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MegaCorp's so-called investment update.............
Old 12-19-2012, 11:03 PM   #1
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MegaCorp's so-called investment update.............

Just thought I'd communicate a investment product being pushed by the megaCorp. They were bragging that this is first of it's kind, a do-it-yourself annuity through people you can trust. You know, those kind, considerate, helpful people at megaCorp. Actually, the proceeds will help fund the overlord's new corporate headquarters complete with pool and sauna for the overstressed management.

I call it the Lifetime Income Strategy Plan or Lisp for short. Don't worry, it get's better.
This year they decided to change our administrator from VG; if you don't roll/map your existing money into one or more of 5 "new" funds; S&P index, Market Bond, International, small cap or company stock, you're VG balance will be automatically transferred into the LISP. why? You're just a inquisitive little bugger, aren't you? Well, you're about to find out.

Being the reasonably prudent investor I am, contrarian and skeptic, I ran their calculator and here's the nifty return promised me. If I rolled my $380k into this immediately, at 60, (I'm early fifties), I'd get a whopping $1399/mo for the rest of my not-so-special life. Yes, thats US dollars and NOT COLA'd. A joint annuity was $1200/mo (spouse same age). The fees were a special 1.71% for this awesome, one-of-a-kind product. According to my IRR calc, my return would be negative until my IRS anticipated death age at which point the return would be approximately 0.2%. If I lived to 95, my return was about 2.5%.

You know, at some point, somebody is gonna call these people out. Maybe, it'll be me, eh? If you are FIRE'd, you have just one more reason to be thankful this holiday season.
Cheers.
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Old 12-20-2012, 07:23 AM   #2
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Wow... unconscionable. But it sounds like you have an easy out? If so, make sure to do it and discreetly spread the word.
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Old 12-20-2012, 07:50 AM   #3
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Well you do have the option to invest in four other areas (I don't include company stock, since I don't believe you should invest in the same place you get a paycheck from).

The annuity returns you quoted are correct (I made up an IRR spreadsheet), as quoted.

The primary reason you are getting such a low interest rate is the same that any other annuity (specifically an SPIA) is paying under today's low interest rate situation. It's not a criminal act by the investment company, but just the way it is in today's world, IMHO.

For comparison, our SPIA contract executed in mid 2007 is paying just under 5% for the guaranteed life term of 28 years (more, if one/both live longer).

We faced the same situation at that time. While just under 5% may be considered good at this time (who ever thought that interest rates would go lower than the already low rates of 2007?), we also knew the risks involved over the long term.

An annuity should be considered as part of your plan for the long term. It should not be considered if you are still in the accumulation phase (exception being delayed annuities) but you need to have a reason to consider such a product. Ours was that we were looking at it as "income gap insurance" since I retired at age 59 (without a pension) and also plan on delaying SS till age 70 - an 11 year income gap.

Look at it this way. Sure, you may not have the options you had with VG, and I'm sure you did not have access to all VG funds - only the one's specified by your company. This is no different then you are facing at the present time.

One thing you may want to check out is if your company will allow you to rollover all/portion of your 401(k) into a rollover IRA to allow you to make your own investment decisions, at age 55.

Not all companies do this (I/DW were with FIDO with our respective 401(k)'s; I did an in-service rollover when I turned 55, DW could not).

Even if they don't allow you to do a rollover, remember that (assuming you don't get the annuity) you will have many investment options once you retire and roll your 401(k) into the investment firms/funds that you want.

Not all employees are willing to make their own investment decisions. For some, the annuity option may make sense (even if we all agree that it is not the way to go). I w*rked with many folks that chose safety over "possibilities" when it came to making investment decisions. And remember, an annuity is an income vehicle - not an investment vehicle; don't confuse the two. Both have their place in a retirement income stragety, but they are not interchangable.

That's why they are still employed and I'm here giving my thoughts on this forum ...
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Old 12-20-2012, 11:26 AM   #4
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I'm obviously missing something here. I'm not challenging you, just trying to learn what I'm missing.

You get $1399 a month/$16788 a year on $308K; that comes out to a 5.4% return, which I assume is after the 1.7% fee.

Ok, it's not COLA'd and it's a dreaded annuity, but on the surface, a lot of folks would be happy with a 5.4% return.
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Old 12-20-2012, 11:32 AM   #5
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You are computing the payout rate, which would include return of principal in addition to interest. The rates cited are effective interest rateS, so the annuitant is pretty much just getting back their principal with a little interest. Not a good deal.
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Old 12-20-2012, 11:35 AM   #6
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Originally Posted by marko View Post
I'm obviously missing something here. I'm not challenging you, just trying to learn what I'm missing.

