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Old 07-05-2011, 09:48 AM   #21
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Some people on this forum seem to have a big bias against them... and dismiss them as a bad idea period!

I do not agree with that position at all.
I don't dismiss SPIAs in the general case; I've said before that depending on the circumstances I would be willing to *consider* putting a part, maybe 1/3, of our portfolio into one to help provide a secure "baseline" income stream. But I do think they are a terrible deal *right now* given the low interest rates that jack up the price of an income stream.
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Old 07-05-2011, 09:49 AM   #22
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Everything I read say I am doing it wrong if doing it differently is wrong.

As far as the GAO report goes, I think it would be good if employers offered an annuity option but the devil is in the details. I've seen some of the 401K's offered to employees that were awful with high fees and poor or inadequate selections. I don't know that I would want to depend on the employer for selection of an annuity insurance company. Also, NOOOOO, to annuity defaults. The people I worked with were smart and highly educated but chose to remain quite ignorant of their retirement needs. I don't think they would even know that, if they didn't want an annuity, they would need to declare this before they defaulted to it. Also, they would make about 0% on a test on their knowledge of annuities.

I would like to know what people think about the "Deeply deferred annuities, or longevity insurance" recommendation. Certainly my extremely negative reaction means I don't understand this so I won't offer that extremely negative reaction.

I kept thinking as I read this that people don't need more retirement babysitting so much as they need protection against unscrupulus providers, including financial advisors and managers.

Advice to lowest quintile case - "Continue working and accumulating assets, if possible. Delay Social Security. That person's assessment of their health at 58 is "fair", the lowest of the self-assessments in the 5! cases considered. I was surprised that someone making $22,000/year didn't get more than 50% ($11,000) from Social Security. This is just about the single person poverty level in 2011 of $10,890 average for US. The CPI will put this person over the line into the poverty level quickly since it doesn't keep up with senior type inflation. No wonder there are so many seniors in poverty despite the intent of Social Security. I hope this person lives in one of those low cost states or can get assistance from other programs.

I wonder how "high" income that last person is today if their investments are in real estate and the numbers were as of 2008. Which was my main thought as I read this - life happens.

Oh, by the way, I am not against good annuity products.
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Old 07-05-2011, 09:53 AM   #23
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It is not the right move for me.... should not be extrapolated into... it is not right for everyone else.
You understand perfectly (tip of the hat, to you) ...

I guess I have a problem (a big one, actually) in anybody saying in any public forum you should ...
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Old 07-05-2011, 10:05 AM   #24
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In early 2010, there was a task force examining how the administration might increase retirement security by changing policies related to annuities. There was at least one thread on the topic:
Annuities wholesaled by Obama administration?

Now it's the General Accounting office's turn:
Delay Taking Social Security, Add Annuity to Survive Retirement, GAO Says - Bloomberg
"The GAO study was requested by Senator Kohl, a Wisconsin Democrat and chairman of the Senate Special Committee on Aging.
The full study is available here: http://www.gao.gov/new.items/d11400.pdf

The report has this subtitle, which will be news to very few here on the board:

"Ensuring Income throughout Retirement Requires Difficult Choices"
Thanks for posting. I thought that subtitle was appropriate.

I like data, so I thought some of the statistics were interesting.

The text seemed good. It seemed to cover the basics. I liked their discussion of SS vs. private annuities, for example.

They could have done something with the question of why people don't annuitize today, I think that's pretty key to the issue if the goal is policy recommendations. Are they unaware? subject to myths? worried about inflation? deliberately keeping assets for risks or legacies? Maybe I skimmed and missed that.

In terms of policy changes, I see a real risk with employers getting too close to annuity providers. If we reduce the employers fiduciary responsibility, then it seems we've got the possibility of some compensation for getting the inside track.

It's not clear to me that most people should annuitize DC funds. I know the "experts" may differ, but what do those experts do themselves?

The only change I could see would be in terms of education. Maybe an annual report (like the now-defunct SS report) which says "Your current balance is ___ If you keep contributing at your current rate, it could be this ___ at age ___. We've looked at a couple annuity quotes, that balance would convert into a monthly income of ____ based on today's quotes."

The primary benefits of that would be to make people aware that there is something called an "annuity" which might relate to retirements, and to demonstrate that the big lump sum really doesn't buy much monthly income.
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Old 07-05-2011, 10:27 AM   #25
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I would like to know what people think about the "Deeply deferred annuities, or longevity insurance" recommendation. Certainly my extremely negative reaction means I don't understand this so I won't offer that extremely negative reaction.
I'm not sure how these products fit into the "state guarantee pools" -- not that I think too highly of them in any case. Theoretically, all companies that sell any type of insurance in a state are to "step forward" in the event of a failure of a company to pay on going benefits and make the beneficiary whole. A deeply deferred annuity isn't paying out but it is paid for.

