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The Case for ALDA's
Old 10-19-2013, 11:03 AM   #1
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The Case for ALDA's

After watching just the first couple of lectures of The Finance of Retirement & Pensions course on NovoEd, I've already learned something new! And apparently not discussed (much?) here: ALDA's. They seem like they might be a good idea for some people:

Quote:
Here's a comparison of the two strategies:
  • With self-insuring, you might set aside your own personal old age fund at age 60. For instance, if you put $23,700 in reserve at age 60 and invested it in bonds paying 5 percent per year, you'd have about $80,000 by age 85. You could then buy an annuity that paid $1,000 a month for life. If you died before age 85, your heirs would get the entire reserve.
  • With an ALDA, you'd pay only about $16,000 (according to one company's quote) at age 60 for a lifetime income of $1,000 starting at age 85. That's a savings of $7,700.
Why is the ALDA cheaper than self-insuring? For the same reason that homeowner's insurance is cheaper than paying for damage to your home: because most homeowners never file a claim, and their premiums are used to reimburse the few who do. Similarly, the premiums of the ALDA owners who don't reach age 85 — and never file a "claim" — go to pay for the ones who do.
Of course you need to trust that the insurance company will be around when it's time to pay

Addition:
Advanced Life Deferred Annuity http://www.dummies.com/how-to/conten...ies-aldas.html
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Old 10-19-2013, 11:05 AM   #2
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A related reason the ALDA is cheaper is heirs get nothing from it.
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Old 10-19-2013, 11:50 AM   #3
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I looked up "Alda" on Google. It's either the Association of Late Deafened Adults or a 77 year old American actor famous for "Mash".

So it would be really helpful to know what the acronym stands for!

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Old 10-19-2013, 12:00 PM   #4
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Quote:
Originally Posted by sengsational View Post
After watching just the first couple of lectures of The Finance of Retirement & Pensions course on NovoEd, I've already learned something new! And apparently not discussed (much?) here: ALDA's. They seem like they might be a good idea for some people:




Of course you need to trust that the insurance company will be around when it's time to pay
You also have to ignore the time value of money to make a straight comparison.

Ha
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Old 10-19-2013, 12:07 PM   #5
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Originally Posted by Meadbh View Post
I looked up "Alda" on Google. It's either the Association of Late Deafened Adults or a 77 year old American actor famous for "Mash".

So it would be really helpful to know what the acronym stands for!

Yes, please type out acronyms the first time they are used in a thread. It takes you just a few seconds and saves those of us who don't know the acronym a lot more than that.
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Old 10-19-2013, 12:12 PM   #6
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A new variation and acronym for deferred annuities...Advanced Life Deferred Annuity http://www.dummies.com/how-to/conten...ies-aldas.html - not really anything new.

Savings of $7,700? If in the example you die at age 85 or before, you've spent $16K, and get ZERO $ in return. An ALDA is longevity insurance. At least with self-insuring or a SPIA you will get something in income and/or residual. I suspect that's why ALDAs don't generate a lot of discussion, you could get nothing at all in return - exacerbating most peoples worst misgivings RE: all annuities (dying before the actuarial averages put your payout in the black).

All these annuity vehicles are actually the same financially in essence, when you examine cost vs benefit. All that changes is the rates/fees that providers extract - and what seems to fit each individuals needs best.

But maybe I'm missing something...wouldn't be the first time.
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Old 10-19-2013, 12:49 PM   #7
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Originally Posted by sengsational View Post
Quote:
Here's a comparison of the two strategies:
  • With self-insuring, you might set aside your own personal old age fund at age 60. For instance, if you put $23,700 in reserve at age 60 and invested it in bonds paying 5 percent per year, you'd have about $80,000 by age 85. You could then buy an annuity that paid $1,000 a month for life. If you died before age 85, your heirs would get the entire reserve.
  • With an ALDA, you'd pay only about $16,000 (according to one company's quote) at age 60 for a lifetime income of $1,000 starting at age 85. That's a savings of $7,700.
Why is the ALDA cheaper than self-insuring? For the same reason that homeowner's insurance is cheaper than paying for damage to your home: because most homeowners never file a claim, and their premiums are used to reimburse the few who do. Similarly, the premiums of the ALDA owners who don't reach age 85 — and never file a "claim" — go to pay for the ones who do.
- If I invest the money myself, I can choose investments that are likely/guaranteed to keep up with inflation. If I invested the money in an ALDA I'd want a product that guarantees the same thing. It wouldn't be great to buy a fixed-return ALDA at 4% and then get 24 years of 7% inflation--your spendign power would be just 50% of what you thought you'd get.

Still, the concept of "longevity insurance" is a very valid one. Theoretically, once you buy it you can then enjoy the remaining money in your nest egg to the fullest while you are still healthy, since you don't need to worry about keeping a large amount of savings on hand for if you reach 85+. Because most folks won't live that long, the insurance company can afford to pay out big(ger) monthly checks to the few survivors. It's real insurance, and I think the idea makes sense. The problems are in implementation: Will the company still be around to pay the promised benefits, and will the benefits keep up with inflation?
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Old 10-19-2013, 12:49 PM   #8
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Quote:
Originally Posted by Meadbh View Post
I looked up "Alda" on Google. It's either the Association of Late Deafened Adults or a 77 year old American actor famous for "Mash".

So it would be really helpful to know what the acronym stands for!

Sorry about that. Changed the OP by adding:
Advanced Life Deferred Annuity http://www.dummies.com/how-to/conten...ies-aldas.html
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Old 10-19-2013, 01:59 PM   #9
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I've been reading about these for a couple years now. Not anything new.
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Old 10-19-2013, 03:57 PM   #10
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If you look at it as an investment only it has a tendency to elicit a grimace because you can die and get nothing. If you have interest in leaving a legacy then the grimace gets grumpier. If you look at it as insurance then I think it make a lot of sense. I like the idea of SS and a deferred annuity taking care of my floor when I turn 70. It gives me warm fuzzies all over. But I don't have legacy considerations at all so it really has no downside for me, as the mortality credits are free money if I'm still alive. If I'm dead..meh. Wade Pfau has talked about them recently on his blog and one of his latest posts sings their praises as part of your fixed income allocation.
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Old 10-20-2013, 01:51 PM   #11
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I would certainly be looking at it as insurance. It would seem to me that it would make planning a lot simpler. Yeah, you slice off a bit of the pie now, but what is left has to last only a fixed number of years. It seems to me that if you don't care about leaving money behind (I don't), a higher standard of living could be attained with this insurance. The caveat is that there is protection from default, and that there's only a reasonable cut taken by the insurance company.
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Old 10-20-2013, 02:08 PM   #12
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The caveat is that there is protection from default, and that there's only a reasonable cut taken by the insurance company.
Don't overlook the inflation pitfall. Annuities right now are at very low yields by historical standards and someone buying an ALDA at 60 YO with a payoff starting at 85 YO has a long uncharted road ahead.
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Old 10-22-2013, 07:22 AM   #13
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Don't overlook the inflation pitfall. Annuities right now are at very low yields by historical standards and someone buying an ALDA at 60 YO with a payoff starting at 85 YO has a long uncharted road ahead.
I'm going to use my TIAA-Traditional as a deferred annuity for longevity insurance. I can turn it into an income stream at any point in the future, it has a minimum accumulation interest rate of 3% plus a supplementary rate with is 1.4% right now, so I'm getting 4.4% right now. The payout rates are also at least 1% better than anything I've seen from other companies. So it's something nice to have as a backstop.
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