Annuity post to end all annuity posts...

[explanade]

Quote:

Originally Posted by ESRBob I think we worked out a really simple rule for the optimum time to buy an annuity in a previous thread: When 50 year old investors can get 7% inflation-adjusted annuities with 2nd-to-die clauses, then we're all buying!

What do you mean by that, that for a $100k premium, you get $7k a year in payments with inflation adjustments while both spouses are alive?


On some other issues raised in this thread, VG won't give a quote for $1 million SPIAs. Could that mean the payments would be at a higher rate the quotes they show for 0-999,999?

Also, do the payments they quote at any given time, beyond the gender, state and age criteria, reflect market conditions? Do they index it to some benchmark rate or otherwise base their payments on what other financial instruments are doing?

[chinaco]

I am on the fence about using an annuity. The issues are complicated.

On the use of longevity insurance (basically a deferred annuity)... I have not gotten a quote... but I suspect that I might be better off self insured by taking the premium and investing it in a target 2045 fund... stick 50k in there and let it grow for 35 years.

Those target funds are really good vehicles. I am thinking that they can be used as an auto-pilot vehicle for DW if anything happens to me (she is not interested or knowledgeable about finance).

I like the idea of the Managed Payout funds also, but I am still mulling it over. I have a few years before ER... so I can see how they perform and study them closer.

Would any of you put your entire portfolio in the managed payout fund during FIRE?

[RockOn]

Quote:

Originally Posted by ESRBob I think we worked out a really simple rule for the optimum time to buy an annuity in a previous thread: When 50 year old investors can get 7% inflation-adjusted annuities with 2nd-to-die clauses, then we're all buying!

Checking for myself at age 53.5, that's about 4.2% right now at Vanguard, (CPI COLA'd, 100% survivorship). It's 7.3% with no COLA and no survivorship.

At 7%, you bet. Not holding my breath! I'd like 7% on investment grade 30yr bonds. Not holding my breath on that either.

[RockOn]

Quote:

Originally Posted by explanade What do you mean by that, that for a $100k premium, you get $7k a year in payments with inflation adjustments while both spouses are alive? On some other issues raised in this thread, VG won't give a quote for $1 million SPIAs. Could that mean the payments would be at a higher rate the quotes they show for 0-999,999? Also, do the payments they quote at any given time, beyond the gender, state and age criteria, reflect market conditions? Do they index it to some benchmark rate or otherwise base their payments on what other financial instruments are doing?

Just trying to help. I am not an expert on this. (Go ahead CFB, I'll be waiting)

1) yes
2) maybe, you have to call them and ask, I doubt it would be much higher, if at all. If you call, let us know what they said. I'd never put that much into one annuity, I'd spread it around for some diversification.
3) yes, I'm not sure what they use and you probably would have a hard time finding out but it is likely tied to interest rates, such as the 10 year treasury, or current corporate bond rates. As rates rise, the payments go up, probably not a lot though, they have to be looking very long term at average investment returns. Berkshire uses a 30 year Treasury strip rate of about 4.65% according to their site in their payout calcs, they pay less than Vanguard. From what I can tell Vanguard uses around 5.25% to 5.5% for their payout calcs, based on living to the age in the Mortality Tables. These rates are what I would call the IRR (internal rate of return) they allow the investor for on an incoming investment. We can argue about the preciseness of that, but it is at least very close to correct.

[FinanceDude]

Quote:

Originally Posted by ESRBob I think we worked out a really simple rule for the optimum time to buy an annuity in a previous thread: When 50 year old investors can get 7% inflation-adjusted annuities with 2nd-to-die clauses, then we're all buying!

I have MANY clients for those....... Maybe NML can figure that out with their dividend rates..........

[explanade]

Maybe they know people ladder and diversify so they offer some incentive to put more of your eggs in their basket.

[Marquette]

Big news. I used to work at the #1 FIA company in the US. I now work at the #3 FIA comany in the US.

To my knowledge, I haven't changed employers or desks.

[RockOn]

Quote:

Originally Posted by explanade Maybe they know people ladder and diversify so they offer some incentive to put more of your eggs in their basket.

Maybe, call them, they should be easy to get the information from.

