07:59 PM   #25
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My father went to some seminar and they're pushing "10-year fixed index annuity" with some 8.5% "bonus" for signing up, I suppose.

Is it some kind of deferred annuity by another name, despite the "fixed" description?
Yes, that's a deferred annuity. The "fixed" means there is some sort of guaranteed floor on the value at the end of 10 years. The "indexed" means you might get more than the floor value if some index (often S&P 500) does better than some bogey. Different products have different formulas. Anybody capable of comparng a couple of these is smart enough to get an equivalent result buying some portfolio that includes a derivative or two.

The conventional wisdom here is to run away from the salesperson.

Here's a typical view: http://www.forbes.com/2010/08/10/tru...-lindauer.html
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Old 09-24-2010, 08:52 PM   #26
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You didn't quote the rest of the paragraph

I read that to say if the load was 9 cents in 1995, it's probably lower today.

The paper says there have been four explanations given for the "annuity puzzle", but none of them is significant enough to explain the low sales. One of them is the "money's worth" argument which you are calling "fairly priced". You say "The major issue with annuities is whether they are "fairly priced". Most annuities in the current marketplace are overpriced and thus a bad deal. Pricing is however something which can be regulated."

The paper says the opposite. That's why the authors use the next section do describe their idea on a better explanation.

Regulation can be a good idea if "overpricing" is caused by some identifiable market failure - most likely monopoly or asymmetric information. There's no evidence of either for SPIAs.

The 9 cents, or whatever it is today, is the load that insurer's need to offset the risk they are assuming, to cover there expenses in writing and managing the business, and to provide a market based return on capital. You may wish it were lower, it may be that it's enough to offset the advantages of an SPIA for you, but it's not something that regulation can lower.

[PS My youngest also graduated from law school into this miserable environment. It's not pretty.]
while I agree with the tone of your piece (and deeply sympathize with your child) I disagree with some specifics. What "risk is assumed? Annuities are prepaid against mortality tables. There is no excess risk (uncertainty risk in mortality tables is almost always on the down side, which is a problem for insurance but a benefit for annuities and "provide a market return on capital" They don't provide the capital. do you emean investment costs?
That leaves only "expenses in writing and managing the business"
(includes investment costs) Which I agree are real costs, but are easily regulated. Operational costs of annuities are very small , less than one percent of the value. Most of the rest is cost of sales and commissions.

I am not hostile to annuities. I bought one for my step mother in law after investigation and I'm pricing one to equalize mine and my wife's pensions.

my pension had the right to purchase 2 extra years of service at full cost, which was effectively the right to buy an annuity at an actuarially fair rate which by law had to include full costs. I did not take it because we were already more than 50 % of assets in annuities and equivalents. But it was 7% cheaper than commercial annuities and I do suffer from failed buyers remorse.

I believe that annuities have always been sold like whole life life insurance rather than marketed like term insurance
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Old 09-24-2010, 09:07 PM   #27
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Yes, that's a deferred annuity. The "fixed" means there is some sort of guaranteed floor on the value at the end of 10 years. The "indexed" means you might get more than the floor value if some index (often S&P 500) does better than some bogey. Different products have different formulas. Anybody capable of comparng a couple of these is smart enough to get an equivalent result buying some portfolio that includes a derivative or two.
If we can shift to a technical point, here is the problem I'm trying to solve with an annuity. DW and I both have pensions and SS. We equal rights in each others pensions and our Ret funds. My DB pesnion is bigger than hers and she has to take a reduction to provide health insurance for me via a survivor pension which aggravates the disparity if one of us dies. .

So we have a large 'who dies first" disparity. On pensions alone if she dies first I get much more than she gets If I die first. I currently carry term life insurance to make up the difference But it expires when I'm 72. Taking my SS and deferring hers helps close the gap. But when I am 72 and she is 71 the gap will reappear. the mathematically elegant solutionis is to buy an annuity for her life from our joint assets that kicks in at the appropriate age, If I am still alive at 72. We can of course "wait and see and buy the annuity at that time but I always wondered if anyone had a product that would fill the gap by wrapping around the insurance

I am alternatively pricing decreasing term for the 8 years after age 72

I'm open to any suggestions.
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Old 09-25-2010, 02:23 AM   #28
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Make it 2 people's opinion.

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We are the wealthiest country in the world and our domestic policy seems to be "I've got mine, screw you and yours"

Just one person's opinion
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Old 09-25-2010, 10:52 AM   #29
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If we can shift to a technical point, here is the problem I'm trying to solve with an annuity. DW and I both have pensions and SS. We equal rights in each others pensions and our Ret funds. My DB pesnion is bigger than hers and she has to take a reduction to provide health insurance for me via a survivor pension which aggravates the disparity if one of us dies. .

