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Old 01-14-2012, 02:46 PM   #61
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When the market tanks like in 2008, it's good to know that you have a constant stream of income such as an immediate annuity. I guess that's why it's really sold as insurance instead of an investment.

I suppose, similar to life insurance that seems like a waste when you are well but at the time when needed, is quite helpful.
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Old 01-14-2012, 02:56 PM   #62
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I have a non-cola pension and SS that provides 70% of normal income needs so I don't plan to buy an annuity.

That being said, if I had an extra 100K laying around at age 75 and withdrew 7.5K per year, assuming a 2% return, it would last until age 90 for a 7.5% rate. I would think that would be more than enough longevity insurance for me.
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Old 01-14-2012, 03:14 PM   #63
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Thanks Michael. When I enter 62 year old Male, and, for example, Deposit $100,000 in Indiana in the same website http://www.immediateannuities.com/ I get $549 per month for Single Life Income with No Payments to Beneficiaries ("SL"). Do we agree this is equivalent to 6.5% a year? 6.5% looks better to me than my 3% average on CDs or munis... especially when I have no heir to worry about.
Not really. The calculator shows the data you mention. We cannot calculate a rate of return because there is no end date. If we look at actuarial tables, the life expectancy of a 62 year old male is 19.4 more years. Based on that number, a $100K annuity paying $594 monthly would return 5.04% and the actual return depends, of course, on real life.
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Old 01-14-2012, 04:17 PM   #64
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Off the top (I'll recheck tomorrow), it would appear that 19.5 years of monthly payments (234 payments) of $594.35, discounted at 3.58% (not 5.04%), has a present value of $100,000.
Update- I 'manually' verified that the 234 payments of $594.35 on a $100,000 investment returns a 3.58% APR.
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Old 01-14-2012, 04:35 PM   #65
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I kicked the idea around a little, but with one pension beginning next year at 55, and another one, smaller, kicking off at 60, I'm not going the annuity route. I don't really have a large amount in my TSP, because I only started maxing it 4 yrs ago. I'm really hoping that once I retire, wife will be able to come close to maxing hers for the the 3 years she has left working. Still, we will only end up with maybe $300k or so total in accounts. At 62, my SS will only be around $250 due to WEP. Wife will turn 62 in 2023, then will get her SS. It won't be a big check, because she's not a big earner. The biggest concern we have at this time, and going forward, is that we don't currently own a home. I'm sweating over whether we should use a big chunk of the TSP/401k/Roth IRA money to buy one, paying cash or financing....or? Whatever we do in that department will, of course, change our retirement dynamics a good bit. With no mortgage, we can live ok on the pensions. With a mortgage, we will have to pull from the accounts to make the payments. Trying to figger it out.
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Old 01-14-2012, 04:50 PM   #66
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Like others my annuity is SSN but I also have board fees and K1 income from a business I can hopefully rely on before touching investments. My husband also has his business so...the plan is not to touch investments at all unless we have to.
Periodically I get a bit squeamish with knowing my current income check cuts off in 2 years and consider an immediate annuity. Every time I look at it....I talk myself out of it. As Mid-pack pointed out, now is not the time to buy annuities of any sort if one can hold off due to low interest rates. The other thing is annuities are not really guaranteed. The annuity company must be strong and we all need to stay below the limits of what our individual states would guarantee. Just like with FDIC insurance with the banks or SPIA insurance with the financial institutions. There are state limits for recovering funds from an annuity company that goes belly up.
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Old 01-15-2012, 08:13 AM   #67
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OK. Let's consider 1) time horizon = 40 years from now (I am 46) and 2) as indicated above, let's consider also that the CD principal (say 100k) is gone in my calculations, the exact same way as the principal invested in an annuity (100k).

Based on these two assumptions, do we agree annuities make sense ?

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Not really. The calculator shows the data you mention. We cannot calculate a rate of return because there is no end date. If we look at actuarial tables, the life expectancy of a 62 year old male is 19.4 more years. Based on that number, a $100K annuity paying $594 monthly would return 5.04% and the actual return depends, of course, on real life.
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Old 01-15-2012, 08:48 AM   #68
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OK. Let's consider 1) time horizon = 40 years from now (I am 46) and 2) as indicated above, let's consider also that the CD principal (say 100k) is gone in my calculations, the exact same way as the principal invested in an annuity (100k).

Based on these two assumptions, do we agree annuities make sense ?
obgyn65, I am not well versed on annuities. In the above example, a 62 year old male buying an immediate annuity looked like a reasonable alternative. In general, some annuities appear to be good options for people to deal with the risk of running out of money. There are many annuities, however, that are not good deals, and any option that involves investing today for payouts beginning in the future needs the advice of our expert members.
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Old 01-15-2012, 09:50 AM   #69
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Obgyn,

Unless I missed it I didn't see that anyone mentioned earning Delayed Retirement Credits from Social Security by delaying your claim for benefits until as late as age 70. In effect you are buying more lifetime annuity from the SSA that way. SS is a better deal than private annuities because it is COLA'ed and has survivorship benefits among other reasons. So, it wouldn't make sense to buy a private annuity unless you already planned to delay SS. Doing so might require spending down some of your assets while waiting for SS to kick in.

