Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
New Wrinkle on Annuities
Old 02-06-2012, 08:44 PM   #1
Thinks s/he gets paid by the post
 
Join Date: Oct 2008
Posts: 2,133
New Wrinkle on Annuities

I'd like to highlight this article in the Tampa Bay Times (2-6-12) but can't find it online in their business section. It is a reprint from the New York Times and talks about a new method the Fed has come up with to deal with old age. They are hyping it as a way for retirees to save money by allowing withdrawals from your 401k or IRA (tax free) to buy an annuity to cover you in your old age. I'm talking 85 years old and up. They say one big problem is people outliving their money and one way to help this is to allow this type annuity purchase. It's also being called "longevity insurance".

One example cited is that a 65 year old would have to pay $277500 for a $20000-a-year annuity that started immediately. However, it would only cost $35200 for an annuity that started at age 85. I guess the major point here is that one could take this $35200 out of an IRA or 401k tax free. Maybe I don't care what happens at age 85. And what happens to the money if I die at 84?

The Treasury Dept is also changing the way it calculates MRD's to exclude any money used for longevity insurance or an annuity. Some of these changes will take place immediately and others are in the public comment period. Sorry I can't hook you into the article but maybe y'all have heard something along these lines.
__________________

__________________
JOHNNIE36 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-06-2012, 08:55 PM   #2
Recycles dryer sheets
MissMolly's Avatar
 
Join Date: Jun 2010
Posts: 303
It's also reported here in the Baltimore Sun

Annuities: Until now, the focus of retirement planning has been helping workers accumulate savings - baltimoresun.com
__________________

__________________
MissMolly is offline   Reply With Quote
Old 02-06-2012, 09:21 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 15,917
Longevity insurance is not a new idea, but is being marketed by an increasing number of insurers. These are a pure risk transfer product: if you drop dead before payout starts, you generall get nothing. I think that when there is significant competition in this product it will be an attractive way to hedge longevity risk without plunking down an enormous amount of capital for a SPIA.
__________________
"Neither my companion or I carry firearms on our persons. We depend on the goodwill of our fellow man and the forbearance of reptiles."


- English Bob
brewer12345 is offline   Reply With Quote
Old 02-06-2012, 09:54 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 21,869
Quote:
Originally Posted by brewer12345 View Post
Longevity insurance is not a new idea, but is being marketed by an increasing number of insurers. These are a pure risk transfer product: if you drop dead before payout starts, you generall get nothing. I think that when there is significant competition in this product it will be an attractive way to hedge longevity risk without plunking down an enormous amount of capital for a SPIA.
The giant flaw I see with this, other than the usual insurance company fraud, is that I see no mention of inflation indexed annuities, and a great deal of inflation can happen in the 20 years between age 65 and age 85. Enough to make this annuity a cruel joke.

Tehee senior, gotcha! We got your money long ago, now you lucky guy can treat yourself once a year to a donut and coffee at Dunkin Donuts on your annuity payout!

Ha
__________________
haha is offline   Reply With Quote
Old 02-06-2012, 10:06 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 15,917
Quote:
Originally Posted by haha View Post
The giant flaw I see with this, other than the usual insurance company fraud, is that I see no mention of inflation indexed annuities, and a great deal of inflation can happen in the 20 years between age 65 and age 85. Enough to make this annuity a cruel joke.

Tehee senior, gotcha! We got your money long ago, now you lucky guy can treat yourself once a year to a donut and coffee at Dunkin Donuts on your annuity payout!

Ha
So size your future payout to cover what inflation you anticipate. The insurers are basing this product on the current interest rate curve and studies of the tail of longevity for the appropriate population. They cannot forecast future inflation any better than anyone else.
__________________
"Neither my companion or I carry firearms on our persons. We depend on the goodwill of our fellow man and the forbearance of reptiles."


- English Bob
brewer12345 is offline   Reply With Quote
Old 02-06-2012, 10:07 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Mar 2010
Posts: 1,600
Rather than coming up with something like this, why didn't they simply propose a change to the RMD dates so that those that do not have to take it at age 70 can take it later? Or come up with some staggered percentage of RMD one doesn't have to take until age 80 or 85.? Or allow us a year by year decision we could make...depending. That way one still has some say over their money.

