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Old 08-28-2009, 06:43 AM   #61
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It seems appropriate to add to this thread that Jim C. Otar's Unveiling the Retirement Myth has several short chapters on annuities. While I am not at that stage yet, I found the info extremely helpful.

I believe the recommendation is to use a CPI-linked SPIA if you need it. He discusses when you need it very thoroughly. He also discusses very thoroughly how much you might need given your assets, your other income, your essential expenses, your total expenses and history.
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Old 03-06-2010, 08:18 AM   #62
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A further question on Immediate Annuities. I am looking at retirement in around six years when I am 58. I am somewhat tax diversified but must of my retirement funds are in 401(a) and 403(b) accounts. I am considering putting one third of our retirement assets in an Immediate Annuity. I believe that interest rates will be significantly higher at that time than they are now. For a $1M annuity, I am hoping for $6K to $7K per month.

My question regards the remainder of our money. Should I consider the IA as the "bond" portion of our portfolio allowing me to keep most of the remaining money in stocks? If I had the IA, can I increase the withdrawal rate on the remaining money to 6% or 7% versus 4% recommended widely?

All advice appreciated.

Marc
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Old 03-06-2010, 08:32 AM   #63
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My question regards the remainder of our money. Should I consider the IA as the "bond" portion of our portfolio allowing me to keep most of the remaining money in stocks? If I had the IA, can I increase the withdrawal rate on the remaining money to 6% or 7% versus 4% recommended widely?

All advice appreciated.

Marc
We had this discussion concerning defined benefit pensions. Many think you can carry a higher proportion of equities but it seems to me that the fundamental questions remain expenses and risk tolerance. How big are the expenses you have that are not supported by the annuity, what will be your SWR from the remaining portfolio, and how much of a drop can you stomach? It seems to me that the calculation remains the same as before only writ smaller (smaller expenses, smaller portfolio).
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Old 03-06-2010, 08:42 AM   #64
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Welcome Marc. This has been discussed a number of times here (use search function, top of page) and at Bogleheads Bogleheads Investing Advice and Info, if you want to see the whole discussion. It seems that it comes down to your whole risk tolerance, as stated above.

I may have oversimplified it, but I hold enough bonds so that if my pension dies, I would not have to sell any equities for 5 years.
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Old 03-06-2010, 09:00 AM   #65
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To me, once you cover your basic expenses with annuities (any combination of SS, pension, and private SPIA) you are able to indulge your underlying risk preference more fully.

If you like being aggressive with investments or withdrawal rate, you can be because you know that you're working with "excess" money. OTOH, if you are inherently risk averse, you can be very conservative with investments - nobody will be telling you that you "have to" get into riskier investments to meet your needs over a potentially long retirement.

In terms of the more agressive decision, I've thought that once you've covered your basic expenses with the annuities you could blow the whole "excess" in the first few years of retirement. Take the around the world cruise, backpack in the Andes, whatever. You know you don't need to save the money for later.
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Old 03-06-2010, 09:38 AM   #66
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My question regards the remainder of our money. Should I consider the IA as the "bond" portion of our portfolio allowing me to keep most of the remaining money in stocks?
This was a point of discussion on BH's the last few days that somewhat relates to your question:

Bogleheads :: View topic - Annual Growth Rate Next 5 Years?

I'll copy the conversation rather than to have you try to wade through the thread:

************************************************** *****

"I'll give you two articles to "ponder"; one in which Mr. Bogle is quoted and says:

"And Bogle has long told Americans that the percentage of bonds in a retirement portfolio should be roughly equal to your age. That way your investment gets safer as you approach retirement. So, if you're 60 years old your nest egg should be 60 percent in bonds.

But here's something that might surprise people who've heard Bogle give that advice before. He says you should count the value of your Social Security benefit when you calculate your bond position. And, for the average American the value of Social Security equals about $300,000 worth of bonds.

"If you accept that $300,000 is the value of Social Security and you had $200,000, that could all be in stocks," Bogle says."

From:

http://www.npr.org/templates/s....=124131819

Another good paper on how you can look at your retirement income sources as part of a "total portfolio" (rather than just your portfolio itself) is:

http://www.austinlemoine.com/documents/File36.pdf

Table 2 contains (IMHO) the "interesting concepts", depending on your retirement income sources ("Present Value" fields) and your retirement financial assets/portfolio.

Whereas our 60/40 planned/actual AA may seem risky at first glance, with our current/planned income sources, matched to our current portfolio value, makes it much less risky to our retirement income plans, than at first blush and actually lowers our existing AA to a 30/70 once all our income sources are "on-line", without changing anything in our existing equity holdings.

