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Old 05-12-2013, 03:12 PM   #41
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To James7, No problem, I like to help on items I feel I have researched, understand and actually own so I can personally see them operate. You actually still get the dividends and capitol gains but they are not broken out like you are used to seeing, they just become part of that days increase in price when they happen, they are never mentioned though. Also, if you purchase the annuity with after tax money, as it sounds like you would do, almost all the payment is not taxed because in effect, it is your money being returned to you. You will pay a very minimal tax (probably none because of other gains in your other portions of your portfolio) Also, the payment is exact, no fees, taxes etc. are taken out of your payment, they come out of your portfolio balance. This lets you know exactly to the penny how much your annuity will pay every month. I much as I like these, I would still do what you are implying, buy them after you retire and take the GLWB at the exact time you sign up. Also, your nest isn't necessarily "protected" as they are stocks and bonds and will go up and down just as if they were not in an annuity, it is just that no matter how low they go your income will not be affected. As a side note, that portion of this makes me less inclined to want to pull the plug if the markets are plunging....just leave it in the annuity and keep collecting the same money. Hope this helps.
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Old 05-12-2013, 03:58 PM   #42
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Also worth mentioning - If you live in a state with a high credit rating, there is the additional security backstop of the State Guaranty Association. Just be aware of the limitations.
Absolutely, completely wrong. No state backs the liabilities of insurers doing business in its borders. The guaranty associations have their own resources and then that is it: no state backing. More information can be found here: www.nolhga.com
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Old 05-12-2013, 04:11 PM   #43
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Good to know, thanks for the correction.
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Old 05-12-2013, 04:38 PM   #44
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Feel free to wallow in ignorance if you like. In the case of AIG, insurance regulaton worked quite well. The unregulated holding company was where all of the drunken skullduggery went on. When the holding company was about to blow up, there was tremendous political pressure to allow the insurance operating companes (which were healthy and well capitalized) to take on the liabilities of the holding company. NY State insurance commissioner Dinallo did the right thing and would not allow it to happen. Insurance policyholders were protected as they should be.

Despite their rating, I would never have bought a policy from AIG. Although it was big and well rated, the company was always leveraged, had an aggressive culture, and was not a mutual.

In the case of the large mutuals that are running around today, they all have very large blocks of participating long term policies. Even if one of the companies managed to demutualize, these policies would be put into what is referred to as a "closed block" and effectively must be made super senior within the insurance operating company's liabilities complete with extra capital and heavy regulatory scrutiny. It would be very, very difficult to ever impair the policyholder's value from one of these policies.
Thank you for the clarification I'm wallowing slightly closer to the surface now as a result. But I still have a long way to go. Along those lines, do I understand you correctly that if someone less well motivated than commissioner Dinallo had been in charge of that decision then the s*** would have hit the proverbial fan?
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Old 05-12-2013, 05:28 PM   #45
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Thank you for the clarification I'm wallowing slightly closer to the surface now as a result. But I still have a long way to go. Along those lines, do I understand you correctly that if someone less well motivated than commissioner Dinallo had been in charge of that decision then the s*** would have hit the proverbial fan?
Whether it would even be possible I do not know. It would likely depend upon the fine points of state insurance law and since there were monied/institutional interests at the insurance company level you can bet that it would have been contested and likely litigated if it had been attempted. Generally speaking, insurance operating companies are not allowed to take on the liabilities of their unregulated affiliates, although I am aware of one instance in which this was allowed (March McClennan). However, the one case I am aware of involved holding company debt that was nowhere near an amount that would have threatened the insurance operating companies. Clearly the AIG case was different.
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Old 05-12-2013, 06:18 PM   #46
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Absolutely, completely wrong. No state backs the liabilities of insurers doing business in its borders. The guaranty associations have their own resources and then that is it: no state backing. More information can be found here: www.nolhga.com

Do you know of any instance where a SGA limit has been breached?
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Old 05-12-2013, 06:30 PM   #47
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It seems annuities are a bad deal when interest rates are low, like now. One of my future scenarios when we are in our 50s and in ER, is if interest rates rise to a high level, then buy $1 million worth of inflation adjusted annuities scattered over several vendors so we are hedged against counter party risk. Of course at that stage we will assess our investment track record in our FI assets. If we believe we can do better than what is offered by the annuities rate then we will go with ourselves.

