Not fond of annuities

[Danmar]

Quote:

Originally Posted by nun I'm using 18% of my investment portfolio to buy into my pension plan. It's COLA'ed and assuming a 2% annual increase and an average life span the associated interest rate is 7% so it's good for longevity insurance and investment return. It even has a survivor benefit that costs $30/month that leaves a lump sum to a designated beneficiary. My pension starts at age 55 (this year) @ $20k/year and with $15k I get in rent my basic expenses are covered. At 66 I expect $20k from US SS and another $20K from UK SS, so I won't be exactly rich, but I should be comfortable without taking anything from the rest of my portfolio.

Sounds like a good plan. When I negotiated my retirement (3 years before I actually retired) I elected to buy up my pension too. As I recall it cost me about 12 times the deferred (6 years) non cola 100% spouse survivor pension. Not sure what the IRR is on this but at this stage I am very happy that I did this.

[nun]

Is anyone fonder of annuities after today.......just kidding

[mathjak107]

it is an example of why having at least a portion of your income not solely dependent on markets is a good thing ..

downturns later on in retirement are not so bad after up cycles but getting hit day one like we are certainly is food for thought .

it is funny because i did consider the rising glide path as a precaution when we started retirement in august but didn't go that route . i just went with 40/50/10 . glad i held back going my full 50/50 but had i done the rising glide path i would have been about 30% equity now instead of 40% .

[HadEnuff]

the other lesson here is for those just planning RE, not to rely on the rosiest of projections.
One better have a plan for bad market returns. 40:60 Bonds:Stocks can be OK, if you aren't planning on always getting that positive return. If your "nut" is big enough that the 40% can buy you enough time to recupe the drop then maybe you can live with it.

I think it's also a valuable lesson about timing the market. OK, we're down whatever % from Jan1, or even worse from July1...so when do you get back in? Now? I don't have any better clue what's going to happen next week than I had about last week or the week before..So you wait until a rebound? OK, it's rebounded...did I miss my chance to get back in?

Whenever I look at my nest egg, I mentally adjust for a 20% market correction...and hope that's conservative enough.

[mathjak107]

i find it ironic that on the fidelity rip planner , if you pick worst case it immediately knocked about 15% off my opening balance .

[HadEnuff]

Quote:

Originally Posted by mathjak107 even 2008 did not see one annuity or life insurance policy holder lose a penny . even aig's annuity and life insurance business was rock solid and had nothing to do with aig's credit default swap business that needed a bail out . they are totally isolated company's. most states require healthy insurers to take over the client base of a failed insurer . states also offer guarantees up to a limit . if we have mass failings of insurers who depend on dead body's as much as financial instrument returns then i would say your portfolio will have a whole lot more to worry about . if i decided to do them i would ladder spia's from a few company's .

But getting back to annuities: I've been pondering this post ever since you made it. I think it's a great post. Your first statement I was unaware of. I figured if it was under the AIG Umbrella, it must have been at risk. I'm not sure where to go with this information, though, because I'm not sure what it means for the future.

Was that money always protected? Or did the SHTF before they got around to risking that money? Is there a fundamental protection somewhere? Whenever I read an article on these things, when risk is discussed, one thing mentioned is the "claimspaying ability of the institution". The point here is to insure an income for potentially a long time. Even spreading it around to 2 or 3 companies, or even 10 is not as diversified as I'm used to being.

I'd like to know more about your second and third thoughts, i.e. states' efforts to make these investments more secure.

As far as your final comment, I think that could be turned around to suggest that if a well diversified, allocated portfolio takes a huge hit ala 2008, it will be due to some major economic SNAFU that may look a lot like what we saw then when institutions we all that were "too big to fail" failed.

Basically, this conversation has really opened my eyes to the potential benefits of annuity. The idea of putting enough of my portfolio into 1, or 2, or even a few more that companies to make a significant difference is so contrary to my belief in diversification that I'm still struggling with it.

[mathjak107]

insurers are very limited to what they can invest in .

they also get a big portion of the money they pay out from something we can never invest in on our own . DEAD BODY'S

they are diversified away from markets and rates to some extent because they also have those who die paying for those who live with spia's .

in fact if your annuity has a death benefit , all that money from the rider goes in to a reserve fund . that money is also used to fund the pay outs where unlike an spia there is a death benefit .

[HadEnuff]

mathjak, if you were shopping now, where would you look?

[mathjak107]

vanguard has them .

[DrRoy]

Quote:

Originally Posted by nun Never mix insurance and investment

Agreed. That is why you have to evaluate annuities so closely. Most of the ones that have ever been suggested to me included an insurance component that I did not want.

[mathjak107]

i am a big believer of don't mix insurance and investments so i don't recommend variable or indexed annuity's . but spia's are fine .

in fact vanguard and fidelity both use 3rd party insurance company's .

[audreyh1]

Quote:

Originally Posted by mathjak107 i am a big believer of don't mix insurance and investments so i don't recommend variable or indexed annuity's . but spia's are fine . in fact vanguard and fidelity both use 3rd party insurance company's .