[ESRBob]

Quote:

Originally Posted by explanade What do you mean by that, that for a $100k premium, you get $7k a year in payments with inflation adjustments while both spouses are alive?

The second-to-die clause is the one that says the annuity keeps paying as long as one of you is alive. Yeah -- 100k would get you (a 50-year-old) 7k a year, inflation-adjusted as long as one of you is alive. The actual rates are more like high 3%s or low 4%s, and most of us here can't bring ourselves to give up the cookies at these sorts of rates, but get up to 7%? Oh yeah! Think of how much safe-withdrawal-stuff you could ignore for the rest of your life!

ps: this is all fantasy -- 7% wouldn't happen -- at least not from a firm you could actually trust.

One idea, though, would be to do annuities inside your family. The gov't has some guidelines, but it can be a way to gift money from one generation to another without gift taxes, since the annuity is a fair-on-both-sides contract. At the end of the day, the receiver of the capital keeps it, which is a nice way to dodge some estate taxes, and avoid the buyers' remorse factor of the person who buys the annuity and then dies soon thereafter. But do you trust your kids to keep paying? Maybe an insurance company doesn't look so bad after all!

[RockOn]

Quote:

Originally Posted by ESRBob The second-to-die clause is the one that says the annuity keeps paying as long as one of you is alive. Yeah -- 100k would get you (a 50-year-old) 7k a year, inflation-adjusted as long as one of you is alive. The actual rates are more like high 3%s or low 4%s, and most of us here can't bring ourselves to give up the cookies at these sorts of rates, but get up to 7%? Oh yeah! Think of how much safe-withdrawal-stuff you could ignore for the rest of your life! ps: this is all fantasy -- 7% wouldn't happen -- at least not from a firm you could actually trust. One idea, though, would be to do annuities inside your family. The gov't has some guidelines, but it can be a way to gift money from one generation to another without gift taxes, since the annuity is a fair-on-both-sides contract. At the end of the day, the receiver of the capital keeps it, which is a nice way to dodge some estate taxes, and avoid the buyers' remorse factor of the person who buys the annuity and then dies soon thereafter. But do you trust your kids to keep paying? Maybe an insurance company doesn't look so bad after all!

Haven't checked, but one might be able to get the 7% at age 65 or 70.
I found 4.2% for my current age of 53 with 100% survivorship and CPI-U COLA at Vanguard.

On the family annuity, now that's thinking outside the box! I haven't heard of that before but I like the concept. Maybe a chapter in your next book? (I think I trust my kids more than an insurance company. At least I know where they live.)

[Texas Proud]

Quote:

Originally Posted by RockOn On the family annuity, now that's thinking outside the box! I haven't heard of that before but I like the concept. Maybe a chapter in your next book? (I think I trust my kids more than an insurance company. At least I know where they live.)

This has been an estate planning tool for many decades... so not really thinking outside the box as much as you think...

It is used for other assets (like a family owned company)... you sell it to your children... for a 'low' price with the agreement they have to make payments for the rest of your life... and then you can 'gift' them the payments they need to make as they don't have the money...

These are not used by the people who will not have an estate tax to pay... but if you are very well off... used all the time...

[RockOn]

Quote:

Originally Posted by Texas Proud This has been an estate planning tool for many decades... so not really thinking outside the box as much as you think... It is used for other assets (like a family owned company)... you sell it to your children... for a 'low' price with the agreement they have to make payments for the rest of your life... and then you can 'gift' them the payments they need to make as they don't have the money... These are not used by the people who will not have an estate tax to pay... but if you are very well off... used all the time...

FWIW, I took the masters degree estate planning course from the College of Financial Planning. Specifically "Family Annuities" were not included there, I thought they had it all covered. That's my TOTAL frame of reference on Estate Planning. On passing other assets, quite understandable.

As far as the Family Annuity idea, it sure would cut the complaints about annuity fees! Are Family Annuities common? It seems like a pretty good concept to me, income for the parents while alive, the kids getting the remainder, no need to annuitize to an insurance company. The withdrawal rate could be set reasonably high and COLA'd with 100% survivorship and the assets could then be invested fairly agressively since the kids would have long term bias. If things go well, it's a win-win. If not, oh well, the kids had a decent shot. Everyone would be in it together. Anything wrong with that?

