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Old 05-16-2013, 05:11 PM   #41
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Originally Posted by allanlevy View Post

I am sincerely looking for numerically solid supporting or rebutting information. Heck I would even take a solid analysis report reference from an expert objective third party group, like consumers reports, if I could find one.
Here's another way of getting a numerically solid comparison.

Any VA will allow you to do the following:

- Pay a premium of $100k
- Accumulate your premium with investment returns, less a variety of fees (fund level and annuity level), providing a daily fund balance.
- Allow you to withdraw your balance, less some surrender charge, at any time
- Allow you to withdraw just a portion of your balance periodically

Let's say you want to start taking $875, in nominal dollars, 10 years after you buy it. That would be $10,500 per year. Any VA will let you do that, and then it will:
- Continue to calculate a fund balance daily. Now it is with investment returns, less a variety of fees, and less the $875/mo withdrawals.
- Continue this until both you and your spouse are dead, and pay the remaining balance to your beneficiary.

Of course, it's possible that the calculation above will lead to a zero fund balance before you die. If so, you can't make any more withdrawals.

The guaranteed lifetime withdrawal rider probably guarantees that if you do all of that, and your fund balance goes to zero, the company will continue making payments - assuming you followed a specific set of steps.

But, you pay some additional fee to get that guarantee. That means that your fund balance is lower at every point in time, including when you die. The benefit of the GLWB is that it will continue to pay monthly amounts even if the balance goes to zero before you die.

Got all that? If so, your numerically solid comparison is to calculate the balance on this VA and another VA, at various points in time and across various investment scenarios. See the difference in surrender and death benefits, and compare that to the value of the guarantee. This requires that you understand the fees on this product and some competitors product, and that you are thinking across various investment scenarios. But, you should't be buying a VA unless you are thinking about those things.

Most people on this board would suggest that you start your comparison with Vanguard because

Quote:
The Vanguard Variable Annuity offers low management fees, as well as low mortality and expense risk charges.
The average costs for the Vanguard Variable Annuity, at 0.58%, are more than 70% lower than the annuity industry
average of 2.28%, according to Morningstar, Inc., December 2012. That difference can save you an average of $1,700
a year in fees for every $100,000 you invest.*
Note that the Vanguard VA also has a version of a GLWB, but details vary. Their fee for the GLWB is 120 basis points.

I'm not trying to tell you this is a bad idea. I think some insurance companies have been slow to drop their guaranteed percents and may be giving people a better deal than they intended. But, you asked for numbers.
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Old 05-16-2013, 06:24 PM   #42
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I looked at a several VA. Generally they do go to zero not too long after you start taking payments (same thing for my equity indexed annuities). BUT your income doesn't go down for life. The things that cause the real account to go to zero include:
1) When you start taking payments your getting a fixed percentage to take out each year that is based on a virtual account guaranteed increase per year and your age. This is usually higher than the 4% safe withdrawal rate. This is taken off your real dollars account.
2) The fees every year are taken off your real dollars account, not the virtual account that is growing for you to get your guaranteed income. The fees can be based on your virtual account. This whittles things down out of the real account in a hurry.

But if you die before you start taking payments then your heir will generally get a chunk of change. It won't be as big a chunk of change as it would have been if it had been in the market due to the fees but the fees are buying you the life time income, should you need it.

In the models I got from the insurance companies if you start taking payments your real account slides to zero faster than you would think.
If the real account value shrinks then this would become a terrible investment. The assumption is the market performance keeps the real account value at at least the initial investment, hopefully substantially higher. Are you saying your ins agent on an equity based VA had the real account value depreciate towards zero with speed after your with drawl began? Yikes! Double yikes!! What were the WR rates that caused this (I am dealing with 5.25% WR)
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Old 05-16-2013, 06:43 PM   #43
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If the real account value shrinks then this would become a terrible investment. The assumption is the market performance keeps the real account value at at least the initial investment, hopefully substantially higher. Are you saying your ins agent on an equity based VA had the real account value depreciate towards zero with speed after your with drawl began? Yikes! Double yikes!! What were the WR rates that caused this (I am dealing with 5.25% WR)
My VA is a Prudential Highest Daily with Lifetime Income. Yes VA are terrible investments. It is alot easier if you think of them as an insurance product and not an investment. My WR is 5% at 65. They ran some very optimistic models, some historical models and some pessimistic models. Frankly I'm buying them for the guaranteed income so I looked at the models and just ignored the ones that were tweaked to be unrealistically favorable. If they happen then great. If not I've got the minimum they contractually promised me.

