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Another VA Question
Old 09-13-2013, 06:21 PM   #1
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Another VA Question

I am new to the forum. I have done a search on the threads about variable annuity's and it looks like most people here are against them for various reason. Here is my situation. My wife and I make a very modest income. We have managed to put some money away but no where near what most people here have. My wife and I are both 61. I am going to retire no later than 65 and maybe 62. My question is if a VA is not the answer what is safe investment that will give me 5%+ interest. I am too old to ride the market. I can't afford to take a loss.I will need to start drawing on this investment in the year I retire.
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Old 09-13-2013, 06:30 PM   #2
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VAs cannot make something out of nothing, meaning if you are undercapitalized they will not solve your problem. In fact, they are likely to exacerbate your problems.

Instead, lets look at the whole picture. What are your expenses? How much scratch do you have? how much will the two of you receive in social security? Any pensions?
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Old 09-13-2013, 08:53 PM   #3
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With our expenses at 65 we can easily get by with SS and about a 5% interest on our nest egg. A VA would get me that. Again I am not sold on a VA I just want something that is safe so I don't out live my money and there is something for my kids when we are gone.
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Old 09-13-2013, 11:22 PM   #4
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Please elaborate on how a VA is going to give you 5% on your nestegg. Be specific.
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Old 09-13-2013, 11:53 PM   #5
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Gee, I didn't know you could get a safe 5% interest anywhere these days ...
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Old 09-14-2013, 06:35 AM   #6
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I didn't either - I'm keen to hear OP's answer.
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Old 09-14-2013, 07:22 AM   #7
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I have been looking at a Transamerica VA. Pay's a minimum of 5% interest. At 65 can withdraw at the rate of 4.8% of the total. From what I have read it will transfer to my spouse if I die and whatever is left after my spouse dies would go to the heirs.
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Old 09-14-2013, 07:59 AM   #8
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Have you actually read and digested the entire prospectus?
Do you understand all the fees and charges they will take out of your money before paying you anything?
Do you realize what will happen if they don't make as much out of your invested funds as they "assume" they will?
Do you understand the insurance you will have on your principal and who (if anyone) guarantees it?

There is really a lot to consider with these instruments, and most purchasers buy them after only skimming the prospectus. Instead, they rely on what the seller tells them, since that seems much easier to grasp.

"Trust but verify."
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Old 09-14-2013, 09:15 AM   #9
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You are not getting 5% gain per year on the amount invested in the VA. Part of the 5% returned to you is the principal that you turn over to them initially.
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Old 09-14-2013, 09:26 AM   #10
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Originally Posted by MN JIM View Post
With our expenses at 65 we can easily get by with SS and about a 5% interest on our nest egg. A VA would get me that. Again I am not sold on a VA I just want something that is safe so I don't out live my money and there is something for my kids when we are gone.
I assume you're thinking about a VA with some sort of "Guaranteed Lifetime Withdrawal Benefit" which is fixed at 5%.

That isn't "interest". It's partially investment earnings and partially a return of your principal.

Also, it's not guaranteed to keep up with the CPI. You're still exposed to a down market. Ask for an illustration that assume 0% gross investment returns and see what happens to your income and balance.

An alternative would be a regular Single Premium Immediate Annuity. It also provides a guaranteed monthly income, using both investment returns and principal. Generally speaking, insurance companies incur lower expenses on SPIAs than on VAs, so an SPIA may be a better deal.

For example, the initial monthly benefit on the SPIA may 6% of your premium. So, you can put 5/6 of your assets in the SPIA and still generate the same monthly income as you would get from 100% of your assets in a VA. The remaining 1/6 of your assets provides an emergency fund or some offset to inflation.

SPIAs are priced off bond yields, which are very low right now. So benefits are not that great. However, note that if some of your VA assets go into bonds, you're buying into the same low yields.

Most people on this board who have looked at VAs come away with an or maybe a response when they see the expense loads. They can usually assemble some SPIA + mutual fund solution which gives a better result.
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Old 09-14-2013, 10:46 AM   #11
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Quote:
Originally Posted by MN JIM View Post
I have been looking at a Transamerica VA. Pay's a minimum of 5% interest. At 65 can withdraw at the rate of 4.8% of the total. From what I have read it will transfer to my spouse if I die and whatever is left after my spouse dies would go to the heirs.
It sounds like you have gotten the sizzle, but not actually bitten into the steak as of yet. These products have actual contracts that routinely top 250 pages long. Some of them are so complicated and have so many embedded gotchas that even I don't fully understand them and I have an MBA, a CFA charter and have spent most of my career dealing with the companies that issue these products (I talk to lots of actuaries and have been repeatedly mistaken for one by insurer senior management). Then you have the frequently ignored issue that whatever guarantee you buy with these products is only as good as the insurer's balance sheet. Lots of VA buyers are finding out that insurance companies can get into trouble when the guarantees come into the money. I would strongly urge you to stay away from this type of product.

If you have a dollar gap in your projected budget, I would suggest that you figure out how to bridge that gap with non-complex solutions. I see three main ways to do this and you could do a mixture of them:

- SPIA: as others have indicated, this is pretty simple. You will have inflation risk and you will have to shop carefully to pick a strong insurer.

- Traditional portfolio: Something like Wellesley, Wellington or another balanced fund might be a good choice. You will be exposed to market volatility, but chosen carefully you should be able to get at least a 3% yield which would go a long way toward you being able to get what you need.

- Wage income: You could work a little longer to pile up more scratch, do a little part time work to help bridge any income gap that your slightly undersized portfolio leaves you with, or simply find some small hobby type business that you would enjoy doing that helps bring in a bit of money. The last option is particularly attractive because you would have all kinds of tax flexibility that W-2 income does not afford you.

I wish there were a magic source of insurer returns that would solve your problem, but insurers face the same capital market environment that we do as is discussed here: Life, Investments & Everything: The Limitations of Magic Factories
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