Another annuity question

[haha]

Quote:

Originally Posted by palomalou Okay, I am still honestly confused. I HAVE googled and read the annuity threads. That was why I asked, because nobody seemed to explain what the problem is, just "run"!

These things are hard to understand, and most of us are a priori convinced that they stink, so we do not make the effort to formulate a well reasoned and likely accurate summary of what is wrong with them. There is just no perceived payoff for this work.

Ha

[FIRE'd@51]

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Originally Posted by palomalou What would be the right questions to ask re an annuity? I've read many conversations here and understand that many people don't like them. What might be problems with one which guarantees 5-6% for life but would pay more, say 1% less than the Dow, if the Dow does better than that?

The first question I would ask is what would be the annual payout be if the annuity contained no Dow "kicker" (i.e. a plain vanilla SPIA). There is an option on the Dow embedded in the annuity you are describing. I would like to know how much that option costs.

[travelover]

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Originally Posted by palomalou Okay, I am still honestly confused. I HAVE googled and read the annuity threads. That was why I asked, because nobody seemed to explain what the problem is, just "run"! Putting money in the stock market means you have to have MUCH more money because it may pay 0 in any given year, and you could also lose principal. And of course we have a significant amount in mutual funds. It still seems that the downside protection of the EIA is worth losing a hair off the upside. But thank you for your thoughts.

You!

Up on the ledge!

JUMP!

[GregLee]

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Originally Posted by palomalou Putting money in the stock market means you have to have MUCH more money because it may pay 0 in any given year, and you could also lose principal.

In the case of a mutual common stock fund, I don't understand why preserving "principal" is a concern or how the fund "may pay 0 in any given year". I'm not saying it's not possible to understand these things, but really, only that I don't, and that I'm often puzzled in these conversations. I have my mutual funds set up to reinvest distributions and dividends, and (except for some tax technicalities) I just pay attention to the dollar value of my shares and the dollar value of shares I redeem. The fund pays out whatever shares I choose to redeem -- it will never "pay 0" unless I choose not to withdraw anything that year or, or course, if there's nothing at all left in my account. If you remove a fixed inflation-adjusted amount each period for your expenses, you expect the dollar amount left in the fund (the "principle"?) to gradually diminish. If that's what you mean by "losing principle", I don't think there is anything necessarily bad about it.

[clifp]

Quote:

Originally Posted by palomalou Okay, I am still honestly confused. I HAVE googled and read the annuity threads. That was why I asked, because nobody seemed to explain what the problem is, just "run"! Putting money in the stock market means you have to have MUCH more money because it may pay 0 in any given year, and you could also lose principal. And of course we have a significant amount in mutual funds. It still seems that the downside protection of the EIA is worth losing a hair off the upside. But thank you for your thoughts.

The problem in a nutshell with EIA is that come with 4 page glossy brochure implying all of the wonderful benefits they provide during a down stock market, and assuring you that if the market goes up you'll benefit almost as much as owning a mutual fund. However, EIA also come with 200+ page insurance contract that describes in highly technical legalese how the products actually work. There is enough disconnect between these marketing brochure and the contract that everybody from FINRA, to the SEC, and various states attorney general offices have put up warning about buying EIAs on their websites. Alan Greenspan even described them as so complicated he couldn't understand them.

EIA have only been sold in large numbers in the last 6 or 7 years and because there is typically at least a 10 year holding period, there is virtually no real data about how much income they provide in retirement. I asked DGoldenz to give me an example of how much income they provide to his past clients and he said that none of the EIA he sold had matured (wrong word).

So one possibility is you were lied/mislaid by the salesman. The 100K in EIA you think provides you the higher of 75% of the S&P growth or 4%/year which is turned into a life time annuity at 10 years. But in 10 years that 100K may actually be worth only $80K* after all the various fees and charges are calculated or the annuity interest rate lowballed. *Made up number.

A second possibility is that investments do great and the 100K in the market goes up by the historically 10% or so in which case you'd be better off investing in index funds.

