immediate annuity (again)

[2B]

Of course I've been wrong on a few rare occasions....

I take mine medium to frequently.

 

[JohnEyles]

I don't recall seeing any information from John about a spouse or SO.  My interpretation of New Thinking's suggestion to "(Use spouse's SS for the annuity)" is that he was suggesting to John how to input annuity data into FIRECalc, recommending he use the spouse SS area to account for the annuity income.

I am not married.

There is no need to use the SS fields to model the annuity. Simply use
the 'Increase/Decrease withdrawals by X starting in Y' field to put in what
the annuity will pay, when it starts, and if it's COLA'ed (no way to model
the fixed annual increase type).

 

[haha]

I realize that when people shop annuities they always assume both spouses will remain healthy and live forever but I hate to break the bad news to you -- you and your wife won't. 

You are such a sweetie! 

 

[New Thinking]

Yes , I was suggesting that he use the SS line for the spouse to model the annuity.

Regarding" One big thing you give up with an annuity is the potential for massive portfolio growth."

I would argue that the annuity replace a portion of the bond component of the portfolio. You are very unlikely to receive any "massive portfolio growth" with bonds over the next couple of decades and that is the time that porfolio growth has the greatest impact (in the early years through growth). Having an inflation-protected core base of income might provide for greater risk tolerance with the remaining portfolio and the individual will not totally suffer when equities and bond markets are down. The annuity income is boring, but it will be stable and dependable.

 

[JohnEyles]

Regarding" One big thing you give up with an annuity is the potential for massive portfolio growth."

I would argue that the annuity replace a portion of the bond component of the portfolio. You are very unlikely to receive any "massive portfolio growth" with bonds over the next couple of decades and that is the time that porfolio growth has the greatest impact (in the early years through growth).  Having an inflation-protected core base of income might provide for greater risk tolerance with the remaining portfolio and the individual will not totally suffer when equities and bond markets are down.  The annuity income is boring, but it will be stable and dependable.

I see that quite quantitatively when I do two FIRECalc runs, asking for
$50K/yr from my $million. In the SPIA-less case, I use the vanilla portfolio
with 60% stock. In the case with $250K into a SPIA, I use 70% stock. The
average ending portfolio value is similar with the SPIA (but the range is
considerably tighter), but the success rate goes from 91% to 96%. (I should
also mention that I'm assuming $16K/yr SS at 62yo, and a 36yr payout).

 

[Nords]

I see that quite quantitatively when I do two FIRECalc runs, asking for $50K/yr from my $million.

Is it possible that you're deciding to sleep better at night with an annuity, and now searching for a quantitative answer to rationalize what's essentially become an emotional decision?

If an annuity helps you sleep better at night then you should buy it. If you want the insurance for an annuity then you should spend the money on it. Just don't confuse the money you're spending on this insurance as any sort of investment. It's an insurance premium.

I'm not so sure that it's worth hours spent torturing FIRECalc to produce the justification you're looking for. According to Bernstein's "Calculator From Hell" articles anything over 80% is polishing cannonballs, and a change from 91% to 96% is not significant.

 

[brewer12345]

I'm not so sure that it's worth hours spent torturing FIRECalc to produce the justification you're looking for.  According to Bernstein's "Calculator From Hell" articles anything over 80% is polishing cannonballs, and a change from 91% to 96% is not significant. 

IIRC, Bernstein's comments only apply to Monte Carlo simulators, not to historical ones. Historical simulations like firecalc are less severe and therefore you probably want a higher % safe number from one vs. Monte Carlo.

 

[JohnEyles]

Is it possible that you're deciding to sleep better at night with an annuity, and now searching for a quantitative answer to rationalize what's essentially become an emotional decision?

Damn, I didn't realize it was that obvious. Yes, guilty as charged I suppose.

But I don't think I'm torturing FIRECalc that badly, honestly; everything I've
entered is fairly vanilla (e.g. the "total market" portfolio, with 0.4% OER).
And I think the idea of considering the SPIA a fixed-income investment (duh)
and thereby justifying a higher percentage of stock (70% instead of 60%) is
reasonable, and I find it quite interesting that this yields a similar average
ending portfolio value.

I take issue a little with the SPIA being insurance instead of investment.
Granted, there is risk pooling. But what this means is that the insurance
company need only invest to handle the WR over the expected life of the
annuitants, plus whatever profit they require. An individual investor (me)
requires a WR that works with my longest reasonable life expectancy.

 

[Nords]

I take issue a little with the SPIA being insurance instead of investment.
Granted, there is risk pooling.  But what this means is that the insurance
company need only invest to handle the WR over the expected life of the
annuitants, plus whatever profit they require.  An individual investor (me)
requires a WR that works with my longest reasonable life expectancy.

Let's see:
- You're buying a contract from an insurance company.
- You're paying someone to assume a risk that you don't want to have to deal with.
- in·sur·ance (noun)
1 a : the business of insuring persons or property b : coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril c : the sum for which something is insured
2 : a means of guaranteeing protection or safety <the contract is your insurance against price changes>

Yeah, I see how that could be confusing.

 

[Rich_by_the_Bay]

If you're more comfortable with the noninsurance concept of IAs, that's fine.

But I find it helpful (and my jury is still out on purchasing an annuity some day) to think of it as insurance:

1. Volatility Insurance (like a bond but without price/call/yield risk)

2. Longevity Insurance - never runs out, never changes in amount

FWIW, I think delaying is very smart in IAs. Payout per dollar invested is higher, and why not see if you are healthy and fit at 65 or 70 before you make your decision. If you have problems you may decide against it after all.