- Ron"

************************************************** ******
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Old 03-06-2010, 10:44 AM   #67
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You know you don't need to save the money for later.
Well, not exactly. You have anecdotal evidence based on your current and historical circumstances that suggests that you "don't need to save the money for later." But, since you don't know the future, this can never be certain until it comes to pass. The vast majority of us will pass either having gone broke and on the dole or with assets "left over." Few will get it right on the nose.
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Old 03-06-2010, 11:18 AM   #68
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Well, not exactly. You have anecdotal evidence based on your current and historical circumstances that suggests that you "don't need to save the money for later." But, since you don't know the future, this can never be certain until it comes to pass. The vast majority of us will pass either having gone broke and on the dole or with assets "left over." Few will get it right on the nose.
Until this past year, no one in my family going back many generations has ever died without leaving a small or large estate. Then last year my brother broke the string. He didn't die broke, he died almost $100k in the hole.

So I now truly believe that anything is indeed possible. Big earthquake to mention only one possibility.

Ha
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Old 03-06-2010, 12:03 PM   #69
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So I now truly believe that anything is indeed possible.

Ha
Yeah, me too. 3.7 years into RE, I'm finally coming to grips with the fact that I can control only so much of my destiny, financial and otherwise. I try to conduct my investing and spending prudently based on my own circumstances and historical understanding of how things have worked in the past. But I have come to grips with the fact that only thing we can really count on is that the time we have is finite and spending it in ways that fulfill us the most is the most important thing.
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Old 03-06-2010, 02:01 PM   #70
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But here's something that might surprise people who've heard Bogle give that advice before. He says you should count the value of your Social Security benefit when you calculate your bond position. And, for the average American the value of Social Security equals about $300,000 worth of bonds.
"If you accept that $300,000 is the value of Social Security and you had $200,000, that could all be in stocks," Bogle says."
Bogle does imputed bonds?!?

Whoa.
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Old 03-06-2010, 06:10 PM   #71
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I am not at a point of looking for SPIAs yet, but I am curious about their state fund guarantees for those that have experience with the subject:

(1) If I move to another state or even out of the country, would the "original" state guarantees still cover me?

(2) Can I buy SPIA from another state and have that other state cover it for me?

(3) Here is a big one: What is really covered - just return of original principle or the income stream itself?? If I invested in COLA-SPIA 100k, 20-30 years down the road, it could be that my COLA-d payments are quite reasonable, but the original 100k is not worth much of anything... so then it does not sound like a great guarantee at all if all I get back is 100k at that point....
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Old 03-06-2010, 07:34 PM   #72
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If one invested the remaining balance of their retirement portfolio 100% in equities after the purchase of a SPIA, wouldn't that preclude the ability to rebalance in the future?
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Old 03-06-2010, 07:56 PM   #73
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I am not at a point of looking for SPIAs yet, but I am curious about their state fund guarantees for those that have experience with the subject:

(1) If I move to another state or even out of the country, would the "original" state guarantees still cover me?

(2) Can I buy SPIA from another state and have that other state cover it for me?

(3) Here is a big one: What is really covered - just return of original principle or the income stream itself?? If I invested in COLA-SPIA 100k, 20-30 years down the road, it could be that my COLA-d payments are quite reasonable, but the original 100k is not worth much of anything... so then it does not sound like a great guarantee at all if all I get back is 100k at that point....
Lots of info here: nolhga.com :: welcome

Personally, I buy insurance products with the assumption that the guaranty fund coverage is worthless.
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Old 03-06-2010, 10:13 PM   #74
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I am not at a point of looking for SPIAs yet, but I am curious about their state fund guarantees for those that have experience with the subject:

(1) If I move to another state or even out of the country, would the "original" state guarantees still cover me?

(2) Can I buy SPIA from another state and have that other state cover it for me?

(3) Here is a big one: What is really covered - just return of original principle or the income stream itself?? If I invested in COLA-SPIA 100k, 20-30 years down the road, it could be that my COLA-d payments are quite reasonable, but the original 100k is not worth much of anything... so then it does not sound like a great guarantee at all if all I get back is 100k at that point....
As a generally rule the laws of the state that you reside in when the insurance company become insolvent are the ones that are followed. In particular in the company isn't licensed to sell insurance in the state that you reside in you are out of luck, so obviously leaving the country hoses you. .

