One more time, variable annuities....

[Art G]

The thing is Art, I have that peace of mind without your high cost VA. I am not considering whether or not I need to cut back on spending as my income has taken no hit, as a matter of fact it is still outpacing inflation.
So while VA MAY be a choice for some, it is not, by any means, the only choice for peace of mind and increasing income in a down market. It is, most likely, the most expensive answer, but certainly not the only one.

I also have preferreds and other stocks for income, but ya' know what, they're cutting their dividends and some have gone out of business. Even some of my higher quality corp. bonds are now valued about 70% less than par and I'm concerned the company may be gone soon. When a Wachovia FOUR MONTH bond is paying 25%, ya' gotta' start wondering how safe it was.
I cannot disagree that a VA has its' cost. If the market had continued up, I would have thrown away money, just like not wrecking my car makes my auto insurance a big waste, just like buying protective puts at times is a big waste. However, there are no other products or investments out there that lock in high water marks and have automatic minimum step ups, not to mention a death benefit. Again, it's not a cure all, it's just one more thing worth considering, and currently something I'm glad to have used. If they renege on their promise, I invite you all to post back and tell me what a fool I am.
I am curious as to what you are using to earn your income. I'm always looking for additional ideas.

 

[Marquette]

What is the value of peace of mind?

But, here's the thing, you're exchanging one thing to worry about for another. Only time will tell which one is right, though. I think everyone understands that a company's operating capital is separate from their investment accounts. We know there are state insurance pools that should pay out if a carrier goes bankrupt. We know that carriers are policed to keep adequate reserves.

However, many of us also feel those state pools are underfunded and couldn't pay out a full policy. Some of us are also worried that those regulators might be lax. We have anecdotal evidence (first-hand accounts) from two members on this thread about issues related to carriers going under (realizing that anecdotal evidence does not equal data).

You've said on another thread that you're not even sure how a certain carrier can afford one of the products they're selling. (sorry, I know you mentioned it privately as well, but I do recall it from one of our last VA discussions)

Brewer (yes, I know, shhh) used to make a life of tracking insurance carriers and he only has a list of half a dozen that he, personally, would bet on.

All of that combined wouldn't give me warm fuzzies. If I were a contract holder at AIG or Hartford, even with the bailout of AIG, I think I still might be a little tense over things.

And, for a VA to truly offer some portfolio insurance, I think I'd need to put a large enough percentage of my assets in that I'd be worried about carrier risk.

This comes back to there being no such thing as a free lunch. You're trading portfolio risk for carrier risk. The question remains to be answered if the trade is worth it. For some people, yes, for others, maybe not.

Plus, if we wanted peace of mind, we'd board up the soap box.

 

[FinanceDude]

I also have preferreds and other stocks for income, but ya' know what, they're cutting their dividends and some have gone out of business. Even some of my higher quality corp. bonds are now valued about 70% less than par and I'm concerned the company may be gone soon. When a Wachovia FOUR MONTH bond is paying 25%, ya' gotta' start wondering how safe it was.
I cannot disagree that a VA has its' cost. If the market had continued up, I would have thrown away money, just like not wrecking my car makes my auto insurance a big waste, just like buying protective puts at times is a big waste. However, there are no other products or investments out there that lock in high water marks and have automatic minimum step ups, not to mention a death benefit. Again, it's not a cure all, it's just one more thing worth considering, and currently something I'm glad to have used. If they renege on their promise, I invite you all to post back and tell me what a fool I am.
I am curious as to what you are using to earn your income. I'm always looking for additional ideas.

Locally, we had a small bank offering 5.75% for 36 months........I'm sure the line is around the block. It's a new bank, I guess they need money.......

 

[Art G]

OK, maybe I should replace the term "peace of mind" with "hope". I KNOW for fact what my mutual funds are currently worth. I at least have hope that my VA's will honor their promises to pay out over a lifetime. Even if the market now rockets up from here, my VA's are starting way ahead as they lock in values.
Here's your morbid comparison, if I had a disease right now, wouldn't I like to know they are working on a cure? Wouldn't I be willing to pay anything to live longer? Aren't we all fighting for our financial lives right now? I know my mother, right now, is scared to death about running out of money. So are many other people I know.

 

[Zathras]

If they renege on their promise, I invite you all to post back and tell me what a fool I am.

As long as you diversify it shouldn't be TOO foolish. But we have heard just on this thread from people that lost their VA investment or a large part of it because of a single company reneging on their end of the bargain. Too much of the funds with one company if you ask me.

I am curious as to what you are using to earn your income. I'm always looking for additional ideas.