In the case of a SPIA failure, annuitants have been made whole by the definition of the insurance companies but I know people that waited up to two years to finally get things straightened out. It was not to their satisfaction.

LTC insurance by a failed plan that is not yet paying is just that, failed. The person can then buy a new policy at whatever the prevailing rate is if they can qualify. If the LTC is being collected on, then the state insurance pool applies. I don't know how this works in practice.
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Old 07-05-2011, 11:38 AM   #26
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I was surprised at the answer: Kohl self-finances over 90% of his campaigns. He has also announced he will retire when his term ends.
Yes, that was just a reflexive shot at Herb Kohl, who is a very high class person. Way too honest to be a politician.

Ha
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Old 07-05-2011, 12:32 PM   #27
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Everything I read say I am doing it wrong if doing it differently is wrong.

As far as the GAO report goes, I think it would be good if employers offered an annuity option but the devil is in the details. I've seen some of the 401K's offered to employees that were awful with high fees and poor or inadequate selections. I don't know that I would want to depend on the employer for selection of an annuity insurance company. Also, NOOOOO, to annuity defaults. The people I worked with were smart and highly educated but chose to remain quite ignorant of their retirement needs. I don't think they would even know that, if they didn't want an annuity, they would need to declare this before they defaulted to it. Also, they would make about 0% on a test on their knowledge of annuities.
I agree.

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I would like to know what people think about the "Deeply deferred annuities, or longevity insurance" recommendation. Certainly my extremely negative reaction means I don't understand this so I won't offer that extremely negative reaction.
.
Let's be clear on the idea. You pay the insurance company a lump sum at (for example) you age 65. The insurance company owes you a monthly benefit starting at 85. If you die before then, you get nothing.

Because half the 65 year olds will die before they get to 85, and the company has 20 years to earn interest on your money, the survivors get a pretty good payout compared to their premiums.

To me, the benefit is that I don't need to "insure the risk" of living the first 20 years. I just plan for that and make scheduled withdrawals from the funds I didn't use for the annuity. Because I've got a fixed date when the annuity begins, I've taken the mortality uncertainty out of my planning.

Then I use the insurance company only for the risk that's worth pooling, which is the chance of living unusually long.

That concept makes a lot of sense to me. Buy insurance for unlikely events, plan for likely events. The catch is that the insurer carries all the long-tail longevity risk. The insurer is going to use conservative assumptions on future improvements in mortality, and that makes the numbers worse.

I don't see any unusual problems with state guarantee funds. If the insurer goes under, I just become a claimant whose expecting a stream of monthly payment, which may not have started yet.
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Old 07-05-2011, 12:59 PM   #28
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It's no different. We did not pay a fee for our SPIA. Any costs are recovered by the insurance company (FIDO), and they are taking the investment risk - same as a bank with a CD.
You paid a fee for your SPIA, you just didn't see it..........
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Old 07-05-2011, 01:00 PM   #29
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Yes, that was just a reflexive shot at Herb Kohl, who is a very high class person. Way too honest to be a politician.
Ha
Really? How long have you known Senator Kohl?
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Old 07-05-2011, 01:40 PM   #30
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Because half the 65 year olds will die before they get to 85, and the company has 20 years to earn interest on your money, the survivors get a pretty good payout compared to their premiums.
The insurance company gets a pretty good payout too... as long as medical science doesn't figure out a way to triple the survival rates of Alzheimer's patients.
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Old 07-05-2011, 02:05 PM   #31
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Much of the debate is rooted in people mismatching the assets (they think they will wind up with more) and the associated risks (real chance of having less).
I think much of the debate is caused by some not distinguishing between the theoretical cost of an annuity for a given interest rate and life expectancy, on the one hand, and on the other, an actual product you can buy from an insurance company.
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Old 07-05-2011, 02:07 PM   #32
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The insurance company gets a pretty good payout too... as long as medical science doesn't figure out a way to triple the survival rates of Alzheimer's patients.
I think we'd have to study a pricing model to see what "pretty good" means. I'm going to guess that tripling survival rates of Alzheimer's patients would more than wipe out the profit margins.

That's the rub. Insurers want to insure a lot of people with non-correlated risks. The possibility of medical advances is a non-diversifiable risk to them, and hence I'd be concerned that they are pricing that pretty conservatively.

(I was going to say "they" was a stretch. But according to this source, at least five companies offer the product. Longevity insurance solves one problem, but not without downsides Robert Powell - MarketWatch )
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Old 07-05-2011, 02:10 PM   #33
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I think much of the debate is caused by some not distinguishing between the theoretical cost of an annuity for a given interest rate and life expectancy, on the one hand, and on the other, an actual product you can buy from an insurance company.
The thing is, insurance companies are pretty good at pricing risk in "old age" policies when there isn't an unknown in the cost of servicing the policyholder in old age. In an annuity, the life expectancy isn't known but the cost to insurer is known in terms of their liability per year.

