When to get rid of FA?

[Gworker]

I think part of the problem with the annuity was I really didn't know what I was getting into and didn't understand the 7%. This was all handled a few days after my mother died.

Looking through the prospectus it looks like I got a one time bonus of 7% (it looks like 5% not 7% for some reason I remember 7) and get to keep that bonus as long as I don't do a full withdrawal with-in 7 years.

The whole prospectus is not easy to read and the different fees are spread out through the prospectus plus there are the individual mutual fund fees that are held within the annuity.

I'm sure annuities have their place but for an inherited IRA at my age it does not seem to make sense. I will wait a few years then terminate the annuity.

[FinanceDude]

Originally Posted by Buckeye

Something didn't get communicated correctly if GWorker is feeling ripped off after doing some research. Is the 7% guaranteed income really 4% after the 3% fees? If the 7% really is 7%, why is GWorker not a happy camper? 7% risk free seems like a heck of a deal.

The "deal" comes at a price. I would need to know the name of the VA before I could comment on all the vagareties of it.............

[saluki9]

Originally Posted by Buckeye

Something didn't get communicated correctly if GWorker is feeling ripped off after doing some research. Is the 7% guaranteed income really 4% after the 3% fees? If the 7% really is 7%, why is GWorker not a happy camper? 7% risk free seems like a heck of a deal.

I can only speak for the largest provider of this type of products (I have a good buddy who is a wholesaler for them) the 7% is AFTER expenses.


I guess it would also be fair to say that it isn't totally risk free. The 7% benefit is subject to the credit risk of the insurer. So if all went bad and the insurer went belly up you would be left with your actual investment performance without the guarantee.

[Art G]

Originally Posted by saluki9

I can only speak for the largest provider of this type of products (I have a good buddy who is a wholesaler for them) the 7% is AFTER expenses.


I guess it would also be fair to say that it isn't totally risk free. The 7% benefit is subject to the credit risk of the insurer. So if all went bad and the insurer went belly up you would be left with your actual investment performance without the guarantee.

Well the answer is much more complicated than that. As financedude pointed out, there are variables missing. If Gworker merely received a front end one time bonus of 7% than this was done immediately and the account is now totally influenced by the investments within with a 7% headstart.
However, if Gworker was offered a 7% for life income, than he would have to deal with the risk of the quality of the insurance company for as long as he lived, not to mention, the performance would dictate any raises he may get in the future.
And lastly, if the 7% guarantee was merely a death benefit option, than Gworker wouldn't gain any advantage from this feature, but his heirs will appreciate it.
Either way, it's quite unfair to say that the annuity is inappropriate without further info.

[2B]

I've pointed out one advantage to buying an annuity that I'll repeat.

I own stocks in my index funds that derive a lot of income from swindling selling people annuities. Even if they make Gworker poorer, my stocks should do better.

Seriously, I looked over the paperwork of my FIL's and my father's variable annuities. They are complicated beyond description. I think the only way you could ever really figure out the fees is to sit down with the jerk FA that sold you the annuity. Even then, it would assume that they understood the fee structure.

Annuities, especially variable annuities, are not appropriate for 99% of the North American population.

[Art G]

I'll say it again, today's variable annuities, aren't the same animal as your father's variable annuities. They serve a completely different service. Just as you wouldn't compare a 1972 Datsun 1200 with a 2008 Infiniti G35.
I will say though, that as far as I can tell, the Index Annuity has completely worn out its' usefulness.

[saluki9]

Wow, how lucky for 99% of the population to have you to speak for them

Variable annuities are very complicated. Many times they are sold by people who don't fully understand them to people who understand even less about them. That is a problem. However, as an industry they have made some very notable enhancements to their products recently.

I think we're going to be seeing a growing percentage of the population who will benefit from using an annuity as part of their retirement strategy. You can get jaded on this forum and forget that much of American will never have enough to live on a 4% withdrawal. For somebody in that 60-70 range who wants to retire and CAN live on the 6,7, or 8% withdrawal an annuity provides these can be a godsend.

