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05-09-2008, 07:19 AM
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#201 | |
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Give me a museum and I'll fill it. (Picasso)
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Join Date: Mar 2003
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Quote:
List hasn't changed. You ideally want to buy life and annuity products from a large, highly rated company that has a long track record. I also have a strong preference for mutual companies, as they do not have the sometimes perverse incentives that investor-owned companies have. So IMO top shelf would be Northwestern Mutual, MassMutual, New York Life, Guardian, USAA and TIAA-CREF. A solid second tier would include companies like Pacific Life, Penn Mutual, Met Life, and some others.
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"The meat slides out in the shape of the can." |
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05-09-2008, 09:10 PM
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#202 |
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,267
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Wasn't AIG the firm the Vanguard used for their inflation-adjusted annuities?
Yeah, just checked -- it is AIG. This I guess is exactly what I've been concerned about -- I am sure Vanguard checked out the field 5 years ago or whenever they started these things and picked from the strongest firms they could find. Then some 'stuff' starts happening in a firm and the next thing you know you've got potential issues. When you're making a 50-year bet on a company's solvency, the importance of even small deterioration can become magnified. |
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05-09-2008, 09:19 PM
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#203 |
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Moderator Emeritus
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 9,688
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Yep. From the Vanguard website: "The Vanguard Lifetime Income Program annuity is a single-premium immediate annuity issued by AIG Life Insurance Company"
Another educational opportunity for those seeking a 'no-risk, guaranteed lifetime income'. |
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05-09-2008, 09:27 PM
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#204 | |||
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Moderator Emeritus
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05-10-2008, 12:10 AM
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#205 | |
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Thinks s/he gets paid by the post
Join Date: May 2005
Posts: 2,923
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Look at Citi... IIRC they have acquired $45 billion in new capital.... now they are looking at selling $500 billion of assets to strengthen their balance sheet and improve their future profit potential... Now... it is not as 'safe' as holding your own CDs and such... but then you have taken on all the risks that you were hoping to sell to someone else... an annuity is just selling the risk of living to long to someone else.... |
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05-10-2008, 07:10 AM
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#206 | |
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Give me a museum and I'll fill it. (Picasso)
Give me a forum ... 
Join Date: Dec 2003
Location: z
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. Please remember that the Weighted Companion Cube cannot speak. If the Weighted Companion Cube does speak, please do not listen to its advice. |
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05-10-2008, 09:12 AM
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#207 |
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Thinks s/he gets paid by the post
Join Date: May 2004
Posts: 2,287
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I wonder . . .
Could the risk of outliving assets be handled in a much lower-cost fashion? Observation 1: We have new peer-to-peer lending, facilitated by the Internet, that allows people to borrow money directly from others (sometimes many others). These functions were formerly performed by banks or more costly brokered means. Observation 2: The primary function of an annuity, for most people, is a means to avoid running out of money. It s not a means of obtaining better investment results, exceptionally good tax treatment, etc. Okay, so why not build a cheap means to gather and bundle risk. Example: People could join the year 2045 risk pool trust. To join, each has to buy into a specified type of investment (Zero-coupon govt bond? TIPS? CD with a very long maturity? ) co-owned by the individual and the trust, plus pay a small fee (to cover the admin costs of running the trust). When 2045 comes around, all bonds are cashed and distributed among the survivors. Each individual gets a proportional share depending on how much he/she invested. In the intervening years (from now until 2045): -- As individuals die, the trust becomes the sole owner of the investments (it is part of the contract, the ownership doesn't pass to the heirs) -- If the trust goes out of business, the individual investments revert to the individual co-owners. To assure an income stream, an individual would need to buy a laddered set of these contracts going out for as long as the person might live. Still, $$ put in for each of the later years (beyond normal life expectancy) would only need to be very small because of the big impact of long-term compounding and the large additions to the pot from members of your cohort who kicked the bucket early. A few thousand bucks invested now would go a long way in 45 years as a result of these two mechanisms. This would be lower risk and higher payout than an annuity because: - Safer: As an individual you are part owner of the investment instruments. If the Trust goes out of business, you' still own the underlying instrument. - Cheaper: No skyscrapers, no dividends to shareholders, no fees after the buy-in. All run on the internet, no agents, etc. No monthly checks to send out: When the maturity date comes, the securities are liquidated and everyone still standing gets their money. - Or, maybe this is being done already. - Or, maybe this is not being done because it is actually a phantom insurance company and would need to be regulated. - Or, maybe the transfer of ownership from the individual to the trust if the person dies early is not legal. If legal and not being done already, I hereby cede all rights to the Samclem Retirement Lottery Trust Construct (C) to the Early Retirement Forum.
