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Is an Annuity a good way to get over a SWR of 5%?
Old 10-22-2006, 09:17 AM   #1
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Is an Annuity a good way to get over a SWR of 5%?

I split this topic into another thread, It may have been beat to death, But I missed the earlier rounds. - Cut-Throat




What kind of annuity--a short-term annuity to replace the Social Security you're postponing for a few years? an immediate annuity when you retire to provide income for the rest of your life? a variable annuity as a tax-shelter while working?
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 09:40 AM   #2
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Re: Jonathan Clements Article today - Contrary Advice

The October issue of Money magazine says that every $100,000 invested in an annuity with inflation protection would kick off $490 per month in income to start with annual inflation adjustments thereafter.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 10:13 AM   #3
 
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Re: Jonathan Clements Article today - Contrary Advice

Quote:
Originally Posted by Merlin
The October issue of Money magazine says that every $100,000 invested in an annuity with inflation protection would kick off $490 per month in income to start with annual inflation adjustments thereafter.
If this was true a $1M annuity purchase would kick out $58,800 a year with inflation adjustment. Not too shabby a way to secure a Inflation Adjusted 5.88% SWR - Probably should read the fine print though.

Anybody familar with this want to give us the downsides of this? - Other, than if you croak early you would not have the $1 Million to pass on to your heirs.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 10:26 AM   #4
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Re: Jonathan Clements Article today - Contrary Advice

Quote:
Originally Posted by astromeria
I suppose one could consider doing this with all or part of one's fixed income slice/dice/bucket/barrel/keg/demijohn.
AHA! The Three-Demijohn method! I need clarification on this, but I like it already.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 10:28 AM   #5
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Re: Jonathan Clements Article today - Contrary Advice

Quote:
Originally Posted by Cut-Throat
If this was true a $1M annuity purchase would kick out $58,000 a year with inflation adjustment. Not too shabby a way to secure a 5.8% SWR - Probably should read the fine print though.

Anybody familar with this want to give us the downsides of this.
The return obviously will depend on your age and whether "significant other" coverage is at 0, 50 or 100%.

An immediate annuity is always a poor financial decision unless you know you will significantly outlive your actuarial longevity. The insurance companies assume "sick" people don't buy immediate annuities and pad their figures a bit. The "real" interest rate they use is just a tad over 3% to calculate the annuity payment. The rest is return of principal.

If you run FIRECalc using a 30 year plan for a 60 year old, you will get a much higher SWR with an immediate annuity than if you don't use one. The key issue is that most 60 year olds won't make it to 90. You can put in an inflation annuity and look even better but FIRECalc and most annuities don't calculate inflation the same way.

Most of us have an inflation adjusted annuity already. It's called social security. It's subject to all sorts of political attacks but it is probably safer than anything you might buy in the open market. Millions of old voters will see to that.

I've said all this before and I expect the same people to come in with the same responses.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 10:34 AM   #6
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Re: Jonathan Clements Article today - Contrary Advice

Quote:
Originally Posted by Cut-Throat
- Other, than if you croak early you would not have the $1 Million to pass on to your heirs.
You edited while I was posting.

The key reason for having a decent pile of cash available at "end of life" is to address the added cost of assisted living and nursing care. I personally am not in love with any of the LTC plans I've seen and feel "self-funding" makes more sense.

My FIRECalc runs have a minimum/ending portfolio of $250K. I've decided that that would cover my needs so I wouldn't be a "burden." When I figure out what I'd have to pay for LTC, the premiums would easily amount to more than the $250K (if I make it into my 70's) that I think would be needed.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 10:35 AM   #7
 
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Re: Jonathan Clements Article today - Contrary Advice

Quote:
Originally Posted by 2B
An immediate annuity is always a poor financial decision unless you know you will significantly outlive your actuarial longevity.
No one ever knows! - That's the point!

If you die early, yes it was a poor financial decision. - But you're dead, so why should you care?
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 10:36 AM   #8
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Re: Jonathan Clements Article today - Contrary Advice

Quote:
Originally Posted by Cut-Throat
Anybody familar with this want to give us the downsides of this? - Other, than if you croak early you would not have the $1 Million to pass on to your heirs.
The inflation rider is typically capped at 10%...
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 10:47 AM   #9
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Re: Jonathan Clements Article today - Contrary Advice

2B quoth thusly:
Quote:
Most of us have an inflation adjusted annuity already. It's called social security. It's subject to all sorts of political attacks but it is probably safer than anything you might buy in the open market. Millions of old voters will see to that.
Always worth repeating. This made me more comfortable with full investment of my stash.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 10:50 AM   #10
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Re: Jonathan Clements Article today - Contrary Advice

Quote:
Originally Posted by Nords
The inflation rider is typically capped at 10%...
Per year or forever? If forever, that would likely get used up in just a few years, making it almost useless.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 11:05 AM   #11
 
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Re: Jonathan Clements Article today - Contrary Advice

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Originally Posted by astromeria
Per year or forever? If forever, that would likely get used up in just a few years, making it almost useless.
I would doubt very much it would be forever, for the reason you stated.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 11:06 AM   #12
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Re: Jonathan Clements Article today - Contrary Advice

Quote:
Originally Posted by astromeria
Per year or forever? If forever, that would likely get used up in just a few years, making it almost useless.
10% max per year. It wouldn't have done well in the late 1970s/early 80s.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 11:21 AM   #13
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Re: Jonathan Clements Article today - Contrary Advice

Quote:
Originally Posted by Cut-Throat
No one ever knows! - That's the point!