My question for annuities experts on this board is what is your take on the relative pluses and minuses of inflation adjusted annuities versus the fixed annuities.
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Old 05-12-2013, 06:37 PM   #48
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Buy an annuity that allows you to get out whenever you want at no cost to you.....(see my other posts) If the rates go up, cash in and buy again, it will not cost you anything,
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Old 05-12-2013, 07:07 PM   #49
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Do you know of any instance where a SGA limit has been breached?
Not off the topof my head. I know there were lots of policyholders impaired when Executive Life blew up in the 90s, but I don't know if it was just people over the guaranty limit or if the state guaranty fund was tapped out. None of the state guaranty funds are prepared for a major loss at a large insurer, IMO.
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Old 05-12-2013, 07:42 PM   #50
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[. None of the state guaranty funds are prepared for a major loss at a large insurer, IMO.[/QUOTE]


Thank you, that is the answer I was seeking.
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Old 05-12-2013, 08:31 PM   #51
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[. None of the state guaranty funds are prepared for a major loss at a large insurer, IMO.

Thank you, that is the answer I was seeking.[/QUOTE]

Well, remember: opinions are like buttholes, everyone has one and most of them stink.

What I think the lack of a believable third party backstop means is that you should be very selective as to which insurers you give your money to, especially if you don't have the right to get it back at your convenience. For me, this means I only do business with larger, highly rated mutuals, although I make exceptions for particularly strong mid-sized companies.
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Old 05-13-2013, 08:14 AM   #52
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Thank you for the clarification I'm wallowing slightly closer to the surface now as a result. But I still have a long way to go. Along those lines, do I understand you correctly that if someone less well motivated than commissioner Dinallo had been in charge of that decision then the s*** would have hit the proverbial fan?
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Do you know of any instance where a SGA limit has been breached?
I don't think it would have been possible for the holding company liabilities to be transferred to the operating companies to any extent that it would have helped the situation, as such a transfer would be deemed a substantive distribution from the operating companies to the holding company and there are limits on the amount of such distributions. The more likely scenario would be that the holding company would start trying to draw distributions from the operating companies to raise cash to help settle the holdco obligations. Same difference at the end of the day. There are limits on such distributions without regulatory approval (generally the lesser of last year's net income or 10% of surplus IIRC, but it varies by state). IMO no commissioner in their right mind would approve distributions if it would reduce the operating company RBC too much - they would protect the operating company and let the holding company go down.

On the second question, I know that in past insolvencies that some policyholders have had their interest reduced to the minimum rate (they didn't get the high rate in the contract or that was being credited at the time the stuff hit the fan) but to the best of my knowledge no customer has ever lost a dime of principal - at least that is what I kept hearing when I was in the industry and to the best of my knowledge it is true (or it may be some urban legend in the industry for all I know). I was fairly involved in one major insolvency when I was in the industry (we were one of the reinsurers in the workout) and I know in that case the policyholders got the contractual minimums (so they would have received their promised payments in the case of a SPIA).
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Old 05-13-2013, 11:03 AM   #53
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Kimo, what you are describing is a variable annuity while the thread started out discussing SPIAs. While I think there is a place for both depending upon one's situation, they are not one and the same.
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Old 05-13-2013, 11:28 AM   #54
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Hello Brooks,
Yes, he referred to SPIA's and when I read the link he provided he appeared concerned having his money tied up with an insurance company. I was merely offering him a way to have annuities without giving his principle to an insurance company....he could still end up with either or none, I was offering the idea there are more annuities than just SPIA's.
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Old 05-13-2013, 05:12 PM   #55
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It seems annuities are a bad deal when interest rates are low, like now. One of my future scenarios when we are in our 50s and in ER, is if interest rates rise to a high level, then buy $1 million worth of inflation adjusted annuities scattered over several vendors so we are hedged against counter party risk. Of course at that stage we will assess our investment track record in our FI assets. If we believe we can do better than what is offered by the annuities rate then we will go with ourselves.

My question for annuities experts on this board is what is your take on the relative pluses and minuses of inflation adjusted annuities versus the fixed annuities.
Now is a tough time to buy annuities with yields/income payouts at historic lows, but some people are comfortable buying them now for their own valid reasons.