So we have a large 'who dies first" disparity. On pensions alone if she dies first I get much more than she gets If I die first. I currently carry term life insurance to make up the difference But it expires when I'm 72. Taking my SS and deferring hers helps close the gap. But when I am 72 and she is 71 the gap will reappear. the mathematically elegant solutionis is to buy an annuity for her life from our joint assets that kicks in at the appropriate age, If I am still alive at 72. We can of course "wait and see and buy the annuity at that time but I always wondered if anyone had a product that would fill the gap by wrapping around the insurance

I am alternatively pricing decreasing term for the 8 years after age 72

I'm open to any suggestions.
I can try three comments:

1. I agreed with an earlier post you did on this topic for someone else. You suggested looking at the real need after the first death. Your wife would get 100% of your joint savings, plus her pension, plus her SS after your death. Are you sure that's not "enough"? Yes, you would be in better shape if she died first, but the difference may simply be that your kids will inherit more if she dies first, and is that worth insuring? (I'm married too, I understand that this may not be a purely economic decision.)

2. There's usually no cost in waiting to buy an SPIA. You don't have to worry about losing insurability like you can with LTC or life insurance. Maybe you should just wait.

3. If you're looking for a product, MetLife sells zero cash value deferred income annuities (legally SPDAs, but economically different from the common type). This looks like pure longevity insurance. Without knowing too much about your situation, I'd suggest you look at them: Income Annuity from MetLife I've never studied this product - it may be full of bells and whistles that you don't want, and Met is the only provider I know of - but it's probably worth a look.
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Old 09-25-2010, 12:07 PM   #30
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while I agree with the tone of your piece (and deeply sympathize with your child) I disagree with some specifics. What "risk is assumed? Annuities are prepaid against mortality tables. There is no excess risk (uncertainty risk in mortality tables is almost always on the down side, which is a problem for insurance but a benefit for annuities
I'm not sure what you mean by "down side" risk in mortality, or why you think it is a benefit for annuities.

We know that mortality rates have been falling for a century. We don't know how much they are going to fall over the next 30 years. The insurance company makes a guess. If they are wrong, and mortality drops faster than expected, then their costs go up and they lose money. Mortality can be lower than expected either because population mortality turns out to be lower, or because the particular group that bought their product happens to be healthier than the company thought they were going to be (more mortality anti-selection than anticipated). That's the mortality risk assumed.

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and "provide a market return on capital" They don't provide the capital. do you emean investment costs?
We must mean something different by "capital". An insurance company holds assets on a new block of SPIAs that exceed the assets that can be purchased with the premiums. The extra assets are provided by somebody else, that's "capital" to me. Those extra assets will disappear if the company experiences mortality losses as described above. They will also disappear if the company suffers investment losses (primarily defaults and reinvestment losses with SPIAs) in excess of whatever was assumed in pricing.

The people who provided the money to buy those extra assets expect a higher return than they would get by simply investing in treasuries (they need a higher alpha to compensate for the higher beta). That extra return shows up in the market price of the SPIA.

Note that any prudent management needs to have some capital to cover the actual economic risks. Since insurers capital levels are regulated, sometimes companies hold more capital than management feels would be adequate. That extra capital also needs to get the market return.

Quote:
That leaves only "expenses in writing and managing the business"
(includes investment costs) Which I agree are real costs, but are easily regulated. Operational costs of annuities are very small , less than one percent of the value. Most of the rest is cost of sales and commissions.
Why would anyone regulate the operating expenses of an insurance company? We don't regulate supermarkets' operating expenses. How are insurers different?

Quote:
I am not hostile to annuities. I bought one for my step mother in law after investigation and I'm pricing one to equalize mine and my wife's pensions.

my pension had the right to purchase 2 extra years of service at full cost, which was effectively the right to buy an annuity at an actuarially fair rate which by law had to include full costs. I did not take it because we were already more than 50 % of assets in annuities and equivalents. But it was 7% cheaper than commercial annuities and I do suffer from failed buyers remorse.
Relating to the capital issues above, is that additional annuity regulated by your state insurance laws on the same basis as private annuities? If the actuarial assumption turn out to be wrong, who loses money as a result, and is that party being compensated at market rates for taking that risk? Who's picking up the operational expenses of managing the annuity? Does the actuarial assumption include as much mortality anti-selection as we'd expect in the individual market, or is it lower because of the different "purchase" psychology? I can believe that there's no marketing expense with that offer because you're basically a captive audience, so that difference is real. I wonder if the other differences aren't all being absorbed by your employer.