I see the possible benefit but if it is as brewer says, in that, if you die before payout starts you get nothing...and your heirs get nothing from that bucket....then "ummmm"
__________________
sheehs1 is offline   Reply With Quote
Old 02-06-2012, 10:19 PM   #7
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,485
Seems like a product like pure "longevity insurance" would be subject to some adverse selection, as "low risk" folks with a family history of dropping dead in your 60s -- or someone who is very unhealthy and doesn't expect to live long -- isn't as likely buy it as a "high risk" person who takes care of themselves reasonably well and has many relatives in their late 80s and 90s.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
ziggy29 is offline   Reply With Quote
Old 02-06-2012, 10:25 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 13,440
Quote:
Originally Posted by brewer12345 View Post
So size your future payout to cover what inflation you anticipate. The insurers are basing this product on the current interest rate curve and studies of the tail of longevity for the appropriate population. They cannot forecast future inflation any better than anyone else.
The main reason we don't see a lot of inflation adjusted annuities is that the insurers have a hard time finding assets that can match the liability cash flows. For such a product they would like to invest in variable rate loans and bonds but the market for those assets is so thin the product isn't viable.
__________________
pb4uski is offline   Reply With Quote
Old 02-06-2012, 10:27 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 10,990
Quote:
Originally Posted by brewer12345 View Post
So size your future payout to cover what inflation you anticipate. The insurers are basing this product on the current interest rate curve and studies of the tail of longevity for the appropriate population. They cannot forecast future inflation any better than anyone else.
This "longevity insurance" could be a nice product. My two worries would be:
- Ability of the issuer to pay (fix: Govt insurance pool?)
- Inflation. Insurers can buy inflation protected investment vehicles, and if their wiz-bang pros can't find investments that stay ahead of inflation over the long haul, what chance do any of us have?
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 02-06-2012, 11:46 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 21,869
Quote:
Originally Posted by brewer12345 View Post
So size your future payout to cover what inflation you anticipate. The insurers are basing this product on the current interest rate curve and studies of the tail of longevity for the appropriate population. They cannot forecast future inflation any better than anyone else.
I still think it is a bad idea. If and when inflation adjusted products like this come along, I suppose there might be a small chance that I would be interested. I understand the point that posters made, these things would be hard to fund.

In general, I think that once central banking and the fiat money system came along, a wise person wants to be an owner, not a lender. Other than in speculative propositions.

Even though I am no kid, I carry way more equities than the average person who posts his allocation here. And I am into 25+ years of retirement that has been completely funded this way, other than my SS contribution which began last spring.

Ha
__________________
haha is offline   Reply With Quote
Old 02-07-2012, 05:10 AM   #11
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,062
I still believe that an annuity-like product (i.e. SPIA, etc) is appropriate when one cannot manage his/her portfolio any longer. I cannot imagine managing my portfolio of many CDs and munis when I reach 90 (if I get ever there).
Quote:
Originally Posted by haha View Post

Tehee senior, gotcha! We got your money long ago, now you lucky guy can treat yourself once a year to a donut and coffee at Dunkin Donuts on your annuity payout!
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 02-07-2012, 08:38 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 13,440
Quote:
Originally Posted by obgyn65 View Post
I still believe that an annuity-like product (i.e. SPIA, etc) is appropriate when one cannot manage his/her portfolio any longer. I cannot imagine managing my portfolio of many CDs and munis when I reach 90 (if I get ever there).
A good argument for keeping one's portfolio simple (mine is 4 tickers) and annual rebalancing. Though when I am 90 I may be able to downsize to 1 ticker.
__________________
pb4uski is offline   Reply With Quote
Old 02-07-2012, 08:51 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by obgyn65 View Post
I still believe that an annuity-like product (i.e. SPIA, etc) is appropriate when one cannot manage his/her portfolio any longer. I cannot imagine managing my portfolio of many CDs and munis when I reach 90 (if I get ever there).
Or, like some people do, just buy enough SPIA to get your necessity living expenses covered. Then take the rest and buy munis or whatnot. I have yet to see a CD that over time beats inflation. Munis don't necessarily do that either, but you get a tax break and the right fund or ladder can give you a sporting chance........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 02-07-2012, 09:40 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 11,539
Quote:
Originally Posted by sheehs1 View Post
Rather than coming up with something like this, why didn't they simply propose a change to the RMD dates so that those that do not have to take it at age 70 can take it later? Or come up with some staggered percentage of RMD one doesn't have to take until age 80 or 85.? Or allow us a year by year decision we could make...depending. That way one still has some say over their money.

