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Financial Rules of Thumb & When to do
Old 04-02-2011, 10:18 AM   #1
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Financial Rules of Thumb & When to do

I've enjoyed reading about all of your ideas, so time to share some thoughts of my own.

It seems like there is a great time and a less great time to own any financial instrument as measured by did you make money or did you lose money.

With stocks it seems:

If you buy enough companies, in enough sectors, and live long enough (17+ years), you will probably make money.
Which leads us to the stock rule. Only own stocks that went up while you own them.

With insurance always buy the cheapest policy by the strongest best paying company that makes enough profit that they are strong enough to pay your claim should you have one. Meaning I just use the carrier I have used all my life as not enough insurance savvy to know how to do this.

If it is not totally obvious I am kidding a bit on this, but it seems there are certain times to do the best on most anything.

I know the sentiment is against annuities and I have never been able to justify them over say owning long term treasuries (10-30 yrs) and stock. But I like the idea of a pension like check as part of the cash flow.

I read a thread here about maybe annuitizing when you were at risk of your investments paying less than you needed.

I was trying to think when a prudent person might buy an annuity just to give a pension like component to a cash stream at the best price. I assume it would be at a time when fixed income would also pay the most interest rates and preferably the older the better such that projected payout years for the insurance company is the least.

I am thinking of this as sort of a semi dementia/addled mind insurance when my investing skills may be diminishing.

Where would the sweet spot be as a buyer of this stuff assuming you kept the policy amount small enough to be covered by the state pension guarantee program?

Like at age 75 when interest rates are 15%?

Am very curious if other self investors plans to eventually diminish their day to day or periodic supervision and active management.
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Old 04-02-2011, 07:58 PM   #2
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I manage fairly actively now, for a mostly buy-and-hold but very slice-and-dice investor. Mostly research for interesting funds, rebalancing, and raising cash when things are going well. I'm sure I'll get tired of it eventually.

Some simplification will come when most of our portfolio is in IRA's and Roth IRA's. Taxes will be easier. Most of the stuff I'm doing now is not strictly required for portfolio maintenance. I can losen up the rebalancing targets if I want, or do it on schedule. But I'll always need to sell some equities to generate cash, as a "total return" investor. I hope to teach DW that skill before I get really tired of it...

Beyond that, not a lot of useful thought.
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Old 04-02-2011, 08:26 PM   #3
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I manage all my own investments (and my wife manages hers as well) - a mix of stocks, index funds, bonds, real estate, commdities and a few misellaneous items.

My father is 75 and still reseaches his own stocks, turns up to AGMs,visits his rental properties etc and shows no signs of asking anyone (including family) to help him manage anything.

I'm comfortable doing it, enjoy it and am happy with the results so far. I'm also deeply paranoid and suspicious realistic about the disconnect between the interests of the financial services industry and my interests and, at best, have only a limited amount of faith in the idea of someone else doing it for me.
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Old 04-03-2011, 06:26 AM   #4
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I hear you on the annuity. While I will be eligible for a lump sum on my pension, I've seriously considered taking part of it as an annuity (company has changed ownership three times in 20 years and so three different pensions).

There's always risk of the annuity (insurance) company bailing on you (see '07-08).

Problem is, the amount you have to give them is a big hurdle. Maybe it'll be better if interest rates go up, but then - of course - your inflation risk is higher.
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Old 04-03-2011, 07:09 AM   #5
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Two comments, on two of your statement/questions:

1. Insurance - I don't know of the type/policy you are speaking about (e.g. life insurance or income annuity/SPIA) but regardless, only buy it if you see the need. That is don't purchase (or over purchase) life insurance if you have few/none folks that depend on your income after you die, if you are speaking of life insurance.

2. Annuity purchase - I'll speak only about my view, since I/DW do have an SPIA (Single Premium Income Annuity).

Most guidance says "you should" purchase it at a later age (70, 80, or above) due to various good reasons; one of those being the better "return" when you take it later. However, most folks don't look at the return also consisting as a return of "your" money in that payback, which actually pushes the payment up and the return up at a later age.

