Annuities, safe investments?

[FinanceDude]

Come to think of it, if that was the case, then the carrier probably offed him. Huge influx in premium with absolutely no payout!

I'm sure his wife was the beneficiary, or a trust.........

 

[FinanceDude]

(2) High net-worth individuals who, in some states, are looking to increase asset protection from creditors and lawsuits. Here in Texas, for example, annuities are almost completely untouchable by creditors or to pay legal judgments against you. I can see this being attractive to high-risk occupations like doctors in states like Texas and Florida, where there are strong asset protection laws and many options for building wealth exempted from bankruptcy or lawsuits.

Having said that, an annuity is only as strong as one individual insurer, and that's one of the reasons why even low-cost annuities scare me a bit.

One advisor I knew did that in Florida with a number of neuro and cardio surgeons..........

 

[REWahoo]

Oh, and I've decided that there's no issue with solvency at my employer because we have a time capsule buried beneath the entrance that says 'open in 2051'.

What are the odds it contains the remains of Jimmy Hoffa?

 

[Marquette]

What are the odds it contains the remains of Jimmy Hoffa?

Probably pretty low... we built this office in 2001. Then again, if he bought a large enough annuity from us and didn't name any beneficiaries...

 

[rs0460a]

So you could look at it as 100% return in 28 years. That averages out to about 3.57% return.

What is your excluding rate like, somewhere between 45-50%? So only about half your payments are taxable?

Actually, I/DW still have more than 90% of our retirement portfolio available (60/40) beyond the SPIA.

Like I said before, an SPIA is not for all people, but for a limited few (no estate to pass on, ER'd before 60, and other sources of income in retirement) it may make sense.

I really don't worry about other folks. All I know is in our case, it works. Our goal is to have enough money to continue to live in the manner in which we have become accustomed. An SPIA (as part of our "total program") makes sense.

You may not like it - so what? As the old saying says "what you think of me is none of my business ...."

- Ron

 

[ziggy29]

One advisor I knew did that in Florida with a number of neuro and cardio surgeons..........

I can believe it. This is exactly the type of individual for whom these things truly make sense -- high-income, high net worth, at high risk of lawsuit, and residing in states where these things are fully protected as exempt assets. For these people, the tax deferral and asset protection features likely justify the fees and expenses of a low cost annuity.

But they are a small minority of the overall population. People with low net worth who haven't even maxed out contributions to other tax-deferred, judgment-proof investments are often sold these things and for them it almost certainly makes no sense.

 

[donheff]

Speaking of judgment proof -- to what extent, if any, are IRAs and 401Ks exempt from civil suits?

 

[FinanceDude]

Speaking of judgment proof -- to what extent, if any, are IRAs and 401Ks exempt from civil suits?

It depends on the state, I want to say it is $1,000,000 on 401K's..........

 

[Marquette]

Speaking of judgment proof -- to what extent, if any, are IRAs and 401Ks exempt from civil suits?

CCH Financial Planning Toolkit | ERISA and Retirement Asset Protection

afaik, ianal, etc, etc, etc...

Old stuff I thought I knew:

An ERISA plan is exempt from judgment. This includes a 401(k), I think an IRA funded by rollover (but not an IRA otherwise), and I would assume a 403(b). It does not cover SEPs, stock bonuses, IRAs, etc.

State law could cover non-ERISA plans.


New stuff that may be different from that?:

FPA Journal - Creditor Protection for Retirement Accounts: ERISA, the Supreme Court, and the Bankruptcy Act of 2005

 

[ziggy29]

It depends on the state, I want to say it is $1,000,000 on 401K's..........

I believe it's the other way around at the federal level: unlimited for 401Ks and up to $1 million for traditional/Roth IRAs.

Some states differ from the federal default. In particular, a few states provide an unlimited exemption for these retirement accounts from civil suits and bankruptcy. And of those, a small number -- Florida, Texas and Oklahoma -- also provide for a virtually unlimited exemption for a homesteaded personal residence.