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"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein Last edited by samclem; 05-10-2008 at 09:26 AM. |
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05-10-2008, 10:10 AM
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#208 | |
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Thinks s/he gets paid by the post
Join Date: May 2005
Posts: 2,923
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And i would say that for the vast majority... then can handle it better than they could... |
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05-10-2008, 10:22 AM
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#209 |
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Thinks s/he gets paid by the post
Join Date: May 2005
Posts: 2,923
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Samclem....
Heck, why get in a 'pool'  Unless you are hoping for a lot of them to die before you and 'make' a lot of money...And what if for some reason every one lived? Would you still have enough money? As I said (and CFB agreed... for a fee)... you are selling your risks to someone else... some charge you a lot, some not as much... but you are paying a company to pay you a stream of money for YOUR life... a fixed amount (or one with inflation adjustments)... not contingent on enough people having to die to get enough... the risks you got rid of were market risks, interest rate risks, living past your money risk. There are not a lot of ways you can construct your own without keeping some of these risks... (did you not see the news magazine where this guy thinks he knows how to 'slow' aging and we will be able to live to 150 If this does happen... an annuity would look pretty nice)The question is 'is it worth the price' for the risk you take on... that the company will be able to pay you for the rest of your life... Most people here answer 'NO'... that is fine... |
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05-10-2008, 11:00 AM
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#210 | ||
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Thinks s/he gets paid by the post
Join Date: May 2004
Posts: 2,287
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"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein |
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05-10-2008, 11:29 AM
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#211 | |
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Thinks s/he gets paid by the post
Join Date: Sep 2005
Location: Northern IL
Posts: 2,692
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samclem, I am glad you brought this up. Here is a fascinating (IMO) podcast on the subject and its history. I heard it a while back, and tyour comment reminded me to share it with this group. While the title refers to Carbon Credit financing, it is largely about the history of finance, and discusses this and other remarkable concepts. I think many here will find it interesting. It is long, 90 minutes with Q/A, but here are some highlights: Yale Business & Management ~ 10 minutes: Finance = Time Machine. A loan makes future money appear now. ~ 27 min - The 'invention' of checks, bonds - Marco Polo had 'traveler's checks' in China. 33 M - Perpetual Bonds from the Holland Water Boards are still paying interest today from the 1600's! (Never defaulted, but they did need to cut the promised interest rate). 38 M - 'Tontines' from the 1700's - these are the pooled annuities you describe. 51 M - some 'trivia' of Ben Franklin developing anti-counterfeit techniques for bonds, using a marbled background and cutting the bond in half, so the holder and the issuer had matching halves. 55 M - discuss a 'basket of goods' measure of inflation on a bond. The bond could be paid in a combination of wheat, meat, etc, - the pictures of those commodities were on the bond. And my favorite - @ 59 min; They talk more about these pooled annuities, and the issuers didn't really have the data to figure life expectancies, so they didn't. Buyers soon figured out that they would buy the annuity in the name of their child. But this still left you with a risk based on a single person. So pools were created by organizations, made up of 6-8 year old girls (past the risk of many childhood diseases, had to be smallpox survivors, girls were ineligible for war drafts, etc). There was also mention that the traditional multi-generation household provided the financial 'smoothing' that many of us seek today - mortgages in our youth, annuities and pensions in old age. Pooling several generations is another solution. Also, some of these early bonds/annuities included an annual lottery - some earned 5%, but paid out 4% and the lottery winner got the group's 1%. Is this really an AA construction of low and high risk investments? and some background info: Q2 Fall 2007: What is a long life worth? Tontine - Wikipedia, the free encyclopedia -ERD50 |
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05-10-2008, 12:03 PM
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#212 |
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Give me a museum and I'll fill it. (Picasso)
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Sam, sounds like a tontine. This has been done in the past, although I don't know if it is legal in the US. If not, no doubt you could do it in Bermuda or somewhere similar. In the US, you might well run afoul of insurance regulation.
But what you are describing is basically what TIAA was set up to be for teachers.
