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Old 05-11-2008, 08:50 PM   #21
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RockOn, some people are so risk averse they shouldn't be in the market. It seems pretty obvious from your posts that you fall in this category. That's just how you are wired, and that's unlikely to change - no reason to frustrate yourself by trying to fight it.

Might as well relax, buy yourself a couple of annuities and try to enjoy life. Oh yeah, and make some insurance salesman very happy...
I just might.

I should add that if investment grade bonds were paying 8% or stocks were selling at a PE of 10, I'd not worry about the risks. Will that happen anytime in my life, who knows, but it doesn't look like it.
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Old 05-11-2008, 09:22 PM   #22
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If you lost 30% your portfolio, you could still sleep well? ...You could ride it out? I would sell.. Annuities might be a partial solution for me.
Yes, I could ride it out. I feel confident that there will be at least a couple of serious downturns during my retired life. Couldn't think of a worse time to sell, and with plenty in cash I am in no rush for the market to recover. Of course, historically it is up more than it is down, you just have to be patient.

RockOn, there are two books I recommend: Solin's Best Investment Book you'll ever read, and - even if you don't buy in to it completely - Lucia's Buckets of money. Maybe an annuity is right for you, but both show that there are alternatives to consider.
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Old 05-11-2008, 09:25 PM   #23
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I should add that if investment grade bonds were paying 8% or stocks were selling at a PE of 10, I'd not worry about the risks. Will that happen anytime in my life, who knows, but it doesn't look like it.
Maybe a solution for you is a 95/5 portfolio: 95% annuities, 5% lottery tickets.
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Old 05-11-2008, 11:44 PM   #24
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Google up Bernstein's 'pal' Angus Maddison and analyize the rise and fall of national markets.
Indeed...I wonder often at what stage the US markets are at...clearly our emerging and developing stages are behind us. With history as our guide its all downhill from here. Which is one of the reasons why I'm slightly leery of holdings consisting primarily of US based stocks and bonds.

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Theres at least one new sig in there, more likely two.

As far as panicking and selling everything if my portfolio went down 30%...well...theres that crazy mindset that seems to only affect stocks and real estate. Prices go up and everyone wants to jump in and own them. Everything goes on sale at a deep discount and everyone wants to run away.

Nutty.
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Old 05-12-2008, 05:34 AM   #25
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RockOn. We likely will see a 30% decline in equity markets in our retirement years. If that would panic you into selling you really should consider some annuities. Research your state guarantee and spread a few around if they will be covered that way. Insure your basic needs so you can stomach the falls when they come. I have a Federal pension that will keep me out of the dog food aisle in a crisis and that certainly takes the edge off the rise and fall of the portfolio.
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Old 05-12-2008, 07:37 AM   #26
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that certainly takes the edge off the rise and fall of the portfolio.
Exactly! Over the next few years, my/DW's retirement income will come from eight separate "sources". Our current SPIA is only one of those and currently covers 1/3rd of my current gross income need (I'm retired, DW is still "out there")

Speaking specifically of an SPIA, it is just part of the total solution in our case and as an "actual user" of the product (unlike the other posters) I see value in its use as part of (not totally) your retirement income plan.

You diversify your investments (hopefully). Why would you treat your retirement income sources any differently? I have "many boats". If one springs a leak, I have others to keep me "afloat" ...

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Old 05-12-2008, 12:02 PM   #27
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Exactly! Over the next few years, my/DW's retirement income will come from eight separate "sources". Our current SPIA is only one of those and currently covers 1/3rd of my current gross income need (I'm retired, DW is still "out there")

Speaking specifically of an SPIA, it is just part of the total solution in our case and as an "actual user" of the product (unlike the other posters) I see value in its use as part of (not totally) your retirement income plan.

You diversify your investments (hopefully). Why would you treat your retirement income sources any differently? I have "many boats". If one springs a leak, I have others to keep me "afloat" ...