In my opinion, and of some others, in analyzing an annuity it is better to consider it as an insurance than an investment product. That means that you are offloading your longevity risk to an insurance company. Usually it makes sense to buy insurance when you can't afford to bear the risk of the financial loss on your own. (Therefore homeowner's insurance is worth buying, but laptop insurance is not.) A break-even analysis is appropriate for some kinds of investment, but not for insurance since the motivation for investment is a return rather than offloading excessive risk. In the case of homeowner's insurance you never hear anyone regret that he never broke-even on his fire insurance. Even if his house never burns down the homeowner got his money's worth from the insurance because he no longer had to worry about financial ruin from a fire. Similarly, a combination of delayed SS and one or more private annuities can provide enough assurance that you will not outlive at least a basic income that you can spend a little more of your assets in the meantime, raising your effective standard of living. From that point of view an annuitant benefits even if he were to die much earlier than he hoped.

The big advantage to an annuity, including SS, is that you have access to the mortality credit, which you can only get through an annuity. That means that, unlike an investment, only survivors can collect. This benefit of pooling risk is what enables an insurance company to avoid default.

In my own case I use the financial planning software, Esplanner, from esplanner.com. This lets me compare many different scenarios including annuities and SS early, at Full Retirement Age and with Delayed Retirement Credits. What I find is that since I will be delaying SS until age 70 and since SS represents a good-sized chunk of the present value of our assets, our standard of living would probably not benefit from adding additional annuities. I reanalyze annually and will be ready to reconsider as time goes on. Also, since we live abroad the range of annuities from private companies available to us is limited.
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Old 01-15-2012, 10:44 AM   #70
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My annuity is Social Security.
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Old 01-15-2012, 10:57 AM   #71
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My annuity is one acre vegetable garden and a firewood lot.
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Old 01-15-2012, 11:23 AM   #72
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obgyn65,

It is difficult to think of yields of life contingent immediate annuities because the annuitant could die tomorrow and the insurer makes no payments or the annuitant could live to be 110, in which case they will have made out like a bandit.

However, you can get a sense for the interest rate that the insurer pays by looking at immediate annuities not involving life contingencies. In the example that one poster shared, his SIL paid $100,000 and will receive $674 a month for 15 years. This is the same as putting $100,000 in an interest bearing savings account that pays 2.67%/annum and withdrawing $674 on the first of each month. At the end of 15 years, the account balance would be zero.

But while the annuitant receives $121,500 over the 15 years ($675 * 12 * 15 years), $100,000 is a return of their original $100,000 and the rest is interest.

A life contingent annuity is similar in that there is an interest component, but there is also a mortality factor as to how many monthly payments will be made. IMO, the best way to compare life contingent annuities is to simply compare the amount per month that you will receive for similar contracts. So if for an x year old male, one company pays $575 a month and another carrier pays $600 a month and the financialworthiness of the carriers isn't substantially different, then the $600 is the better deal.

That said, I'm not a big fan of annuities, particularly in a low interest rate environment, but an annuity may well be appropriate in your case where your SS will be low as a result of working abroad. I would probably wait for interest rates to rise, but whether you buy now or wait, it would pay to shop around.
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Old 01-15-2012, 11:31 AM   #73
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pb4uski.......

Very clear. Thanks.
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Old 01-15-2012, 11:49 AM   #74
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If we look at actuarial tables, the life expectancy of a 62 year old male is 19.4 more years. Based on that number, a $100K annuity paying $594 monthly would return 5.04% and the actual return depends, of course, on real life.
According to my HP 12C, this annuity would have an IRR of 3.5%. If the monthly payment were $549 (as obgyn suggested), the IRR would be 2.6%.
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Old 01-15-2012, 01:09 PM   #75
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According to my HP 12C, this annuity would have an IRR of 3.5%. If the monthly payment were $549 (as obgyn suggested), the IRR would be 2.6%.
That is only if the 62 yo male drops at 81.4. If he lives to 100 the IRR is much higher and if he drops at 70 it is negative.
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Old 01-15-2012, 01:19 PM   #76
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That is only if the 62 yo male drops at 81.4. If he lives to 100 the IRR is much higher and if he drops at 70 it is negative.
Understood. I was responding to the 19.4 years MichaelB used in his calculation.
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Old 01-15-2012, 01:22 PM   #77
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That is only if the 62 yo male drops at 81.4. If he lives to 100 the IRR is much higher and if he drops at 70 it is negative.
That's what the insurance / death gamble aspect of an annuity is about.
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Old 01-15-2012, 01:37 PM   #78
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That's what the insurance / death gamble aspect of an annuity is about.

Kinda like both the car dealer and the buyer smiling and saying to oneself "sucker" after the negotiations.
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Old 01-15-2012, 02:16 PM   #79
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pb4uski.......

Very clear. Thanks.
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Old 01-15-2012, 02:40 PM   #80
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obgyn65,

It is difficult to think of yields of life contingent immediate annuities because the annuitant could die tomorrow and the insurer makes no payments
+1

SS will be my annuity, this is why I will take SS at 62 (almost sure). If I postpone taking it, I would be spending from portfolio and if I die, that money would be gone. That would leave less money for DW!
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