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Old 09-24-2010, 07:41 AM   #41
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Well, if you want to leave your money to insurance companies, sign up.
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Old 09-24-2010, 07:49 AM   #42
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Well, if you want to leave your money to insurance companies, sign up.
Please explain...
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Old 09-24-2010, 08:17 AM   #43
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You're not getting that payout as pure interest. It's a drawdown of principal.

So actually, you don't have to pay taxes on all that payout but you've surrendered your principal pretty much. You have to outlive that principal or the insurance company is going to make out.
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Old 09-24-2010, 09:01 AM   #44
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Originally Posted by obgyn65 View Post
Hello 73ss - when I enter $100,000 as the $ amount I want to invest for example in this link:

Immediate Annuities - Instant Annuity Quote Calculator.

I get $589 a month. That's a 7% yield. Why would I want to go with a 5% CD then (assuming I do not have any heirs) ?
That 7% includes the return of your own investment such that at the end of the contract you have a zero balance. A CD, bond, etc. pays interest and at the end of the maturity period your initial investment is intact. There are many other issues surrounding annuitiies - suggest you do a few searches here, as well as elsewhere.

The most common issues include huge management fees, resulting in poor net performance, immediate locking up of a large premium with early withdrawal penalties, carrier solvency risk (at least theoretically). All that aside, some feel that a fixed (not variable or indexed), single premium, immediate annuity has some place in one's overall plan. Caveat emptor.
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As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
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Old 09-24-2010, 09:10 AM   #45
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You have to outlive that principal or the insurance company is going to make out.
Again, please explain (as I responded earlier in this thread)..

I/DW have an SPIA, and that is not within the constraints of our policy at all.

I'm just trying to understand the various comments on this thread that are saying SPIA's (specifically) are not an option for a retiree.

I am not willing to debate "assumptions", but I can respond with facts, based upon our reality.

However before responding to just "general comments", I would like to get a list of what folks think that an SPIA actually is - nothing more, nothing less.
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Old 09-24-2010, 09:33 AM   #46
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An SPIA is an annuity where an insurance company pays you some of your money back along with interest each month. It helps transfer your longevity risk to the insurance company. They have a pool of SPIAs sold to the elderly. Some of the elderly are expected to die earlier than the others and when that happens the insurance company gets to keep the principal that they did not pay back. Some of the elderly live longer than the insurance company expected them to live, so the insurance company has to use some of the money from the dead elderly to keep paying the elderly who are still alive.

In some sense the age you get your SPIA does not matter. Payments will be lower if you get it earlier, but you will likely get more payments because you have less chance of dying earlier. Which is better: lower payments for a longer time or higher payments for a shorter time? It's all actuarily the same.

A good read on laddering SPIAs and all the riders that can be attached to them is found in Jim C. Otar's book: "Unveiling the Retirement Myth".
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Old 09-24-2010, 09:35 AM   #47
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Originally Posted by obgyn65 View Post
Hello 73ss - when I enter $100,000 as the $ amount I want to invest for example in this link:

Immediate Annuities - Instant Annuity Quote Calculator.

I get $589 a month. That's a 7% yield. Why would I want to go with a 5% CD then (assuming I do not have any heirs) ?
Another way to look at that is you can get a 10% yield from a simple checking account. Just take out about 9.95% of your principal each year (for ten years).

-ERD50
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Old 09-24-2010, 09:44 AM   #48
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Some of the elderly are expected to die earlier than the others and when that happens the insurance company gets to keep the principal that they did not pay back.
That’s not necessarily true. It depends on the contract. It's no different than buying a home for 0% down.

In our case, DW/me have a "life annuity" under our SPIA contract. We know exactly what we will receive in benefits (fixed payment, so we can take our monthly benefit x length of guaranteed period). If we live longer than the life projected period, payments continue at 100%. If one dies early, payments continue at 100% to the survivor. If we both pass before the calculated "life benefit period"? Payments continue (either monthly or lump sum) to our estate.

BTW, we know we will receive at least 2x our original premium, if we live or die; more than 2x if we beat the odds.

Again, I'm trying to understand what I give up. It's up to the insurance company (e.g. take on the risk) to ensure I get our contracted monthly benefit.

If they are able to invest and get gains better than I? Great. I really don't care. What I do care is to ensure a portion of my retirement income...
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Old 09-24-2010, 10:13 AM   #49
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Part of the money you are receiving is the return of your investment. For simplicity's sake I plugged in the $ for a fixed term. Abt 1.59% for 10 years simple interest. $115,080 received.

Put that same sum in a Pen Fed CD for 10 years and you will receive $150,000.
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Old 09-24-2010, 10:26 AM   #50
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That’s not necessarily true. It depends on the contract. It's no different than buying a home for 0% down.

In our case, DW/me have a "life annuity" under our SPIA contract. We know exactly what we will receive in benefits (fixed payment, so we can take our monthly benefit x length of guaranteed period). If we live longer than the life projected period, payments continue at 100%. If one dies early, payments continue at 100% to the survivor. If we both pass before the calculated "life benefit period"? Payments continue (either monthly or lump sum) to our estate.

BTW, we know we will receive at least 2x our original premium, if we live or die; more than 2x if we beat the odds.

Again, I'm trying to understand what I give up. It's up to the insurance company (e.g. take on the risk) to ensure I get our contracted monthly benefit.

If they are able to invest and get gains better than I? Great. I really don't care. What I do care is to ensure a portion of my retirement income...
Everything I wrote is exactly true. You have riders on your annuities. Notice that I used the word "Some" and not "All". Your riders reduce the monthly benefit that someone without those riders would receive.