 

[RockOn]

It is, because the annuity doesnt have a "6% IRR". You're still doing the IRR calculation incorrectly.

Sorry, I know you said that before, but I believe you are mistaken. Using the situation I gave, it is 6%. That is based on age 53, living to 86 (I know this is beyond the tables but it is a reasonable expected lifespan for Financial Planning). It was a COLA plan with inflation assumed to be 2.8%. 2B confirmed a similar result in a previous thread. To good to be true? eh? Maybe you should take a look. Don't be closed minded now.

 

[RockOn]

So you could look at it as 100% return in 28 years. That averages out to about 3.57% return.

That's really not accurate because you are also withdrawing principle from the account during that timeframe. The IRR calc is needed to calculate the return. I ran an example where $1,000,000 was put in at a $73,000 payout for 28 yeas without COLA. The IRR on that example is 5.8%. Notice the total payments are about the 2x that rs0460a suggested.

 

[explanade]

If you get $2 million in payments for an original "investment" or premium of $1 million, your "return" is $1 million over the principal/investment/premium of $1 million, no?

I realize I may be oversimplifying but I guess we're trying to describe a withdraw plan in terms of other investments.

BTW, that example is single-life only, no guaranteed period, no COLA, no cancellation option?

 

[cute fuzzy bunny]

Don't be closed minded now.

I'm not. Its just that I can do math and use reasonable parameters in my calculations.

 

[mathjak107]

its very easy to manipulate the numbers on an annuity to reflect what you want ... if you think about it i can say at a 7% withdrawl rate from an immeadiate annuity at 7% the first 10 years they give you back your own money. thats zero return.... the first hint of a real return would be starting year 11... so if you figure that return for that year its like a fraction of a percent or so...... it dosnt reach anywheres near 7% until like year 18

 

[RockOn]

I'm not. Its just that I can do math and use reasonable parameters in my calculations.

As you saying my parameters are not reasonable? Which ones? The only questionable one that I think you could point to is a retiree living to age 86. I don't think that's outside the limit what a Financial advisor would use, in fact 90 comes up a lot. Why would planning to 86 be incorrect for a specific life if reasonably healthy in the mid-50's? We don't all die on the date the tables say.

I'm not sure why we cannot accept the IRR calcs. There is no manipulation ntended, it is what it is.

 

[RockOn]

If you get $2 million in payments for an original "investment" or premium of $1 million, your "return" is $1 million over the principal/investment/premium of $1 million, no?

I realize I may be oversimplifying but I guess we're trying to describe a withdraw plan in terms of other investments.

BTW, that example is single-life only, no guaranteed period, no COLA, no cancellation option?

Sorry but it is a little more complicated than that. It's hard for me to explain, it has to do with the fact you are withdrawing during your investment period.

Try this, if you invested $1 million in a Mututal Fund and made 6% annualized; or, in the SPIA (6% IRR) I am talking about, and made the same number of withdrawals for the same amount over the same number of years, the outcome would be the same. Account depleted at age 86.The IRR calculation compares apples to apples. If you don't believe it set up a spreadsheet and work through it year by year, you'll see what I mean.

P.S. my example was for a single, COLA plan (assumed 2.8% inflation), no guaranteed period, no cancelation, but any option you choose would likely calculate to be the same IRR if it is from the same company and the inputs on age remain the same. If you want me to calc a specific one for you, let me know the inputs.

 

[Nords]

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.

Sorry, I know you said that before, but I believe you are mistaken.

Using the situation I gave, it is 6%.

That is based on age 53, living to 86 (I know this is beyond the tables but it is a reasonable expected lifespan for Financial Planning).

RockOn, annuities aren't appropriate for my situation so I don't care about them.

But I care about the quality of the info & discussion on this board, and I think that yours could be better. Look at the statements you're making above. You have many qualifiers on your calculations... and I'm not seeing your calculations because you don't put up numbers or tables or formulae or links to websites that walk everyone through the process for us to check on our own.