My annual fees are 2.8% per year and that doesn't include any of the fund fees. Those are probably another 1-2.5%. I would have to dig out the paperwork to be sure but lets assume 2% average. So my VA investment has to make at least 4.8% every single year just to break even. The funds are sort of funny funds. They aren't the ones you would buy on the street. My guess is the insurance companies have some influence on their fees which can change and their performance. Remember they want to keep your money, not give it back to you. So what is the likely hood that the return every single year will be at least 4.8%? I think it isn't likely. That is just to keep the value dead even. So yes, terrible investments.

But the virtual account goes up 5% every single year. And if your 2.8% account fee is off the virtual account then the fees are rising with that, not your real money account. Pretty tricky! (I don't think mine did this but some I looked at did.) So then you have a constantly increasing value over 4.8% to keep up with every year to just break even. Not so easy to do and probability of this happening is pretty low.

So why did I buy it? Because I wanted the guaranteed income and didn't care about getting the lump sum principal back. It also has an income doubler if I need health care assistance in my home or go to a nursing home. This is the reason the fees are a little higher than some others.

For my Prudential Highest Daily VA I judged that the highest daily feature was only good in the first several years. After that the fees will have taken their toll and then it's likely that the virtual money will out pace the real account value.

Edit: Despite what I've written above I'm still very happy with my purchase. They key with annuities is to really understand what your getting and what your giving up. If your happy with the trade-offs a particular product makes and it helps you achieve your goals then they can be a great fit. They aren't the end-all be-all for every situation and for every thing you get your either paying for it or giving something up somewhere else.
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Old 05-16-2013, 07:17 PM   #44
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If I understand your situation, you would make a single premium and then in 10 years receive 10.50% of your single premium each year for life (5.25% * the doubled annuity value).

By my calculations, if your then receive that 10.5%of your single premiums for 10, 20, 30 or 40 years your IRR is 0.32%, 3.80%, 4.96% or 5.44%, respectively. Obviously the longer you live and receive benefit payments then the better your return is.
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Old 05-16-2013, 07:26 PM   #45
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If the real account value shrinks then this would become a terrible investment. The assumption is the market performance keeps the real account value at at least the initial investment, hopefully substantially higher. Are you saying your ins agent on an equity based VA had the real account value depreciate towards zero with speed after your with drawl began? Yikes! Double yikes!! What were the WR rates that caused this (I am dealing with 5.25% WR)
Maybe , maybe not. It depends on your reason for buying it. Not only can the real value account go to zero quickly once you start taking withdrawals but so can the Guaranteed Death Benefit if one pays an extra fee for that. Even if you have already purchased, it is worth it to have your guy run the scenarios during the withdrawal phase under different market conditions. (I repeat myself). Once you get thru the years with heavy surcharges for redeeming it, you can possibly make another determination and can choose to keep it or cancel it.

I no longer have the simulations and data that I analyzed within the last few years, otherwise I'd share, but I did have them run projections once I started taking withdrawals. I was more than surprised to see the account values go to zero and the Death Benefit that I was paying extra for go to zero. Yes they would still pay me the contracted amount but "poof" there went my principle. That Guaranteed Death Benefit was not guaranteed when account values went to zero. Also a surprise.
Tricky wording, tricky fine print and tricky fees. One has to really study these products to know what they are getting.

As long as someone is willing to accept all of that in return for the contracted pay out and they fully understand it then so be it. It's their decision. We just try to help others understand enough so they do their own analysis and come to their own conclusion for their own situation.
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Old 05-16-2013, 07:36 PM   #46
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So here is my real world example. I bought my Prudential VA last year for $150K.

My current account value is $167,855 so I have a 11.9% appreciation. This is locked in for my lifetime income value. I selected an investment mix of 51% asset allocation and 49% bond. Probably way too conservative for this last year. But hindsight is 20/20. If I want to get out of the annuity right now I can get back $154K as there is a steep surrender fee of $13,500. My death benefit is $158,855.33.

My minimum worst case lifetime income value in July (my anniversary date) was $166,950 so I'm a little bit ahead of the minimum contractual guarantee. The highest daily value is locked in and will grow at 5% compounded until I'm 65. But, wait, there is another feature. The value of the virtual account is guaranteed to double at year 12. So far my highest daily with the compounded 5% guarantee isn't enough to get me ahead of that so I don't have a change in my guaranteed amount after 20 yrs. If I had been a little more aggressive with my investment selection I might have been but hindsight is 20/20...
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Old 05-16-2013, 08:04 PM   #47
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... The assumption is the market performance keeps the real account value at at least the initial investment, hopefully substantially higher. ...
And what magic is used to create a fund that can pay out for years yet never go down? And why would they share this magic with people like us?


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Old 05-16-2013, 09:46 PM   #48
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So here is my real world example. I bought my Prudential VA last year for $150K.

My current account value is $167,855 so I have a 11.9% appreciation. This is locked in for my lifetime income value. I selected an investment mix of 51% asset allocation and 49% bond. Probably way too conservative for this last year. But hindsight is 20/20. If I want to get out of the annuity right now I can get back $154K as there is a steep surrender fee of $13,500. My death benefit is $158,855.33.