- Ron
Ron, I think that most closely matches my approach, I don't think I could come up with 8, but maybe 4 or 5. Diversify every way possible.

On the 30% decline, I think that will happen someday also. At that point the 4% SWR really becomes a 5.75% SWR, the way I see it. At some point I would not be optimistic enought to stay with it. If you could, we are different there. I realize selling out after the decline is always a bad move, but there is the possiblility of the black swan. The 30% could become 50%, security could become insecurity. Since I know I would sell before the pain was too great, I don't think a 100% 60/40 portfolio is for me. 25% to 50% of my money, but not 100%

I don't buy lottery tickets, I pay enough taxes. I might buy annuities.

Rich, I'll read your books, the bucket aproach I understand. I'm not too sure that really helps anything other that a little peace of mind. What attracts me to SPIA's is that if I could get a long term nominal return of 7%, I'd be well off. (I base my SWR calcs on a nominal 6% return with 3% inflation.) The 6% IRR I calculated on annuities (assuming of course I live long enough to get the 6%) gets me close without taking the 30% downside risk on that portion of my assets.
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Old 05-12-2008, 08:32 PM   #28
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I don't need to beat the market, I just would prefer to avoid the major meltdowns that happen now and then. I see that as a different thing.
Right. So missing meltdowns without beating the market over the long term means missing the big upswings. Reduced return in exchange for reduced volatility. The question is, how much return are you willing to potentially forego in order to miss the negative downswings?

You could buy annuities (I don't like the single-company risk), TIPS, and/or implement a Treasury ladder. Or do some/all of the above with 80% of assets and do a world equity index with the remaining 20%.

Note that there IS value in limiting downward volatility during decumulation. The Trinity study showed that.
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Old 05-12-2008, 08:37 PM   #29
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Right. So missing meltdowns without beating the market over the long term means missing the big upswings. Reduced return in exchange for reduced volatility. The question is, how much return are you willing to potentially forego in order to miss the negative downswings?
Since you asked, I would give up 30-40% of the total upside if there was no downside risk. See anything out there for me?

As far as a treasury ladder, I don't see a 6% IRR there. Nor do I see it with TIPS.
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Old 05-12-2008, 08:47 PM   #30
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I think we'v e come 360 degrees here. RockOn is distressed by volatility, and is willing to forgo larger total returns in return for stability of his nest egg. Notwithstanding the fact that it will cost him considerable sums to achieve that goal, an annuity is one way of doing so. And while there are techniques for achieving a sound night's sleep without annuities, they just don't do it for him.

That said, consider spreading your SPIAs among several carriers, buying over time so you get more bang for your buck as you get older, and kiss your estate goodbye. Make sure you account for inflation either by purchasing inflation adjustments, or by buying supplemental annuities when inflation catches up with you. Finally don't assume that insurance companies are invulnerable to business reversals over periods of 30 years or more.

Then enjoy your retirement.
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Old 05-12-2008, 09:04 PM   #31
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Theres a lot of different kinds of risks. Taking low "safe" returns and finding your buying power stinks 20 years from now is just as bad as a temporary 30% downturn. Someone who wants to spend 3-4%+ of their portfolio and also stave off inflation is going to have a hard time doing that over 40+ years without owning a good slug of equities.

I find it interesting that someone who was arguing that the CPI is gamed and that actual inflation is well in excess of what is reported now seems comfortable with a CPI adjusted annuity that returns less than the "real" rate of inflation.
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Old 05-12-2008, 09:10 PM   #32
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I think we'v e come 360 degrees here. RockOn is distressed by volatility, and is willing to forgo larger total returns in return for stability of his nest egg. Notwithstanding the fact that it will cost him considerable sums to achieve that goal, an annuity is one way of doing so. And while there are techniques for achieving a sound night's sleep without annuities, they just don't do it for him.

That said, consider spreading your SPIAs among several carriers, buying over time so you get more bang for your buck as you get older, and kiss your estate goodbye. Make sure you account for inflation either by purchasing inflation adjustments, or by buying supplemental annuities when inflation catches up with you. Finally don't assume that insurance companies are invulnerable to business reversals over periods of 30 years or more.