I like the idea of SPIAs. Nevertheless, I am sure that you do not believe that the insurance company has figured out how to give you a free lunch. They are in business to pay their expenses and make a profit from your business.

When both of you die after the guarantee period is up, the insurance company gets the money left over. That's what they get for accepting the longevity risk that you have transferred to them. They also get some of the average investment return and some upfront fees, so they invested less than your entire amount to start with. They have pooled your money with that of many others, so on average they come out ahead.

That's not to say that you are not getting something in return. That peace of mind that you have transferred longevity risk to them is worth something to you, but you did not get it for free. The price you paid seems to be well worth it to you and the price they charged seems to be well worth it to them.
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Old 09-24-2010, 11:02 AM   #51
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I'm just trying to understand the various comments on this thread that are saying SPIA's (specifically) are not an option for a retiree.
The various objections that come from forum members are mostly irrational, based on a fallacy that if a counterparty makes a profit on trading with you, you must be losing. Another fallacy is framing the relevant entity as the portfolio, rather than lifetime consumption and security. So once the annuities have been purchased, we can no longer gaze so fondly on our total assets and think what very good, virtuous people we have been. A big loss for some of us, including me.

I've been here over 7 years, and I have never seen it dawn on people that these two assumptions (and others) can lead to biased and faulty thinking.

Clearly more competition will likely push down margins- but under current real interest rates there is no way an individual can mimic what a COLA lifetime SPIA can offer him, even under current competitive conditions. And what is being offered is a very valuable thing, as any government worker can attest. A check arriving every month, that will stay current with the cost of living as defined by CPI-U, no matter what happens in markets of the economy. Compare that to a computer program that will attempt to tell us how to safely draw down our portfolios to try to approximate this same result

If any one thinks that his equity allocation and SWR can do this as well or better, he should look at pages 7 and 8 of Worry Free Investing by Zvi Bodie, professor of finance at BU School of Management.

A member can make documented observations that are historical fact, and even though they give clear counter examples of the consensus "principles" the consensus of opinion will not be moved one inch.

If it is counter to the received consensus, only one's direct personal experience is given any validity, and usually by that person only. Even the sobering effect of personal bruising typically doesn't last long beyond the crisis.

During the 08-09 downturn some people disappeared from the boards, and others who are still here came very close to abandoning their committment to their allocation. At the present time we can look back and say, "I was smart and brave that I stayed the course". But if we were in Japan, we would look back and say, "Oh, I was stupid and foolhardy, I should have got out and stayed out!"

So Rescueme, I would save my breath. Not going to be much questioning of beliefs happening.

Ha
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Old 09-24-2010, 11:11 AM   #52
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While we're at it, what about the risk of default with annuities? Are they typically federally insured?
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Old 09-24-2010, 11:22 AM   #53
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While we're at it, what about the risrk of default with annuities? Are they typically federally insured?

They are state insured, up to a maximum purchase. Look under the heading: "Max. liability for present value of an annuity contract":

http://www.annuityadvantage.com/stateguarantee.htm
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Old 09-24-2010, 11:22 AM   #54
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While we're at it, what about the risk of default with annuities? Are they typically federally insured?
No. I would say that analysis, diversification among different providers as well as asset classes other than annuities, and familiarity with state guarantees all would be important.

Ha
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Old 09-24-2010, 11:30 AM   #55
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They are state insured, up to a maximum purchase. Look under the heading: "Max. liability for present value of an annuity contract":

http://www.annuityadvantage.com/stateguarantee.htm
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No. I would say that analysis, diversification among different providers as well as asset classes other than annuities, and familiarity with state guarantees all would be important.
Ok. Thanks.
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Old 09-24-2010, 11:33 AM   #56
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So Rescueme, I would save my breath.
Yes I know; however I hate to see a product like an SPIA (which has worked well in our situation) be dismissed due to "false assumptions" that are often made on a forum, where we are all trying to share possible solutions to a perceived challange...

I'm not saying that it is a solution for everybody, but in some cases it is, assuming you do a full analysis of the specific product vs. your indivudial need.
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Old 09-24-2010, 11:49 AM   #57
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I have a big problem trading with Insurance companies as every time I've been involved with them I've lost money. Problem is they don't trade fairly as there is always 40 pages of disclosures to protect them from screwing with you. No doubt that I'm not smart enough to figure out what they are saying. You may be able to prove that they are all not unfair but it won't change the way I feel. 3 Whole Life Policies all ending in litigation with payouts to me from the courts. I can go on with other dealings with insurance companies but you get the idea.

All this may be irrational but that's how I feel and they won't get any more of my money.
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Old 09-24-2010, 11:56 AM   #58
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3 Whole Life Policies all ending in litigation with payouts to me from the courts. I can go on with other dealings with insurance companies but you get the idea.

All this may be irrational but that's how I feel and they won't get any more of my money.
Well, this would make me sit up and take notice too. Although I am not sure, it seems that weasel opportunities are less with an annuity. If you are alive, you are supposed to get the payment. But I haven't done research at this level of granularity, so I really have no experience or relevant knowledge. When I recently looked into annuities it was mainly to compare with payback of social security.

Only 2 companies offer COLA annuities in my state; their bids were about 7% apart, and both quite a bit higher than the comparable required payback and payments missed for an equal added annuity amount from social security.

Ha
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Old 09-24-2010, 12:18 PM   #59
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I feel that if I deal with the market in general I have a 50/50 chance of doing OK. If I deal with an insurance company that % drops as they have to take their vig out of me. No thanks, been there done that.
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Old 09-24-2010, 01:55 PM   #60
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3 Whole Life Policies
?

Who would ever go down that path?
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