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Confessions of a VA Owner
Old 11-26-2010, 05:39 AM   #1
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Confessions of a VA Owner

Yeah, Yeah, Yeah... snicker all you want. Get it out of your system.

I noticed something interesting and wanted to share it and see what you think about it.

This is my defense... (before you heap disparaging remarks on me)

Back in the early 90's DW and I purchased VA's from VG (at least they are low cost). The reason is that tax rates were high, we were maxing tax deferred contributions in IRA and 401ks. We had extra money... it would have to go into a taxable account. But we were FIRE planning. So we contributed to it with excess money in the VA for several years. Eventually there were increases in IRA levels for contributions and 401k contributions... and tax rates lowered. We have not contributed money to the VA Since the late 90's. For the last decade, I have been putting excess investment money in our taxable account(s) because of lower tax rates and needing/wanting accessible money to FIRE at 55.


OK... now that I have rationalized my actions.

For guaranteed income during later retirement years, DW and I have SS and I have a pension. My pension does not have a COLA. We will do the SS 62/70 thing to to maximize the benefits of an early cash stream and a maximum cash stream from SS (for the survivor).

I have been taking a much closer look at SPIAs (and other annuity products for a payout). Some sort of annuity (maybe a ladder of several small ones) will be used to guarantee some level of income for DW and me. I want to provide a base income that is guaranteed (or as close as it can get). By base income I mean minimum acceptable lifestyle. I will round out our planned income... probably with a Bond Ladder. The rest of the portfolio will be in Mutual Funds. I digress.

To the point. I was looking at the VA contract. It has a GMWB (Guaranteed Minimum Withdrawal Benefit).

I compared our GMWB to a SPIA quote at Immediate Annuity... Our GMWB is about the same as a current SPIA quote.

I know that interest rates are artificially depressed so this is probably temporary. I looked at 10 year treasury rates when we purchased these things and rates were in the 5+% to 7% range during the year. Not sure how much those rates would play into setting the GMWB... But I am sure the insurance company was conservative.

I have no doubt that mortality tables have changed since we purchased them also.... reflecting longer life expectancy. I am sure that is reflected in the GMWB.


Now I am wondering if those VAs should be a rung in the annuity ladder. I have always been considering using SPIAs for that purpose up to this point.
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Old 11-26-2010, 05:50 AM   #2
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Confession is good for the soul - and "I was young and stupid" is a valid defense.

Now, go and sin no more.
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Old 11-26-2010, 07:54 AM   #3
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VA guarantees have become a lot less generous over the years as the more enthusiastic players got burnt. So you might have a contract with an excessively generous withdrawal benefit that you could use. Here is the hard part: these things are complex and often quite challenging to use in an optimal manner. This is intentional as the insurance industry makes Gawd knows how many billions a year from customers failing to exercise their options in an economically optimal way, and they want this state of affairs to continue.

If I were in your shoes and the contract were with a viable insurer that will survive, I would try to model out your options to see what made the most sense. If you are having a hard time doing that or simply want someone to check your work, there are independent consultants out there who will analyze your policy for a fee (these guys are generally actuaries and that sort of thing).
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Old 11-26-2010, 11:28 AM   #4
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Having income steams you don't have to think about is great. I have a small pension and will be taking SS at 62. At 63 I'm estimating those two income streams will provide about 97% of my budget. (That is 7.5 years away so I might be off.) It isn't that the pension and SS is a lot of money; it is that my estimated expenses are low - single person, no debt.

I know we like to maximize every dollar's return. But, if the VA brings you some peace of mind; I say keep it.
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Old 11-26-2010, 12:01 PM   #5
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Quote:
Originally Posted by brewer12345 View Post
If I were in your shoes and the contract were with a viable insurer that will survive, I would try to model out your options to see what made the most sense. If you are having a hard time doing that or simply want someone to check your work, there are independent consultants out there who will analyze your policy for a fee (these guys are generally actuaries and that sort of thing).
+1 on this. I never bought an annuity mainly because I never felt up to analyzing it and there were always other invetment possibilities. In spite of the generally negative attitude toward annuities around here, I think that in any set of contracts with varying terms, created over many different years, in comptetitive environments, some of them will be adventageous to the buyer/holder.

Ha
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Old 11-26-2010, 12:09 PM   #6
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I misstated some information. It is not a GMWB.

It is a Guaranteed Minimum Payout that sets a floor for the payout level if annuitized.

It can be annuitized as a fixed annuity or variable or a mix of the two. I am assuming that if one chooses fixed the pervailing bond rates will be used to set the payout schedule... but if rates are bad... the contract owner will get the minimum guaranteed rate.


Since a SPIA quote today is about the same as the minimum... it shows how bad rates are today. Immediate Annuity has some historic information on rates that are helpful for doing SPIA Analysis.
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