immediate annuity (again)

[Rich_by_the_Bay]

Quote:

Originally Posted by 2B Buy the annuity now. I mean right away. I'm so tired of telling people how f******g stupid they are that I have come to realize that I own stocks in many of the companies selling them. If you have half a brain you wouldn't have asked so since you are dumber than dog dung I suggest you put 100% of your money in it and then promptly slit your own throat after realizing how stupid you are.

How tactful.

Donheff, take a look at Gummy's analysis (here) for an interesting if somewhat technical discussion about this.

Like you, I could see a place for this type of assurance some day. I found it helpful to compare self-annuitizing with insurance company annuities by using a mortgage calculator (see how much you'd have to self-annuitize to get the same monthly payments as a commercial product would pay). I've found that the commercial IA always wins in the scenarios I have analyzed. This is despite their expenses.

I think the main reaosn is that they can invest for the mean life expectancy payout, whereas an individual must assume the longest plausible lifespan to make this work (say 5-10 years more than the mean).

The unavoidable IA risk is losing the money for your estate if you die young.

[donheff]

Quote:

Originally Posted by 2B Buy the annuity now. I mean right away. I'm so tired of telling people how f******g stupid they are that I have come to realize that I own stocks in many of the companies selling them. If you have half a brain you wouldn't have asked so since you are dumber than dog dung I suggest you put 100% of your money in it and then promptly slit your own throat after realizing how stupid you are.

Well thought out and nicely defended. From now on 2B is my goto guy for rock solid investing advice.

[JohnEyles]

Quote:

Originally Posted by 2B ... you are dumber than dog dung I suggest you put 100% of your money in it ...

Bummer, seemed to be a pretty high level of civility here, but I guess
there are resident assholes on every forum.

[Khan]

Quote:

Originally Posted by JohnEyles Bummer, seemed to be a pretty high level of civility here, but I guess there are resident assholes on every forum.

I think it's required ( spelled out somewhere in the bylaws ).

[Gone4Good]

Quote:

Originally Posted by Nords Would that CPI adjustment be for every CPI, or would it by any chance be capped at a figure like 10%? I wonder how that kind of SPIA went over during the '70s & '80s.* But of course this time it's different...

Not too bad, actually. There were only a handful of years where inflation was over 10%. Using the 10% cap, it looks like you would have escaped the 70's and early 80's with about 95% of your purchasing power (as measured by CPI) intact.

Now if you lived in Brazil . . .

[Texas Proud]

Quote:

Originally Posted by brewer12345 What I mentioned was basically buying put options on an equity index ETF. The one I use most often is QQQQ because it is very liquid and you get relatively good pricing on options on this ETF. A put option gives you the right, but not teh obligation, to sell something at a specific price. So, for example, you could buy a put on QQQQ yesterday for about 60 cents that would allow you to sell the ETF at 37 any time between now and the third friday of January, 2007, regardless of what the open market price of QQQQ is. Obviously, the farther QQQQ might drop the more valuable the put would be. If QQQQ is above the strike price (37 in this case) by the time the option expires (January in this case), the option expires worthless. But you might not care, since that would mean that no disaster scenario heppened in your portfolio. Basically, you pay a smallish insurance premium to limit your losses while preserving your upside. Obviously, more reading and a thorough understanding of the basics of options is required before doing any of this, but that's about what it boils down to.

Just a quick question on these things... as I have never traded them.. but know what they are and do... so it is only a trading question..

You say it cost 60 cents... is this 'per share'? And if so, how many shares does one option represent? I am thinking 100.. so if you bought one option you would pay $60 plus fee??

[2B]

Quote:

Originally Posted by JohnEyles Folks, I apologize, but I cannot let this one rest.* Sorry.* *In my 'critique my plan' thread, many of you expressed disapproval of SPIA, and pointed me to some papers which* analyze why they don't make sense, at least for a 53yo.* But, leaving aside the academic issues like "mortality credits" and such, the bottom line for me is as follows ... AIG (via Vanguard) will sell me a SPIA with initial payout equal to 4.4% of my principal, and which is adjusted every year by the CPI.* This sounds a LOT like the criterion for a SWR with "constant spending power". Given the conventional wisdom of a 4% "safe withdrawal rate" (SWR), this seems pretty good to me.* Especially given that my median life expectancy is about 30yrs (the number for which the 4% SWR is usually specified) - but of course my 90-percentile expectancy is more like 36 yrs.* *And this 4.4% is not THOUGHT to be safe by a historical analysis.* No.* It IS safe.* It's guaranteed - at least unless AIG becomes insolvent (but of course, if I invest the money in other fixed-income, besides Treasury, insolvency is still a risk). Yes, I realize nothing will be left over.* But given I will still have my house, plus the remains of the other 75% of my portfolio, to be bequeathed to as yet undefined survivors, I'm comfortable with that.* It seems like a fair exchange for a GUARANTEED inflation-adjusted 4.4% SWR ! Please don't humor me just to make me shut up* , but doesn't this make sense ? Thanks, John