To make this simple, a single life SPIA annuity (pays an individual for their life only) for a $100K premium at age 59 will currently pay $565/mo.

A single life SPIA annuity (pays and individual for their life only) for a $100K premium will currently pay $726/mo at age 70. Note that both estimates were from http://www.immediateannuities.com/

Why the difference? Not that one pays a superior interest rate but that the older person will be receiving payments for an estimated eleven years less.

I use this example to illustrate part of the decision process I used when I actually retired at age 59. Sure, I could have waited to get a "superior rate of return", however I looked at the realities. That superior rate of current return was not based upon interest rates, but simple mortality tables.

The other point about SPIA's (or any other similar product) is not what the current interest rate is, but comparing it to an unknown rate many years in the future. Heck, when I purchased my SPIA in 2007, the computed IRR on our policy was 4.79%, which is quite low by many standards, including the return on long term equity holdings.

But guess what happened? Interest rates (which some thought would go up) went lower. Additionally, if I would have used my retirement portfolio (my only source of income from 2007 to 2014) and realizing the losses of 2008, along with possible selling at the low point to provide my required income shows that maybe I did do the right thing.

I would suggest, based upon my actual experience is to look at an (SPIA) annuity in a manner that asks the question "can the annuity provide me with current income that meets my required income needs, today?" rather than why I opt for one today, when sometime in the future it may be advantageous to purchase one at that time?

That was the question in my situation. For those that retire a traditional age (62-67), are planning on taking SS immediately, and may even have traditional retirement income sources (such as a defined benefit - e.g. pension), than that immediate need for income is not as great, and may benefit from purchasing an SPIA far in the future, or maybe not at all.

While every situation is different - that is retirement asset base, additional retirement income sources, plans for spouse and plans for drawing SS, I just wanted to point out that delay of an SPIA to the future may not be preferable for somebody (like us) that needs income today. That's why "immediate" is in the name of the product...

Just one final point related to SPIA's & RMD's. Since we're fortunate in a way that we have estimated to have substantial "excess RMD's" at age 70.5, the SPIA removes a portion of our portfolio from RMD consideration, since a life annuity meets the requirement of equal withdrawls over a lifetime. BTW, I use the term "excess RMD's" rather than just RMD's. While anybody who has a TIRA will have RMD's at age 70.5 and beyond, the only "problem" is that you are forced (under existing law) to withdraw more (and pay immediate taxes) than what would possibly only be needed for day to day living expenses at that time of your life. Those required withdrawls beyond your needs are truly "excess", IMHO.
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Old 04-03-2011, 07:23 AM   #6
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There's always risk of the annuity (insurance) company bailing on you (see '07-08).
I don't actually recall hearing of any insurance company failing to pay its annuity obligations during recent ressions.
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Old 04-03-2011, 07:59 AM   #7
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I don't actually recall hearing of any insurance company failing to pay its annuity obligations during recent ressions.
There have been a number but they have been small(ish) and were generally not highly rated to begin with so it was not a shock that they finally fell over.
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Old 04-03-2011, 08:00 AM   #8
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- Only insure what you cannot afford to lose

- Liquidity and flexibility have a lot of value, especially when the commode hits the windmill
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Old 04-03-2011, 08:21 AM   #9
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There have been a number but they have been small(ish) and were generally not highly rated to begin with so it was not a shock that they finally fell over.
Thanks Brewer, good info, and important to stress to go with highly rated companies.
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Old 04-03-2011, 08:43 AM   #10
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There have been a number but they have been small(ish) and were generally not highly rated to begin with so it was not a shock that they finally fell over.
More importantly, how many policies were not covered by state guaranty programs?

Do you (or the OP who made the comment) have a list of companies? I would like to read more...
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Old 04-03-2011, 08:45 AM   #11
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More importantly, how many policies were not covered by state guaranty programs?