GE, C, ASBC, FO, JNJ, O, BUD, KO, MMM, DEO, LLY, PG, SYY and a few others.
While C has cut its dividend, most of the others have increased theirs. In this market my income stream continues to increase faster than inflation. In addition I am still able to invest more as the sale of a business is completed. This also all goes into dividend paying stocks. Zero fees, minimal transaction costs, low taxes (well, for another year at least).

And no, this method isn't for everyone either, no investment method is. But for me, I sleep much easier than having a large percentage of my portfolio in a VA.

 

[Zathras]

This comes back to there being no such thing as a free lunch. You're trading portfolio risk for carrier risk. The question remains to be answered if the trade is worth it. For some people, yes, for others, maybe not.

This is an excellent and very concise way to put it!

 

[REWahoo]

Here's your morbid comparison, if I had a disease right now, wouldn't I like to know they are working on a cure? Wouldn't I be willing to pay anything to live longer? Aren't we all fighting for our financial lives right now? I know my mother, right now, is scared to death about running out of money....

Art, I'm not sure I understand. Are you comparing VA's to a disease or to research for a cure for a disease? And if you haven't been able to convince your own mother to buy an annuity from you, what chance do you think you will have of convincing any of us?

 

[Marquette]

OK, maybe I should replace the term "peace of mind" with "hope". I KNOW for fact what my mutual funds are currently worth. I at least have hope that my VA's will honor their promises to pay out over a lifetime. Even if the market now rockets up from here, my VA's are starting way ahead as they lock in values.

How do VAs work? I know with an EIA product you're capped on the downside and upside. Am I limited on my upside on a VA off the bat? If not, then if I exercised my 6% lock on my VA (not using the right terminology here) am I limited?

It seems that someone that's old enough and wants to ensure an income stream for life and bet against the actuaries might be better off with a SPIA. I get the idea of a SPIA. It's a risk exchange (it pays off if you live long enough, if your carrier doesn't die, etc... but, in general, it lowers your downside risk in exchange for lowering upside rewards), but one that lets me purchase a pension for myself. A base to smooth consuming my portfolio and guarantee a certain level of living.

I'm still trying to fit in where VAs and EIAs fit into the puzzle. I know you're not a fan of EIAs so it might help if you could highlight why a VA is a better overall choice.

 

[Art G]

As long as you diversify it shouldn't be TOO foolish. But we have heard just on this thread from people that lost their VA investment or a large part of it because of a single company reneging on their end of the bargain. Too much of the funds with one company if you ask me.



GE, C, ASBC, FO, JNJ, O, BUD, KO, MMM, DEO, LLY, PG, SYY and a few others.
While C has cut its dividend, most of the others have increased theirs. In this market my income stream continues to increase faster than inflation. In addition I am still able to invest more as the sale of a business is completed. This also all goes into dividend paying stocks. Zero fees, minimal transaction costs, low taxes (well, for another year at least).

And no, this method isn't for everyone either, no investment method is. But for me, I sleep much easier than having a large percentage of my portfolio in a VA.

Thanks for the list. I own a few of those companies also. Most don't pay enough income for people to live on. For instance, KO at 3.3% is nice, but most people can't retire on it. Plus, when they look at their account values and it's down a bunch, they start getting nervous no matter how much I tell them to hang tight. Not surprisingly, I had a few people INSIST on going to cash on Friday, never fails.

 

[Art G]

Art, I'm not sure I understand. Are you comparing VA's to a disease or to research for a cure for a disease? And if you haven't been able to convince your own mother to buy an annuity from you, what chance do you think you will have of convincing any of us?

Sheesh! Now I've got to defend my mother's thought process to you? If she had sold her rental property, she would have bought one. I hope that pleases you.

 

[Art G]

How do VAs work? I know with an EIA product you're capped on the downside and upside. Am I limited on my upside on a VA off the bat? If not, then if I exercised my 6% lock on my VA (not using the right terminology here) am I limited?

It seems that someone that's old enough and wants to ensure an income stream for life and bet against the actuaries might be better off with a SPIA. I get the idea of a SPIA. It's a risk exchange (it pays off if you live long enough, if your carrier doesn't die, etc... but, in general, it lowers your downside risk in exchange for lowering upside rewards), but one that lets me purchase a pension for myself. A base to smooth consuming my portfolio and guarantee a certain level of living.

I'm still trying to fit in where VAs and EIAs fit into the puzzle. I know you're not a fan of EIAs so it might help if you could highlight why a VA is a better overall choice.

