Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: immediate annuity (again)
Old 09-19-2006, 09:10 AM   #21
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: immediate annuity (again)

Quote:
Originally Posted by astromeria
I might consider partially annuitizing in my late 60s/70s (the immediate kind). I don't think I'd put more than $100k in any one annuity. This might make particular sense if we enter a CCC facility, making it easier to stay on top of (increased) monthly payments while our brains are fuzzing out.
That's a scenario where an annuity might make sense. Plus it kind of fits:

- Put the cat in the oven
- Wear underpants on head
- Buy an annuity

__________________

__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: immediate annuity (again)
Old 09-19-2006, 09:23 AM   #22
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: immediate annuity (again)

Quote:
Originally Posted by brewer12345
* Basically, you pay a smallish insurance premium to limit your losses while preserving your upside.
Agree except for "smallish." In the example you cited, if you had a 60% equity allocation and hedged all of it, you would spend more than half of your 4% withdrawal rate just on the hedge!

Puts can be useful tools, but the user should carefully understand the cost!
__________________

__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 09:31 AM   #23
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: immediate annuity (again)

Quote:
Originally Posted by youbet
Agree except for "smallish."* In the example you cited, if you had a 60% equity allocation and hedged all of it, you would spend more than half of your 4% withdrawal rate just on the hedge!

Puts can be useful tools, but the user should carefully understand the cost!
Since options typically change % value much faster than the underlying, I presume you wouldn't want/need to hedge the entire notional amount of your equity position. You also might be in the position of owning the S&P500 but buying puts on the QQQQ. You would likely require less of the much more volatile QQQQ protection to protect your S&P500 position.

But, yes, buying insurance does cost money. That's why you generally don't come out ahead buying insurance. But we were talking about sleep-at-night alternatives that might be less costly and irreverible than a SPIA.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 09:36 AM   #24
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: immediate annuity (again)

Sometimes things are the same even though they are named differently. *I'm generally not interested in immediate fixed annuities, although I understand their pros and cons and that they have a legitimate purpose under some circumstances.

However, it dawned on me that when I choose whether to take my DBP pension as a lump sum or a monthly income stream for life, I'll actually be chosing between buying an annuity or not! * *I had been planning on taking the income stream or "annuity." * *Suddenly, I realize that I better go do an analysis and decide if I would buy an immediate annuity that pays equal to my pension with an amount equal to the lump sum payout. *If not, then I guess I should take the lump sum from my pension..........

Comments?
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 09:41 AM   #25
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: immediate annuity (again)

Quote:
Originally Posted by youbet
Suddenly, I realize that I better go do an analysis and decide if I would buy an immediate annuity that pays equal to my pension with an amount equal to the lump sum payout. *If not, then I guess I should take the lump sum from my pension..........

Comments?
I would look at two things:

- Can I buy the same annuity for less money than the lump sum?
- Can I reasonably expect to draw a larger inflation-adjusted stream of money out of the lump sum than from the annuity payments?

Obviously, if you aren't sure that the entity paying the pension out is a very solid credit, it might be wise to ignore all of this and just take the money and run.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 09:59 AM   #26
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: immediate annuity (again)

Agree on the analysis Brewer.

I still wonder how many folks currently receiving a DBP pension or going to recieve one in the future realize that taking the income stream in lieu of the lump sum is equivalent to buying an annuity?
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 10:06 AM   #27
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Re: immediate annuity (again)

Quote:
Originally Posted by youbet
Agree on the analysis Brewer.

I still wonder how many folks currently receiving a DBP pension or going to recieve one in the future realize that taking the income stream in lieu of the lump sum is equivalent to buying an annuity?* *
Not many.........yet many of these SAME folks hate all life insurance and annuities............
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 10:11 AM   #28
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Re: immediate annuity (again)

Quote:
Originally Posted by brewer12345
Since options typically change % value much faster than the underlying, I presume you wouldn't want/need to hedge the entire notional amount of your equity position.* You also might be in the position of owning the S&P500 but buying puts on the QQQQ.* You would likely require less of the much more volatile QQQQ protection to protect your S&P500 position.

But, yes, buying insurance does cost money.* That's why you generally don't come out ahead buying insurance.* But we were talking about sleep-at-night alternatives that might be less costly and irreverible than a SPIA.
Good point, but not all folks are as savvy about the markets as you...........

