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Old 09-28-2015, 09:49 PM   #41
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Don't combine investing and insurance, and don't confuse the two. Insurance is for insurance. Investing is for investing. A SPIA or this deferred annuity product are essentially "insurance" for guaranteeing at least some income stream to live off of. I don't see people talking these products up as a way to reach the top 1%-2% of net worth individuals. Rather, people talk about them as a way to INSURE against not having at least some steady income stream to live off of.

Oh, so you're talking about interest rate payments? I suppose you would more strongly suggest people instead simply pluck it all down on 30 year Treasury bonds, paying.....wait for it......3%?

Oh, so we shouldn't buy 30 year treasuries, and instead just by 5 year Treasuries and wait for the interest rates to rise? Of course, the 1.5% for 5 year is just as good as the 3% 30 year. And it would have been great if someone just stuck to that plan in 2009/2010, as they waited for the inevitable interest rate reversion in...oh, yeah, rates are still non-existent.

Do you read what you are quoting? The other poster said "annuities might be appropriate for some retirees who worry about running out of money." Name for me a 30 year period in which a portfolio DIDN'T suffer a large swing in value or volatility. You have to live off of your portfolio for 30-40-50 years. You must live every day with the volatility. Some people can handle more than others. Just as some people don't want to live below a certain threshold of standard of living, some people don't want to live below a certain "worry" of income.

Can you explain what they are supposed to do as they are worrying themselves to death as the market gyrates 20%-30% or more? you don't know what the market will do, but you do know that there is a way to help insure you have at least some income that you can depend on (based on the claims-paying ability of the regulated insurer).
Who are you kidding? Annuities are a place where people put their money to work. IT DOESN"T MATTER how you want to "classify" them! "Insurance products or "investment products". DOES NOT MATTER. You want the BEST return given the low level of risk that you put your money to work at.

And you are completely ignoring diversification into bonds. Gyrate 20 - 30? Name for me a period when a 33/ 67 portfolio "gyrated 30 - 30%" NEVER HAPPENED IN HISTORY! Anyone who "worries" about 20 - 30% gyrations is not properly diversified into bonds. Bonds and stocks balance each other out because money has to go somewhere. When stocks fall, money runs to the safety of bonds and vice versa. Bonds and stocks TOGETHER are not risky and not going to run down to zero when taking out 4%. The insurance companies know it.

You buy bond and stock index funds like AGG and VOO. Simple.

You REALLY sound like an insurance salesman.
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Old 09-28-2015, 10:56 PM   #42
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Who are you kidding? Annuities are a place where people put their money to work. IT DOESN"T MATTER how you want to "classify" them! "Insurance products or "investment products". DOES NOT MATTER. You want the BEST return given the low level of risk that you put your money to work at.

.
What is BEST in retirement? The highest possible return? Probably not because that would involve too much risk. A portfolio of TIPS, I-Bonds, CDs and annuities, probably not as there's little opportunity for growth, although Ziv Bodie would disagree. Still the solution for most people will be in the middle and many people will like the insurance aspect of a deferred fixed annuity if it also comes with the chance to defer income tax for another 15 years and is equivalent to a 5% tax free annual return if you live an average lifespan once you reach 85.

Personally I have no use for a QLAC or an SPIA because I'm lucky enough to have several guaranteed income sources, one being TIAA-Traditional which is a fixed deferred annuity that has paid me an annual average of 6% interest since 1987. I use it as part of my fixed income allocation. It's a very particular annuity product as it has interest rate vintages, which is why the rate is so much higher than the prevailing rates, and I have full access to the principal through systematic withdrawals and can pass it on to my heirs......so it's like a CD returning 6%. Of course there are plenty of terrible annuities too. You have to make sure you get the right one, and a QLAC might be the right one for some people.
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Old 09-28-2015, 11:03 PM   #43
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What is BEST in retirement? The highest possible return? Probably not because that would involve too much risk. A portfolio of TIPS, I-Bonds, CDs and annuities, probably not as there's little opportunity for growth, although Ziv Bodie would disagree. Still the solution for most people will be in the middle and many people will like the insurance aspect of a deferred fixed annuity if it also comes with the chance to defer income tax for another 15 years and is equivalent to a 5% tax free annual return if you live an average lifespan once you reach 85.

