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Old 12-17-2009, 09:17 AM   #21
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Out of curiosity, what is the commission payout you would get if you sold a 72 year old couple a $100K EIA?
Depends on which company and product. Every company has different commission levels and the commissions vary between products with the same company. They vary between 2 and 8% usually. The commission is the same whether the couple is 72 or 62 or 52 though. The commissions are usually lower on people over age 75 because of the risk of death....in almost every annuity out there (can't think of one that doesn't), all surrender charges are waived in the event of death and the proceeds are paid out to the beneficiary.
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Old 12-17-2009, 09:27 AM   #22
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I will have to give you credit dgolednz - no matter what the question, you keep selling.
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Old 12-17-2009, 09:30 AM   #23
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I will have to give you credit dgolednz - no matter what the question, you keep selling.
I'm not selling anything by telling you what the commissions are. I am, however, trying to clear up the misconceptions you and others have about EIA's.
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Old 12-17-2009, 09:32 AM   #24
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I am, however, trying to clear up the misconceptions you and others have about EIA's.
I don't think it's working.
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Old 12-17-2009, 09:34 AM   #25
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I don't think it's working.
Ok, we can agree to disagree then. Fair enough?
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Old 12-17-2009, 09:48 AM   #26
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Out of curiosity, what is the commission payout you would get if you sold a 72 year old couple a $100K EIA?
Depends on the surrender period, the company, etc. Gross commission could easily be 10% or higher.
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Old 12-17-2009, 09:50 AM   #27
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Depends on the surrender period, the company, etc. Gross commission could easily be 10% or higher.
What companies are paying over 10% commission? Almost every annuity pays 8% or less. Fixed annuities usually pay 1-4% depending on how many years it is.
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Old 12-17-2009, 04:16 PM   #28
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Ok to put this thread back on topic.
If the couple is looking for income a Vanguard bond fund is probably the easiest and simplest option, like the VFICX (4.07% yield). If they are very concerned with capital preservation a CD ladder ladder can be constructed with 2.5-3% average yield. Alternatively they can buy a 12-24 individual bonds and get reasonable diversification and additional 1 to 1.5% yield, but it would require some more research and entails default risk.
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Old 12-17-2009, 04:38 PM   #29
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A relative has recently sold a property and now has $600k to invest. They are in their early '70s, so they want to be fairly conservative and go with some sort of bond ladder. I fully understand the concept of bond ladders, but my questions are more administrative in nature.

They want the portfolio to spin off cash at least annually, and preserve most of the principal. So far I've advised on a bond ladder with something maturing every year, they spend the earnings and reinvest the principal only.

Now for the questions:

1) Where can they buy individual bonds directly? Vanguard?

2) They are in a low tax bracket (other than this year due to this transaction), so I've so far steered them away from tax free bonds. Any other recommendations?

3) What's the best way to minimize transaction fees?

4) Would you buy several bonds of different debtors to minimize default risk? For example, if they buy $50k tranches x 12 tranches, then they could buy multiple issues within the $50k...is that a good idea?

Thanks,

Dave
You may want to consider a short term annuity (2,5, or 7 years). If you have a military background, try usaa.com
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Old 12-17-2009, 04:41 PM   #30
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You may want to consider a short term annuity (2,5, or 7 years). If you have a military background, try usaa.com
Yes a SPIA, not an EIA.
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Old 12-17-2009, 04:49 PM   #31
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I believe that lakehawk is suggesting a fixed deferred annuity, not a SPIA. Fixed deferred annuities look a lot like a CD in an insurance wrapper, but do not have FDIC backing. Not a terrible choice with the right insurer, but one must read the fine print carefully (as always).
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Old 12-17-2009, 04:58 PM   #32
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Hmmm... So this person wants nothing but bonds? What if we enter an inflationary spiral?
If you hold a bond to maturity, there is zero inflation risk to a bond, right?
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Old 12-17-2009, 05:07 PM   #33
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I believe that lakehawk is suggesting a fixed deferred annuity, not a SPIA.
Ahhh... What USAA calls an "Extended Guarantee Savings Annuity"