As Brewer says you shouldn't depend the guaranty fund, it is not equivalent to FDIC coverage. There are numerous limitation and exceptions and the most important being unlike FDIC where banks actually pay money into a fund, the guaranty associate assess its members an insurance company becomes insolvent. So in the event of a systemic failure like we back in 2007, I am not sure where the association would get the money.

The FAQ section for my states association says.
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Frequently Asked Questions Why hasn't my agent or company told me more about the Hawaii Life & Disability Insurance Guaranty Association?
The law prohibits insurance agents and companies from using the Hawaii guaranty association in any advertising. The guaranty association is not and should not be a substitute for your prudent selection of an insurance company that is well managed and financially stable. Agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance. For more information, see our Advertising Prohibition in the Additional Info section.
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Old 03-07-2010, 04:46 AM   #75
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Aside from guarding against longevity risk, are there any other advantages to a spia? For example: Will the money be legally shielded from negative events... bankruptcy court, law suit against you, etc.
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Old 03-07-2010, 08:54 AM   #76
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Aside from guarding against longevity risk, are there any other advantages to a spia? For example: Will the money be legally shielded from negative events... bankruptcy court, law suit against you, etc.
Depends on the state. In Texas, Florida and Oklahoma, for example, annuities are generally shielded from creditors and lawsuits so an immediate annuity can be part of an asset protection plan once all the other more attractive alternatives (IRAs, 401Ks, et cetera) have been maxed out.

In other states, protection of annuities is limited, if at all.
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Old 03-07-2010, 10:21 AM   #77
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As a generally rule the laws of the state that you reside in when the insurance company become insolvent are the ones that are followed. In particular in the company isn't licensed to sell insurance in the state that you reside in you are out of luck, so obviously leaving the country hoses you. .
Hmm.. looking at FAQ of the site posted by Brewer (thanks), seems like above is half true... i.e. looks like originating state picks up the tab - or am I misreading the following? Also, I guess this does not answer move-out-of-country case directly, but might have the same rules... more reading required.

"Coverage will be provided by the guaranty association in your state of residence, even if the policy was purchased in another state. Policyholders who reside in states where the insolvent insurer was not licensed are covered, in most cases, by the guaranty association of the company’s domiciliary state."

Now, I am still unclear on what's covered. From reading the site, I get the impression that either (a) policy can be transferred to another insurance company, or (b) it will be paid out up to the 100k/300k limits. Now, in case of SPIA policy where the single premium was already paid and presumably used up by the failed insurance company, I can't imagine why another company would take on the obligation to pay out the rest of SPIA. What benefit would they get from this? So, I don't understand why (a) would ever happen for SPIA. For case (b), those limits seem to suggest to me that the income stream will not be protected - only the inflation-reduced "cash-value" of annuity. What is "cash value" of SPIA? Original premium? In any case, whatever it is, I assume 100k check will not buy nearly as much of an income stream in 30 years.

P.S. Found this (scary?) statistic on that website: Since their creation, state guaranty associations have:
- Provided protection to more than 2.3 million policyholders
- Guaranteed more than $21.2 billion in coverage benefits
- Contributed more than $5.2 billion to ensure that policyholders received their benefits
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Old 03-07-2010, 10:30 AM   #78
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snjsl, I think the best place to get the info would be to call your state insurance department or guarantee fund. But as I said, pick your insurer carefully and it is academic. If you look at the ratings history of insurers in bad times, the companies that have generally been stable through thick and thin are the largest, well capitalized mutual companies. They do not have to answer to shareholders and they generally have very conservative cultures. This is all good for policyholders.
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Old 03-07-2010, 01:11 PM   #79
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Well, not exactly. You have anecdotal evidence based on your current and historical circumstances that suggests that you "don't need to save the money for later." But, since you don't know the future, this can never be certain until it comes to pass. The vast majority of us will pass either having gone broke and on the dole or with assets "left over." Few will get it right on the nose.
Sure. I should have sail stuff like "less likely".
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Old 03-27-2010, 11:10 PM   #80
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Depends on the state. In Texas, Florida and Oklahoma, for example, annuities are generally shielded from creditors and lawsuits so an immediate annuity can be part of an asset protection plan once all the other more attractive alternatives (IRAs, 401Ks, et cetera) have been maxed out.

In other states, protection of annuities is limited, if at all.
Seem to recall that OJ Simpson was able to avoid paying the judgement to the Goldmans because his retirement income came from annuities.

He was able to play a lot of golf with that retirement money.

Of course, whatever his retirement income source, it didn't protect him from stupidity.
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