In my opinion, there is ABSOLUTELY no reason to buy an equity index annuity. They are sold by insurance salesmen who don't have a brokerage license, so they have nothing else to offer. As to the SPIA, my understanding is that once you annuitize, you've lost control of it. Unless you're OJ Simpson or Ken Lay, I can't think of a reason to annuitize.
To answer your question, IF the company keeps their promise, you've locked in the initial amount invested (the principal). Some products lock in daily high water marks (with restrictions), some lock in quarterly values, some annually.
There are many different guarantees and offers, so it's not really possible to answer your question definitively, however, one product gives automatic 5% increases no matter what (towards income), and every quarterly gain lock from the last high. Again, it's tough to explain in posts and I don't want to mislead anyone.
BTW, also depends on whether or not you're more concerned about leaving money to heirs or living well yourself and telling your kids to tough it out. All JMO

 

[FinanceDude]

GE, C, ASBC, FO, JNJ, O, BUD, KO, MMM, DEO, LLY, PG, SYY and a few others.
While C has cut its dividend, most of the others have increased theirs. In this market my income stream continues to increase faster than inflation. In addition I am still able to invest more as the sale of a business is completed. This also all goes into dividend paying stocks. Zero fees, minimal transaction costs, low taxes (well, for another year at least).

And no, this method isn't for everyone either, no investment method is. But for me, I sleep much easier than having a large percentage of my portfolio in a VA.

Did you "firetest" your portfolio in FIRECALC to see if it can withstand a 4% withdrawal rate based on a flat market?

 

[Zathras]

Did you "firetest" your portfolio in FIRECALC to see if it can withstand a 4% withdrawal rate based on a flat market?

Depends what you mean by 'flat market'. I ran it through Firecalc and came through with flying colors over 50 years.
As Art commented, 3.3% for KO as an example may not be enough for some. However, since many are paying much higher than that, my portfolio's dividend return right now is 3.95% and is still pretty conservative.
As I am still rebalancing from bonds into stocks, the plan is that I won't need to sell any stocks and can rely solely on the income stream.
This crash in the market actually just speeds up the day that will come.
Of course, that will slow down if more companies cut their dividends than increase them, but so far that is not the case.
And again, no fees, no penalty if I do need to access the money sooner, no limits on growth (or loss).

 

[Art G]

Depends what you mean by 'flat market'. I ran it through Firecalc and came through with flying colors over 50 years.
As Art commented, 3.3% for KO as an example may not be enough for some. However, since many are paying much higher than that, my portfolio's dividend return right now is 3.95% and is still pretty conservative.
As I am still rebalancing from bonds into stocks, the plan is that I won't need to sell any stocks and can rely solely on the income stream.
This crash in the market actually just speeds up the day that will come.
Of course, that will slow down if more companies cut their dividends than increase them, but so far that is not the case.
And again, no fees, no penalty if I do need to access the money sooner, no limits on growth (or loss).

You are one of the very few who can live on under 4% per year. Either you have a lot of money, or are very cheap.....most though need a much higher percentage and that's why a bit more risky investments and growth are necessary. Obviously, if you can live on AAA muni bond income, there's little reason, other than the greed factor, to do anything else.

 

[Zathras]

You are one of the very few who can live on under 4% per year.

Not the few around here
Heck, many members around here put me to shame. Isn't 4% considered pretty reasonable for retirement in general?
Please note, I am not talking about a 4% portfolio growth rate, but the income I need. The income growth the last 2 years has been about 7%. Obviously the portfolio has taken a big hit this year, but the income stream continues to grow.
For long term portfolio growth I am planning on 6% and hoping for 8%.

 

[Art G]

Not the few around here
Heck, many members around here put me to shame. Isn't 4% considered pretty reasonable for retirement in general?
Please note, I am not talking about a 4% portfolio growth rate, but the income I need. The income growth the last 2 years has been about 7%. Obviously the portfolio has taken a big hit this year, but the income stream continues to grow.
For long term portfolio growth I am planning on 6% and hoping for 8%.

I'm talking about taking 4% income per year from your investment while not touching the principal. Most people need more and end up eating into their principal and in a year like we're having, are currently very concerned about their assets lasting them a lifetime. Obviously, if you're biting into the principal, you either have to live on less next year, or else take a higher percentage.
BTW, just got this from an insurance company. It makes sense to me, but probably not to most here.....

1) For an additional 2.05% in cost, the XXXX rider in XXX increased the client's future income base by 5% and protected the downside against a 27% loss, roughly a 33% swing that benefits the client
2) It would allow the client to start an approx. 44% higher guaranteed lifetime income today (assuming a 5% withdrawal rate)
3) Provided 100% downside protection for the client's family in case of an untimely death during the past year

 

[clifp]

I'm talking about taking 4% income per year from your investment while not touching the principal. Most people need more and end up eating into their principal and in a year like we're having, are currently very concerned about their assets lasting them a lifetime. Obviously, if you're biting into the principal, you either have to live on less next year, or else take a higher percentage.
.