I'm weary anytime somebody declares an inanimate object evil which you seem to do on every possible occasion.

Originally Posted by 2B

I've pointed out one advantage to buying an annuity that I'll repeat.

I own stocks in my index funds that derive a lot of income from swindling selling people annuities. Even if they make Gworker poorer, my stocks should do better.

Seriously, I looked over the paperwork of my FIL's and my father's variable annuities. They are complicated beyond description. I think the only way you could ever really figure out the fees is to sit down with the jerk FA that sold you the annuity. Even then, it would assume that they understood the fee structure.

Annuities, especially variable annuities, are not appropriate for 99% of the North American population.

[Art G]

Absolutely saluki! I predict that with people living longer than ever before, the cry of the middle class baby boomer will be, "do I have enough income to last until I die?"

[saluki9]

Originally Posted by Art G

Absolutely saluki! I predict that with people living longer than ever before, the cry of the middle class baby boomer will be, "do I have enough income to last until I die?"

Go read any of the more notable academic financial journals. I promise at least once a quarter you will see an article that basically asks why more people don't buy annuities for at least part of their portfolio when it makes so much sense?

[Marquette]

One of the trade rags we get just had an interesting graph on AA and including a VA as part of that...

odd that an annuity company would get magazines about annuities and that magazine talks about how good annuities are.

maybe I'll post the graph later.

[Art G]

Originally Posted by saluki9

Go read any of the more notable academic financial journals. I promise at least once a quarter you will see an article that basically asks why more people don't buy annuities for at least part of their portfolio when it makes so much sense?

Even Scott Burns, who has written for years of the evils of annuities, is more and more writing about the benefits of the living benefits.

[FinanceDude]

Originally Posted by 2B

I've pointed out one advantage to buying an annuity that I'll repeat.

I own stocks in my index funds that derive a lot of income from swindling selling people annuities. Even if they make Gworker poorer, my stocks should do better.

Seriously, I looked over the paperwork of my FIL's and my father's variable annuities. They are complicated beyond description. I think the only way you could ever really figure out the fees is to sit down with the jerk FA that sold you the annuity. Even then, it would assume that they understood the fee structure.

Annuities, especially variable annuities, are not appropriate for 99% of the North American population.

You keep beating a dead horse, we KNOW you hate annuities.........

However, saying they are not appropriate for 99% of North America is like saying NOONE should drive a Honda because the profits will find their way back to Japan..........

[Art G]

I'm also curious 2B, you say "especially variable annuities". Does this mean you see a value to fixed or index ones? I'd be curious as to why?

[youbet]

I don't think the "seasonal effect" has been noted yet. In summer, bodies decompose quickly and the smell can be horrific. Therefore, definitely have the grave prepared and everything ready before getting rid of the FA. In winter, you can simply dump the body outside and take care of disposal chores in the spring. Or, if you're lucky, carrion scavengers will handle the disposal chore for you.

[2B]

Originally Posted by Art G

I'm also curious 2B, you say "especially variable annuities". Does this mean you see a value to fixed or index ones? I'd be curious as to why?

For some people I can see a possible value in an immediate fixed annuity. The "positive indicators" would include current age over 65, excellent health with a family history of long life, limited financial skills and expenses beyond the 4% withdrawl rate. Even then the annuity purchase shouldn't be more then 50% of their net worth.

I don't think that very many people really qualify based on my list but some might find it helps their planning.

My basic dislike for annuities is something anyone thinking about buying either a fixed or variable annuity product should consider. And, that is fees and true rate of return. Annuity products are carefully designed to hide fees upon fees. The actual return is also confused in its description. They sound "market beating" but have so many "ifs" that they consistently underperform. VAs are especially good at this.

