Longevity annuity... QLACs

[samclem]

Bold added:

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.

 

[nun]

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.

So we beat on, boats against the current, borne back ceaselessly into the past.

 

[robertf57]

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.

 

[Options]

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.

 

[ziggy29]

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.

 

[Big_Hitter]

annuities are just a form of de-risking. they turn a known unknown into a known known.

 

[ETFs_Rule]

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.

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.

 

[nun]

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.

 

[Big_Hitter]

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

 

[Koolau]

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

 

[Koolau]

On a different subject (but still QLACs): Folks who know how QLACs work, please explain to me the tax benefit in a bit more detail. I understand that one can use (IIRC) up to $135K from their qualified plan. The advantage would be to lower future RMDs since the qualified plan's balance would be lower. Now, 1) must one pay taxes on the (in this case) $135K withdrawal? 2) If not, does one pay taxes when receiving eventual payments when the QLAC matures?

If either of these two questions is answered "yes", it would be debatable whether QLACs have actual tax benefits. I sense that maybe the answer to both is "no" in which case this seems like a license to steal from the IRS. Please forgive my ignorance and educate me. Much thanks.

Oh, on the concept of whether some forms of annuities ever makes sense, I am firmly in the camp of "yes", they may make sense as long as they are the "low cost" version (i.e, not "indexed" high-cost variety, but rather the SPIA or DIA variety.) YMMV

 

[meierlde]

On a different subject (but still QLACs): Folks who know how QLACs work, please explain to me the tax benefit in a bit more detail. I understand that one can use (IIRC) up to $135K from their qualified plan. The advantage would be to lower future RMDs since the qualified plan's balance would be lower. Now, 1) must one pay taxes on the (in this case) $135K withdrawal? 2) If not, does one pay taxes when receiving eventual payments when the QLAC matures?

If either of these two questions is answered "yes", it would be debatable whether QLACs have actual tax benefits. I sense that maybe the answer to both is "no" in which case this seems like a license to steal from the IRS. Please forgive my ignorance and educate me. Much thanks.

Oh, on the concept of whether some forms of annuities ever makes sense, I am firmly in the camp of "yes", they may make sense as long as they are the "low cost" version (i.e, not "indexed" high-cost variety, but rather the SPIA or DIA variety.) YMMV

Qlacs are just like an immediate annuity bought from and IRA/401k you pay taxes on the distributions when they occur. They are deferred annuities so there are no distributions for a while thus no taxes until the distributions start.

 

[nun]

You can take 25% or $125k, whichever is the smaller, and buy a QLAC. You must start payments by age 85. The amount used to buy the QLAC is not used in your RMD calculation.

 

[Koolau]

Sorry, one more thing I forgot. In this discussion, the chances of living to 85 (and beyond) seem to be a sticking point to some (quite understandable from an actuarial point of view.) On a strictly empirical basis, I know almost two dozen folks within my social sphere who are between 85 and 99. There are several men in this group - one 94 who is still quite with it and reasonably active. Living in Hawaii, one meets a very large number of older folks as HI is the state with the longest-lived people. I'd like to be one of them (someday.) Perhaps a QLAC would make the most sense for one already living in Paradise! YMMV

 

[Koolau]

Qlacs are just like an immediate annuity bought from and IRA/401k you pay taxes on the distributions when they occur. They are deferred annuities so there are no distributions for a while thus no taxes until the distributions start.

If I pay taxes on the QLAC payments (at 85 and beyond) what is the theoretical tax advantage? Is it simply "delaying" payment? Or is it that I might get "lucky" and die before payments begin in which case the IRS gets my final single-digit salute instead of a tax payment? Sorry to be dense.