Then enjoy your retirement.
I'm not closed minded. I haven't bought anything yet but annuities are interesting to me. Which other techniques are you talking about? The one's in the books I'm going to read? They might do it for me, but things like a bucket approach only seem like a gimmick. The money is still invested in about the same way, 60/40, 50/50 or whatever, it's just organized in different pots. It still has all of the same risks. I'm looking for ideas to limit risk.

I hear once again how it would be kissing my estate goodbye. I just don't agree with that. To me an investment with a 6% IRR investment is just that. The fact it will deplete is already in 6% the calculation. If I bought a 30 year bond for $1000, in 30 years what would I get back, maybe $200 of purchasing power? It's not kissing an estate goodbye anymore than a long term bond, a defined pension plan, or choosing a SWR that proves to be too large. If I want to pass on money (which I do), I have options. I can always not spend all the money the annuity produces and invest that seperately for that purpose, use other money which could then remain invested in long term risky assets since volatility wouldn't affect my retirement, or maybe even buy life insurance.

I would want a COLA plan. I agree 100% with you about individual insurance company risk, that is the biggest negative the way I see it. If the state guarantee would cover multiple smaller annuities that risk could be covered. Even if the state wouldn't cover them though, it appears there has never been a default, that's a pretty good record.
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Old 05-12-2008, 09:31 PM   #33
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I have been considering a SPIA with (through) VG but they use AIG for their annuities. The recent financial events on AIG has led me to consider other higher rated insurers for the annuity. As far as an annuity crapping out you might try your state's insurance regulator to see if they have ever had to make good on something like that.

I've been also checking their SPIA quotes once or twice a week.

Any ideas how they calculate the payments? Is it indexed to 30-year Treasuries or something like that? I noticed also, you get a bit more if you choose monthly payments vs. quarterly or less frequent payments.

Yeah I was thinking of AIG as well. They also say John Hancock is another provider of their SPIAs but it's not clear which one they'd use.

Before the latest AIG report, both AIG and Hancock had the highest credit ratings.

Also looked at SPIAs at Fidelity and the payouts there were a bit lower and the insurers didn't have as high credit ratings.

Any idea on the standard or conditions which must be met before an insurer could bail out on their SPIA obligations? Would they have to file bankruptcy or something? Or would it be purely at their discretion that they can't pay as promised, like companies which cut their dividends?

Thought I also read somewhere that many of these insurers have been around well over 100 years. It was specifically noted that they survived the Depression.
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Old 05-12-2008, 09:36 PM   #34
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I find it interesting that someone who was arguing that the CPI is gamed and that actual inflation is well in excess of what is reported now seems comfortable with a CPI adjusted annuity that returns less than the "real" rate of inflation.
I'm not comfortable at all with the reported CPI. But I don't think inflation can be assumed to stay high for the long term. If I believed the reported CPI-U was correct, I'd more likely buy TIPS.

If you can find any investment that doesn't have the same issue with CPI- P not matching CPI-U, let me know what it is. On a 4% SWR withdrawal plan, that problem is the same.

The only thing that I like about SPIA's is that they are a "fairly safe" approximately 6% IRR investment for the really long term. I don't see anything else out there that offers that without hugely more volatility. The "fairly safe" is the variable. I don't see 6% as a low return investment, as you might. That may be where we differ.

Putting total faith in equities for the long term (which in our cases is really the next 15 years or so....not really long term....because that is when the final outcome of a Firecalc will probably be decided using a basic 60/40, 4%SWR) that is risky in my conservative view.
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Old 05-12-2008, 09:53 PM   #35
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How do you calculate a 6% return?

The quotes I've seen amounts to about 6.5-6.9% if you total up the annual payments and divide by the premium you paid.

But they say 40-43% of those payments is excluded from taxes. So I take that to mean that that percent represents withdraw from your premium.