My minimum worst case lifetime income value in July (my anniversary date) was $166,950 so I'm a little bit ahead of the minimum contractual guarantee. The highest daily value is locked in and will grow at 5% compounded until I'm 65. But, wait, there is another feature. The value of the virtual account is guaranteed to double at year 12. So far my highest daily with the compounded 5% guarantee isn't enough to get me ahead of that so I don't have a change in my guaranteed amount after 20 yrs. If I had been a little more aggressive with my investment selection I might have been but hindsight is 20/20...
What features did you like about your VAs compared to a single payment deferred income annuity?
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Old 05-16-2013, 10:18 PM   #49
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What features did you like about your VAs compared to a single payment deferred income annuity?
Two things. This particular VA has an income double for home health care (must lose two activities of daily life) and nursing home confinement. No other one I looked at had the home health care component. I also have 3 equity indexed annuities. I'm pretty sure the caps and participation rates won't allow me to get more than what the minimum guarantee is. I plan to have this money accumulating for 20 yrs. The VA gave me a way to get more out of the market if it should go up, up, up. With the quantitative easing who knows what will happen.
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Old 05-16-2013, 11:03 PM   #50
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First thanks very much for this calculation. Its interesting to me that you do this based upon only the cash flow of the draw amount annual for the duration (correct?). So you assume 0 return of principle at the end of the duraction making the assumption that the actual cash value is zero (or negative) and only the account balance provides the return. OK (or at least that is what I think you are doing.

In contrast, I ran scenarios for 5-8 (ok even 10)% market performance of the equity fund the VA is wrapped around. That does change the ROI different from the method you describe above. The other thing is the effect of tax deferred account, and the probability of increased payout amounts due to the resetting (increasing) of the income base over time as a function of market volatility. How does one model that on the ROI, which presumably has some lift aspect to the return (no? wishful thinking on my part?

Finally, just as a point of comparison on the 20 year duration I came up with an ROI of 3.7% and 4.2% respectively when the underlying equity fund performance is 6% and 8% respectively. Not to distant from your 3.8% figure.

Thx again!
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Old 05-16-2013, 11:07 PM   #51
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If I understand your situation, you would make a single premium and then in 10 years receive 10.50% of your single premium each year for life (5.25% * the doubled annuity value).

By my calculations, if your then receive that 10.5%of your single premiums for 10, 20, 30 or 40 years your IRR is 0.32%, 3.80%, 4.96% or 5.44%, respectively. Obviously the longer you live and receive benefit payments then the better your return is.

First thanks very much for this calculation. Its interesting to me that you do this based upon only the cash flow of the draw amount annual for the duration (correct?). So you assume 0 return of principle at the end of the duraction making the assumption that the actual cash value is zero (or negative) and only the account balance provides the return. OK (or at least that is what I think you are doing.

In contrast, I ran scenarios for 5-8 (ok even 10)% market performance of the equity fund the VA is wrapped around. That does change the ROI different from the method you describe above. The other thing is the effect of tax deferred account, and the probability of increased payout amounts due to the resetting (increasing) of the income base over time as a function of market volatility. How does one model that on the ROI, which presumably has some lift aspect to the return (no? wishful thinking on my part?

Finally, just as a point of comparison on the 20 year duration I came up with an ROI of 3.7% and 4.2% respectively when the underlying equity fund performance is 6% and 8% respectively. Not to distant from your 3.8% figure.

Thx again!
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Old 05-16-2013, 11:22 PM   #52
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What features did you like about your VAs compared to a single payment deferred income annuity?
Alas I will admid not comparing the VA to the single payment deferred income annuity. Perhaps I should have.

What I did do is compare it to a bond. Its characteristics are similar to a higher quality corp 30 year bond (paying about 4.5%), but with diversified characteristics un-shared by bonds (eg., protection for the longevity tail risk, and possible upside potential should equity market performance be in excess of 8%), with perhaps comparable safety characteristics.

I also compared it to cash, which I had sitting totally idle, feeling a bit concerned about the market at all time high right now, so not particularly feeling good about entering it in bulk, and interest rates in cash being particularly stupid right now, so not feeling good about leaving it in cash. So moving into VA gave me something to do way better than cash, comparable but different than bonds, maybe an upside potential to equity exposure, comparable safety to higher quality corporate, and the potential for increased upside value should my wife and or I live the long tail.