I see the possible benefit but if it is as brewer says, in that, if you die before payout starts you get nothing...and your heirs get nothing from that bucket....then "ummmm"

Why would changing RMD make a difference.... all that it requires is you take money out of an IRA and pay taxes... nothing about making you spend the rest of the money....
__________________
Texas Proud is offline   Reply With Quote
Old 02-07-2012, 09:50 AM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 10,698
Sounds like a deferred annuity, just using a lump sum payment instead of periodic investments. But nothing wrong with that...
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 02-07-2012, 09:53 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 21,869
Quote:
Originally Posted by Texas Proud View Post
Why would changing RMD make a difference.... all that it requires is you take money out of an IRA and pay taxes... nothing about making you spend the rest of the money....
Tax payments perhaps? If you are running out of money in very old age, being able to get that IRA money without owing tax could matter a lot, as opposed to taking it starting at age 70 when you still may have relatively high taxable income.

Ha
__________________
haha is offline   Reply With Quote
Old 02-07-2012, 10:04 AM   #17
Thinks s/he gets paid by the post
 
Join Date: Oct 2008
Posts: 2,133
Quote:
Originally Posted by Texas Proud View Post
Why would changing RMD make a difference.... all that it requires is you take money out of an IRA and pay taxes... nothing about making you spend the rest of the money....
Unless I missed the point of this post, the break on the RMD revision is that it is TAX FREE if you use it to buy a longevity annuity.

Editing because I posted beforeI saw haha's reply.
__________________
JOHNNIE36 is offline   Reply With Quote
Old 02-07-2012, 10:08 AM   #18
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,245
Quote:
Originally Posted by haha View Post
The giant flaw I see with this, other than the usual insurance company fraud, is that I see no mention of inflation indexed annuities, and a great deal of inflation can happen in the 20 years between age 65 and age 85. Enough to make this annuity a cruel joke.
+1

Quote:
Originally Posted by brewer12345 View Post
So size your future payout to cover what inflation you anticipate. The insurers are basing this product on the current interest rate curve and studies of the tail of longevity for the appropriate population. They cannot forecast future inflation any better than anyone else.
Why couldn't the insurance companies price a COLA'd product off the forward inflation rates embedded in the TIPS markets?
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Old 02-07-2012, 10:26 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 13,440
Quote:
Originally Posted by FIRE'd@51 View Post
Why couldn't the insurance companies price a COLA'd product off the forward inflation rates embedded in the TIPS markets?
The problem is that there are insufficient investments that they could invest in that would also provide an inflation adjusted cash flow stream to match the inflation adjusted annuity obligation.

The inflation risk is too much for them to take on and it would probably require a lot of capital to support it without assets with a similar cash flow profile.

They prefer to simply issue products where they can find assets that match with the liabilities, take a spread and put it in their pocket. They don't mind assuming mortality or morbidity risk because they believe it is measurable, but to take on inflation is more than they can stomach.

Memories on how they got burned by LTC expanding into areas of risk that they thought they knew but later found out that they didn't know as much as they thought they knew are still pretty fresh.
__________________
pb4uski is offline   Reply With Quote
Old 02-07-2012, 10:34 AM   #20
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,855
Quote:
Originally Posted by brewer12345 View Post
These are a pure risk transfer product: if you drop dead before payout starts, you generally get nothing.
Most SPIA's (inluding ours, a dual-life policy) has an option for a guaranteed term. The term is calculated on your (or in our case, our) remaining life expectancy. In our case, it's a 28-year period, for our policy purchased at age 59.

We could both die in an accident tomorrow (or any other reason) and the remainder payments go to our (son) estate.

OTOH, if we exceed the calculated term (possible, but no bets on that), payments continue at 100% until we both pass.

This "insurance on insurance" reduces our monthly payout by a few dollars a month, but it's worth it. IMHO, only a fool would get a policy without the assurance that "your money" can be passed on, even if you die after you sign the contract, but before receiving the first payment.
__________________

__________________
rescueme is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Annuities - ugh BellBarbara FIRE and Money 33 10-20-2011 11:08 AM
Managing a Retirement Portfolio: Do Annuities Provide More Safety? chinaco FIRE and Money 23 10-10-2011 05:57 PM
Calculator and annuities palomalou FIRECalc support 0 09-26-2011 03:28 PM

 

 
All times are GMT -6. The time now is 02:38 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2016, vBulletin Solutions, Inc.