So it would seem that 2.8-3.1% of the payments is withdraw so the remaining 3.4-3.7% of the payments represent a return.

If you buy the SPIA at an older age, then these figures are higher. Payments are higher but also the portion excluded from taxes or withdraw from the premium you paid.

Maybe I'm misunderstanding how payments are calculated.
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Old 05-12-2008, 10:08 PM   #36
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How do you calculate a 6% return?

The quotes I've seen amounts to about 6.5-6.9% if you total up the annual payments and divide by the premium you paid.

But they say 40-43% of those payments is excluded from taxes. So I take that to mean that that percent represents withdraw from your premium.

So it would seem that 2.8-3.1% of the payments is withdraw so the remaining 3.4-3.7% of the payments represent a return.

If you buy the SPIA at an older age, then these figures are higher. Payments are higher but also the portion excluded from taxes or withdraw from the premium you paid.

Maybe I'm misunderstanding how payments are calculated.
To get the IRR of about 6%, I am calculating the internal rate of return on the life of the investment through a cash flow calculation. I would say it is is about equivalent to to the annualized investment rate of return that Mutual Funds advertise. Someone more expert than I can explain the correctness of that statement.

Be careful about my 6% IRR number, that is what I calculated for my age of 53, living to the 86. If you died at 79, the IRR may actually be 5.5% or so, it's a guess.

Payments are difficult to understand since there are so many options. The best way to understand the investment is to look at the IRR, at least that's how I see it. The insurance companies probably decide what IRR they are willing to provide, look at lifespan tables, and then work backwards to calculate the payments for the various options.

You have to be careful about what is excluded from taxes, if purchased with after-tax money the 40% is about correct.

You are correct that some of the payment is considered a return of principal, but that doesn't change the calculated IRR of the investment.

I hope that helps, someone can probably be more precise on these answers.
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Old 05-12-2008, 10:28 PM   #37
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OK kind of get it.

I think Fidelity returns quotes in several ways and one is with a guaranteed 20-year payment option. They show you the minimum total payments over 20 years.

But from what I saw, you have to collect for over 25 years to get more in payments than if you'd invested the premium in an investment with modest returns.

I played around with the Vanguard quote page and if you pay the premium but defer the payment for a year (you have to start taking payments within a year), you get about $4,000 more a year for a $100k premium.
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Old 05-13-2008, 04:45 AM   #38
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But from what I saw, you have to collect for over 25 years to get more in payments than if you'd invested the premium in an investment with modest returns.
Just so happens my SPIA is with Fidelity. After 28 years (my SPIA guaranteed payout), I'll get slightly better than 2x my original investment. The contract is 1 year old, so the interest calcuations would have been around this date, last year.

BTW, I/DW were age 59 at the time of the first payment.

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Old 05-13-2008, 08:15 AM   #39
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I don't see 6% as a low return investment, as you might. That may be where we differ.
It is, because the annuity doesnt have a "6% IRR". You're still doing the IRR calculation incorrectly.

But if you're only worried about 15 years, then things should be peachy. Just hope there arent another 15 after that.
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Old 05-13-2008, 08:44 AM   #40
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Any idea on the standard or conditions which must be met before an insurer could bail out on their SPIA obligations? Would they have to file bankruptcy or something? Or would it be purely at their discretion that they can't pay as promised, like companies which cut their dividends?
Assuming we are not talking about a "participating" policy/annuity, insurers generally do not have discretion to reduce or stop making payments unless that is what is specified in the policy (read the fine print).

Insurance companies cannot file for bankruptcy. Instead, if they get into serious trouble, the regulator steps in and takes control. They ideally try to sell the company to another insurer. If they cannot do that, they liquidate the company and distribute the proceeds to policyholders first, with other creditors only getting paid after the policyholders are made whole. Usually long before a company gets seized and liquidated the regulators are on the scene beating management with a stock and pushing them to try to fix the problem.
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