Personally I have no use for a QLAC or an SPIA because I'm lucky enough to have several guaranteed income sources, one being TIAA-Traditional which is a fixed deferred annuity that has paid me an annual average of 6% interest since 1987. I use it as part of my fixed income allocation. It's a very particular annuity product as it has interest rate vintages, which is why the rate is so much higher than the prevailing rates, and I have full access to the principal through systematic withdrawals and can pass it on to my heirs......so it's like a CD returning 6%. Of course there are plenty of terrible annuities too. You have to make sure you get the right one, and a QLAC might be the right one for some people.
Annuities are all variations of the same thing. The one commonality is that the insurance company always wins. I have never seen an annuity that was a good deal. They all wind up paying between about 0 and 5% (if you're lucky) unless you want to sign off on some ridiculous deal like giving away 100% of your principal if you die on day 1 of your contract. With these risky all or nothing contracts, if you live to be 100 you might do well, or if you die soon your ROI would be a total disaster.

You are just plain wrong about risk. Yes never bear too much risk, but NO you don't want to bear too LITTLE risk. An annuity is too little risk. CD's is not investing either. Again look at a diversified low risk portfolio of 33% total stock market index and 66% total bond market index. If you take out 4% in the early years of retirement you will be doing JUST FINE by age 83 or so. Then you can start taking out even more because your money was growing and compounding. That video explains this in even the worst case scenario.
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Old 09-28-2015, 11:07 PM   #44
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Well, as I said, I did buy one as soon as they hit the market which is only in the last couple of months. That's one of many errors int he Kitces paper on the subject. As a customer who's been studying the upcoming QLACs for a long time, I found his post to be well-written but just full of significant errors. Starting with the one about if it was so great, why hasn't anyone bought it yet....I've followed Treasury since 2012 so I do know that even after they finally approved this reg, then it was almost a year before the insurance companies came up with offerings. Like I said, tons of errors in his blog post.
I didn't recall him saying that in his article. I went back and couldn't find it, but I could be missing it as I probably did originally. Are you referring to his comment about deferred annuities in general not selling well? He did say deferred annuities made up only 1% of annuity sales in 2014. I thought he was very honest and fair with his evaluation of them. I still don't see QLACs as something I'd consider.
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Old 09-28-2015, 11:16 PM   #45
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Annuities are all variations of the same thing. The one commonality is that the insurance company always wins. I have never seen an annuity that was a good deal. They all wind up paying between about 0 and 5% (if you're lucky) unless you want to sign off on some ridiculous deal like giving away 100% of your principal if you die on day 1 of your contract.

You are just plain wrong about risk. Yes never bear too much risk, but NO you don't want to bear too LITTLE risk. An annuity is too little risk. CD's is not investing either. Again look at a diversified low risk portfolio of 33% total stock market index and 66% total bond market index. If you take out 4% in the early years of retirement you will be doing JUST FINE by age 83 or so. Then you can start taking out even more because your money was growing and compounding. That video explains this in even the worst case scenario.
I would caution against a 4% SWR with bond yields probably being quite a bit lower over the next 10 years than the yields used in the Trinity study and of course anyone retiring now with such a portfolio would want to avoid taking out too much too soon. When it comes to risk I think I said you don't want too much or too little risk...please read my responses rather than commenting on things I have not said. A sensible portfolio will include a variety of things, equity and bond mutual funds, maybe a bond ladder, TIPS, I-Bonds and maybe even an annuity.

You could never get an SPIA today with an IRR (if you lived an average life span) much better than 2% or 3%, which is why I'm glad of my TIAA-Traditional that pays 6%. is that ok as part of a fixed income portfolio? In a perfect world where I knew that the future would be like the past and when I would die I would not buy an annuity (unless I knew I was going to live to be 100), but given those two unknowns pooling risk in an annuity is attractive and useful to many people.
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Old 09-29-2015, 09:47 AM   #46
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Annuities are all variations of the same thing. The one commonality is that the insurance company always wins. I have never seen an annuity that was a good deal. They all wind up paying between about 0 and 5% (if you're lucky) unless you want to sign off on some ridiculous deal like giving away 100% of your principal if you die on day 1 of your contract. With these risky all or nothing contracts, if you live to be 100 you might do well, or if you die soon your ROI would be a total disaster.