Do you (or the OP who made the comment) have a list?
I believe the little ones generally are easily covered by the state guarantee funds. The risk is that something big falls over and overwhelms the relatively modest resources of the funds.

The last major one that blew up and boned policyholders that I know of is Executive Life.
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Old 04-03-2011, 09:20 AM   #12
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....

Am very curious if other self investors plans to eventually diminish their day to day or periodic supervision and active management.

I plan to do just that... My goal is to create a reliable income stream till death and a reserve investment portfolio that requires little effort or complexity to manage.

I intend to use more balanced funds for the portfolio. Looking into the use of bond ladders for part of the fixed assets.

I am intending to buy a SPIA (laddered across several of the highest rated insurance companies). This will augment my pension and our SS.

DW does not understand how to manage investments. She understand managing a budget and is careful with money.... but that is about it.

I want to structure the assets such that if anything happens to me, that she would not be in a position to have to make big investment decision right away.

For that matter if she didn't watch it closely, I want to position it such that it would likely turn out ok.
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Old 04-03-2011, 01:44 PM   #13
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The last major one that blew up and boned policyholders that I know of is Executive Life.
But they did not offer SPIA's, did they?
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Old 04-03-2011, 01:58 PM   #14
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I read a thread here about maybe annuitizing when you were at risk of your investments paying less than you needed.

I was trying to think when a prudent person might buy an annuity just to give a pension like component to a cash stream at the best price.
I am planning to buy one at age 85, should I survive that long.

To expand on that, my financial plan goes to age 95, but if I live to 85 I will revise it so that it lasts to at least age 100 or more. Part of that revision will be to buy an SPIA immediate lifetime annuity or annuities with 1/4th of my portfolio or less, if needed.

Annuity rates should be pretty low at age 85. I probably won't need it for long, so the company risk and inflation risk would both be lower. I like the idea of having a steady income in my last years that doesn't require any attention. This would make things easier for me if/when my physical or mental condition deteriorates.
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Old 04-03-2011, 02:53 PM   #15
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I am planning to buy one at age 85, should I survive that long.
Ditto, and for the same reasons.
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Old 04-03-2011, 03:31 PM   #16
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But they did not offer SPIA's, did they?
Actually, they did offer payout annuities and some of the policyholders suffered reduced or delayed payouts.
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Old 04-03-2011, 04:48 PM   #17
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Some really good comments, ty. One thing I was just playing with the spread sheet was spending down roughly 10% of our net worth till the youngest of us is 70 and then taking social security.

I am almost paranoid about having too much in tax deferred stuff and having big RMDs so we may try to use the tax brackets effectively to move money out.
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Old 04-03-2011, 06:02 PM   #18
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More importantly, how many policies were not covered by state guaranty programs?
Isn't the state guarantee usually something like $100K?
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Old 04-03-2011, 06:20 PM   #19
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Isn't the state guarantee usually something like $100K?
Depends on your state; some cover up to $300K:

State Guarantee Funds
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Old 04-03-2011, 06:26 PM   #20
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I'm pretty sure that each state sets their own insurance rate that companies must pay to issue an annuity there. That is why they always ask your state when issuing a quote.

Per the Illinois Dept of Insurance as of oct 2010
Annuities (other than unallocated annuity contracts)
$100,000 in present value per annuitant

Also note the states don't necessarily guarantee any specific interest rate.

Combined Aggregate
No individual may receive benefits aggregating more than $300,000 from the Association

Imagine the way it is held legally makes a difference per what this said.

I found a specific site that lists liability limits of state funds but believe we are not to link other sites here so will just paraphrase.

Other than California which paid 80% not to exceed 250k, others had present value of annuity limits that ranged from 100k to 300k.

Apparently annuity sales people are not allowed to discuss these limits in some states as well. No idea if site is accurate or timely but seems so.
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