That's true. And they provide them at lower fees than you can buy directly, and they choose the top insurance companies in terms of financial strength.

[audreyh1]

I am seriously looking at options for a recently widowed friend, who is not comfortable investing herself and really want some degree of guaranteed income, but is also concerned about long term growth. She's extremely leery of market volatility.

One approach I'm considering suggesting is annuitizing about 1/4 of her investable assets. That covers her expenses above what she gets in social security (SS covers 3/4). Giving her a baseline at least where she doesn't have to worry about her basic expenses being covered. I'm hoping with this she can be more comfortable with some of her investments fluctuating. Then perhaps with some funds set aside for some short-term spending goals, she can invest 1/2 in some type of "income" fund with a low stock component (say 20%), and the remaining 1/4 in a fund with a higher stock component for growth. Then she can just leave them alone, collect the dividends, no monitoring, no rebalancing, no nothing. In five to 10 years she can decide whether to take some of those longer term investments and annuitize again to increase her guaranteed floor. She would like to pass some along to children, so it's a balance between guaranteed income for her with a little growth, and still be able to pass some along.

[samclem]

Quote:

Originally Posted by HadEnuff The idea of putting enough of my portfolio into 1, or 2, or even a few more that companies to make a significant difference is so contrary to my belief in diversification that I'm still struggling with it.

And you should be. Before you get too swept up with the idea, keep in mind the very high costs annuities extract from those who buy them. And remember that, ultimately, a bunch of insurers aren't much more stable than a single one >if< we get a very big economic upset (because they insure each other).
Annuities can make sense in some situations, but only the most rabid "annuity bug" would consider buying more than enough to meet the most basic expenses. Buying more than that just pays for a lot of high salaries, corporate jets, and urban skyscraper headquarters. And the cheapest annuity-like product is SS, so start first by deferring SS to age 70.

[nun]

I'm using a liability matching approach in retirement and have a 70% equity allocation because I'll have my daily income needs met from pensions and other fixed income, but a 10% correction still hurts.

I have yet to buy into my employer's pension plan because the admin people are dragging their heels in sending me the paperwork. But I was sensible enough to put the money I needed to pay for it into a stable value fund in the middle of last year. When we are in correction territory I worry that many people sell madly and do serious damage to their retirement prospects. FYI there was a big liberalization of the pension rules in the UK last year making it far easier for people to set up stocks and bonds income portfolio rather than buy an annuity. As a consequence annuities became very unpopular and everyone bought into mutual funds. The level of investment sophistication in the UK is very low and I can see big trouble ahead for UK retirees.

[nun]

Quote:

Originally Posted by audreyh1 One approach I'm considering suggesting is annuitizing about 1/4 of her investable assets. That covers her expenses above what she gets in social security (SS covers 3/4). Giving her a baseline at least where she doesn't have to worry about her basic expenses being covered. I'm hoping with this she can be more comfortable with some of her investments fluctuating. Then perhaps with some funds set aside for some short-term spending goals, she can invest 1/2 in some type of "income" fund with a low stock component (say 20%), and the remaining 1/4 in a fund with a higher stock component for growth. Then she can just leave them alone, collect the dividends, no monitoring, no rebalancing, no nothing. In five to 10 years she can decide whether to take some of those longer term investments and annuitize again to increase her guaranteed floor. She would like to pass some along to children, so it's a balance between guaranteed income for her with a little growth, and still be able to pass some along.

I like that approach. SS and an annuity for a worry free income floor. The amount of money you annuitize will depend on the need for income, the payout levels and your age and your sensitivity to inflation. But seeing what happens by using 25% of the portfolio seems like a good starting point. Combine that with a cash buffer and a core Vanguard portfolio or Wellesley or Wellington and I think you have a solid setup.

[mathjak107]

the fidelity rip planner lets you play with different types of annuity's to see the effects .

[UpAnchor]

Quote:

Originally Posted by nun Never mix insurance and investment

Quote:

Originally Posted by DrRoy Agreed. That is why you have to evaluate annuities so closely. Most of the ones that have ever been suggested to me included an insurance component that I did not want.

And why I'll avoid those with an "investment" component I do not want...

[mathjak107]

most of the indexed ones have high water marks that can not be hit .

so basically all you get is the guarantees .


some like the prudential defined income variable annuity are not bad products if all you want is the guaranteed part . i looked at that one in great detail .

there is no way you will ever do better then the guarantee's with it using a bond index as a benchmark and almost 2.50% in expenses but the 5.50% growth rate that is guaranteed is inclusive of expenses so that is nice for cash flow .

like all annuity's with guaranteed growth rates , you never own the additional money which you can take , it just sits in a separate account where it acts as a base amount for annuitizing.

If anyone does not understand what that means i will be happy to explain it .

[hurricane harry]

Sure, I've lost some money in my IRA and 401 but damn it feels good to know that my pension and annuity are holding strong.
Had I put that lump sum into stocks instead of that annuity, it could have changed my retirement outlook.