The fact remains that products are "invented" to meet "perceived needs", and then marketed to the masses..........certainly a backwards approach to the need...........but prevalent in Wall Street.............

I can count on NO HANDS the number of immediate annuities I've written.........I guess that means ZERO............
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 11:49 AM   #29
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
Re: immediate annuity (again)

A little off topic, but I saw a reasonable use of annuities mentioned in the NYTimes article on folks who get lots of money and squander it (Mike Tyson, Michael Jackson, lottery winners, etc)
Fortune's Fools: Why the Rich Go Broke
http://www.nytimes.com/2006/09/17/bu...y/17broke.html

One idea was for folks who blow through money easily and perhaps wrecklessly, they should invest windfalls and good fortune into annuities just because that would prevent them from blowing it all at once and give them a steady future income stream.
__________________
LOL! is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 11:56 AM   #30
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: immediate annuity (again)

Quote:
Originally Posted by LOL!
A little off topic, but I saw a reasonable use of annuities mentioned in the NYTimes article on folks who get lots of money and squander it (Mike Tyson, Michael Jackson, lottery winners, etc)
Fortune's Fools: Why the Rich Go Broke
http://www.nytimes.com/2006/09/17/bu...y/17broke.html

One idea was for folks who blow through money easily and perhaps wrecklessly, they should invest windfalls and good fortune into annuities just because that would prevent them from blowing it all at once and give them a steady future income stream.
Which works great until they hear an ad from JG Wentworth or similar promising them a lump sum in return for their annuity.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 01:55 PM   #31
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,634
Re: immediate annuity (again)

Quote:
Originally Posted by brewer12345
I would look at two things:

- Can I buy the same annuity for less money than the lump sum?
- Can I reasonably expect to draw a larger inflation-adjusted stream of money out of the lump sum than from the annuity payments?

Obviously, if you aren't sure that the entity paying the pension out is a very solid credit, it might be wise to ignore all of this and just take the money and run.
I would look at those also. But on the second item OP demonstrated at the beginning of the thread that he can do better with the annuity than with a standard 4% SWR. The same may very well apply to the DBP vs lump sum question. The chooser is faced with the same basic question any portfolio holder faces - does the likely substantial remaining principal I will keep by self directing outweigh the assurance I get from the annuitized income stream.

A good example is the Federal Thrift program. For anyone mid fifties or older, you can leave you money in the TSP with very good expenses and do it your self (lump sum). Or you can buy an annuity (inflation protected with survivor if desired) and exceed the 4% SWR by a little bit.

I will say this - I have seen posters consider skipping health or LTC insurance so they can boost current spending by a few thousand/yr. I would rather annuitize if I could boost the income stream enough to fund those items rather than forgo them so I could leave a nest egg behind.
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 02:22 PM   #32
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
Re: immediate annuity (again)

Quote:
Originally Posted by brewer12345
As a though exercise, try sticking in a plain vanilla 60/40 portfolio into firecalc. *Make the same amount as what you are thinking about ptting into the annuity and assume a 4% inflation-adjusted wthdrawal ver 30 years. *Check out teh range of ending portfolio vales, paying special attention to the high, median, average, bottom and the range. *
Absolutely a good point.* FIRECalc gives an average of about $320K remaining,
depending on what the fixed-income choice is, and a tolerable 3.8% chance
of ruination (one minus the "success rate").

However, the SPIA I'm looking at would pay me 4.4% or so.* Then, applying
FIRECalc again, the average ending portfolio value is still quite high (higher than
my premium), but the chance of ruination rises to 13%.

But, of course, per your suggestion, these are all for 30yr payouts, about my
median life expectancy. However, when I up the payout to 36yrs (about my
90%-tile expectancy), the average ending portfolio value is actually higher
(no surprise I guess), but the chance of ruination is 26%.

So I think this exercise argues FOR the SPIA.* Is the chance of a major
highly-rated insurance company failing within 36 years greater than 26% ?
Also, my state guarantees for more than the typical $100K, covering my
$250K.* It guarantees me nothing if my portfolio performs badly.

John

P.S. And to clarify, yes I have no pension (other than SS). I have the
TIAA-CREF retirement account, one payout option being a lifetime
annuity. But there's nothing gauranteed about it, as best I can tell.
__________________
JohnEyles is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 03:23 PM   #33
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: immediate annuity (again)

Quote:
Originally Posted by JohnEyles
So I think this exercise argues FOR the SPIA.* Is the chance of a major
highly-rated insurance company failing within 36 years greater than 26% ?
Also, my state guarantees for more than the typical $100K, covering my
$250K.* It guarantees me nothing if my portfolio performs badly.