For those that didn't remember how this thread started, I thought I'd remind you. In my prior post I refrained from "humoring" him.

Being more specific --

John is looking at buying a product that has a high initial commission and high annual fees built into the product. For any other financial product brought up on this board the poster would be encouraged to avoid it. Somehow, annuities have been determined by some to be more "sophisticated" than load mutual funds.

If you use FIRECalc, you can see that a SWR of around 4.3% can be achieved and usually leave a substantial residual many times the original investment so comparing an annuity withdrawl rate to 4% is inappropriate. When you die with an annuity, it will have no residual. FIRECalc is the most conservative of the investment calculators I've come across so if you'd like to use a different "base" it would almost have to be higher.

The interest rate used to calculate the payout for an annuity is probably less than 4%. If you created your own personal annuity you would have to live more than 15 years longer than your mortality table before the annuity would have yielded a better payout. I realize most annuity fans think they will live forever so the annuity is a great deal for them.

We are currently experiencing near record low interest rates. This doesn't seem like a good time to tie my money up for the rest of my life.

My FIL has Alzheimer's and I've talked with a number of people where their parent(s) have a similar problem. It is very common for us to admit that shortly before "Dad" was diagnosed he went out and sunk a big hunk of money into an annuity. My FIL did. My father did not too long before he died. He was never diagnosed with the big A although my sisters had noticed other odd behaviors. I've come to associate buying annuities with brain disorders.

So, I had assumed ol' John had read some of the earlier annuity threads and was simply fully infected with the "gotta have an annuity" bug. Since I own insurance company stocks in my index mutual funds, I wanted to know that he will be helping me financially if not himself.

[donheff]

Quote:

Originally Posted by 2B My FIL has Alzheimer's and I've talked with a number of people where their parent(s) have a similar problem. It is very common for us to admit that shortly before "Dad" was diagnosed he went out and sunk a big hunk of money into an annuity. My FIL did. My father did not too long before he died. He was never diagnosed with the big A although my sisters had noticed other odd behaviors. I've come to associate buying annuities with brain disorders.

2B: What happened with your father is a shame and quite possibly criminal. But you should not let it lead to to viciously attack anyone who doesn't think like you. You might note that many of the people who are interested in certain types of inflation protected annuities are doing very well financially. They are not as dumb as (whatever) and just may be smarter than you.

[brewer12345]

Quote:

Originally Posted by Texas Proud Just a quick question on these things...* as I have never traded them.. but know what they are and do...* so it is only a trading question.. You say it cost 60 cents... is this 'per share'?* And if so, how many shares does one option represent?* I am thinking 100.. so if you bought one option you would pay $60 plus fee??

Ah, yes, the mechanics. Optons are traded in "contracts", with each contract representing an option on 100 shares of teh underlying. The prices are quoted in per share amounts, so you would multiply price times 100 to get the price of a contract.

You are right in your recollection.

[2B]

Quote:

Originally Posted by donheff 2B: What happened with your father is a shame and quite possibly criminal.* But you should not let it lead to to viciously attack anyone who doesn't think like you.* * You might note that many of the people who are interested in certain types of inflation protected annuities are doing very well financially.* They are not as dumb as (whatever) and just may be smarter than you.

People can do very well financially and still make poor investments. *I have not seen one annuity product that I would consider anything but a "poor" investment. *I realize that annuity salesmen do a great job in showing how "sophisticated" investors utilize various annuities to assure their financial security. *Mostly, annuity salesmen assure their own personal financial security. *

We've had multiple annuity threads here and its always the same story. *"Hey! *I can get a higher SWR with an annuity!" *I'm tired of pointing out their errors. *It's not a question of who is smarter. *It's a question of who does the basic math necessary to show that the insurance companies didn't build those big fancy buildings and hire all those people just to make you rich. *

If you think they did, you probably also believe all those casinos in Las Vegas were built to make people rich. *The big difference between them is that in Las Vegas you get free drinks while they are taking your money.

