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Old 09-20-2016, 02:25 PM   #21
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you cannot duplicate the diversification and consistency of an spia on your own .

they have the diversification of investing in something we never can - dead body's .

those who die pay for those who live . ..besides market and interest rate risk they can have a totally unrelated asset class - the dead .
Of course if they offer life insurance they can also offset the annuity risk with the life insurance risk. One pays the customer more if they die early and one pays the customer more if they die later, but if done right it sort of takes the risk out of the equation for the company as it can lay one risk off against the other.
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Old 09-21-2016, 03:01 AM   #22
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the insurers are in a pretty good position . they can tell us pretty much how many people will die in a year . they just can't tell us who .

that allows them to plan .

they actually pool all the money from the riders and options they sell and use that to mitigate risks in their products .

there is no way we can normally do what they do on our own .

spia's pay out far more cash flow than we can safely draw from ourselves unless we have only the best outcomes in our investments .
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Old 09-21-2016, 05:23 AM   #23
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Avoid variable annuities, only buy ones that have fixed interest rates.

Because rates are so low I would not even consider buying a lifetime annuity today.
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Old 09-21-2016, 06:29 AM   #24
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A DEFERRED annuity is a great tax shelter. Just don't ever annuitize the income from it.
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Old 09-21-2016, 08:57 AM   #25
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Hi Everyone,

Requesting thoughts on annuities. I know there is a lot of controversial info out there. Would like some advice about using them to preserve wealth vs. hoping we don't have another 2008 where investments can take a huge hit. Many thanks.
As others have commented, stay away from anything other than a SPIA. And even those are a poor value right now due to low interest rates. While I don't know your whole situation, in general, I think SPIA's are not a good fit for your stated purpose (bolded above). They are a good fit as longevity insurance in your 70s, especially for those in good health with no pension and possibly no SS. For pre-SS early retirees concerned about sequence risk, you might be better served by just holding a few year's cash in an online savings account. Use that cash to weather the storm and develop the discipline to avoid panic-selling.
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Old 09-21-2016, 01:09 PM   #26
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Mixing insurance and investing is usually expensive so I've never considered variable annuities with income riders etc. However, I have invested in TIAA-Traditional Deferred Annuity because it simply declares an interest rate each year and I'm guarantees a minimum of 3%. Right now it is producing 4.8% which I like as part of my fixed income allocation.

Fixed deferred annuities can work as longevity insurance, but in these times of low interest rates it's hard to make a case for annuities.
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Old 09-21-2016, 04:18 PM   #27
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Hi Everyone,

Requesting thoughts on annuities. I know there is a lot of controversial info out there. Would like some advice about using them to preserve wealth vs. hoping we don't have another 2008 where investments can take a huge hit. Many thanks.
Annuities are a bad idea. Why don't you just buy a basket of investment grade preferreds, and medium term corporate notes instead and draw distributions from the income and capital.
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Old 09-21-2016, 04:26 PM   #28
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A DEFERRED annuity is a great tax shelter. Just don't ever annuitize the income from it.
Can you explain a bit more, I'm thinking I understand if I used $300K and bought a DEFERRED annuity that would not start until 15yrs from now, I have avoided paying taxes for 15 yrs , when maybe I'm generating lots of taxable income.

Am I right ?

And I don't get the "Just don't ever annuitize the income from it." part.
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Old 09-22-2016, 02:52 AM   #29
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many longevity annuity's go away and heirs get nothing if you don't annuitize . not much sense in paying for income than not taking it .

you pay no taxes on the longevity annuity's until you start taking income .
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Old 09-22-2016, 08:13 AM   #30
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many longevity annuity's go away and heirs get nothing if you don't annuitize . not much sense in paying for income than not taking it .

you pay no taxes on the longevity annuity's until you start taking income .
The nice thing about the TIAA-Traditional deferred annuity is that you have lots of choices as to how to take income when you retire. You can buy an annuity or just take interest income, or make systematic withdrawals of some other amount and pass on the account value to your heirs or even transfer the money out over 10 years.
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Old 09-22-2016, 08:23 AM   #31
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spia's pay out far more cash flow than we can safely draw from ourselves unless we have only the best outcomes in our investments .
Correct and this is often ignored by those who have a bias against SPIA's. For many people in their late 60's-early 70's SPIA's pay out around 6%. 50% higher than a reasonable SWR.

I am always a little surprised that we appear to have a fairly large group of retirees who think a conservative 2-3% SWR is appropriate but also seem to be against annuities? Seems to me that this is not consistent? Although, maybe they aren't the same people?
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Old 09-22-2016, 09:09 AM   #32
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....

I am always a little surprised that we appear to have a fairly large group of retirees who think a conservative 2-3% SWR is appropriate but also seem to be against annuities? Seems to me that this is not consistent? Although, maybe they aren't the same people?
I am not (will not be) in either of these categories--but if one is looking at leaving a bequest, the two positions are not inconsistent.
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Old 09-22-2016, 09:33 AM   #33
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Can you explain a bit more, I'm thinking I understand if I used $300K and bought a DEFERRED annuity that would not start until 15yrs from now, I have avoided paying taxes for 15 yrs , when maybe I'm generating lots of taxable income.

Am I right ?

And I don't get the "Just don't ever annuitize the income from it." part.
Think of a deferred annuity as being almost like a IRA with no RMD's and no maximum contribution. All the money you put in grows tax deferred until you pull it out. Mine does not convert to income until I am 95.5 years old. So it now sits in a balanced fund and an S&P fund. For high earners like me and it is a nice way to continue to shelter funds.
The money in the annuity can be converted to a regular annuity paying a stream of income. That is the annuitized part of my comment. Once you do that, then it is just like any other annuity paying the low returns.
So use it as a shelter, just not for annuitized income.

