Do annuities fit into an ER plan? (SWR-related)

[wstu32]

azanon, i liked your post!

[brewer12345]

Quote:

Originally Posted by . . . Yrs to Go Maybe.* But annuities are fundamentally different from 30-year corporate bonds.* If you own a bond of an insurer whose credit starts to deteriorate you can sell it and get out with 99% of your skin intact.* If you were unfortunate enough to buy an annuity from the same company all you can do is sit and pray it doesn't keep getting worse. What do you wager the spread to treasuries would be on a 40 year 'Aaa' rated insurance company bond that, once bought, could never be sold?*

Like I said, we have had this discussion before and I am happy to agree to disagree. I personally think you are ignoring all of the extra protections afforded policyholders, since policyholder status is a far cry from being an unsecured creditor, regardless of the rating.

[cute fuzzy bunny]

Quote:

Originally Posted by ats5g I'm a little confused. Are you using a balanced portfolio SWR [with firecalc] to compare to the inflation adjusted annuity? For a 100% TIPS @ 2% real, I get a 40 yr 95% WR of $15,450 per year.

I probably used the 5 year treasury for the bond piece a la bernsteins 'stick with short term bonds for your bond piece, there is little risk premium for long term bonds'. I think its due to the frequent periods of deflation or sideways inflation tips dont always give very good results. I wouldnt expect a buttload of deflation going forward, but I could be wrong there.

I've got very little experience or knowledge with these, but I noticed the payout drops quite dramatically if you choose the "inflation protection" option with these, as I did and I think you didnt.

Granted you might be giving a more apples to apples comparison by using the pseudo vwelx variable option and counting on the equity piece to provide the inflation protection, but I'm sort of thinking that the people who would favor an annuity are probably trying to escape the "maybe not sure thing, at least historically" approach with volatility and loss risk.

I keep hearing 'guaranteed income stream for life' as the main mantra.

[Jane_Doe]

Two questions-

First, in th's scenario - $500k producing an income stream of just under $16k - if you just stuck the $500 k under your mattress you could pull over $12k out a year for 40 years before running out of money (I know not inflation adjusted, but still ....) To me it just doesn't make sense to hand over that kind of money to let them "pay you interest on your own money" and in the end they keep the prinicipal. Am I missing something?

Second question - slightly off topic - If a financial planner is a fee only planner, don't some take a percentage of your portfolio? Isn't that a worse scam than taking a percentage of your profits?! Or do most fee-only planners just charge an hourly fee? All I know is if I had accumulated a port of say, $2 mm, I sure wouldn't be happy to just had over say 1 - 2 % or more (yearly??) to someone who is simply advising me. Again, am I missing something?

Interesting subject. Sorry, Leonard, not trying to bash you - just trying to figure all this out - you seem like a nice person.

Jane

[cute fuzzy bunny]

No Jane, you're right on.

These guys are arbing your money. If they werent keeping more than they're paying out, they wouldnt be doing it. The very best you can do if you dont live longer than you should is to lose enough to make it worth their while to have taken you on as a customer.

You're paying a premium for 'sleeping well at night'.

[free4now]

Fee only planners do not take any percentage of your portfolio or profits. *The fee you explicitly pay them for service is their only compensation.

If a planner gets compensated by taking 1% of your portfolio per year and they sell you annuity or other products that have fees or costs of an additional 1% per year, that reduces your SWR in half from 4% to 2%. *So you have to live on half as much money. *

[cute fuzzy bunny]

A true statement, but not applicable entirely to the topic. You will pay vanguard a premium in fees and higher annual costs to do an annuity than buying the funds directly. Plus the insurer keeps your remaining principle when you die. Thats a pretty strong fee...

[free4now]

My "Fee only" comments were a response to the following:

Quote:

Originally Posted by Jane_Doe If a financial planner is a fee only planner, don't some take a percentage of your portfolio?* Isn't that a worse scam than taking a percentage of your profits?!* Or do most fee-only planners just charge an hourly fee?*

And I agree with () that the fees in annuity wrappers are burdensome and unavoidable no matter what kind of planner gets you your annuities.

