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WSJ article - Variable Annuities were a good investment
Old 07-29-2009, 04:53 AM   #1
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WSJ article - Variable Annuities were a good investment

FWIW.

long-derided-this-investment-choice-now-looks-wise.html: Personal Finance News from Yahoo! Finance
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Old 07-29-2009, 11:06 AM   #2
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Yes, indeed. Hindsight remains 20/20.
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Old 07-29-2009, 11:09 AM   #3
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Monday morning quarterbacks tend to have the best statistics, too.
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Old 07-29-2009, 11:38 AM   #4
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I get it! So right before a huge market crash, invest in a variable annuity!

Less sarcastic - I suppose for those folks who feel strongly that the market is way overvalued and are concerned about the market tanking right after they retire, this might be a good approach. Certainly many folks on this forum expressed anxiety about the "lofty market" during 2007.

I don't really understand this though, because I thought owners of variable annuities were totally creamed by the 2000-2002 bear market, and to add insult to injury were unable to recognize capital losses to help offset taxes.

Must be more than one kind of "variable annuity".

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Old 07-29-2009, 11:41 AM   #5
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Originally Posted by audreyh1 View Post
Must be more than one kind of "variable annuity".
A lot of VAs are indeed invested in equities and any that were would have been crushed with the rest of us. It sounds like this type of VA is invested in something more akin to GICs or stable value funds with perhaps a bond component as well.
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Old 07-29-2009, 12:25 PM   #6
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Not really; reread the article.

My brother who pays no attention to investment dogma but knows a one sided bet when he sees it bought one of these. Needless to say, it beats the hell out of my results.

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Old 07-29-2009, 12:36 PM   #7
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Not really; reread the article.

My brother who pays no attention to investment dogma but knows a one sided bet when he sees it bought one of these. Needless to say, it beats the hell out of my results.
Basically I think some of these insurance companies were making a bet that long term 10-11% returns in the market were here to stay -- maybe more than that with the "magic" of leverage -- and they priced low-risk stuff to reflect that, figuring they could still make a profit on the money long-term even if they guaranteed 6% or more.

But it's still Monday morning quarterbacking to say people should have known better and realized that it was a no-brainer. This is a lot like the 30-year Treasury bond yielding 14% in 1981 -- in hindsight, the obvious move seems to have been to invest every last dime in those. Just like a 14% T-bond seems like a no-brainer today now that we know inflation was tamed, the guaranteed 6.5% seems like a no-brainer today. The problem is that these deals were offered at a time when they were *not* no-brainers.
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Old 07-29-2009, 01:19 PM   #8
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How many varialble annuity owners do you know that have anywhere near the value they had in 1999? In a variable annuity unlike a fixed annuity, the owner takes all the risk. The sad thing is, you aint seen nothing yet in my opinion. That is because I firmly believe we are in a bear market rally and when it ends, look out.

Those in variable annuities are going to have some kind of headache.
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Old 07-29-2009, 01:44 PM   #9
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Hmmm - I passed on variable annuities in 1993 when I almost bought at Vanguard.

Even with the plain vanilla 60/40 'policy portfolio' plus a few Norwegian stocks and the recent butt wupping I've taken from Mr Market - my retirement income has on average quadrupled and been as high as 7 times(one year post Katrina). A gold decade followed by a tin decade per Bogle.

Recency being what it is - I can see how attractive they look in hindsight.

heh heh heh - boy o boy I'm glad/(lucky?) I was such a cheap SOB in the 90's. .
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Old 07-29-2009, 03:07 PM   #10
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These VAs sound like they are cousins of the much-maligned EIAs
which have an insurance component that guarantees that principal can only stay the same or go up but not down. The downside for the EIAs is that this guarantee might only work if you annuitize and not for taking out lump sums.
For some, having that income stream might be useful.
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Old 07-29-2009, 06:32 PM   #11
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Variable Annuties are not cousins to EIA'a. They are no way like an EIA. In a VA, the owner takes all the risk. In an EIA, the owner takes no risk. Plus, you can still make excellent returns with no risk in an EIA. The KEY in this and in anything pertaining to investing is simple: Don't lose money in down years.