Here is Fidelity's explanation of it, which I am sure is far better than mine.

https://www.fidelity.com/annuities/F...nuity/overview
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Old 09-22-2016, 10:08 AM   #34
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you cannot duplicate the diversification and consistency of an spia on your own .
A tontine would cut-out the middle-man, but I think they're illegal.

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A DEFERRED annuity is a great tax shelter. Just don't ever annuitize the income from it.
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Think of a deferred annuity as being almost like a IRA with no RMD's and no maximum contribution. All the money you put in grows tax deferred until you pull it out.
Too bad products like this get lumped in with the complicated "variable annuity" products. These are pretty simple, and the fees are nothing like the hard-sell "variable annuity" products. There's really no insurance aspect on these products until you annuitize, and you 'never' have to annuitize if you don't want. So basically it's a legal wrapper around a standard mutual fund.

The 'bad news', tax-wise, is that you need to remove every cent of gain before you get the tax-free jackpot at the end. So, say you had a deferred variable annuity invested in the S&P500 fund. And say you put in $100K in 1995, and now it's worth $300K. You'd pay tax on $200K, which you might need to spread-out over a couple of years to keep in a lower tax bracket, but once you "uncover the buried treasure", so to speak, you get the $100 basis tax-free. So you never have to annuitize, unless you want to...just pull out money and pay tax on the gains.
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Old 09-22-2016, 10:14 AM   #35
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Correct and this is often ignored by those who have a bias against SPIA's. For many people in their late 60's-early 70's SPIA's pay out around 6%. 50% higher than a reasonable SWR.

I am always a little surprised that we appear to have a fairly large group of retirees who think a conservative 2-3% SWR is appropriate but also seem to be against annuities? Seems to me that this is not consistent? Although, maybe they aren't the same people?
I'm not sure it's ignored by people who are dubious about annuities as they realize that the annuity with a 6% payout rate pays a constant amount and their SWR is supposed to increase with inflation.

You need to compare the SWR with the initial payout rate of an index linked or escalating annuity.
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Old 09-22-2016, 11:32 AM   #36
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Correct and this is often ignored by those who have a bias against SPIA's. For many people in their late 60's-early 70's SPIA's pay out around 6%. 50% higher than a reasonable SWR.

I am always a little surprised that we appear to have a fairly large group of retirees who think a conservative 2-3% SWR is appropriate but also seem to be against annuities? Seems to me that this is not consistent? Although, maybe they aren't the same people?
I just got some quotes for a lifetime annuity with 3% COLA for a 65 year old male and the initial payout is 3.3%.
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Old 09-22-2016, 06:27 PM   #37
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I just got some quotes for a lifetime annuity with 3% COLA for a 65 year old male and the initial payout is 3.3%.
Also, when that person dies be it at age 66 or age 96 or 106 then the money is gone.

OTOH, if I run firecalc with $1,000,000 of assets, $33,000 initial spending and 3% COLA and a 60/40 portfolio I get the following:

Quote:
FIRECalc looked at the 111 possible 35 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 111 cycles. The lowest and highest portfolio balance at the end of your retirement was $-259,371 to $5,670,263, with an average at the end of $1,882,860. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 35 years. FIRECalc found that 1 cycles failed, for a success rate of 99.1%.
So the choice becomes a guaranteed benefit with a 3% COLA and a guaranteed nothing at the end (be the end is a year or 35 years or 45 years) OR a 99.1% success rate but a potential generous legacy and access to more money during my life if investment performance is favorable.

I would take the second option but some people may prefer the first.
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Old 09-22-2016, 06:36 PM   #38
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Think of a deferred annuity as being almost like a IRA with no RMD's and no maximum contribution. All the money you put in grows tax deferred until you pull it out. Mine does not convert to income until I am 95.5 years old. So it now sits in a balanced fund and an S&P fund. For high earners like me and it is a nice way to continue to shelter funds.
The money in the annuity can be converted to a regular annuity paying a stream of income. That is the annuitized part of my comment. Once you do that, then it is just like any other annuity paying the low returns.
So use it as a shelter, just not for annuitized income.

Here is Fidelity's explanation of it, which I am sure is far better than mine.

https://www.fidelity.com/annuities/F...nuity/overview
Ok so similar to putting into some investment like BRK (no divs and no captial gain declared).

But with more choice of investments, so what happens if you die at 94 ?
Do your heirs inherit it, or the cash ? The site didn't talk about death.
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Old 09-22-2016, 06:49 PM   #39
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Ok so similar to putting into some investment like BRK (no divs and no captial gain declared).

But with more choice of investments, so what happens if you die at 94 ?
Do your heirs inherit it, or the cash ? The site didn't talk about death.
It is an asset. You designate a beneficiary. The money is always yours, not the insurance company's. You can also pull the money out at anytime without penalty.
The 95.5 age is only to push the potential for income out as long as possible so you don't have to annuitize. Other than that, it is just about like an IRA.
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Old 09-22-2016, 08:14 PM   #40
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So the choice becomes a guaranteed benefit with a 3% COLA and a guaranteed nothing at the end (be the end is a year or 35 years or 45 years) OR a 99.1% success rate but a potential generous legacy and access to more money during my life if investment performance is favorable.

I would take the second option but some people may prefer the first.
Using FireCalc is a great way to compare an annuity or pension with a invested lump sum. If you do it with any of today's annuity quotes it is bound to favor the invested lump sum as that uses historical returns and the annuity rates are going to reflect today's low bond rates.

When I was given the chance to buy into my employer's defined benefit pension I did the FireCalc comparison for 30 years and the invested lump sum only had a 13% chance of beating the pension (which has a 7% payout and 3% COLA), so I bought into the pension.
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