The third possibility is that EIA works as advertised, and we have a decade of 0 gain in the stock market and low interest rates. Now at this point it is worth asking yourself. "If the stock market makes no money over 10 years, (which is exactly what you are understandably worried about) and the total bond market is yielding 3.25% how can the insurance company afford to pay me 4%? The insurance company has to pay for salesman salaries electricity for all of those nice buildings etc. Clearly they will lose money on every EIA policy they wrote, how many of them will still be around after a decade of losses?

[brewer12345]

Quote:

Originally Posted by palomalou Okay, I am still honestly confused. I HAVE googled and read the annuity threads. That was why I asked, because nobody seemed to explain what the problem is, just "run"! Putting money in the stock market means you have to have MUCH more money because it may pay 0 in any given year, and you could also lose principal. And of course we have a significant amount in mutual funds. It still seems that the downside protection of the EIA is worth losing a hair off the upside. But thank you for your thoughts.

I personally do not understand the appeal, but if you like the idea of an EIA I would do it yourself rather than take credit exposure to a potentially shaky insurer and get locked into an inordinately expensive, very complex contract that hits you with a large early withdrawal penalty if you need the money sooner than the insurer tells you it is OK. If you search the forum, I took the trouble in a past post to explain in detail how you can "roll your own" EIA. With the high VIX, these strategies will be locking in a modest return at best.

Personally, I would just stick with a balanced, diversified portfolio and skip the option theatrics, but to each their own. Just take 5 minutes a year and save yourself the expense and credit exposure brought on by an EIA.

[FinanceDude]

Does Vanguard still offer a VA underwritten by AIG??

[brewer12345]

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Originally Posted by FinanceDude Does Vanguard still offer a VA underwritten by AIG??

Your point is?

[Gone4Good]

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Originally Posted by clifp However, EIA also come with 200+ page insurance contract that describes in highly technical legalese how the products actually work.

The only question you need to ask is "Can I have the contract" mentioned by clifp. Get it. Read it. If you understand it and are comfortable with how the product works, buy it.

[FinanceDude]

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Originally Posted by brewer12345 Your point is?

Why would VG promote a product that seems to be universally hated as an overpriced fee-loaded expensive product? Doesn't seem very Bogle-like...........

[chinaco]

There are several types of insurance contracts that fall into the annuity category. Make sure you understand the type of annuity and all of it features, benefits, restrictions and costs.

The costs related to almost any annuity contact is high.

Like others have stated.... don't buy something you do not understand.

I am intending to buy an annuity for income purposes. We will stick with a plain vanilla nominal SPIA (from a highly rated insurer). Our goal is to build a guaranteed base income using SSx2 + Pension + SPIA. I will handle the inflation adjustment on income myself.

But, I am not putting all of our money into a SPIA. Just enough to insure a base income. The majority of it will remain in our control invested in securities.

I going wait to make the SPIA purchase till the fed is done with its heavy handed rate manipulation.... which could be a few years (according to recent developments).

[mystang52]

Palomalou - I am NOT expert on annuities. But, based on your expressed concerns, I think a SPIA is what you're looking for. Concept and pay-out is simple, and gives you the peace of mind you are apparently seeking.
The product you originally were considering seems to be chock full of pitfalls, as noted by so many of the responders.

[palomalou]

Now I understand much better! Thank you all!

[Berkshire_Bull]

If you buy a CD, you're giving your money to a bank, they loan it out, subtract their expenses and profits, and give you the remainder in a stated rate.

If you buy a traditional deferred annuity, you're giving your money to an insurance company, they're investing it in a portfolio of bonds and maybe some real estate, subtracting out their costs and profits, and give you the remainder in a stated rate. Obviously a SPIA is the same drill, just with actuarial assumptions about life expectancy.

If you buy an index annuity, the insurance company takes your money, invests it in bonds and real estate, subtracts their costs and profit, and then buys options from a market maker like Goldman Sachs or Morgan Stanley on a stock market index, most likely the S&P 500. Rather than opting for a stated rate of return such as a CD or traditional fixed annuity, you're opting for a variable rate of return with your upside being the maximum of your crediting choice and the floor being zero. If the index rises the contract owner receives a percentage of the upside, or 100% of the upside to a certain cap, or a monthly averaging of the closing values of the index. A positive index means you're credited interest to the extent of your participation rate or cap, you can choose. If the index is negative the options the insurance company bought on your behalf expire worthless so your return is zero. This is worst case scenario.