[cute fuzzy bunny]

Ahhhhhh...

Then we agree!

[Gearhead Jim]

FWIW, I plugged our current ages (60/58) into the Vanguard inflation-protected annuity calculator, $100K would produce $3,973 per year if i remember correctly, adjusted for inflation.* That looks suspiciously like the 4% SWR we all talk about.

The annuity is illiquid, subject to some (slight) credit risk, and does not cover you when inflation exceeds 10% per year (hard to beat 10% inflation with anything unless you know in advance), and you leave nothing to the kids.

But it also requires no care, is not subject to panic-selling at the wrong time, and avoids the hassles of money management (for that portion of your portfolio).

The vehemence of some of the anti-annuity posts here makes me just as suspicious as the enthusiasm of some annuity salesmen.


When I used the FIRE calculator, putting 10%-20% of our portfolio in the Vanguard annuity increased our 100% SWR just a little over 50-50 stocks-bonds.* Higher percentages in the same annuity resulted in a slight reduction.* Some day I'll figure that out.

In the mean time, I don't have any annuity and don't plan to buy one soon.* But for SOME people it seems reasonable to put SOME of their portfolio in an inflation-indexed annuity from a stable company.

[mathjak107]

lets see ,an annuity...what a great idea for a money maker...you give us say 100,000 up front ..we then give you back your own money for 14 years...hmmmmm total return on investment zero...next ill give you 8,000 of the interest we earned over the last 14 years with your money...lets see 8,000 on 100,000 over 15 years is less then 1% return....year 16 i get another 8,000 so now we got 16,000 in 17 years on our 100,000.......boy these annuity companies got a great one here.....

[Gearhead Jim]

Yeah, kinda like a home insurance policy...

you give us several hundreds or thousands of dollars per year and we give you...* *nothing, if you're lucky.* But if you're unlucky (house burns down), then the insurance is the best bargain of your life.*

An annuity is similar in that you are "insuring" against the possibility of living "too" long, bad investment decisions, bad market conditions during your retirement, ulcers from worrying about your investments, etc.

Annuities have some significant downsides, as has been posted above (by me, too).* In my own case, having a modest fixed pension plus SS is enough "annuity" that I likely won't buy any more.

Your reply does not address the fact the the FIRE calculator shows a slight advantage, at least for some people, to having an immediate INFLATION-indexed annuity. When I run the same program with an immediate FIXED annuity, the results always come out worse.

"The vehemence of some anti-annuity posts here makes me just as suspicious as the enthusiasm of some annuity salesmen."* Still true.

[cute fuzzy bunny]

Can you share the way you induced firecalc to provide an advantage for the immediate inflation indexed annuity? I've tried every way from sunday to find an annuity approach that beats plain old investing over the long haul. Unless I figure i'm going to live well into my 90's (a statistical unlikelihood even with several people in my family having done so), I cant get it to turn that way.

As far as the anti-annuity, the moment someone shows me one that makes sense for more than a small portion of my investments (as another 'slice' in the 'dice as it were), I'll say some very positive things. As it stands, the primary advantages are it assures payment as long as you live and gives an emotional safety net. Note i'm not knocking those things, I just try to make sure I know that i'm buying emotional benefits with money. Sometimes thats a good trade. Right now every apples to apples comparison i've made on an annuity vs an equal standard investment shows me a 20-30% benefit financially to steer away from the annuity. Thats a stiff cost.

Face it, if these things werent a big money maker for the insurers that offer them, they wouldnt offer them. Someones paying for those profits. I dont think i'll be one of them.

The analogy to home insurance isnt entirely an apple to apple to me. If my home burns down or gets hit by a car, its an immediate and unrecoverable loss. I cant wait a while and watch the damage go away. There are few things that would result in permanent loss of funds from a well diversified investors stash. Those things (complete economic meltdown in the US, nuclear war, widespread pandemic, etc) would have such a fundamental effect on so many things that A) I dont think i'd be feeling too good about some insurance company making my payments for another 20 years and B) Even with a badly damaged or nearly wiped out portfolio, I'd still have a huge economic advantage over the masses of great unwashed regular working people.

