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Old 10-07-2012, 11:32 PM   #61
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Hello - again, if you give $50,000 today for example when you are 47 and the payout when you reach 62 in 15 years' time is $6,000 a year, what is the rate then according to you?
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I hope you don't really believe a company can guarantee you 12% income in an environment where 10-year Treasurys are yielding about 1.5%.
Bruce
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Old 10-08-2012, 12:23 AM   #62
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Originally Posted by obgyn65 View Post
Hello - again, if you give $50,000 today for example when you are 47 and the payout when you reach 62 in 15 years' time is $6,000 a year, what is the rate then according to you?
I am certain that this payment includes return of principal because it is too high otherwise and how else is the carrier going to return your principal, a lump sum payment the day before you die? But a return of principal has the advantage that it is not taxable so that the taxable equivalent rate would be somewhat higher depending on tax rates, bracket, etc.
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Old 10-08-2012, 12:29 AM   #63
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There is no mention of any 'return of principal' in the documentation provided to me.
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I am certain that this payment includes return of principal because it is too high otherwise and how else is the carrier going to return your principal, a lump sum payment the day before you die? But a return of principal has the advantage that it is not taxable so that the taxable equivalent rate would be somewhat higher depending on tax rates, bracket, etc.
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Old 10-08-2012, 12:48 AM   #64
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Originally Posted by MBMiner
You say the payout in 15 years is 12%. 12% of what and for how long? There is no way you can be guaranteed a payout of that magnitude without a return of principal.
Bruce

I also think the information provided is too brief/cryptic to figure out a true rate of return. I get that $6K is 12% of $50K, but that's a single payment 15 years down the road and you would have to assume a zero rate of return - i.e., the initial $50K investment is still worth $50K after fifteen years - to say you've gotten 12%.

I think if you invested about $9135 today and received an annual (compounded) rate of 12%, you'd end up with $50K in 15 years, which would then give the 12% payout of $6K (for the first year, anyway).
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Old 10-08-2012, 01:44 AM   #65
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I only said the annual payout in 15 years' time on my investment represents about 12% of my initial payment. I am not saying I am getting 12% interest, yield or rate of return today on my payment. I understand my payment is gone.

Please check here: http://www.investmentnews.com/articl...FREE/121009981

I am not trying to sell anything to anyone. I only answered this thread about longevity insurance.

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I also think the information provided is too brief/cryptic to figure out a true rate of return. I get that $6K is 12% of $50K, but that's a single payment 15 years down the road and you would have to assume a zero rate of return - i.e., the initial $50K investment is still worth $50K after fifteen years - to say you've gotten 12%.
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Old 10-08-2012, 02:01 AM   #66
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It's ok, I am only putting less than 1% a year of my approximate NW in these annuities. It's an easy bet I am happy to make.
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I think if you invested about $9135 today and received an annual (compounded) rate of 12%, you'd end up with $50K in 15 years, which would then give the 12% payout of $6K (for the first year, anyway).
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Old 10-08-2012, 08:42 AM   #67
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So if you give $30,000 today for example and the payout in 15 years' time is $3,600 a year, what is the rate ?
It's certainly not 12%. The rate is determined by a fraction with $3,600 being the numerator and the value of the fund in 15 years as the denominator. You're fooling yourself if you think you're getting 12% on your money unless you're happy having it non income producing for 15 years.
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Old 10-08-2012, 09:16 AM   #68
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Choice? I saw that movie too! In Time - Wikipedia, the free encyclopedia

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Looks like an 'interesting' movie... wonder how I never knew about that one. One of the downsides to DVR is that I never know when good movies are coming out anymore
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Old 10-08-2012, 10:10 AM   #69
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If this is a hedge against inflation, which using a normal definition of hedge it cannot be, might not a US treasury zero coupon bond to mature on the same date that your pyments would begin be as good or better?

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HA, don't confuse us with logic.
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Old 10-08-2012, 11:01 AM   #70
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It's ok, I am only putting less than 1% a year of my approximate NW in these annuities. It's an easy bet I am happy to make.
I'll probably have about 10% of my investments in TIAA-Traditional when I retire. It's part of my safety net of guaranteed income and as I LBYM that net will provide all my requirements for retirement income leaving 90% of my money to compound.

TIAA- Traditional gets a minimum of 3% a year, it's usually much more- 4.2% this year. I'll buy a SPIA with it when I stop working. Surely all annuities involve return of principal. That's the whole point! You die you g and the company gets to keep your principal.
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Old 10-08-2012, 11:08 AM   #71
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Originally Posted by obgyn65 View Post
I only said the annual payout in 15 years' time on my investment represents about 12% of my initial payment. I am not saying I am getting 12% interest, yield or rate of return today on my payment. I understand my payment is gone.

Please check here: http://www.investmentnews.com/articl...FREE/121009981

I am not trying to sell anything to anyone. I only answered this thread about longevity insurance.
Ok, I was thrown by the 12%...

If you put in a $30k lump sum, let it compound at around 5.5%, wait 15 years and then (after 15 years) draw interest at around 5.5% then the payout will indeed be around $3600/year.

