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VA - as a Transition Strategy??
Old 05-30-2011, 04:35 AM   #1
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VA - as a Transition Strategy??

Long post.... complicated topic.

Since I am approaching FIRE, I am doing quite a bit of reading and study.

Up front - I am not promoting VAs... [Don't flame me]... I am asking questions to try to further my understanding. Pesonally, I am a bit wary of VAs.... especially the costly and complex riders. Maybe they can be used successfull... But I am not sure I understand some of the complex riders they make available and how they might work to my advantage. Plus.... most of them have huge fees. However, there are a few VAs out there that have fairly low fees and no loads.

I watched this wealthtrack episode (someone posted a while back) about longevity risk and the role annuities can play.

Chris Blunt - Kimberly Lankford | WealthTrack on

I picked up on a comment the NY Life guy made about VAs and thought I would put it out there for discussion. Frankly, I had not thought about using a VA this way.

His comment [paraphrase] - VAs can play a role as a transition strategy. His comment was in the 12 min - 13 min timeframe of the video.

I assume he meant the series of years that one is transitioning from accumulation into decumulation (withdrawal)... but maybe he meant as a permanent transition to a variable payout solution.

What do you think he meant?? Because he did not elaborate. Did he mean use a VA temporarily (during transition to stretch out the hopeful accumulation and use more equity along with the rider to lock-in gains) or use a VA to transition to create the permanent payout solution?

[obviously a savvy investor could use derivatives... but less savvy investors might not feel confident doing that]

Do you think a VA can be used as a viable transition strategy... If so, what are the conditions and parameters that would need to be employed?

It would seem to me that using a VA temporarily for transition might have some issues. Can a VA be wrapped in an IRA and later be moved out of the VA and into normal mutual funds and remain in the IRA? Can it even be done and retain the tax deferal? I suppose if one were intending to buy a SPIA, they could do a 1035 transfer.

What do you think?

Has anyone seen a back-tested study on a (use a VA temporarily) type of approach?

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Old 05-30-2011, 10:24 AM   #2
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Neat graph on the components of each SPIA payment as interest, capital, and mortality credits.

Blunt blunders badly with "When SS was created the life expectancy was 67, now it's 85 or 88 depending on gender". The first number is life expectancy at birth (which is irrelevant for retirement planniing), the second life expectancy at 65.

Blunt says "Using some of your bond allocation to buy a traditional fixed SPIA is a rare free lunch. You decrease your chance of running out of money, but increase your average estate." That doesn't seem likely to me, but I've never modeled it.

Lankford is talking about Guaranteed Lifetime Withdrawal Benefits from a VA at 11:00. That's a unique product that requires careful thought.

At 12:00, I think "transition phase" is a poor choice of words. The context is "not the most efficient income vehicle and not the most efficient investment vehicle".
So I think Blunt should have said "compromise" instead of "transition".

NYL doesn't have a COLA'd annuity available, so Blunt didn't mention them. Lankford does. She also does a good job of talking about total portfolio, "If you've got a pension and SS, you probably don't need an annuity".

They talk about "longevity insurance" (deferred annuities with no cash values). Blunt says "academics love it and so do advanced financial planners". Lankford has a good discussion.

IMO, they both blew the question "What one asset should everyone have?" My answer is Social Security. Simply deferring SS to age 70 provides all the basic lifetime income most people need.

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Old 05-30-2011, 10:54 AM   #3
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I think these insurance products will very likely get more and more play, as the reality of a low return world begins to sink in. Ironically, another big blastoff in equities would sink the annuity ship once more, but will actually make prospective securities returns just that much worse.

The guy who shifts reference on life expectancy is doing what almost everyone does to make their point-tell indirect lies. There is about zero chance that he does not understand his trick.

Also, what he means by the word "transition" is the period immediately leading up to retirement.

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