John

P.S.* And to clarify, yes I have no pension (other than SS).* I have the
TIAA-CREF retirement account, one payout option being a lifetime
annuity.* *But there's nothing gauranteed about it, as best I can tell.
I don't come to the same conclusions about firecalc outputs, but you are the one who has to sleep at night. Thats why I suggested you play with the tool and see what the results said to you.

So which company is this annuity with? TIAA-CREF or Vanguard/AIG? I think very highly of TIAA-CREF. AIG, not so much. And I would not put a lot of stock in the state guaranty funds. They are a far, far cry from FDIC insurance.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 04:06 PM   #34
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
Re: immediate annuity (again)


The one I've been quoting is Vanguard/AIG. TIAA-CREF does not
do SPIAs, unless I'm mistaken.

I also have a batch of quotes from WebAnnuities.com, and would be
curious what you think of these insurers: American General, Aviva,
Fidelity and Guaranty Life, Genworth Life, and Integrity Life. Thanks !

John
__________________
JohnEyles is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 04:10 PM   #35
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: immediate annuity (again)

Quote:
Originally Posted by JohnEyles
I also have a batch of quotes from WebAnnuities.com, and would be
curious what you think of these insurers: American General, Aviva,
Fidelity and Guaranty Life, Genworth Life, and Integrity Life.* *Thanks !

John
The only one of these I would even contemplate buying an annuity from is Integrity, and even then I would rather buy it from one of their companies that actually had the Western & Southern name on it.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 04:11 PM   #36
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
Re: immediate annuity (again)

Quote:
Originally Posted by brewer12345
I don't come to the same conclusions about firecalc outputs, but you are the one who has to sleep at night.* Thats why I suggested you play with the tool and see what the results said to you.
I am curious as to why you don't come to same conclusions. *Do you believe
that the risk of one of these insurers becoming insolvent is higher than the
risk of my portfolio underperforming into the FIRECalc "failure" zone (13-26%
depending upon living to median versus 90% life expectancy) ? *Or do you
believe this risk of failure is worth it for the "expected" ending portfolio
value of $250-300K ?

John
__________________
JohnEyles is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 04:13 PM   #37
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Re: immediate annuity (again)

Quote:
Originally Posted by REWahoo!
Anyone else suffer from this separation anxiety disorder?
Heck, yeah.* If annuities are such a good deal, how many executives of insurance companies own them-- and why are they selling them to us?

Quote:
Originally Posted by youbet
Sometimes things are the same even though they are named differently. I'm generally not interested in immediate fixed annuities, although I understand their pros and cons and that they have a legitimate purpose under some circumstances.
However, it dawned on me that when I choose whether to take my DBP pension as a lump sum or a monthly income stream for life, I'll actually be chosing between buying an annuity or not! I had been planning on taking the income stream or "annuity." Suddenly, I realize that I better go do an analysis and decide if I would buy an immediate annuity that pays equal to my pension with an amount equal to the lump sum payout. If not, then I guess I should take the lump sum from my pension...
A lump sum is generally a better deal in periods of low interest rates (like today) so that the lump is bigger.

It's also a better deal if you're capable of & interested in managing your own money and if you don't want a survivor option.

It's a great deal if you suspect that your company is going to go down the tubes in the next 10-50 years, use the bankruptcy court to dump your pension check on the PBGC, and leave you with a salami string.

My FIL took a lump sum from CBS in 1994. 12 years later, he's still thrilled that he did so.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 04:22 PM   #38
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: immediate annuity (again)

Quote:
Originally Posted by JohnEyles
I am curious as to why you don't come to same conclusions. *Do you believe
that the risk of one of these insurers becoming insolvent is higher than the
risk of my portfolio underperforming into the FIRECalc "failure" zone (13-26%
depending upon living to median versus 90% life expectancy) ? *Or do you
believe this risk of failure is worth it for the "expected" ending portfolio
value of $250-300K ?

