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Old 07-06-2016, 03:07 PM   #21
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Count me among the iggorent...
It was back in the '80's when mom passed away, and the lawyer suggested the $8000 bequest be put into an annuity. We never paid much attantion until several years ago, when the statement read well into the mid 50K's..., but with a surrender value of under $45K...
We let it lie, until two years ago when I decided to check into the terms, to see what the annual payout would be. I was quoted a 5 year payout, which seemed ok, except a call back said it would be over a 10 year period. That made the annual amount would be so small as not to be noticed, and besides... at age 80, more trouble than it's worth.
And so.... I suppose we left something on the table, but the amount is so small, that it wouldn't matter much, anyway.

Never claimed to be financially bright.

BTW... the first two years interest on the annuity was 12%, after which it rather quickly dropped to a minimum of 4% which it still pays today.
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Old 07-06-2016, 03:10 PM   #22
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Originally Posted by pb4uski View Post
Since annuities are largely mortality driven.... what actuaries do when they have a lump sum/annuity decision would have greater weight with me than what economists recommend or do.

Makes sense to me. Although, regarding their mortality driven nature, I find it interesting how much the payouts in recent years have seemingly been influenced by the low interest rate environment. Perhaps projected longer life spans has played into that as well.
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Old 07-06-2016, 03:20 PM   #23
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I didn't think either, that's why I asked the question because I didn't understand your post, still don't.
OK, I'll go through it bit by bit and explain, then.
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totally agree with (most of) those on this forum - but what about the other 90% that don't have the same financial acumen?
I guess I should care about them. I suspect that many such retirees are doing things most of us might consider to be completely crazy - - like busily gambling away their entire retirement savings in Las Vegas - - and are among those that end up with no income beyond SS.
You really think people living off of ss are doing so because they gambled away their retirement??

Seriously?
Hopefully the emphases I added to my own post above (and to Big Hitter's post) will clarify the meaning of my post, which I thought was written in English but which apparently was impossible to understand. These things happen and I apologize if my post was incomprehensible.

Such retirees might be doing things most (not all) of us might (not would) consider to be completely crazy - - LIKE (not 100% always) gambling.

Other possible examples of things those of low financial acumen might make that most (not all) of us might (not would) consider to be completely crazy would be things like, oh, say, making poor investment decisions, or other personal finance decisions that turned out to be disastrous, despite the best of intentions.

Of course, other retirees who are not of low financial acumen might also make decisions that did not work out due to sheer rotten luck, evil ex-spouse, or whatever reasons, and they might also end up living on nothing but SS.

Better?
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Old 07-06-2016, 03:20 PM   #24
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As hard as I tried to disuade them from taking the lump sum, almost ALL of them took it...and of course, went out and bought a new car. It was sad to see, because I knew that when they realized how much it would affect their bottom line when they finally got that 1st pension check they would be full of regret. Oh well...what are you going to do?
We had a similar situation where I worked. The retirement system when I was hired was a DB COLA'd, 50% of the last year's pay at 25 years service or 2% per year after 20 years. (I actually got a much better deal but that's another long story.) When I had about ten years on they changed the retirement system to a less-beneficial plan (I forget the details) but the COLA was capped at 3% where it was 100% of the DC area COL and the COLA raises were a lower percentage of the DC area COL. The hook was that if you switched to the new plan you could get a tax-free check for one-half of your previous retirement contributions since you'd already paid the taxes on it. A lot of guys took the bait, and as I predicted at the time, they were regretting it later. The same thing happened: they bought cars, boats, motorcycles, larger homes, and the like.

Me, I just plodded along, stayed in the old plan and paid a higher percentage into the retirement system, and didn't have to work a second job until SS after I retired.
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Mortality salience: why retirees tend to choose lump sums
Old 07-06-2016, 04:08 PM   #25
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Mortality salience: why retirees tend to choose lump sums

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We had a similar situation where I worked. The retirement system when I was hired was a DB COLA'd, 50% of the last year's pay at 25 years service or 2% per year after 20 years. (I actually got a much better deal but that's another long story.) When I had about ten years on they changed the retirement system to a less-beneficial plan (I forget the details) but the COLA was capped at 3% where it was 100% of the DC area COL and the COLA raises were a lower percentage of the DC area COL. The hook was that if you switched to the new plan you could get a tax-free check for one-half of your previous retirement contributions since you'd already paid the taxes on it.