You are just plain wrong about risk. Yes never bear too much risk, but NO you don't want to bear too LITTLE risk. An annuity is too little risk. CD's is not investing either. Again look at a diversified low risk portfolio of 33% total stock market index and 66% total bond market index. If you take out 4% in the early years of retirement you will be doing JUST FINE by age 83 or so. Then you can start taking out even more because your money was growing and compounding. That video explains this in even the worst case scenario.
did someone force an annuity on you?

please tell us where the bad man touched you.

If you don't like or want an annuity, don't get one.
With good research, annuities can work for some people and be part of a balanced portfolio, no different than a pension.
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Old 09-29-2015, 10:42 AM   #47
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I think it's important to realize that you won't do well from an investment perspective by buying an SPIA if you use the historical returns of a balanced portfolio as a comparison. For an average life span you are looking at an equivalent interest rate on your money of maybe 3%. The deferred nature of a QLAC pushes that up to 5% and you get the added tax deferral too. But annuities are insurance. They guarantee an income. Like all insurance they are a waste of money if the insured event does not happen; you are buying risk mitigation.

If you have a portion of your income from guaranteed sources this allows you to take on greater risk with the rest of your portfolio and some studies have shown that replacing some of your bond allocation with an SPIA or DIA can allow a greater SWR in the long run. But these are just models. I think it's safe to say that no one has a definitive answer and when that happens I avoid putting all my eggs in one basket.
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Old 09-29-2015, 11:48 AM   #48
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I think it's important to realize that you won't do well from an investment perspective by buying an SPIA if you use the historical returns of a balanced portfolio as a comparison. For an average life span you are looking at an equivalent interest rate on your money of maybe 3%. The deferred nature of a QLAC pushes that up to 5% and you get the added tax deferral too. But annuities are insurance. They guarantee an income. Like all insurance they are a waste of money if the insured event does not happen; you are buying risk mitigation.

If you have a portion of your income from guaranteed sources this allows you to take on greater risk with the rest of your portfolio and some studies have shown that replacing some of your bond allocation with an SPIA or DIA can allow a greater SWR in the long run. But these are just models. I think it's safe to say that no one has a definitive answer and when that happens I avoid putting all my eggs in one basket.
But you're arguing points that are already covered in the video I posted. A 50/50 portfolio is too risky. Try a 33/67 portfolio and it's MUCH lower risk.
You are buying mitigation against risk that HAS NEVER EXISTED. This is explained pretty well in the video that even in the WORST year to retire you did fine.
5% is worse than what a SPIA pays and SPIA's stink. Inflation will eat that 5% alive as time goes on.
There are no experts (other than insurance salesmen) who are preaching annuities as being part of "diversification". It's an arbitrary line drawn in the sand by insurance salesmen. There are no fee-only fiduciary advisers telling people that they need to have a part of their portfolio "guaranteed". A balanced portfolio is protected by the notion that when stocks fall, money runs to the safety of bonds and vice versa.
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Old 09-29-2015, 12:00 PM   #49
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But you're arguing points that are already covered in the video I posted. A 50/50 portfolio is too risky. Try a 33/67 portfolio and it's MUCH lower risk.
You are buying mitigation against risk that HAS NEVER EXISTED. This is explained pretty well in the video that even in the WORST year to retire you did fine.
5% is worse than what a SPIA pays and SPIA's stink. Inflation will eat that 5% alive as time goes on.
There are no experts (other than insurance salesmen) who are preaching annuities as being part of "diversification". It's an arbitrary line drawn in the sand by insurance salesmen. There are no fee-only fiduciary advisers telling people that they need to have a part of their portfolio "guaranteed". A balanced portfolio is protected by the notion that when stocks fall, money runs to the safety of bonds and vice versa.
I'm sorry you are relying on old studies using old numbers. Given the current US 10 year T-bill yield someone relying on a bond heavy portfolio would not be well advised to withdraw 4% as the studies your video rely on use bond yields that are higher than we might expect in the next decade. There are plenty of retirement academics and professionals who advocate annuities as part of a portfolio, they are usually DIAs for longevity risk. Variable annuities are almost universally seen as rip offs and so are never recommended......do some Googling...maybe start with "liability matching".
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Old 09-29-2015, 01:38 PM   #50
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I'm sorry you are relying on old studies using old numbers. Given the current US 10 year T-bill yield someone relying on a bond heavy portfolio would not be well advised to withdraw 4% as the studies your video rely on use bond yields that are higher than we might expect in the next decade. There are plenty of retirement academics and professionals who advocate annuities as part of a portfolio, they are usually DIAs for longevity risk. Variable annuities are almost universally seen as rip offs and so are never recommended......do some Googling...maybe start with "liability matching".
This is explained in the video. We've ALREADY been through these rising interest rate climates. Watch the part about 1969 onward.