Finding quotes for inflation adjusted annuities is harder to begin with, but most I have seen are based on a fixed rate of inflation (ie 3%). I doubt any insurer would offer one that floated with CPI for the lifetime of a participant, and I know some insurers have even stopped offering fixed inflation rate SPIAs. Here's a reasonably timely article by a far, far better, arguably conservative, source than me. Retirement Researcher Blog: Efficient Frontiers: Inflation Assumptions, Fixed SPIAs, & Inflation-Adjusted SPIAs
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An important point to note is that the initial retirement date payout is 51% larger for the fixed SPIA than the inflation-adjusted SPIA ((5.84-3.875) / 3.875). After retiring, the fixed SPIA amount will always stay at the same nominal amount, whereas the nominal amount of the real SPIA increases along with the sequence of inflation experienced after retirement. For my simulations, I did have inflation fluctuate randomly around an average inflation rate of 2.1%, which represented the breakeven inflation rate expected by the markets as determined by comparing Treasury yields with TIPS yields.

If inflation is fixed at 2.1%, the table shows that the actual income amount provided by the real SPIA would not start to exceed the fixed SPIA amount until the 20th year of retirement. That’s a long time to wait. Granted, after 20 years, the real SPIA will continue providing a larger amount of income forever, but it is a long time to wait for that to happen. That is the fundamental intuition about why fixed SPIAs beat real SPIAs in my simulations.
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Old 05-14-2013, 05:24 PM   #56
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Now is a tough time to buy annuities with yields/income payouts at historic lows, but some people are comfortable buying them now for their own valid reasons.

Finding quotes for inflation adjusted annuities is harder to begin with, but most I have seen are based on a fixed rate of inflation (ie 3%). I doubt any insurer would offer one that floated with CPI for the lifetime of a participant, and I know some insurers have even stopped offering fixed inflation rate SPIAs.
American General has one (I got there thru Vanguard).
Monthly, straight life payout for a 65 year old male:

$537 Fixed
$386 Scheduled 3% increases
$372 CPI indexed

Companies can cover the CPI risk by investing the premiums in TIPS. They can probably invest in other bonds than swap into the TIPS inflation protection, but I'm no expert on swaps.

I can remember a day in the late 1990's when I read an article about this new Treasury bond and immediately walked over to my boss's office and said that it was now possible to write CPI indexed SPIAs. It took at least 5 years before that company had a product on the market. They may have pulled it by now because bond yields are generally low, but not because they can't cover the CPI risk.
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Old 05-14-2013, 07:32 PM   #57
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American General has one (I got there thru Vanguard).
Monthly, straight life payout for a 65 year old male:

$537 Fixed
$386 Scheduled 3% increases
$372 CPI indexed
Good info thanks. May be just me, but I don't see straight comparisons like this often enough. Initial payouts for 3% annual increase version are over 30% lower. That matches up with other actual quotes I've seen where initial purchase price of 3% annual increase annuity was 40% higher for same first year payout. I'm too lazy (at the moment) to figure out the break even point, but the Pfau quote above gives me pause. Here again:
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If inflation is fixed at 2.1%, the table shows that the actual income amount provided by the real SPIA would not start to exceed the fixed SPIA amount until the 20th year of retirement. That’s a long time to wait. Granted, after 20 years, the real SPIA will continue providing a larger amount of income forever, but it is a long time to wait for that to happen. That is the fundamental intuition about why fixed SPIAs beat real SPIAs in my simulations.
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Old 05-14-2013, 09:08 PM   #58
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Good info thanks. May be just me, but I don't see straight comparisons like this often enough. Initial payouts for 3% annual increase version are over 30% lower. That matches up with other actual quotes I've seen where initial purchase price of 3% annual increase annuity was 40% higher for same first year payout. I'm too lazy (at the moment) to figure out the break even point, but the Pfau quote above gives me pause. Here again:
Yep. The AG quote shows that the CPI indexed pays just a little less than a fixed 3% increase. So presumably inflation has to be just over 3% to make those two equivalent.

I'm guessing that the company gives up a little spread to get into CPI indexed bonds. Corporates are 100-200 basis points above treasuries. Some of that is anticipated defaults, the company loses some to capital requirements, they may be able to pick up some with a swap, but there's still a residual difference.
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Old 05-14-2013, 09:37 PM   #59
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Now is a tough time to buy annuities with yields/income payouts at historic lows, but some people are comfortable buying them now for their own valid reasons.
Maybe smaller fixed period annuities is a way to get some exposure to rising interest rates. But what about just putting the money into a Stable Value fund you have access to one in your retirement account. You'd have access to principal if you needed it, you'd get a similar return to an annuity but the rate would reflect going interest rates and you'd have insurance backing for your principal. You wouldn't have the lifetime guarantee though.
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