[brewer12345]

Quote:

Originally Posted by JohnEyles 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

I think we are starting out from different premises. The day I sit with a portfolio of 60% TSM and 40% treasuries is probably right after I am diagnosed with Alzheimer's, assuming I have blown the lot on Venezuelan Beav3r-Cheese futures by then. IMO, that is a portfolio that is foolishly undiversified. So when you start talking about 26% chance of withdrawal failure, we are already at a point of departure since a more diversified portfolio would be a LOT more robust than a 60/40 portfolio, especially in the kinds of scenarios that blow up the 60/40 port (runaway inflation, stagflation, etc.).

So I think that firecalc's results are extremely conservative compared to how well a more diversified portfolio would have fared in the most challenging historical scenarios.

As for the insurance companies, I am not eager to take an outsized credit exposure to any entity, no matter how highly rated. Companies demutualize, fail, get downgraded, sell off entities or blocks of policies, and usually this stuff happens in troubled times. And almost no company is immune. Not so long ago, AIG was Aaa rated (not anymore). You can somewhat mitigate these risks by choosing carefully, but you can never completely avoid them if you take an outsized credit exposure. And many of the most active companies in the SPIA world are the industry equivalent of stupid people running as fast as they can with a pair of sharp scissors (pointy end up).

So I am not all that sanguine about dealing with the insurers unless A) you have no choice and B) you keep your exposures modest.

Finally, it is worth revisiting how insurers design and manage SPIAs. These are pretty simple products. The insurer sells a block of SPIAs, takes in cash, and puts the proceeds into a bond portfolio that is usually heavy in BBBs and AA/AAA stuff, with a modest helping of junk. If they sold you an inflation indexed SPIA, they probably also threw in a fixed to CPI-linked swap. So out of this portfolio, they expect to be able to pay you in full and make a 15% ROE on the capital they put up against the SPIA. What does that tell you? It tells me that a well managed bond portfolio is more than adequate to pay out the SPIA cash flows. Now inagine how much better it would be if you could invest in higher eturn assets, didn't have to put up any expensive equity capital, and got to keep the insurer's profits.

One last thought: the option to wait has value. If you like the idea of a SPIA, there is nothing wring with staying invested, kicking the can down the road for a while, and revisiting the idea. But once you buy the SPIA, you are committed.

[donheff]

Quote:

Originally Posted by 2B People can do very well financially and still make poor investments. I have not seen one annuity product that I would consider anything but a "poor" investment. ... We've had multiple annuity threads here and its always the same story. "Hey! I can get a higher SWR with an annuity!" I'm tired of pointing out their errors. ...

SB: a bit more reasonable post. But on your first point virtually everyone interested in SPIAs views them as insurance not investments. I don't consider my health or home insurance a good investment but I still carry it. On your second point (again, looking at this as insurance not an investment) the SWR for a possible long life (which is what people are insuring for) does appear to beat comparable SWRs for self investments (at least at the outset years - later it may not but that is, again, true with all insurance).

Brewer's post following yours addresses the real dispute - is this good insurance, or not. I disagree with Brewer on the complaint that the insurance companies make money with a bond portfolio, so you could too. That applies to all insurance - health, life, home. The companies bet the averages and win. The insurees are betting against the averages and understand that they will likely lose -- so what? They are hedging and don't have the patience or nerves to do it Brewr's way (with puts). But Brewer does make some points that are very important to us insurance evaluators -- these folks may sell your insurance to other carriers, may go belly up, etc. The fact that the insurance itself may be an illusion gives me a lot more pause than the fact that the companies make money or that it would make a poor investment.

I have to admit, I too am getting tired of this topic. So I will take the pledge. From now on, I will stay out of this topic unless a future thread sheds some interesting light on the risk factors of the insurance industry itself.

[brewer12345]

Quote:

Originally Posted by donheff the risk factors of the insurance industry itself.

Heh, if you are interested, just ask. No doubt there are lots I haven't thought or seen, but I can at least round up the usual suspects.

[JohnEyles]

Folks, thanks for all you've given me to think about.

For the record, there is no salesman pressuring me to
buy a SPIA. I am reading about it a lot, and getting quotes
from Vanguard and WebAnnuities.com. I am contemplating
committing at most 25% of my savings - still a lot of $$$.