These situations remind me of a recent thread or two regarding legacy whole life policies. If you are being encouraged or even just "offered the opportunity" to switch to a different plan, there's usually a reason. And it's not to place money in your wallet...
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Old 07-06-2016, 04:17 PM   #26
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If you are being encouraged or even just "offered the opportunity" to switch to a different plan, there's usually a reason. And it's not to place money in your wallet...
Yes, when the County sent us all to a half-day seminar - on the clock - that was a strong clue that going for the new plan was probably not in my best interest.
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Old 07-06-2016, 04:21 PM   #27
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I briefly read the study - it's very rigorous - they took over 700 observations from actual plan participants

Bottom line - it's a HUGE deal for most retirees, maybe not most on this forum but most retirees in general

I think the "anxieties" can be broken down into the three L's - lifestyle, longevity and liquidity - problem is, most DC (and to an extent defined benefit) plans don't offer payout options that can alleviate those anxieties:

Lifestyle - fixed annuity that covers basic expenses.
Longevity - QLAC or similar
Liquidity - hunk of cash left in the DC plan to leave to progeny or cover catastrophic expenses

anyway, this is the very first article I've ever read (and I've read tomes) that addresses the psychology behind annuity versus lump sum. all others just focus on the financial side and most are blog posts written by armchair actuaries

taking a lifetime annuity benefit in a single lump sum is a huge coin flip - you have a 50% chance to outlive it - also, taking lump sum distributions is known to cause poverty among the elderly but that's another scholarly article/discussion

so you get guaranteed income for life or....a coin flip that gives you a mansion and prime rib every night or a tent by the river with cat food every night

so how do we fix this? different plan designs and pre-retirement counseling, IMO
Prime rib or cat food? https://en.wikipedia.org/wiki/Fear,_...inty_and_doubt

Your ending reads like the last page of an annuity brochure. The risk of mortality should make people lean towards a lump sum, because if you do die early the annuity was a bad deal...and never mind the higher administrative expenses etc. There is a reason annuity salesmen exist, that fat commission came out of your portfolio.
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Old 07-06-2016, 04:45 PM   #28
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Prime rib or cat food? https://en.wikipedia.org/wiki/Fear,_...inty_and_doubt

Your ending reads like the last page of an annuity brochure. The risk of mortality should make people lean towards a lump sum, because if you do die early the annuity was a bad deal...and never mind the higher administrative expenses etc. There is a reason annuity salesmen exist, that fat commission came out of your portfolio.
nope, not an annuity salesman, not even close

the ending has to do with "in-plan" (i.e. not retail) annuity options - those usually don't have commissions, if so, they are extremely modest

I don't manage assets or sell anything, except myself. What I'm (simply) attempting to advocate, is that plan sponsors allow more choices other than a single lump sum distribution out of a DC plan and provide rank and file employees some pre-retirement education. Single sum distributions are positively correlated with poverty among the aged, especially women. (this is not sexist)

Actually, the risk of longevity (related to mortality) would steer you towards an annuity, not a lump sum.

What's worse, outliving your assets or not outliving your assets - I'd say the former. Ask DW what her biggest fear is - being a bag lady.

It's easy to lose that lump sum...the annuity is certain.
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Old 07-06-2016, 04:52 PM   #29
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Since annuities are largely mortality driven.... what actuaries do when they have a lump sum/annuity decision would have greater weight with me than what economists recommend or do.
what do actuaries know about anything




If I had the option, I'd take the a mix of the three Ls I outlined in post 1
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Old 07-06-2016, 05:45 PM   #30
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nope, not an annuity salesman, not even close

the ending has to do with "in-plan" (i.e. not retail) annuity options - those usually don't have commissions, if so, they are extremely modest

I don't manage assets or sell anything, except myself. What I'm (simply) attempting to advocate, is that plan sponsors allow more choices other than a single lump sum distribution out of a DC plan and provide rank and file employees some pre-retirement education. Single sum distributions are positively correlated with poverty among the aged, especially women. (this is not sexist)

Actually, the risk of longevity (related to mortality) would steer you towards an annuity, not a lump sum.

What's worse, outliving your assets or not outliving your assets - I'd say the former. Ask DW what her biggest fear is - being a bag lady.