Perhaps this is why people are skeptical of your numbers and your conclusions-- because others are having a hard time replicating your results.

By the way if you give an insurance company a bunch of your money and they eventually give your money back to you, then I don't care what the IRR is. You're no more well off than if you'd kept it at a discount brokerage, and quite possibly worse off. But if you can show where return of principal is included in the standard calculations then we can have a more constructive discussion.

To good to be true? eh? Maybe you should take a look. Don't be closed minded now.

Well, sure, if you can't get your position to stand on its own merits then you can always counterattack or make fun of the other posters!

 

[RockOn]

RockOn, annuities aren't appropriate for my situation so I don't care about them.

But I care about the quality of the info & discussion on this board, and I think that yours could be better. Look at the statements you're making above. You have many qualifiers on your calculations... and I'm not seeing your calculations because you don't put up numbers or tables or formulae or links to websites that walk everyone through the process for us to check on our own.

Perhaps this is why people are skeptical of your numbers and your conclusions-- because others are having a hard time replicating your results.

By the way if you give an insurance company a bunch of your money and they eventually give your money back to you, then I don't care what the IRR is. You're no more well off than if you'd kept it at a discount brokerage, and quite possibly worse off. But if you can show where return of principal is included in the standard calculations then we can have a more constructive discussion.


Well, sure, if you can't get your position to stand on its own merits then you can always counterattack or make fun of the other posters!

Come on now, everything I have posted can easily be checked. Use Vanguard for the annuity amounts. There are no secrets here. It's just basic cash flow calcs on a cheap HP calculator. I'm not making fun of anyone, maybe having a little fun chiding cutie, if it is offensive, I'm sorry. I've taken a bit of chiding myself in the past months.

P.S. If I need to run through the exact calcs, I could, but why doesn't someone just come on board and verify my results. It would be easier.

 

[cute fuzzy bunny]

I've taken a bit of chiding myself in the past months.

Theres a reason for that.

P.S. If I need to run through the exact calcs, I could, but why doesn't someone just come on board and verify my results. It would be easier.

That already happened and your results were found to have a number of issues and inaccuracies. Its funny you mention close mindedness because it appears you've convinced yourself of several contradictory positions, most of which are absent of facts. You throw out wild claims and concerns and when shown solid information that is contrary to those claims you dont seem to consider them.

Sigh. I need to stop pushing that dang shiny, pretty, inviting red button... :

 

[RockOn]

Theres a reason for that.



That already happened and your results were found to have a number of issues and inaccuracies. Its funny you mention close mindedness because it appears you've convinced yourself of several contradictory positions, most of which are absent of facts. You throw out wild claims and concerns and when shown solid information that is contrary to those claims you dont seem to consider them.

Sigh. I need to stop pushing that dang shiny, pretty, inviting red button... :

Nobody will step up? Come on, some of you must know that my numbers are correct.

If you need the inputs for the IRR calc, I can come up with them again. I erased them as I did another calc on my calculator.

This is unreal. There is no BS going on here. The annuity does have a 6% IRR (Actually 5.94% if I remember right) for my age of 53 living to 86 with a 2.8% COLA and using Vanguards payouts. Is it that hard to believe?

 

[RockOn]

That has already happened and your results were found to have a number of issues and inaccuracies.

Please review the Thread I started on Vanguards SPIA IRR's recently. The results were verified by 2B, another poster said they thought they were about correct if I remember correctly. The results were not found to have issues and inaccuracies. I don't know where you are coming from with that.

This is what 2B found:

"I went on the Vanguard site and put in a Texas male born on Jan 1, 1955 that would start receiving annuity payments annually on Jan 1, 2009. If you assume receiving 35 payments (age 86), I got an IRR of 6.36%. Live to 76 and it falls to 5.14%. Live to 96 and the IRR becomes 6.82%. This is the same story. Live forever and an annuity starts looking pretty good"

(2B might have a small error, it is 31 payments, I'm not sure if he really used that or the 35.) 2B's results were slightly better than my calc for age 53. It is a 6% IRR, roughly. I'd say live to 86 and it starts looking pretty good.