Art you've been around here long enough to understand that for an early retiree a withdrawal of 4% adjusted for inflation is the max people should be taking. The fact that people need more than 4% means that they either should work longer, spend less, or die sooner. If none of those options are viable than a SPIA may make sense for a portion of their assets, with the downside that they won't be leaving money to their heirs.

 

[Zathras]

I'm talking about taking 4% income per year from your investment while not touching the principal. Most people need more and end up eating into their principal and in a year like we're having, are currently very concerned about their assets lasting them a lifetime.

I think that is a large part of your problem Art, most people around here don't need more. Although I thought it was even less than what I found.
According to this poll http://www.early-retirement.org/forums/f28/fire-ratio-2007-a-24908.html, just over half require LESS than 4%. I also suspect if the poll were limited to those in retirement it would have been more.

I do agree that the current environment make some people nervous. And I suppose 4% isn't enough for most people paying 2.05% fees for dubious financial products

 

[ziggy29]

Art you've been around here long enough to understand that for an early retiree a withdrawal of 4% adjusted for inflation is the max people should be taking. The fact that people need more than 4% means that they either should work longer, spend less, or die sooner.

Agreed. If we can't make the numbers work with less than 4% and an acceptable lifestyle, we're not retiring.

 

[brewer12345]

Brewer (yes, I know, shhh) used to make a life of tracking insurance carriers and he only has a list of half a dozen that he, personally, would bet on.

Actually, I currently have "bets" (equity positions) on 5 different insurance companies. But these are speculative/risk capital positions, not sinking a huge portion of my net worth into an insurance policy that I would be sorely inconvenienced without. AFAIK, the insurers I would be willing to buy a policy from generally will not write anything like the aggressive guarantees that [moderator edit] loves to tout. There is a reason for that...

 

[donheff]

AFAIK, the insurers I would be willing to buy a policy from generally will not write anything like the aggressive guarantees that [moderator edit] loves to tout. There is a reason for that...

Sounds like the state guarantee agencies should set criteria for insurers they will cover. As things stand buyers could safely go for the risky carriers up to the state limit and be protected from their profligacy.

 

[2B]

Sounds like the state guarantee agencies should set criteria for insurers they will cover. As things stand buyers could safely go for the risky carriers up to the state limit and be protected from their profligacy.

State insurance pools are just pools. To my knowledge there isn't any state the "guarantees" the policies beyond the pool. The FDIC is "full faith and credit" for the US so they'll print money as needed to guarantee insured deposits. States don't have that luxury and their insurance is limited. I can't see a state having a budget crisis to back annuities. This is especially true since if insurance companies are failing in large numbers they are already in a budget crisis.

The other thing I don't think is covered is all the "extras" on the fancy VAs. I believe the "no loss guarantee" is just between the policy holder and the company. The funds within the VA are held just like at any brokerage house so a failed insurance company wouldn't lose the funds. The equity value may be higher or lower but that's all. I don't think all the other features are guaranteed. I'm sure if they are someone will pop in.

 

[chinaco]

IMO - variable annuities main benefit is tax deferral and with capital gains taxes being what they are... that is not much of a benefit.

 

[donheff]

State insurance pools are just pools. To my knowledge there isn't any state the "guarantees" the policies beyond the pool...
The other thing I don't think is covered is all the "extras" on the fancy VAs.

I assumed the state was on the hook up to their limit. If not, the guarantee would only be valuable for an outlier failure, not a major breakdown. Still leaves you with some carrier risk. I don't know for sure but when I looked at DCs web page on this I got the impression it was for traditional SPIAs, not VAs.

 

[FinanceDude]

The fact that people need more than 4% means that they either should work longer, spend less, or die sooner. If none of those options are viable than a SPIA may make sense for a portion of their assets, with the downside that they won't be leaving money to their heirs.

Outside of this forum, how many folks do you think need more than 4% withdrawal, maybe 75% of most Americans?? I think you are overgeneralizing that folks that don't end up FIRED at a 2-3% withdrawal rate are lesser people than the folks on here.

So, their options are to work longer (maybe not possible), spend less (possible), or die sooner (not very nice). In other words, you are saying: "Screw you, you didn't plan well, have a nice life". There are a fair number of circumstances where that is not the case, where people aren't lazy or don't care or whatever. Many of them are over the age of 70. SPIAs are not the golden goose for many of them.......