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"The meat slides out in the shape of the can." |
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05-10-2008, 08:47 PM
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#213 |
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Thinks s/he gets paid by the post
Join Date: May 2004
Posts: 2,287
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Brewer, ERD50: Thanks. Yep, it looks like what I decribed is a variant of a tontine, though without the "last
I do think it might provide the same protection as an annuity at lower cost and greater safety.
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"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein |
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05-11-2008, 05:04 AM
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#214 | |
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Give me a museum and I'll fill it. (Picasso)
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Quote:
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"The meat slides out in the shape of the can." |
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05-11-2008, 01:50 PM
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#215 | |
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Moderator Emeritus
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Location: Oahu
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05-11-2008, 06:45 PM
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#216 |
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Recycles dryer sheets
Join Date: Oct 2006
Posts: 426
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sam, imagine doing the same thing with life inusurance. We get a group of people of about the same age. (You need to pass a health exam to get in.) We agree that anytime one of us dies during the next ten years, each of the other people in the pool will send $1,000 to the deceased's spouse.
To avoid cheating, you want some way of knowing exactly who is in the pool, and exactly who died, and exactly who is keeping up with their $1,000 payments. If you want smoother and more predictable results, you want to get a bigger pool. (A bigger pool means you have a bunch of $10 payments instead of a few $1,000 payments.) But that means the pool is too big to run with volunteers, you'll need a paid staff. You'll also want someone to do some marketing. And probably a lawyer to defend the pool in case of lawsuits. Then you need some way of making sure your paid staff isn't stealing from the pool.... I expect that if we could do enough research on "assessment societies" we'd discover that a reasonable number of "insurance companies" started this way. In today's world, the regulators will discover you before you get big enough to be viable. OTOH, I'm often thought that I'd like a chance to set up something that has a similar sales story to your tontines, but somewhat different mechanics. I'd like to see if just changing the way we describe payout VA's would change the way people perceive them. |
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05-15-2008, 08:26 PM
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#217 |
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,267
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Sam,
I like your idea, but what about the 6-year-old-girl phenomenon? That people buy these things in the name of their kids who are past the childhood diseases stage, but otherwise are going to live a really long time. I guess that is OK, too, if everybody is doing it? Otherwise it does penalize the older participant. |
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05-16-2008, 06:19 AM
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#218 | |
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Dryer sheet aficionado
Join Date: Mar 2008
Posts: 27
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You buy an annuity by transferring assets in. You (or you advisor) can continue to manage those assets. In one scheme there is a choice of about 10 funds, in another there is a much wider choice, you can even have a stockbroker account and hold stocks directly. You have control of what your money is invested in. I think the insurance company going bust can't affect you - they are just administrators of the scheme, the money in it does not belong to them. (I assume the assets are owned by a trust of which the insurance company is a trustee, but I may be wrong.) The insurance company tells you how much you can extract each year. There are government regulations that specify the minimum and maximum income you can take. These regulations take into account your life-expectancy and are designed to ensure you never run out of money. As an extra safeguard, if you run your capital down (through bad or unlucky investing) to something like half of what it should be you then can be forced to switch to a conventional annuity. The annuity aspect works (I think) like this. On any given day, you will actually either contribute nothing to the mortality pool (if you survive) or everything (if you die.) Your notional contribution is probability of death on that day multiplied by your closing balance. Suppose someone else has died that day, and their assets are to be redistributed to everyone else. Your share of the assets will be the fraction your notional contribution is of the sum total of all annuitants notional contributions. (I'll just elaborate to address a point someone made: a 90 year old with 100K of assets will receive far more of the pool than a six-year-old with the same balance. The 90 year old is notionally contributing far more, because of the higher probablity of death.) If I remember correctly, Prudential UK charge about 0.75% (of assets) per annum for running a scheme like this. Last edited by cjking; 05-16-2008 at 06:35 AM. |
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05-18-2008, 09:39 PM
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#219 |
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Thinks s/he gets paid by the post
Join Date: Mar 2004
Posts: 1,267
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Got it... that explains how to cover the 6-year-old girl problem. It is normalized for the age of the person in whose name it is taken out (and on whose life it is designed to pay). Interesting scheme. The .75 is steep considering you're also paying fund managers for the actual investing part, but it's nice to know something is out there.
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05-19-2008, 07:50 AM
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#220 | |
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Recycles dryer sheets
Join Date: Oct 2006
Posts: 426
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