Where is the creativity in a name like that? A more progressive insurance company would call it the "Extended Guarantee Motherhood Apple Pie Stars and Stripes Savings Annuity".
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Old 12-17-2009, 05:10 PM   #34
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If you hold a bond to maturity, there is zero inflation risk to a bond, right?
Bzzzttt! Wrong. Fixed rate bonds have significant inflation risk regardless of whether you own a fund or individual bonds. Makes no difference. If you want to avoid inflation risk, stay real short, stick with TIPS, or add some commodities to the mix.
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Old 12-17-2009, 11:58 PM   #35
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If you hold a bond to maturity, there is zero inflation risk to a bond, right?
Yes and no. Yes, unless the bond defaults you will get your money back. The real (inflation adjusted) value of the bond at maturity will decrease by an amount equal to the inflation rate. This is different than bond fund where the principal value will fluctuate depending on the interest rates.

In general you income will fluctuate more with a bond ladder (because interest rate could rise or fall when it is time to reinvest) and your principal well remain relatively stable, the reverse is true with a bond fund. For fixed investment your income will remain relatively stable but the value of the fund could change fairly dramatically, depending on quality of the bonds and the average maturity of the bond fund.

It seems to me the only certain thing about annuities is that after you die your heirs wouldn't have anything.
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Old 12-18-2009, 04:26 PM   #36
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If you hold a bond to maturity, there is zero inflation risk to a bond, right?

If you hold a bond until maturity there is NO principal risk (obviously assumes no default). There will always BE inflation risk (or deflation gain) in a fixed interest rate instrument. If interest rates go up while you own the bond, inflation eats into your return... thus inflation risk.
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Old 12-18-2009, 04:36 PM   #37
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Yes a SPIA, not an EIA.
SPIA's are paying next to nothing right now. This isn't a few years ago where you're getting 5% interest. A period-certain SPIA is probably paying 1% or less right now.
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Old 12-23-2009, 10:03 AM   #38
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Bzzzttt! Wrong. Fixed rate bonds have significant inflation risk regardless of whether you own a fund or individual bonds. Makes no difference. If you want to avoid inflation risk, stay real short, stick with TIPS, or add some commodities to the mix.
I mis-spoke...what I meant to say is that if you hold a bond to maturity, you are guaranteed the face value (unless the issuer defaults), so there is no price risk associated with changes in interest rates...right?

I thought they called that interest rate risk, but perhaps I should have called it "price" risk?
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Old 12-23-2009, 10:04 AM   #39
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If you hold a bond until maturity there is NO principal risk (obviously assumes no default). There will always BE inflation risk (or deflation gain) in a fixed interest rate instrument. If interest rates go up while you own the bond, inflation eats into your return... thus inflation risk.
Yes, see my post above...I did not articulate this correctly.

Thanks LARS
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Old 12-23-2009, 10:09 AM   #40
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Thanks everyone for the input...we are still analyzing this and it will take some time.

He has the money in his bank now. For the short term, he has the money in an online savings account paying about 1.3%. I've advised him to keep it there until his tax accountant figures how much tax he'll owe on the sale (I tried to read the IRS rules, but they are too complex so I suggested he get a professional advisor to look at it).

Once he files his tax return and pays the taxes (this was a rental property, not a primary residence), we'll invest the remaining amount.

I'm actually going to sit with him for 1/2 a day next week to discuss his goals (this is my dad), risk tolerance, what he wants out of the money, etc....then we'll devise a plan.

I'm leaning towards spreading it amongst TIPS and long-term Treasury Bonds at this point, but I have asked him to show me the remainder of his investments...I want to make sure he's got about 15-25% equities to protect against inflation risk....he has other investments with a broker but I've not seen how those are invested.

I'll report back on what we do...but it may be a few months yet.

Edit: By the way, I did advise him to split the money in online savings banks to stay within the FDIC limits of $250k...so no worries there...he will be opening the accounts as joint so double the coverage..he is married.

Dave
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