The interest rate that everyone should key on here is the annual return on principle of (around) 5.5% not the posted 12% return on the original investment.
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Old 10-08-2012, 11:08 AM   #72
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It's certainly not 12%. The rate is determined by a fraction with $3,600 being the numerator and the value of the fund in 15 years as the denominator. You're fooling yourself if you think you're getting 12% on your money unless you're happy having it non income producing for 15 years.
Bruce
Yeah the insurance company is taking the payments and giving the customer some return minus a couple of percent for them.......to come up with a principal amount for the annuity. The payout will be some fraction of principal adjusted for mortality and some below market gain. You're buying the guarantee and giving up individual return. This isn't such a bad deal as it insures you against failure
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Old 10-08-2012, 11:16 AM   #73
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I don't think zero coupon bonds do something similar to annuities or longevity insurance. I bought annuities to provide me with a guaranteed income for life. I just looked up zero coupon bonds on Fidelity and they appear to be fairly low yield bonds just like other bonds are paying today. I have laddered bonds maturing over the next 8 yrs at about a rate of $100K per year so don't really need any more bonds. The rates are nothing to write home about and I then have to decide where to put the money in whatever the economic climate is. When I get older my annuities will be chugging along spitting out money and require no thought what so ever to keep doing so. I'm very tired of the stock roller coaster...
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Old 10-08-2012, 11:17 AM   #74
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Sorry for any typos as I am typing from iPad. Agree with below. sorry if I did not express myself correctly. Again I don't work in finance - and my native tongue is not English.
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Originally Posted by MasterBlaster

The interest rate that everyone should key on here is return on principle of (around) 5.5% not the posted 12% return on the original investment.
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Old 10-08-2012, 11:27 AM   #75
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I think so, too. The articles about these products ("deferred income annuities") indicate that companies offer these, but I haven't found one yet.

What I'd be interested in: A pooled fund through an insurance company available for purchase by folks who are presently my age. Invested in (and secured directly by) stripped TIPS that mature in the year I turn 85. In that year the insurance company cashes in the stripped TIPS and distributes the proceeds to all surviving members of the pool. They can use the funds to buy an immediate annuity that will provide income for the rest of their lives. I'm 51 now, so approx 1/2 of the "class" will be dead by age 85. If I put $50K into this and it only barely keeps pace with inflation (the insurance company keeps any real growth as their piece of the pie), I can expect to get $100K (because only half us are alive to get a payout) in 2012 buying power when I'm 85.
That will provide approx $1200 per month (2012 dollars) through an immediate annuity for as long as I live. Not a king's ransom, but enough (together with SS and a paid-off house) to keep the groceries coming in. The knowledge that it was in the offing (guaranteed by USG bonds, not a private insurance company) would permit more aggressive spend-down of the rest of the portfolio while I'm young enough to enjoy it.
Also attractive: I don't have to buy the annuity today (with interest rates at record lows). Also a bonus if I can use $50K from my 401K to buy the initial contract--pre-tax money and I don't really care if the later monthly checks are taxable as I'll probably be at zero effective tax rate if these checks are what's keeping me afloat.
Anyway, I'm sure if this could be profitably sold that some companies would already be doing it.
I've thought about the same general idea, but to me it was a transparent way to do an SPIA.

I'm not sure why you need an insurance company for your idea. A mutual fund company could sponsor the same thing. (You would need an insurance company if the sponsor guaranteed that if less than x% of the buyers actually died, then sponsor would make payments as if x% had died.)

BUT, the common wisdom is that "tontines are illegal in most states". I've never pursued the issue to determine when a legal annuity becomes an illegal tontine.
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Old 10-08-2012, 01:27 PM   #76
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I'm not sure why you need an insurance company for your idea. A mutual fund company could sponsor the same thing. (You would need an insurance company if the sponsor guaranteed that if less than x% of the buyers actually died, then sponsor would make payments as if x% had died.)
Yes, it's true that we wouldn't need the financial resources of an insurance company in order to guarantee the payments, provided the promise is only that the survivors will get whatever money is in the pot. But one aspect is that the participants have put money into a contract and they have purchased items of value (the stripped TIPS) in common with others. Each participant's share has value but it is unusual in that it cannot be passed on to heirs. To me, the product most like this is an annuity, and those are run by insurance companies. Probably, since the deep pockets of an insurance company wouldn't be required, skilled lawyers could write a contract that does the same thing.

Aspects I like:
-- My expected "take" at age 85 would not be dependent on the vagaries of the market. Large group mortality is a lot more predictable than equity returns.
-- The payoff is not dependent on the promise of a private company to make good on their promise 34 years later.
-- I will defer the decision on whether to buy an annuity until I have better information. If I'm in very poor health when I get the payoff, I'll use the money for a big bash and/or give it away. If I'm healthy I can buy an annuity to assure it lasts as long as I do.

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BUT, the common wisdom is that "tontines are illegal in most states". I've never pursued the issue to determine when a legal annuity becomes an illegal tontine.
According to this paper, (from 2009, pg 514) only Louisiana and South Carolina specifically prohibit tontines, so maybe it's not a legal impossibility to do something like this.
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Old 10-08-2012, 03:12 PM   #77
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I'm joining this party late, as I have just discovered this thread. I am very interested in longevity insurance. My focus has been on the theory, and I've only begun looking at the real world, i.e., who offers these plans and are they price appropriately. (I still haven't figured that out.) But if there's anyone else like me, here is a link to a Financial Analysts Journal article that makes the case for longevity insurance. Tell me if you'd like to see more links like this. I've been piling them up. . . .
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Old 10-08-2012, 03:36 PM   #78
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Hi xwd-puzzler, welcome aboard. Why don't you stop by over here to tell us about yourself and what brings you to the forum.
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Old 10-08-2012, 06:51 PM   #79
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There is no mention of any 'return of principal' in the documentation provided to me.
Does it mention what portion of the payout will be taxable?
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Old 10-08-2012, 07:39 PM   #80
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There is no mention of any 'return of principal' in the documentation provided to me.
Of course not. The insurance company isn't going to use that term. I'm sure it says we will pay you $6,000 per year beginning 15 years hence in exchange for your premium of $50,000 today. The point is this is simply a single premium immediate annuity with the start date delayed 15 years.
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