All contracts carry a "reset" which is usually annual. Any interest credited is permanent, and the insurance company buys a new round of options for you instead of crediting you a stated rate as with a CD or traditional fixed annuity. Your money is never actually in the stock market, thus fixed index annuities are not a security, although some salespeople may represent them as such, and well as misinformed message board members. Fixed annuities do not carry an expense either. None of them, and neither do CD's.

An EIA is a lousy alternative to mutual funds or stocks, but can be a great alternative to CD's or bonds. I wouldn't buy one becausebI don't buy CD's or bonds.

[REWahoo]

Clarification in blue...

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If you buy a CD, you're giving loaning your money to a bank, they loan it out, subtract their expenses and profits, and give you the remainder in a stated rate, without charging you a sales commission. If you buy a traditional deferred annuity, you're giving your money to an insurance company, who pays the annuity salesman a commission from the money you gave them. If you buy an index annuity, the insurance company takes your money and pays the annuity salesman a big commission from the money you gave them.

[REWahoo]

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Originally Posted by Berkshire_Bull I didn't mean to hurt your feelings with my Vanuard comment...

You didn't hurt my feelings nor did you respond to any of my questions - and in not doing so, perhaps you did provide the information I was seeking.

On we go...

[Berkshire_Bull]

So the cost of the bank paying multiple branch vice presidents to surf the net and cashiers to chew bubblegum and gossip while waiting for someone to walk up doesn't affect CD rates? That's just free?

Fixed Annuities don't charge any loads or expenses, were you under the impression they do?

[REWahoo]

Quote:

Originally Posted by Berkshire_Bull So the cost of the bank paying multiple branch vice presidents to surf the net and cashiers to chew bubblegum and gossip while waiting for someone to walk up doesn't affect CD rates? That's just free? Fixed Annuities don't charge any loads or expenses, were you under the impression they do?

Sorry, I didn't mean to hurt your feelings.

[Berkshire_Bull]

Quote:

Originally Posted by REWahoo Sorry, I didn't mean to hurt your feelings.

You didn't, and if you had it wouldn't be a problem at all. I like a little banter back and forth as long as everyone is civil about it =)

[brewer12345]

Quote:

Originally Posted by Berkshire_Bull If you buy a CD, you're giving your money to a bank, they loan it out, subtract their expenses and profits, and give you the remainder in a stated rate. If you buy a traditional deferred annuity, you're giving your money to an insurance company, they're investing it in a portfolio of bonds and maybe some real estate, subtracting out their costs and profits, and give you the remainder in a stated rate. Obviously a SPIA is the same drill, just with actuarial assumptions about life expectancy. If you buy an index annuity, the insurance company takes your money, invests it in bonds and real estate, subtracts their costs and profit, and then buys options from a market maker like Goldman Sachs or Morgan Stanley on a stock market index, most likely the S&P 500. Rather than opting for a stated rate of return such as a CD or traditional fixed annuity, you're opting for a variable rate of return with your upside being the maximum of your crediting choice and the floor being zero. If the index rises the contract owner receives a percentage of the upside, or 100% of the upside to a certain cap, or a monthly averaging of the closing values of the index. A positive index means you're credited interest to the extent of your participation rate or cap, you can choose. If the index is negative the options the insurance company bought on your behalf expire worthless so your return is zero. This is worst case scenario. All contracts carry a "reset" which is usually annual. Any interest credited is permanent, and the insurance company buys a new round of options for you instead of crediting you a stated rate as with a CD or traditional fixed annuity. Your money is never actually in the stock market, thus fixed index annuities are not a security, although some salespeople may represent them as such, and well as misinformed message board members. Fixed annuities do not carry an expense either. None of them, and neither do CD's. An EIA is a lousy alternative to mutual funds or stocks, but can be a great alternative to CD's or bonds. I wouldn't buy one becausebI don't buy CD's or bonds.

Laughable. I do not like the strategy, but it is a no brained to just roll your own eia. Buying one means you pay the commission, the insurer's overhead, and their profit, while getting inflexibility and a huge lack of transparency. All that for a product anyone with a brokerage account can replicate in 15 minutes.