Once again, you dont have to outrun the bear, just the other guy it can eat instead.

[Gearhead Jim]

I'm away from the data I used for the FIREcalc entry but i should be able to repost tomorrow. And I'm still puzzled why putting a small portion of my portfolio into an inflation-indexed annuity seems to help my portfolio survival, but putting in a larger portion does not. As mentioned, I could not find any combination for me where a fixed annuity helped, only the inflation-adjusted one could be useful.

I don't have an emotional stake in this argument, just trying to figure out what might work best for both myself and for others.

[brewer12345]

Quote:

Originally Posted by () Face it, if these things werent a big money maker for the insurers that offer them, they wouldnt offer them.* Someones paying for those profits.* I dont think i'll be one of them.

Hmmm, actually I think I can come up with a scenario under which an insurer would be happy to offer a payout annuity for a small profit. Imagine a big life insurance company with a lot of old fashioned life insurance policies on the books. When do they get hurt the worst? When lots of people croak before the actuaries have forecast them to do so. Not so pretty, right?

What if that insurer could sell a product which offered greater profits when people croaked early? Might the insurer be willing to sell that product at a lower rate of return (to the insurer) in order to hedge some of their existing risk? Sure. So a company with lots of life insurance policies might be willing to sell a payout annuity with rich benefits.

Not saying this is the way it works (it isn't), but sometimes things aren't quite as cut and dry as they might seem.

[laurence]

Hmm, interesting thought, brewer. But the company would have to control the buying pool, right? If they sold these small profit annuities to different people then held their life insurance policies, they could get a perfect storm of short lived life insurance holders and long lived annuity holders. I'm thinking a mailing that says, "A special offer to our current valued customers....".

[brewer12345]

Quote:

Originally Posted by Laurence Hmm, interesting thought, brewer.* But the company would have to control the buying pool, right?* If they sold these small profit annuities to different people then held their life insurance policies, they could get a perfect storm of short lived life insurance holders and long lived annuity holders.* I'm thinking a mailing that says, "A special offer to our current valued customers....".

Maybe, or maybe you just make sure that your pricing and underwriting are geared to attract certain populations to your products. You could also market through targetted channels to avoid getting stuck with the wrong demographic. Insurers have 100+ years of avoiding "adverse selection", although some choose to ignore all those years of painful experience in favor of pumping up the next quarter's results.

[laurence]

You know, the profits are so fat, you'd think there would be room for someone to enter the market, slightly undercut the competition and run away with phat market share....brewer, maybe we should PM about this.

Know any venture capitalists?

[wstu32]

I just dont trust any insurance companies.
I had a friend who worked for a major insurance co.
I can not verify or deny this story...
but he said the insurance co. have teams of attorney's to
"fight" any and most claims!

~if true, gotta make you sick!

[brewer12345]

Quote:

Originally Posted by Laurence You know, the profits are so fat, you'd think there would be room for someone to enter the market, slightly undercut the competition and run away with phat market share....brewer, maybe we should PM about this.* Know any venture capitalists?

The problem with this great idea is that there are already lots of players in the industry who are pricing annuities aggressively. To give you an idea, there is some arbitrage currently going on for healthy seniors who have some money moldering away in a CD:

- Step 1: cash in the CD
- Step 2: buy an immediate annuity (not inflation indexed)
- Step 3: buy a life insurance policy that pays out the amount of the CD principal on death and has guaranteed no-lapse premiums for life of less than the ammount the annuity pays every year

For the right individuals, you can set this up so the amount paid out by the annuity every year in excess of the life insurance premiums is greater than the interest they can get on the CD (plus the agent walks away with a big, fat commission check). In that case, the agent and customer win and either the seller of the annuity, life policy or both have made a mistake and will be very sorry in a few years...