These "academics" are often also employed or connected with the insurance industry. David Babbel is a prime example. His "study" reads like boilerplate insurance sales tactics as he touts index annuities.
Fiduciaries like Ric Edelman all say to avoid annuities. He was telling a caller to AVOID QLAC's just about a week ago.
It's not just variable and index annuities that are scams.
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Old 09-29-2015, 01:51 PM   #51
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This is explained pretty well in the video that even in the WORST year to retire (well, only counting recent history, and in the US only) you did fine (in retrospect).
I'm generally in agreement that annuities are bought by too many people who don't need them, and that they are overpriced. But you are oversimplifying the situation and it does not help your case. There >are< impartial analysts who recommend SPIAs in specific instances, and they can make a lot of sense in these cases. Jim Otar's work is probably among the most well known and rigorously researched. If you find yourself in Otar's "red zone", an SPIA can be an important tool to assure your dollars see you through your days. To imply that annuities never make sense is not correct.
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Old 09-29-2015, 02:03 PM   #52
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This is explained in the video. We've ALREADY been through these rising interest rate climates. Watch the part about 1969 onward. These "academics" are often also employed or connected with the insurance industry. David Babbel is a prime example. His "study" reads like boilerplate insurance sales tactics as he touts index annuities. Fiduciaries like Ric Edelman all say to avoid annuities. He was telling a caller to AVOID QLAC's just about a week ago. It's not just variable and index annuities that are scams.
It seems hard for you to believe, but I have watched your video, I think I understand everything in there and I still think that SPIAs and DIAs are useful tools in some circumstances. The worry is not rising bond rates but a decade of low yields as predicted by the US 10 year T-bill rates. I would not bet on a 4% WR from a bond heavy portfolio starting today, whatever history tells us. I'm just not as sanguine about the future as you....is it possible to be sanguine about the future? Still all this reliance on the past puts me in mind of the Great Gatsby and how his preoccupation with it ended.

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Old 09-29-2015, 02:39 PM   #53
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There are many true advisors (Fiduciaries) who support the idea that annuities have a place for SOME retirees. Probably the best developed and easily understood discussion I have seen comes from Jim Otar (Unveiling the Retirement Myth, (c) 2009). 500+ pages of well thought out discussion.
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Old 09-29-2015, 03:00 PM   #54
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Great thread and discussion. Probably the best in weeks, IMO. Too many of these threads these days are of the "what did you do today?" variety for my taste. Whatever I am going to do it does not entail what I view as wasting my time staring at a computer screen (YMMV). I'd rather take a walk to the library, which I'm about to do now.