With products like health insurance and long term care, insurers often underpriced their product by underestimating the persistent and rampant inflation in providing these benefits, and it's those which are in trouble. Over a large group of insureds, it's not hard to properly price an annuity or life insurance. Coverage related to the cost of senior care, on the other hand, is harder to price.
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Old 07-05-2011, 02:24 PM   #34
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Over a large group of insureds, it's not hard to properly price an annuity or life insurance.
I agree that it's not hard to properly price them. But that is not the issue I raised.
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Old 07-05-2011, 02:32 PM   #35
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I agree that it's not hard to properly price them. But that is not the issue I raised.
The point is they can and do offer the product, whereas many are pulling out of markets like LTCG because of pricing issues. Of course there's a difference between what insurers offer and the theoretical expectancy based payout. There are two reasons for this:

1 -- The insurer is a for-profit business and if they paid out 100% of the real expected annuitization based on life expectancy and interest rates, there would be no profit and hence no reason to offer the product.

2 -- Self-selection bias among annuitants. If you're 60 years old and you're somewhat sick and have a family history of ordinary life expectancy at best, you're a lot less likely to buy a SPIA than someone who is very healthy and has a family history of longevity. Thus I would expect the "average" SPIA customer to have a longer life expectancy than would be merely predicted by their current age -- and again, the insurer has to account for this by reducing the payout to be more in line with the life expectancy of the typical annuity customer rather than the overall life expectancy.

Still, these are easy to price and the insurer knows their exposure per year.
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Old 07-05-2011, 02:47 PM   #36
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My hub works for one of the large financial services companies mentioned in this thread related to annuities. He is inundated with information about them, to buy them, how they will help us to survive, etc.

I can't help but be suspicious because we are getting emails, mailings, he is bombarded at work....it is their strategy to make money off of the money we already paid to them for fees.....like a churn to me.

He is hassling me to make an appt with one of their reps, and I am dragging my feet.
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Old 07-05-2011, 03:36 PM   #37
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My hub works for one of the large financial services companies mentioned in this thread related to annuities. He is inundated with information about them, to buy them, how they will help us to survive, etc.

I can't help but be suspicious because we are getting emails, mailings, he is bombarded at work....it is their strategy to make money off of the money we already paid to them for fees.....like a churn to me.

He is hassling me to make an appt with one of their reps, and I am dragging my feet.
I am probably the most consistent voice against annuities. The only one I see any reason for is a SPIA. The only time "normal" people would want one is to create a comfort zone on insurance company guaranteed (not FDIC) income that simulates a defined benefit pension (which is guaranteed by the Federal govt). The total of SS and annuities would equal a minimum income for their existence as a theoretical safety net. I would only recommend this if someone felt truly worried about their ability to manage their money, are very healthy and come from a longlived family. I would also limit any annuity purchase to less than 20% of any portfolio. They should also be bought as late as possible to reduce inflation risk, unforseen heath problem development and to increase payout.

Other annuities for "normal" people are akin to criminal fraud IMHO. This includes all forms of variable and index annuities. The more riders attached the worse they become.

Back to your comment. Have you and DH worked out a comprehensive retirement path forward? The last thing you want to do is to walk into an insurance salesman's office without a plan. If you do, he's selling hammers and all your problems will look like nails.
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Old 07-05-2011, 03:40 PM   #38
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I've often wondered why insurance companies don't "underwrite" for their annuity products. After all, it's the reverse situation from life insurance products - for which underwriting is nearly always a given. I've always assumed they do some sort of "least common denominator" approach or in some fashion factor in the fact that annuity customers self-select for their generally good health. In any case, not too many insurance companies seem to consistently lose money (not and stay in business).

So apparently, most know what they are doing. I'd bet the longevity/mortality issues of both life and annuity business is the LEAST problem insurance companies have in making money. They DO seem to get this right most of the time. I assume the volatility of the markets they invest in is the big issue for the most part.
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Old 07-05-2011, 03:55 PM   #39
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I've often wondered why insurance companies don't "underwrite" for their annuity products. After all, it's the reverse situation from life insurance products - for which underwriting is nearly always a given. ...

They do... but it is up to you to tell them. If you can prove a health problem that might lead to an early death, they may increase the annuitant's payout. Otherwise they assume you are healthy.

Medically Underwritten Annuities | Rated Age Determination

There have been some studies that indicate that insurance companies are conservative in pricing of annuities because of concerns about anti-selection (assumed healthy people buy that are not expecting to die early)
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Old 07-05-2011, 03:56 PM   #40
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I've often wondered why insurance companies don't "underwrite" for their annuity products. After all, it's the reverse situation from life insurance products - for which underwriting is nearly always a given.
Most annuity products involve lump sums, whereas most life insurance products do not................ $100,000 into an annuity which pays out 10 years from now is much easier than a guy giving them $20 a month for $500,000 of life insurance..........
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