[rs0460a]

Quote:

Originally Posted by explanade On some other issues raised in this thread, VG won't give a quote for $1 million SPIAs. Could that mean the payments would be at a higher rate the quotes they show for 0-999,999?

It might be due to the limitations on acquiring an annuity (specifically an SPIA).

Yes, I have one (quite pleased, thank you).

No, I didn't wait till I was "too old" (purchased at age 59).

Part of the application was questioning how much of your retirement portfolio would be "cashed in" to purchase the annuity. The company I used (Fidelity) had a limitation of not more than 50% of your base retirement portfolios be used for an SPIA (one or many, for those who will be "laddering", as I plan).

Anyway, here's another article (although more general in scope) for your edification:

Money Magazine, Retirement Guide. Income plan - Sep. 12, 2006

- Ron

[RockOn]

Quote:

Originally Posted by rs0460a Yes, I have one (quite pleased, thank you).

You don't wake up every night in terror and live a horrible life of self-doubt?

It has to be at least as stressful as having a pension plan. :confused:

What were you thinking?

[haha]

Are annuity writers allowed to charge a 60 year old woman more for her annuity than they would charge a 60 year old man for the same thing?

If not, women should perhaps feel more positively toward these than men should, since women have a considerably greater life expectancy.

Ha

[RockOn]

Quote:

Originally Posted by haha Are annuity writers allowed to charge a 60 year old woman more for her annuity than they would charge a 60 year old man for the same thing? If not, women should perhaps feel more positively toward these than men should, since women have a considerably greater life expectancy. Ha

Yes, gender is the second question asked. A sex change is questionable.

[Ed_The_Gypsy]

Does anyone remember Baldwin United?

[rs0460a]

Quote:

Originally Posted by RockOn It has to be at least as stressful as having a pension plan. :confused:

Let's see - one of my area's major employers (e.g. Beth Steel) is no longer in business along with another local company (formerly known as Western Electric/Bell Labs)

Guess where their pensions are? (Hint: taken over by the government at a fraction of their former monthly benefit).

Purchased with 10% of my/DW's retirement portfolio, we are "guaranteed" (everybody knows nothing in life is guaranteed ) to have monthly income for the next 28 years (longer if we live beyond that time, with the remainder benefit paid to our estate if we live less) in a contract that will at least make total payments of 2x what we originally "gave up".

Could we do better? Maybe. That's why we still "retained" 90% (of course, with the pullback in the market, its a bit less) to keep up with inflation and expected market increase in value in the future.

Will we buy additional SPIA's in the future? Don't know. However the "investment" I paid will yield a greater numerical payback than the former pension plan payments I was to receive (former company converted to a cash balance plan to replace the pension plan) when I started working there 25+ years ago. Like most pension programs, it reduced monthly payments when you started receiving SS (level plan benefit, as most non-government pension programs went). The SPIA payments will not be reduced when I start collecting SS in 10 years (another reason I chose the SPIA - the ability to delay SS till age 70).


- Ron

[explanade]

Article comparing annuities to "payout funds."

Mutual Funds Pitch Alternative to Annuities - MarketWatch

Some sample payments between SPIA and payout funds in the chart at the bottom.

[W2R]

Quote:

Originally Posted by explanade Article comparing annuities to "payout funds." Mutual Funds Pitch Alternative to Annuities - MarketWatch Some sample payments between SPIA and payout funds in the chart at the bottom.

Yes, but the comparisons are apples and oranges to my way of thinking.

For example, with Vanguard's Growth and Distribution Managed Payout Fund, which yields a stead 5%, I would expect the share price to grow at least somewhat through the decades, wouldn't you? Would it? Who knows? I wouldn't buy it for retirement otherwise, but so far as I know that is still up in the air. My guess on the answer to that is "probably?"

And the immediate annuities they quote are not inflation protected. Likewise, I would be hesitant to buy one that wasn't inflation protected, and I don't think it would be comparable to the G&D managed payout fund.

To me it would be more relevant to see a comparison of an inflation protected immediate lifetime annuity with the options given, to the G&D managed payout fund, for example, maybe even with a projection of expected G&D share prices over 35 years or so.