When I've looked at immediate fixed annuities, they could be replicated with a sinking fund based on CDs or bonds. The withdrawl could be continued for about a decade past your actuarial mortality. If you live past that, the immediate fixed annuity would have a higher NPV since the benefits would probably keep coming.

We consistently talk about the need for "low fee" investments on this forum. Somehow the horrible fees associated with annuities in the form of commissions and management fees seem to get a pass from some people here.

[Art G]

2B....So, if you like immediate annuities that pay 4%, why wouldn't you like a variable annuity with a life pay feature (could be joint life to include your wife if you like), that pays you at least 5% with a chance for raises? Forget for a moment that the company makes a money...more money in your pocket and a chance for a raise, ANDDDDD a good chance to leave money to your heirs.
So, what don't you like about this? Just curious.

[FinanceDude]

Originally Posted by 2B

For some people I can see a possible value in an immediate fixed annuity. The "positive indicators" would include current age over 65, excellent health with a family history of long life, limited financial skills and expenses beyond the 4% withdrawl rate. Even then the annuity purchase shouldn't be more then 50% of their net worth.

To do that, folks have to ANNUITIZE their money, and there's NOT many folks who want to do that.........

My basic dislike for annuities is something anyone thinking about buying either a fixed or variable annuity product should consider. And, that is fees and true rate of return. Annuity products are carefully designed to hide fees upon fees. The actual return is also confused in its description. They sound "market beating" but have so many "ifs" that they consistently underperform. VAs are especially good at this.

Fixed anuities have very low fees, because there's no mortality and expense fees charged. The "fee" comes in the form of a holding period.......

The actual return is not hidden. If you go on any website for the VA, even Vanguards, those returns listed are NET of fees..........just pointing that out......

We consistently talk about the need for "low fee" investments on this forum. Somehow the horrible fees associated with annuities in the form of commissions and management fees seem to get a pass from some people here.

Noone's giving it a "pass". On this board, we talk about MANY things, but LONGEVITY risk is a real risk with advances in medicine. Not everyone in America is like folks on here, they can't live on a 4% SWR. According to Webster's Dictionary, a PENSION is defined as a "fixed sum paid regularly to a person", and an ANNUITY is "a sum of money payable yearly or at other regular intervals"..........tell me the difference?

I am not going to debate the costs of a VA with living benefit guarantees, etc, they ARE expensive. However, for folks who don't have a pension, want a guaranteed stream of income, AND control of their money, it COULD be an option. FWIW, SPIA's IMO, are NOT COLA'd, and therefore, carry HUGE purchasing power erosion risk.........

I DON'T have all the answers, but I can tell you I work with retirees everyday, and for the most part they are concerned with rising Medicare costs, rising energy costs, rising food costs, inflation, etc. The mantra torch carried by some on this board of "well, you're in this pickle because you didn't LBYM, you deserve it", is not reality...........

[Sarah in SC]

FD or Saluki, have you seen the exponential reciprocal gamma formula to predict probability of retirement ruin? With all of the talk about longevity risk, it is pretty interesting. My bosses were fiddling with it the other day; getting ready for a presentation. It is funny though, once they put it in a spreadsheet that the math-retarded could process, I ran my info through and what is the bottom line? 4.5% withdrawal rate will work.

[FinanceDude]

Originally Posted by Sarah in SC

FD or Saluki, have you seen the exponential reciprocal gamma formula to predict probability of retirement ruin? With all of the talk about longevity risk, it is pretty interesting. My bosses were fiddling with it the other day; getting ready for a presentation. It is funny though, once they put it in a spreadsheet that the math-retarded could process, I ran my info through and what is the bottom line? 4.5% withdrawal rate will work.

Is it like Monte Carlo? I have a software program that does Monte Carlo, and I run about 50,000 different scenarios for each portfolio I suggest for a client.

I can make due on a 3.5% SWR for my portfolio based on my conservative projections. I can drop it to 2.5% SWR if I have the advantage of a good bull market leading up to FIRE.........