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How safe is Immediate Annuity?
Old 08-15-2008, 02:22 PM   #1
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How safe is Immediate Annuity?

I'm thinking about getting a $200K immediate annuity for 15 years for about $1,484/month.

Is it a good idea? Is there better alternative? The one thing I'm really worry about its safety since annuity is not insured.

I'm also thinking about opening an ING Orange interest paying account and set it up to do a monthly transfer of $1,500 to my regular checking account until it runs out.

Advises are welcome.
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Old 08-15-2008, 02:46 PM   #2
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Insurance policies (like your annuity) are indeed not backed by the federal government. There are state guaranty funds, but the protection offered by them is weak. So the safety of your policy really rests on the creditworthiness of the insurer.

Buying a SPIA is akin to buying a senior secured bond issued by the insurer. Would you sink $200k into such a bond issued by one company? If this is 10% of your assets, it might be OK if you pick carefully. If it is 50% of your assets, I would suggest you reconsider.

I would insist on buying such a product from an insurer rated at least Aa3/AA-, or higher. If you would like an opinion (which would only be that) as to the creditworthiness of a particular company, I would be happy to offer one.
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Old 08-15-2008, 03:06 PM   #3
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If all you want is $1500 a month of cash flow for 15 years out of 200k you could probably get that out of a cd ladder with the interest paying out to your checking account and cashing one when it matures every now and then.

Better interest rate than an ING account, insured if you split it into two separate accounts, and you'd probably do as well or better than the annuity.
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Old 08-15-2008, 03:39 PM   #4
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I'm thinking about getting a $200K immediate annuity for 15 years for about $1,484/month.

Advises are welcome.
The only reason I can imagine you'd want a 15 year immediate annuity for is tax deferral but then you say you're going to transfer the interest into your checking account which destroys the whole concept.

The numbers you cite amount to an effective interest rate of 4.05% which isn't very good based on current interest rates. That assumes you will deplete your principle and receive nothing at the end of 15 years. Is this the case?

You can easily beat this with a ladder of CDs and high grade corporate bonds. 4+ year CDs are yielding around 5%. I don't know if CDs are available for more than 10 years but you could certainly continuously reinvest at the long maturities. This would expose you to a certain amount of interest rate risk but with interest rates at near record lows that seems like a small risk. A CD is FDIC insured so it's a significant step more secure than an insurance company backed product.

Of course, the annuity salesman is probably real nice and you wouldn't have to worry about all the paperwork. That would only cost you about $30,000 over the life of the annuity. That's about $2,000 per year and you'd never miss the extra $166 per month.
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Old 08-15-2008, 03:46 PM   #5
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I hear that Bear Stearns annuities are selling like hotcakes!
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Old 08-15-2008, 04:10 PM   #6
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Quote:
Is it a good idea?
No
Quote:

Is there better alternative?
Yes
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Old 08-15-2008, 07:00 PM   #7
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This is an easy one (using my HP financial calculator). Quick answer: No, not a very good idea.

A $1,484 monthly annuity for 15 years (180 monthly payments), and an initial value of $200,000, requires a
interest yield of (drum roll):

4.046%

Since the risk-free rate from a 15 year US Treasury is currently about 4%, you can get the same monthly annuity yourself using Treasuries, and have the (big) advantage of having ready access to the principal if needed.

I think even the money market account is a better choice, because if inflation takes off, eventually those rates will rise too (my opinion: short-term rates are being held down by the Fed in attempt to rescue the banking system).

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Old 08-16-2008, 03:59 AM   #8
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Ditto others... I would buy fixed securities and create my own 15 year annuity. You could probably do it with treasuries. Might do it with TIPS and get some inflation protection to boot.
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Old 08-16-2008, 06:38 AM   #9
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5.25% APY 10 year CD Capital One. FDIC Insured you can take interest out monthly. AND at the end of 10 years you still have ALL your principal. Only Annuity I would ever consider is the one the SSA provides.
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Old 08-16-2008, 08:32 AM   #10
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Where are all the usual suspects championing annuities? Here we have a real life example with exact dollar amounts to evaluate. They all seem to have disappeared.
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Old 08-16-2008, 09:20 AM   #11
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Not here to champion this type of annuity but a quick check with the Vanguard annuity calculator shows you could get $1631 for a $200K 15 year immediate annuity.

I am looking at retireing early (in 2009 at 51) and will purchase a lifetime immediate annuity, with a 3% annual increase, to cover my expected expenses in retirement. I will be using about 40% of my total savings for this, I will also get a pension and SS at 62. The annuity will be funded with qualified IRA savings. Ran the numbers and there was no way I could generate the income I needed to retire early using the other 72t withdrawal options.
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Old 08-16-2008, 09:34 AM   #12
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Where are all the usual suspects championing annuities? Here we have a real life example with exact dollar amounts to evaluate. They all seem to have disappeared.
I don't think I'm a "usual suspect" as an annuity champion. I can see a theoretical argument for an SPIA as longevity insurance. That's a "bailout" option for me. However, I can't see the benefits of a fixed 15 year annuity.
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Old 08-16-2008, 09:37 AM   #13
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Where are all the usual suspects championing annuities? Here we have a real life example with exact dollar amounts to evaluate. They all seem to have disappeared.
No, "we" are still here .

The OP's question poses a situation that differs from my SPIA. Since I'll only comment on a sitution that matches my actual situation (rather than offer suggestions based upon "personal feelings") I have nothing to add to this thread.