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Old 07-29-2009, 06:40 PM   #12
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Plus, you can still make excellent returns with no risk in an EIA.
You need to learn more about how an EIA works John. The defination of risk is broader than you suggest.
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Old 07-29-2009, 06:55 PM   #13
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The VAs in the referenced article sound quite different from what my concept of VAs
were.....but then I haven't followed them for many yrs. They sound like at least some
of them have morphed closer to the EIA model.
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Old 07-29-2009, 08:26 PM   #14
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Let's talk about risk for a minute. There is risk that the insurance company could get in trouble and not be able to meet their obligations. That is highly unlikely and even if it did happen, to my knowledge, no one has ever lost any principal in a failed insurer. They are either merged with another company or liquidated. And if liquidated if there is a shortfall, the state guaranty funds make up any shortcoming.

There is no market risk. It is impossible to lose money in index annutiies due to market declines. That is not true with VA's. I suppose you could say there is risk of not being in the best strategy every year. But even if you are not, you still cannot lose any money.

Can you make a good return? Absolutely. I know a person who bought one in March of 2008 and made zero the first year when the market dropped 40+ percent. This year she is up over 28 % so far with 7 months to go. The strategy is a monthly average strategy so even if the market declines chances are the return will still be
very high.

The point is you don't lose money in bad years and you make good money in up years which is great for the average investor. You can get 10% a year penalty free out of most of them. They are not for money that one needs though in the short or intermediate time frame. They are excellent accumulation products though.

If there is a risk I am overlooking, please by all means let me know what it is.
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Old 07-29-2009, 08:31 PM   #15
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They are excellent accumulation products though.
Do the folks who sell EIA's make good commissions off them?
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Old 07-29-2009, 08:31 PM   #16
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It seems to me these kinds of "investments" or insurance products fit within the definition of a broadly diversified portfolio. The fees may seem excessive, but then again, no one ever expects to get any value out of their home owner's insurance either.
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Old 07-29-2009, 08:43 PM   #17
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Commissions are good on index annuity products. But what is very important to understand is that unlike VA's, there are no fees on index annuities. Commissions are paid 100% by on the company and the customer earns on 100% of their money.There are no fees unless you have an income rider on the policy which some have. But they are optional. So what difference does it make what the commissions are if you don't have to pay them? The key is, does the product meet your needs? I guarantee you if you polled index annuity owners the last two years versus those in other alternative products yo willl not find one unhappy index annuity owner. You will find tons of unhappy folks in funds, stocks, or managed money programs.
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Old 07-29-2009, 08:47 PM   #18
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You selling many EIA's these days?
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Old 07-29-2009, 08:56 PM   #19
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Do the folks who sell EIA's make good commissions off them?
Yeah, no kidding. Is something a bargain when it goes from being grossly overpriced to merely expensive? Like Neiman Marcus having a "sale"?

Quote:
So two and a half years ago, Prof. Milevsky updated his research, making an about-face: "Some insurance companies are not charging enough," given the cost of risk-management instruments that insurers can buy to protect themselves, he wrote in 2007 in Research Magazine.
And he has enough credibility to know what he's talking about. I can understand why an ER with no pension would buy a VA (as insurance) to ensure a bare-minimum living standard.

But buying a VA as an investment? How long do people have to hold these "bargains", and how do they perform during a decade of hyperinflation? Just asking.

I think Greaney's article (and the accompanying spreadsheet) really open people's eyes to how much an insurance company has to overcharge for their "guarantee".
The high cost of a no-fee, no-commission Single Premium Immediate Annuity (SPIA).
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Old 07-29-2009, 08:58 PM   #20
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Back when I was working for a "diversified financial services" megacorp, I thought that lots of VA's had side guarantees. In almost all cases, they would at least repay your premium if you died. For an additional charge, they would provide some type of "living benefit" guaranty. Here's a source Variable Annuities With Living Benefits: Worth The Fees?

The insurance company should be buying options to cover its risks with these benefits. Many people on this board would argue that individuals could buy their own options, or simply modify their AA, if they want less downside risk. I'd tend to agree with that position.

The benefit that was getting a lot of activity when I retired was the "guaranteed minimum lifetime withdrawal". Basically, you'd set up fixed monthly withdrawals from your account at something like a 5% annual rate. As long as you didn't take any other withdrawals, the insurance company guaranteed that you would get that fixed dollar amount as long as you lived, regardless of the results of your investments. It's like a life annuity without "giving up the principle". Needless to say, it wasn't a free lunch.
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