P.S. my CPI rants are mostly for a little fun. It's beyond anything we can do anything about. I'm not just having a little fun here. Explanade asked some questions, I answered them the best I could. I would not want to mislead him. If I am wrong, please correct me so he/she doesn't make a bad decision. I started the Thread to see what people thought about the question of whether annuities were safe.

 

[Peter]

Rock on, I haven't checked all your numbers, but I believe they are correct. I did my own IRR calculations and got similar results.

For example, for an SPIA with no COLA, the Fidelity annuity calculator says $632 per month payout for a 61 year old male in CA, with $100,000 initial payment. Doing the IRR calculation (which is the same as mortgage payout) for a payout period of 300 months, the IRR comes out at 0.48% per month, or 5.76% annually.

If the payout goes to 360 months, the IRR is 6.48%. For 200 months (early death) it is 2.88%.

Nothing really new here. If you live longer than average, you get a good deal; shorter, you lose out.

Can't understand why this topic arouses such ire with certain people ...

Peter

 

[RockOn]

Rock on, I haven't checked all your numbers, but I believe they are correct. I did my own IRR calculations and got similar results.

For example, for an SPIA with no COLA, the Fidelity annuity calculator says $632 per month payout for a 61 year old male in CA, with $100,000 initial payment. Doing the IRR calculation (which is the same as mortgage payout) for a payout period of 300 months, the IRR comes out at 0.48% per month, or 5.76% annually.

If the payout goes to 360 months, the IRR is 6.48%. For 200 months (early death) it is 2.88%.

Nothing really new here. If you live longer than average, you get a good deal; shorter, you lose out.

Can't understand why this topic arouses such ire with certain people ...

Peter

Not hearing anything else, I think that settles it. Annuities do provide a lifetime 6% IRR if you live to the mid 80's or so and retire in the mid-50's. Three of us get roughly the same results, the calcs are not incorrect. A rough rule of thumb might be that at today's payouts, if you are approximately age 50 to 60, you need to collect the payments for about 30 years to get a 6% IRR, that could be researched.

My conclusion: SPIA's, at todays payouts, are equivalent to buying a perpetual bond with a rate of 6% if you live about 30 years. If you hold any perpetual bond, the real value (by that I mean inflation adjusted) of that bond decreases toward zero with time. Just like an annuity goes to zero. If you live longer than 30 years, you do better, if you die sooner they were not as good a deal. However the guaranteed income does provide a level of security for a lifetime. The biggest downside is the single company risk of the insurance company, some of that is mitigated by regulation, state guarantees and diversification. To me they make sense for conservative retirees and as an option for the fixed portion of a portfolio for older people.

 

[ronin]

I have run the numbers as provided by RockOn (more or less) and although I have some minor questions about his methodology, the IRR that I get is ~5.96%. This seems within spitting distance of 6% to me.

I couldn't get an instant quote from the Vanguard site for 1 million, so I used 100K figuring on proportionality. I couldn't get a COLA of 2.8%. I used the COLA button with unknown future CPI changes (this run yielded IRR=5.53%) and 2 runs with graduated payments of 2% and 3%. These yielded the 5.96%. A fixed payout with no COLA yielded 5.93%.

I used excel w/IRR function starting with an inital payment of 100,000 and annual annuity payments from the various quotes for ages 55 - 86. My HP 12c calculator won't accept more than 20 uneven cash flow entries so I don't know how it can be used for calculations of that many COLAed yrs (and punching in all those numbers would be tedious). Quick and easy w/excel.

I have no opinion one way or another on this issue. I have no need for an annuity in addition to our STRS pensions. Others might find some value in it.