These threads however and my retrospective numerical analyses does make it clear to me that VAs are an expensive product relative to what they produce. Hmmm, isn't that what the initial flurry of responses to this thread were telling me!!
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Old 05-16-2013, 11:51 PM   #53
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It's astonishing what some people expect to get for zero consideration.
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Old 05-17-2013, 08:24 AM   #54
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The question in the heading of your thread was "are they worth it or are they too expensive"...
In every possible piece of research you can perform, the expense is usually the first "con". Your withdrawals will be taxed at ordinary income tax rates rather than dividend or cap gain rates and if you have any left at your passing, your heirs will not get the stepped up basis that equities or other vehicles provide.
Those are the some of the reasons that "responsible" financial planners tell you not to invest all of your money in these. Only invest 10% to 20% or a small portion (if any).
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Old 05-17-2013, 08:33 AM   #55
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Alas I will admid not comparing the VA to the single payment deferred income annuity. Perhaps I should have.

What I did do is compare it to a bond. Its characteristics are similar to a higher quality corp 30 year bond (paying about 4.5%), but with diversified characteristics un-shared by bonds (eg., protection for the longevity tail risk, and possible upside potential should equity market performance be in excess of 8%), with perhaps comparable safety characteristics.

I also compared it to cash, which I had sitting totally idle, feeling a bit concerned about the market at all time high right now, so not particularly feeling good about entering it in bulk, and interest rates in cash being particularly stupid right now, so not feeling good about leaving it in cash. So moving into VA gave me something to do way better than cash, comparable but different than bonds, maybe an upside potential to equity exposure, comparable safety to higher quality corporate, and the potential for increased upside value should my wife and or I live the long tail.

These threads however and my retrospective numerical analyses does make it clear to me that VAs are an expensive product relative to what they produce. Hmmm, isn't that what the initial flurry of responses to this thread were telling me!!
Comparing cash or bonds to a VA is not an apples to apples comparison. With the former, you still have access to your principal, can sell presumably without penalty or fees, can move your money around based on interest rate environment, etc. After this thread perhaps that has become apparent.
Good luck to you.!
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Old 05-17-2013, 09:37 AM   #56
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These threads however and my retrospective numerical analyses does make it clear to me that VAs are an expensive product relative to what they produce. Hmmm, isn't that what the initial flurry of responses to this thread were telling me!!
Yes and no. Yes if you are trying to get the same performance of the stock market on the upside. No if you want to get some of the upside but still want to guarantee an income for yourself that has a baseline minimum. I fell into the guaranteed income camp.

To use my real world example of the VA I bought last year. I put $150K in. I picked three funds and got $17,855 appreciation. But lets say I put $150K in and lost $17,855 because the market went down. My account would be worth $132,145. If I were in the market I might be worried about this and wonder if I could make it back.

In the annuity I don't worry because I get $166,950 of accumulated value no matter what. Yes, death benefit is the lower real money value but the income I get in old age isn't affected. In my mind the peace of mind is what your buying with all the fees and for me it is worth it.
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Old 05-17-2013, 09:52 AM   #57
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Yes and no. Yes if you are trying to get the same performance of the stock market on the upside. No if you want to get some of the upside but still want to guarantee an income for yourself that has a baseline minimum. I fell into the guaranteed income camp.

To use my real world example of the VA I bought last year. I put $150K in. I picked three funds and got $17,855 appreciation. But lets say I put $150K in and lost $17,855 because the market went down. My account would be worth $132,145. If I were in the market I might be worried about this and wonder if I could make it back.

In the annuity I don't worry because I get $166,950 of accumulated value no matter what. Yes, death benefit is the lower real money value but the income I get in old age isn't affected. In my mind the peace of mind is what your buying with all the fees and for me it is worth it.
and be done with it?
If all you are worried about is the guaranteed income portion why not buy just an immediate annuity?
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Old 05-17-2013, 10:50 AM   #58
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and be done with it?
If all you are worried about is the guaranteed income portion why not buy just an immediate annuity?
I did look at those but for me they don't work as well. I bought mine at 45 and plan to allow the annuities to accumulate for 20 yrs before drawing income. Income now would just be another thing to get taxed.
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Old 05-17-2013, 11:02 AM   #59
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It's astonishing what some people expect to get for zero consideration.
+1

I'm constantly amazed that people seem to think they can offload risk on someone else, w/o paying a high price plus overhead. As if the person on the other side of the transaction is saying 'sure, I'll take the risk, no problem!' We see it with stock options also.

That said, annuities do have the advantage of pooling risk, which (AFAIK) an individual can only obtain by buying into the pool through something like an annuity (or delaying SS, or pension). So I try to keep an open mind, and will consider them if/when that longevity insurance appears to be a reasonable trade-off for me.

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Old 05-17-2013, 11:21 AM   #60
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I did look at those but for me they don't work as well. I bought mine at 45 and plan to allow the annuities to accumulate for 20 yrs before drawing income. Income now would just be another thing to get taxed.
You can buy deferred payout immediate annuities (sometimes known as "longevity insurance"). You pick how long you want to wait for them to start paying out.
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