I appreciate 2B's more nuanced response (and condolence on
his FIL's experience). As to his assertion about SWRs, I am
unable to get FIRECalc to give a 95%-safe SWR of 4.4% (that's
what the SPIA is giving, not 4.3%), that is CPI linked, for a
30-yr payout (about my mean life expectancy), with any
portfolio other than a hand-crafted "mixed portfolio". I am
not real comfortable with that, because (A) I gather many users
seem to feel the excellent results of this portfolio are an artifact of
the data set, (B) there seems to be a widespread opinion that stock
returns, going forward, may be lower than historical precedent, and
(C) I am NOT smart regarding investments, more to the point I am
not very interested in investment, so I think anything more complex
than a TSM/Treasury split may be unrealistic in the long-term.

I also continue to assert that the combined risk of my requiring
a longer than 30-yr payout, along with the 5% risk of
portfolio ruin even at 30yr payout (assuming FIRECalc's
predictions are accurate), is probably greater than the
chance of insurance company insolvency. But I respect
Brewer's apparent feelings to the contrary and willl look into
this further.

Finally, I believe the advice to wait and see - will I see
the light and realize what a moron I am?, will interest rates
rise and make the relative SWR of the SPIA even better ? - is
good advice, and I intend to take it.

John

[brewer12345]

Quote:

Originally Posted by JohnEyles Finally, I believe the advice to wait and see - will I see the light and realize what a moron I am?, will interest rates rise and make the relative SWR of the SPIA even better ? - is good advice, and I intend to take it. John

Aside from these considerations, waiting also cuts time off your actuarial lifespan estimate, which means that the payout per $1000 you lay out will rise, all else remaining equal.

[Dawg52]

Quote:

Originally Posted by JohnEyles (C) I am NOT smart regarding investments, more to the point I am not very interested in investment, so I think anything more complex than a TSM/Treasury split may be unrealistic in the long-term.

You don't have to be smart to get a good balanced mix. Take a look at the target funds before you make a final decision. Best of luck.

https://flagship.vanguard.com/VGApp/...FundIntExt=INT

http://personal.fidelity.com/product...sr?refpr=ipmf8

[brewer12345]

Quote:

Originally Posted by DOG52 You don't have to be smart to get a good balanced mix. Take a look at the target funds before you make a final decision. Best of luck. https://flagship.vanguard.com/VGApp/...FundIntExt=INT http://personal.fidelity.com/product...sr?refpr=ipmf8

Yeah, I don't get that. You are willing to spend a lot of effort researching SPIAs, but won't consider spending a dozen hours a year on a portfolio?

[kaneohe]

John,

Don't know if you have seen the current issue (Oct) of Money Magazine but they have an interesting article on your topic of making your nest egg last. The article is also reproduced online here http://money.cnn.com/2006/09/07/pf/r...ymag/index.htm

Money's conclusion is that a 50-50 mix of a diversified stock/bond portfolio and an immediate annuity is the best but that is a conclusion you can decide for yourself.
They provide an interesting plot (by Ibbotson) of how 3 portfolio mixes:
1) 100% diversified stock/bond portfolio
2) 25% immediate annuity, balance diversified stock/bond portfolio
3) 50% immediate annuity, balance diversified portfolio

fare over the long term for a 65 yr old spending 4% of his funds a year.
The 3 plots are similar up until age 83 or so and then increasingly diverge with the 50-50 mix holding up the best for ages over 93 or so..

No single conclusion will satisfy everyone, I suppose, since as you and others have pointed out, it depends on what allows you to sleep at night and how good your genes and health might be. And whether future statistics of inflation/asset returns will be like the past and how dependable annuity insurance cos. will be in a crash and how well defined expenses
(including health care) are, etc.etc.

In my case, I am hopeful that SS for me and DW when retired will provide 50% of spending and confess to having writer's cramp if I ever had to write a check for 50% (or even 25%) of assets, so I will continue to procrastinate on the IA decision. You mentioned that you had SS but never quantified it.....was that already built into you decision?

[Rich_by_the_Bay]

If I had 50% in an IA (which I won't), I would not have any bonds in my portfolio. How much volatility protection would your really need in that situation?

[FinanceDude]

Why are we talking immediate annuities at all? Annuitization, period certain or not, it 99.99% of the time a horrible proposition. I personally would NEVER give up CONTROL of my money to an insurance company..........

If you are bound and determined to have an annuity for "peace of mind" look at a VA with Vanguard and put some "sleep at night" riders on it.

In lieu of that, listen to brewster, he speaks wisdom..........