Thanks to all who contributed. The exchange between ETF and Nun in particular helped me to come to my own conclusions.
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Old 09-29-2015, 03:04 PM   #55
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There are many true advisors (Fiduciaries) who support the idea that annuities have a place for SOME retirees. Probably the best developed and easily understood discussion I have seen comes from Jim Otar (Unveiling the Retirement Myth, (c) 2009). 500+ pages of well thought out discussion.
In the general case AND in the right financial environment, I believe SPIAs can be a reasonable option for *some* people who would like to use some of their nest egg to effectively "buy a pension" they can't outlive. The problem is that in the current interest rate environment, it's hard to make that case, since when interest rates are pathetically low, the cost of buying an income stream is very high.
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Old 09-29-2015, 03:18 PM   #56
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annuities are just a form of de-risking. they turn a known unknown into a known known.
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Old 09-29-2015, 03:25 PM   #57
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In the general case AND in the right financial environment, I believe SPIAs can be a reasonable option for *some* people who would like to use some of their nest egg to effectively "buy a pension" they can't outlive. The problem is that in the current interest rate environment, it's hard to make that case, since when interest rates are pathetically low, the cost of buying an income stream is very high.
Again, you WILL outlive a SPIA if you live long enough. Inflation will turn those payments that SEEMED high in the early going, into a drip... drip... drip.

Again, look at the horrific interest rate environment in 1969. Nobody ran out of money if they turned to an alternative low risk portfolio. Bond and stock index funds TOGETHER solve the risk of rising interest rates.

The key point is that MONEY HAS TO GO SOMEWHERE: Either bonds or stocks. And TOGETHER money keeps flowing into the two.

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they turn a known unknown into a known known.
Yeah. It's "known" that by the time you get to be 95 you will be a poor man with an annuity, all due to inflation. By the time you get to be about 83 you will begin to surpass what the annuity pays.
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Old 09-29-2015, 03:41 PM   #58
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In the general case AND in the right financial environment, I believe SPIAs can be a reasonable option for *some* people who would like to use some of their nest egg to effectively "buy a pension" they can't outlive. The problem is that in the current interest rate environment, it's hard to make that case, since when interest rates are pathetically low, the cost of buying an income stream is very high.
Historically low interest rates make today's SPIAs bad value for money from an investment return perspective as no matter how long you live your IRR will never be more than the initial payout rate, maybe 5%, and if you die on schedule you'll have got around 3%. DIAs look a bit better because the mortality credits bump up the return. However, those low rate should also be of concern to people with bond heavy portfolios.

Back in 1987 I bought a DIA that has paid 6% every year since. To lock in today's rates might not be a great idea because they can't go much lower and maybe a QLAC ladder might be worth considering for some of your money if you want some longevity insurance.

The difficulty for people retiring on a bond heavy portfolio today is that rates are at historic lows and if you are taking income out Bergen's worst 30 year period might look pretty good in comparison. Hey but I'm ok I have TIAA-Traditional, a DIA paying 6% that gives me access to all my principal too.
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Old 09-29-2015, 05:17 PM   #59
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Yeah. It's "known" that by the time you get to be 95 you will be a poor man with an annuity, all due to inflation. By the time you get to be about 83 you will begin to surpass what the annuity pays.
you have a low probability of making it to 95 - you have a 50/50 chance of "ending" your retirement prior to 83

managing, withdrawing, trading (etc.) the money yourself can easily be a coin flip if you aren't careful - heads you get to live in a castle and eat prime rib every night, tails you live in a van down by the river

like several posters have said, annuities make sense for a lot of people, especially QLACs


and no, I don't sell annuities
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Old 09-29-2015, 06:15 PM   #60
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As usual, I came late to this party. I think I've read the threads pretty carefully, so forgive me if I missed this: Has anyone mentioned a QLAC as a substitute for LTC insurance? That's what occurred to me the first time I read about QLACs. LTC insurance has many unknowns INCLUDING the on-going premium. I don't know for a fact, but I would bet that LTC policies are more "costly" (i.e, the insurance company makes more from them) than QLACs. Therefore, using a QLAC as an LTC back-up might have merit. True enough, if you must wait until 85 to begin collecting, the certainty factor may not be as good as with an LTC policy which typically begins paying at 90 or 180 days or whatever was in the policy. Still, knowing that the QLAC is waiting in the wings might make one feel better about paying LTC costs from "principle" until the QLAC payments come along.

Not a suggestion, but throwing this out as a discussion point. YMMV
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