You get $1399 a month/$16788 a year on $308K; that comes out to a 5.4% return, which I assume is after the 1.7% fee.

Ok, it's not COLA'd and it's a dreaded annuity, but on the surface, a lot of folks would be happy with a 5.4% return.
You can't compute it in that manner. You are reducing the principal sum invested each month as payments are made, thus investing an ever decreasing amount over time.

It's different than say a CD, where the principal remains intact for the period. That's why annuities and investment vehicles (such as CD's) cannot be considered the same when trying to compute a return.

You need to run an IRR (not XIRR) Excel function to see the actual return, based upon the initial sum invested, the monthly payment, and the period of time of the contract in order to establish the true return rate.
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Old 12-20-2012, 12:59 PM   #7
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This year they decided to change our administrator from VG; if you don't roll/map your existing money into one or more of 5 "new" funds; S&P index, Market Bond, International, small cap or company stock, you're VG balance will be automatically transferred into the LISP.
So, you actually only have 3 choices, as you are nearing retirement. S&P, Market Bond, and Small Cap. You want to invest after-tax money in international to take advantage of deducting foreign taxes on your income tax.

Look at this as an opportunity to re-align your asset allocation. You are absolutely correct that this is not the best time to be buying an annuity.

-- Rita
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Old 12-20-2012, 01:44 PM   #8
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Originally Posted by pb4uski View Post
You are computing the payout rate, which would include return of principal in addition to interest. The rates cited are effective interest rateS, so the annuitant is pretty much just getting back their principal with a little interest. Not a good deal.
How does it compare to annuities commonly available today?
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Old 12-20-2012, 01:49 PM   #9
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How does it compare to annuities commonly available today?
It looks low. 5.4% payout rate vs 5.95% on immediate annuities.com for a 60 yo male in WA.
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Old 12-20-2012, 01:51 PM   #10
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How does it compare to annuities commonly available today?

Pretty bad.... I calculated an immediate annuity for two people who are 60 with $380K.... the benefits were $1,621... just one was $1,885...

Now, since the OP is in his low 50s, his investement should have time to grow bigger...

So, about a 35% haircut on the annuity....


I would think that this would open mega up to lawsuits..... there IS a fiduciary role here...
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Old 12-20-2012, 02:28 PM   #11
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pb4uski and TP.....

Thanks.
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Old 12-20-2012, 03:25 PM   #12
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The thing that isn't clear to me is whether the $1,399 a month is based on $380k today but would be adjusted for any growth between now and when the OP turns 60 or whether it is just a trade of $380k today for $1,399/month when OP turns 60.

If it is the latter, I agree it is a lousy deal. If it is the former it is still not a good deal.
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Old 12-20-2012, 07:59 PM   #13
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If you'd like to do the IRR math for practice; here's the details on the annuity:
I'm 52 as is spouse. Annuity pays out at age 60 for rest of my life. Lump sum to annuity includes roughly $220k now plus $20k per year till 60 or eight years. It appeared there was a 1.7% annual fee associated with this insurance product. Return was $1399/month for me only, $1200 for a joint annuity per their calculator. Not COLA'd, no other survivor benefits.
Calculate IRR for a SPIA for me passing away at 65, 75, 85, 95.

Have fun and as someone said earlier, what happened to trust and fiduciary responsibility? Actually, I think I've found out how megaCorp's are now sitting on so much cash. Cheers.
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Old 12-20-2012, 10:05 PM   #14
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Here's what I get as IRRs assuming a $380k balance at age 60 and then monthly payments until the ages indicated.

  1,399 1,200
65-39.2%-41.8%
75-5.0%-6.7%
850.8%-0.4%
952.7%1.7%
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Old 12-21-2012, 07:49 PM   #15
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Winner, winner.......sorry there ain't no chicken dinner.


Now, I'm just trying to figure out how I approach our management with this?
Maybe, discretion is the better part of valor, eh?
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Old 12-21-2012, 10:56 PM   #16
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I guess it depends on your role in the organization. If you have some sort of leadership role then I think you should try to find a way to raise the issue that this is a raw deal for employees without stepping on toes/pissing the wrong people off. If you don't have any leadership role, then just elect what is best for you, keep your head down and hope that no one asks you for your opinion on the new plan.
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