John
I clearly have a risk appetite very different than yours, so any actual fact-based arguments I might put forward are not likely to matter.* Having said that, I don't like the trade off because I think that firecalc is inherently extremely conservative, the more diversified portfolio I (and most retirees) have is highly likely to be "safer" than what firecalc indicates, and I know how insurers design their products so I know that any annuity you buy is an inherently bad deal.

And I am really, really, really picky about which life insurers I will do business with.* You are buying a guarantee that will only be really important to you if things get very bad.* If I actually part with the money to buy a guarantee, I want to know that there is just about no chance that the guarantee will not be honored.* My experience dealing with these companies and their management teams suggests that very few companies meet that standard.* Unfortunately, many of the companies selling SPIAs are exactly the type of company I won't do business with.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 05:51 PM   #39
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
Re: immediate annuity (again)

Quote:
Originally Posted by brewer12345
I clearly have a risk appetite very different than yours, so any actual fact-based arguments I might put forward are not likely to matter.* Having said that, I don't like the trade off because I think that firecalc is inherently extremely conservative, the more diversified portfolio I (and most retirees) have is highly likely to be "safer" than what firecalc indicates ...

And I am really, really, really picky about which life insurers I will do business with.* You are buying a guarantee that will only be really important to you if things get very bad.* If I actually part with the money to buy a guarantee, I want to know that there is just about no chance that the guarantee will not be honored.*
I guess I have less faith in the markets than you, and perhaps more faith in the
insurance companies.

You want "just about no chance" that the SPIA terms will not be honored,* but
there's not anywhere close to zero chance that the portfolio being withdrawn
at 4.4% will not vanish.* So again, do you really think there's a 13-26% chance
that AIG will become insolvent ?

Is FIRECalc really "extremely conservative" ?* The default portfolio that I'm using
is 40% treasuries and 60% "total market", which sounds like something like VG
Total Stock Mkt Index to me.* Sounds like a pretty conservative portfolio to me.

No question that the insurance company failing and the portfolio failing are
highly correlated outcomes.* But have not many of these insurance companies
survived many of the historical periods which lead to one of the 13-26% likely
"failure" outcomes in FIRECalc ?

Not trying to pick a fight here - I respect that fact that you know a lot more
about insurance companies than me, and probably more about FIRECalc and
investing in general - but I'm trying to be very analytical and UN-emotional
in comparing SPIA versus invested portfolio.

John

scenarois
__________________
JohnEyles is offline   Reply With Quote
Re: immediate annuity (again)
Old 09-19-2006, 07:18 PM   #40
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,634
Re: immediate annuity (again)

Quote:
Originally Posted by brewer12345
And I am really, really, really picky about which life insurers I will do business with. You are buying a guarantee that will only be really important to you if things get very bad. If I actually part with the money to buy a guarantee, I want to know that there is just about no chance that the guarantee will not be honored. My experience dealing with these companies and their management teams suggests that very few companies meet that standard. Unfortunately, many of the companies selling SPIAs are exactly the type of company I won't do business with.
This is why, if I ever decide to actually look seriously at annuities, I hope Brewer (or some reasonable facsimile) is around to tell me what the good companies are.

Interestingly Brewer, I have always considered myself to be in a relatively high risk category. I have a nice pension to cover the essentials. So I have been comfortable keeping the portfolio in a diversified group of stock funds. Little cash, no bonds. Now that I am ER and DW is close I am starting to be a bit more conservative by building some "Lucia" buckets to carry us throuh a few down years.

My compulsive posting in the annuity threads results from my initial surprise that one could potentially get a "safe" piece of income at or above the standard SWR we talk about all the time. It intrigues me as a way to lock in some extra income to cover non-essentials like travel if everything goes to hell in a handbasket. My biggest concern with annuities continues to be whether the companies can survive well in a major, protracted downturn. But, if I remember right, you or someone else advised that the "good" companies have been able to weather some bad periods before pretty well.
__________________

__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
My coworker's argument on spousal annuity value-- swampmaple FIRE and Money 18 11-12-2006 02:08 PM
Annuity Horror Story...Again mickeyd FIRE and Money 6 09-28-2006 09:57 AM
Variable Annuity Help 2B Life after FIRE 0 05-13-2006 03:46 PM
Annuity question (what to do, what to do...) cj FIRE and Money 9 09-19-2005 07:38 AM
Lump sum or annuity runnerr FIRE and Money 17 07-01-2005 03:39 PM

 

 
All times are GMT -6. The time now is 02:29 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.