It's easy to lose that lump sum...the annuity is certain.
I saw nothing in your article about COLA or inflation....annuities feel good in year 1, not so great in year 15 when it will only buy you...cat food....
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Old 07-06-2016, 06:13 PM   #31
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The first paragraph in the article reminded me of what they teach life insurance/annuity sales people in pushing people to make a buying decision - "back up the hearse and let them smell the roses".
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Old 07-06-2016, 07:24 PM   #32
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....Contrary to popular belief, I am neither a jack-booted Nazi thug, nor a heartless person who has never known someone who lived off of SS alone.
Dang!!! I had just bet the house on jack-booted Nazi thug! Oh well..... back to work.
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Old 07-06-2016, 07:51 PM   #33
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...the annuity puzzle, the low rate at which retirees buy annuities even though economists recommend annuities as an optimal decision"
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...the citation is in the pdf of the study
I clicked through the citation to find a 158-page paper from the Journal of Economic Perspectives. I read the first 10 pages or so before losing interest. From what I read, the argument seemed to be: (a) people are living longer, and (b) withdrawal rates are hard and thus most people will screw it up. It also requires that you ignore a bequest motive. Didn't strike me as particularly compelling, but again, I only read a small portion of the paper.

I had the same reaction to your post as pb4uski and HadEnuff... I see nothing universally auspicious about the annuity option just because 3 economists got together and wrote a paper. If there's some universal truth in the remaining 148 pages, maybe you could enlighten us? It is your thread after all. And the whole argument is predicated on the assumption that annuitization is an economic no-brainer.
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Old 07-06-2016, 07:58 PM   #34
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I agree. I think annuities basically suck. But, they do have a "regularity" about them and you know geezers like to be regular -

I plan to use 10% of my net worth to buy an annuity about the same time I sign up for SS at FRA.

So, voting with my dollars, 10% annuity, 90% lump.
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Old 07-06-2016, 08:25 PM   #35
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I agree. I think annuities basically suck. But, they do have a "regularity" about them and you know geezers like to be regular -

I plan to use 10% of my net worth to buy an annuity about the same time I sign up for SS at FRA.

So, voting with my dollars, 10% annuity, 90% lump.
Can you buy a better SS annuity by waiting until age 70 before claiming? SS is generally better than commercial annuities, and COLA'd.
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Old 07-06-2016, 08:38 PM   #36
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I have to wait until 66+ and I'm collecting on deceased wife's account now.

My plan is to Roth half the IRA over that time and buy the annuity with the IRA remains.

Easy tax planning, and no minimums to remember.
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Old 07-06-2016, 08:57 PM   #37
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I saw nothing in your article about COLA or inflation....annuities feel good in year 1, not so great in year 15 when it will only buy you...cat food....
of course the annuities could be cola'd - should be relatively inexpensive too given the low future consensus on inflation

since you are so knowledgeable about this where did you study actuarial science and/or qualified plan design?
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Old 07-06-2016, 08:59 PM   #38
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I clicked through the citation to find a 158-page paper from the Journal of Economic Perspectives. I read the first 10 pages or so before losing interest. From what I read, the argument seemed to be: (a) people are living longer, and (b) withdrawal rates are hard and thus most people will screw it up. It also requires that you ignore a bequest motive. Didn't strike me as particularly compelling, but again, I only read a small portion of the paper.

I had the same reaction to your post as pb4uski and HadEnuff... I see nothing universally auspicious about the annuity option just because 3 economists got together and wrote a paper. If there's some universal truth in the remaining 148 pages, maybe you could enlighten us? It is your thread after all. And the whole argument is predicated on the assumption that annuitization is an economic no-brainer.
yeah I'll work on it. just got off the golf course, my back hurts and I need a cold one

basically it has to do with uncertainty and risk pooling
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Old 07-06-2016, 09:01 PM   #39
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The first paragraph in the article reminded me of what they teach life insurance/annuity sales people in pushing people to make a buying decision - "back up the hearse and let them smell the roses".
that's interesting since annuities are the inverse of life insurance. why would they teach the sales people the same techniques?
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Old 07-06-2016, 09:04 PM   #40
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Please do and submit your synopsis. I ain't gonna read that manuscript either.

Pulp fiction is more my taste -
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