Quote:
I believe that annuities have always been sold like whole life life insurance rather than marketed like term insurance
I think if SPIAs have had "excess" marketing expenses in the past, those days are pretty well gone. It can be an extraordinarily simple product "You give me $X today, I'll give you $y per month as long as you live." It's actually easier to quote on the internet than term because there usually isn't underwriting. The only issue is the market is so small there are no scale economies. I'd guess there are companies that are willing to lose money on administration today just because they believe that someday the 401k rollover market is going to be huge and they want to be positioned for it, so that's a plus for buyers.
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Old 09-25-2010, 06:11 PM   #31
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1) I'm not sure what you mean by "down side" risk in mortality, or why you think it is a benefit for annuities. We know that mortality rates have been falling for a century. We don't know how much they are going to fall over the next 30 years. The insurance company makes a guess.

2) We must mean something different by "capital". An insurance company holds assets on a new block of SPIAs that exceed the assets that can be purchased with the premiums.

3) Why would anyone regulate the operating expenses of an insurance company? We don't regulate supermarkets' operating expenses. How are insurers different?

4) Relating to the capital issues above, is that additional annuity regulated by your state insurance laws on the same basis as private annuities? If the actuarial assumption turn out to be wrong, who loses money as a result, and is that party being compensated at market rates for taking that risk? .

Due to problems in quoting I put some numbers on your statements so I can respond

#1 and 2 are simply a restatement of actuarial science. all such risk and mortality uncertainty is included in the "general" actuarial rate. Since there is no moral hazard in annuities, the only "non actuarial risk" is adverse selection

#3 most states guarantee annuities at least up to a certain level
yes they regulate both their capital requirements and operating costs.

#4 yes the pension board is controlled and must comply with the same actuarial requirements as the private companies. As a practical matter the extra annuity is always les than the state guarantee amount
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Old 09-25-2010, 08:50 PM   #32
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Old 09-26-2010, 11:43 AM   #33
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Due to problems in quoting I put some numbers on your statements so I can respond

#1 and 2 are simply a restatement of actuarial science. all such risk and mortality uncertainty is included in the "general" actuarial rate. Since there is no moral hazard in annuities, the only "non actuarial risk" is adverse selection

#3 most states guarantee annuities at least up to a certain level
yes they regulate both their capital requirements and operating costs.

#4 yes the pension board is controlled and must comply with the same actuarial requirements as the private companies. As a practical matter the extra annuity is always les than the state guarantee amount
1) Maybe you've got a reference that defines "general" actuarial rate? I'm not familiar with that term. Something written by an actuary would be good.

There are "most likely" mortality rates /investment returns, then there are an unpredictable deviations from the most likely. The unpredictable deviations are the source of the risk and the reason that insurers must hold capital and compensate the people who provide capital.

2) If states already regulate operating costs, why are you saying the annuities are "overpriced" and that regulation would correct that? Do you agree that the cost of the capital that regulators require is part of the cost of the private annuity you buy, and one reason you can't buy annuities for just the discounted benefit stream?

3) "Same actuarial requirements" means identical reserve and surplus requirements? (Same mortality table, same valuation interest rates, same surplus formula) Maybe you have a link?

If the actuarial assumption in your purchase price turns out to be wrong, who picks up the loss, and is that party getting compensated at a market rate for the risk?
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Old 09-26-2010, 11:45 PM   #34
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2. There's usually no cost in waiting to buy an SPIA. You don't have to worry about losing insurability like you can with LTC or life insurance. Maybe you should just wait.
For SPIAs:If your health is really bad the insurance company will set the rates as if you are older for annuity because they figure your life expectancy is less. Its sort of the reverse of life insurance. In this case the sooner you die the better for them, the exact converse of life insurance.
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Old 09-27-2010, 07:59 AM   #35
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On top of the other objections to annuities, the companies who sell annuities can go banko. I remember Baldwin United.

There was also a company who Reading and Bates (an "inconsequential S&P 500 [drilling] company" at the time) shifted all their DB programs to--because they were the lowest-cost provider. Said provider had unrealistic expectations (as did R&B) and soon had to cut the distributions (to their retirees!) by 25% (IIRC). The court ruled that R&B was a "prudent man" by seeking the lowest cost provider. With that protection, R&B would make retirees whole--only if they were sued by that individual.

Another trap for the defenseless.
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Old 09-27-2010, 06:32 PM   #36
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What do you think most 403Bs are??
Properly structured, many 403b plans can include low-cost index funds. Or, they can include highly commissioned annuity dogs that provide agents and LI companies with an excellent cash flow.

As always, the Plan participant must make a wise choice.
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Old 09-27-2010, 08:14 PM   #37
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Properly structured, many 403b plans can include low-cost index funds. Or, they can include highly commissioned annuity dogs that provide agents and LI companies with an excellent cash flow.

As always, the Plan participant must make a wise choice.
Not if your CFO is buddies with a Principal or John Hancock rep......
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