If you die early, yes it was a poor financial decision. - But you're dead, so why should you care?
That is kind of the way I see it. Once I'm dead I could really care less whether my investment choices were optimal. My bigger concern is living with no income rather than dieing with money left on the table.

Recent studies have suggested that retirees with pensions are happier than those without. It seems logical that people expecting a check in the mail every month will feel more secure than those who aren't.

I understand they are not right for everyone, but I don't quite understand the hostility toward immediate annuities. Sure they likely provide a lower total return then an equivalent bond portfolio, but half of all people beat the actuarial averages - some folks by a lot. The law of large numbers means the insurance company doesn't care much about the tails on the mortality distribution curve but as a self insured individual you certainly do.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 12:23 PM   #14
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Re: Jonathan Clements Article today - Contrary Advice

It's Deja Vu all over again. Now I understand why some posters got mad and SHOUTED in the last annuity thread.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 12:26 PM   #15
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Re: Jonathan Clements Article today - Contrary Advice

Quote:
Originally Posted by donheff
It's Deja Vu all over again. Now I understand why some posters got made and SHOUTED in the last annuity thread.
I am personally happy that people are rushing into immediate annuities. My index funds are full of financial companies that profit from selling them. My ethics demand I point out they are not likely to be good investments but I have come to realize that the people that like annuities think they will live forever (or nearly so).
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 12:38 PM   #16
 
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Re: Jonathan Clements Article today - Contrary Advice

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Originally Posted by 2B
I am personally happy that people are rushing into immediate annuities. My index funds are full of financial companies that profit from selling them. My ethics demand I point out they are not likely to be good investments but I have come to realize that the people that like annuities think they will live forever (or nearly so).
I'm not sold on aunnuities, I'm just trying to learn something. If you are against annuities mostly because companies make a profit on the aggregate - why have any insurance at all?

On the other hand - we have many SWR discussions here that say that 4% is too risky maybe it shoud be 3% or ? - Seems to me like if some folks want to get over 5% SWR and die with nothing, an annuity might be the way to go. The real problem, as I see it, would be someone that struggles to make it on 3% SWR dies early with a pile of cash. - An annuity might just let them spend a little more than they would otherwise.

Now if you are trying to protect a Pile for your heirs, this would not apply. I think you are trying to make a case for annuites are all bad for everybody. I think you just have to look at what you are trying to accomplish. And for me, dying broke is the goal! - You obviously want to have a pile when you die!




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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 01:37 PM   #17
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Re: Jonathan Clements Article today - Contrary Advice

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Originally Posted by 2B
My ethics demand I point out they are not likely to be good investments but I have come to realize that the people that like annuities think they will live forever (or nearly so).
Different strokes for different folks . . .

Cash is likely a worse investment then bonds which is likely a worse investment then stocks. Each, though, has a place in a portfolio. Some folks here like to swing for the fences and put 100% in stocks while others will have a higher concentration in bonds. That allocation decisions is a personal risk / reward trade off. Others may like the risk / reward trade off of having an insurance company provide a monthly check for as long as they live. This is not a mortal sin, or even necessarily a bad investment decision. Piece of mind is worth a ton in managing your personal portfolio.

Also, someone doesn't need to think they are going to live forever to justify buying an annuity. All they need to do is recognize that there is asymmetric longevity risk in retirement planning. I sure wouldn't build my retirement plan assuming actuarial life expectancy.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 04:39 PM   #18
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Re: Jonathan Clements Article today - Contrary Advice

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Originally Posted by 3 Yrs to Go
That is kind of the way I see it. Once I'm dead I could really care less whether my investment choices were optimal. My bigger concern is living with no income rather than dieing with money left on the table.

Recent studies have suggested that retirees with pensions are happier than those without. It seems logical that people expecting a check in the mail every month will feel more secure than those who aren't.

I understand they are not right for everyone, but I don't quite understand the hostility toward immediate annuities. Sure they likely provide a lower total return then an equivalent bond portfolio, but half of all people beat the actuarial averages - some folks by a lot. The law of large numbers means the insurance company doesn't care much about the tails on the mortality distribution curve but as a self insured individual you certainly do.

Immeadiate annuties arent about total return or heirs , they are about the highest withdrawl rate possible, for life.

they are about not bouncing the check to the morgue

they pay a rate higher than most can do with a bond or cd ladder because they are funding it with something you dont have,, money from all the dead people.

its basically the opposit of life insurance,, with life insurance you are betting you will die , annuties are a bet you will live.
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Re: Jonathan Clements Article today - Contrary Advice
Old 10-22-2006, 05:38 PM   #19
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Re: Jonathan Clements Article today - Contrary Advice

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Originally Posted by 3 Yrs to Go
Also, someone doesn't need to think they are going to live forever to justify buying an annuity. All they need to do is recognize that there is asymmetric longevity risk in retirement planning. I sure wouldn't build my retirement plan assuming actuarial life expectancy.
You have one of the best annuities in the world available to you -- social security. You can enhance your return by deferring your withdrawl date until age 70. The cost is whatever your earlier benefit was for a few years. Your payment for life goes up about 8.5% for every year you wait -- plus it's inflation protected. That's probably a better return for your money than you'll get from any annuity but I haven't run the numbers.

The last time I ran the numbers someone would have to live about 12 years beyond their actuarial longevity to break even. Don't let me discourage you from buying one. It is one of the most profitable aspects of the financial services industry and I'm heavily invested in that segment.
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Re: Is an Annuity a good way to get over a SWR of 5%?
Old 10-22-2006, 05:41 PM   #20
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Re: Is an Annuity a good way to get over a SWR of 5%?

for people with little assets even waiting until 70 to take ss may not do the trick for them. for them an annuity would be good.
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