OK? ...

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Old 08-16-2008, 11:10 AM   #14
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Not here to champion this type of annuity but a quick check with the Vanguard annuity calculator shows you could get $1631 for a $200K 15 year immediate annuity.
Based on this return, the annuity pays 5.47% which is more in line with the return of investment grade corporates. A Feb 2017 GE AAA bond currently yields 5.52%. If you're willing to go into financial companies that are investment grade, interest rates are above 7%. Of course, that's sort of like the company selling the annuity.

If so inclined, I could probably create a bond ladder of investment grade corporates that would beat the 5.47% annuity return but it would be more of a philosophical exercise.

The Vanguard 15 year annuity appears better than the first one proposed. It still eliminates future access to the principle, returns less than would normally be available outside the annuity and puts your income stream at the mercy of the future of the annuity company. Those weaknesses would require me to receive a substantially higher return then available with ladddered bonds or CDs.

The basic argument for a SPIA always comes down to some form of "immortality" argument. The three major weaknesses still are present; but if someone lives 15 years beyond their longevity table lifespan, they made a great financial decision. Most don't which is why you see all those big, fancy insurance company buildings.

We all buy our ticket and take our chances. Good luck.
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Old 08-16-2008, 11:55 AM   #15
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Of course, the annuity salesman is probably real nice and you wouldn't have to worry about all the paperwork. That would only cost you about $30,000 over the life of the annuity. That's about $2,000 per year and you'd never miss the extra $166 per month.
SPIAs don't have internal expenses, like VAs. There's no M&E charges or subaccount charges. One could argue the "charge" comes in the form of a lower IRR or yield, most likely true.

Why would you buy an SPIA and throw the money back into a taxable account?? SPIA proceeds are for folks that need a guaranteed income stream to spend......
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Old 08-16-2008, 11:56 AM   #16
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However, I can't see the benefits of a fixed 15 year annuity.
They had sweet yields in the early 80's............
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Old 08-16-2008, 12:00 PM   #17
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A Feb 2017 GE AAA bond currently yields 5.52%. If you're willing to go into financial companies that are investment grade, interest rates are above 7%. Of course, that's sort of like the company selling the annuity.
Any idea how low that bond will go if interest rates go up 1% or so? Most likely dowen 10%...just pointing that out.........

Quote:
The basic argument for a SPIA always comes down to some form of "immortality" argument. The three major weaknesses still are present; but if someone lives 15 years beyond their longevity table lifespan, they made a great financial decision. Most don't which is why you see all those big, fancy insurance company buildings.
I know some doctors that are in the higher risk areas of medicine use SPIAs to protect some of their assets in the event of a large malpractice settlement that goes against them.
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Old 08-16-2008, 12:53 PM   #18
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Any idea how low that bond will go if interest rates go up 1% or so? Most likely dowen 10%...just pointing that out.........



I know some doctors that are in the higher risk areas of medicine use SPIAs to protect some of their assets in the event of a large malpractice settlement that goes against them.
You have good points. The key to interest rate risk is the eventual maturity of the underlying bond. I owned bond mutual funds in the mid-70's when the yields were about 6%. I was hammered principle wise when rates when up to the 14 -16% range. That's one of the reasons I won't personally buy a bond mutual fund again. I always buy an issue with an eventual maturity date. The principle may fluxuate but I'll eventually get the original bond amount back.

The original question was directed towards the eventual depletion of the assets; or in the case of the bond, spending the principle. One of the things annuity boosters never seem to want to accept is that once they sign on the dotted line their principle is now zero. They don't have an option (other than rip-off secondary annuity buyers) to recover their principle and use it for another and possibly more immediate need.

I agree with your use of annuities for asset protection in certain high risk occupations. That's a separate discussion topic for a very limited group of which I'm not among. I suspect very few on this forum would be in that group.
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Old 08-16-2008, 01:02 PM   #19
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I have nothing to add to this thread.
Doesnt seem to have stopped you from trying.
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Old 08-16-2008, 01:13 PM   #20
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I heart annuity threads.

Here's a real life example of an immediate annuity from a long ago defunct pension which will start paying off in October. The pension benefit was to be $326.32/month for life. Of the 6 options Aurora National Life Assurance Company gave me, I selected 120 month certain at $420.50/month. This will pay a total of $50,460 to me or my beneficiary over ten years. They indicate the conversion amount from Executive Life as $3,079.62.

I think of this as an experiment and plan to take the difference between the period certain and life benefit and automatically transfer it into my money market account and then continue paying the $326.32 amount to myself which will take the ten year payout to at least 13 years (ignoring interest) when I will be 75 years old. I'm rounding the amount off to $100 so at the end of ten years I will have transferred $12,000.

I am acutely aware that an uncanny number of my relatives both male and female have died at age 74; it's got to be a statistical anomaly. And my brother, father and both grandfathers went considerably earlier than that. Of course, I might luck out like mom (91) and a few others; and there is nothing better for longevity IMO like retiring as young as possible, so "Dr. Cuppa" is retiring. Cheap bastardhood should mitigate the loss of $326.32/mo.

How about that wheel of fortune! I never took a j*b "for the benefits" but have acquired a patchwork of bennies nonetheless. This immediate annuity is somewhat like found money as I vested by the skin of my teeth just before they cancelled the plan; only five of us qualified, including the two owners and their son.
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