 

[haha]

I have a questiuon for you "an annuity is insurance, and not an investment" boys.

Say Rich buys an annuity, to try to guarantee that he will certainly have income for as long as he lives. He has paid up front for a future stream of cash flows, with certain specified contingencies. Now to me, this also sounds a lot like an investment. Much like owning a note secured by a mortgage. The contingencies are different, but in each case there is a contract or indenture, and some contingencies are spelled out in that contract.

Now further suppose that a few years later Rich has a need for some ready cash- maybe Willie Nelson is selling the Bud- Mobile and Rich wants to buy it.

So Rich sells his annuity contract to HaHa, who loves cash but cares not for Homes on Wheels.

So HaHa thinks he has an investment. He has had Rich undergo a physical, and the price is right for Ha’s perceived risk.

So if an annuity is insurance, and only insurance, what the heck is HaHa insuring? It appears to me that he is doing the opposite of insuring- he is bearing risk in hopes of attaining a higher than risk free return.

But both Rich and HaHa have done the same thing- buy an annuity contract!

So does an annuity magically change its character from solely insurance to solely an investment when it changes hands 

Ha

 

[Rich_by_the_Bay]

So if an annuity is insurance, and only insurance, what the heck is HaHa insuring? It appears to me that he is doing the opposite of insuring- he is bearing risk in hopes of attaining a higher than risk free return.But both Rich and HaHa have done the same thing- buy an annuity contract!

I hear where you're coming from and agree: eye of the beholder. I never felt that an IA is solely insurance, nor solely an investment. Actually, I think it's a hybrid product, depending on how long you live and even market performance. In fact, people buy "viaticals" which is an investment consisting solely of others' life insurance policies. They pay them $x dollars today and collect $x+y in a few years when the insured dies. Doesn't mean life insurance isn't "insurance."

With annuities, live long, you win financially and it was a great investment. Live through a looonnnnggg bear market and that 7% payout in your annuity looks like a great investment. Live short you lose, or let the market or inflation soar, and it was a lousy investment. So you buy it to mitigate the conditions you don't feel you can tolerate. Sounds like insurance. Outlive-your-money insurance. It's a mongrel.

For someone who is healthy and close to the line on their nestegg:expenses ratio, this might be an appealing hybrid to buy. For someone who has plenty of cushion, they don't need to worry about a long life (financially) -- plenty better things to do with their dubloons.

I can envision scenarios where it would be a sensible part of FIRE planning done late, selectively, and spreading the risk over a few carriers. The label (insurance v investment v hybrid) wouldn't be that important to me.

P.S. How much does Willie want for the Budmobile? Does the IRS know about this?

 

[FinanceDude]

I have a questiuon for you "an annuity is insurance, and not an investment" boys.

Say Rich buys an annuity, to try to guarantee that he will certainly have income for as long as he lives. He has paid up front for a future stream of cash flows, with certain specified contingencies. Now to me, this also sounds a lot like an investment. Much like owning a note secured by a mortgage. The contingencies are different, but in each case there is a contract or indenture, and some contingencies are spelled out in that contract.

Now further suppose that a few years later Rich has a need for some ready cash- maybe Willie Nelson is selling the Bud- Mobile and Rich wants to buy it.

So Rich sells his annuity contract to HaHa, who loves cash but cares not for Homes on Wheels.

So HaHa thinks he has an investment. He has had Rich undergo a physical, and the price is right for Ha’s perceived risk.

So if an annuity is insurance, and only insurance, what the heck is HaHa insuring? It appears to me that he is doing the opposite of insuring- he is bearing risk in hopes of attaining a higher than risk free return.

But both Rich and HaHa have done the same thing- buy an annuity contract!

So does an annuity magically change its character from solely insurance to solely an investment when it changes hands 

Ha

Well.......an annuity IS insurance, because it is a contractual policy issued by an insurance company, and because it contains a death benefit paid to a beneficiary......

Neither way is it ever an investment, because IMO investments don't have "insurable interest" as a tenant of the contract.

 

[Running_Man]

I am new here but it seems apparent to me from running_Numbers on Fire_Calc that an immediate annuity definetly shows a higher withdrawl rate with a higher success rate.   However Firecalc is assuming when you enter that the Annuity is 100% guaranteed which it is not.  The likelihood of an individual IA going bust is not something I have seen numbers on but over 30-40 years surely it must be in the 10% range anyway?  Very subjective.

Despite that I also find the risk in the stock market is higher than most here must realize, most of the calculations I have seen are based in the past when our country was growing.  Where I live I have seen the city of Chicago sell a profitable tollway to an Australian company for 1 Billion dollars and use the money for operating budgets (primarily school maintenance but a good dolop of graft I assume knowing Chicago).  My Northwest Indiana sold our I-90 toll Road for 3.2 billion over 30 years with a guarenteed 13% rate of return on investment for another Australian company.  They have received permission to raise tolls every year and over 30 years can make a maximum of 132 Billion dollars!  That is money that will leave the country that previously could have been used to buiild/rebuild roads and line pockets with graft.  Now Mayor Daily would like to sell Midway Airport for a few more billion.

When major cities are taking these kind of actions I feel this is not a healthy economy.  The time to buy American companies was when US companies were buying Canals in Panama and Oil rights in the Middle East.  The reasons for these concerns to me is that I would like to retire in 8 years at age of 58 and live another 40 so I am viewing out 48 years and am considerably concerned by the state of affairs and the flow of capital out of US.

The overriding consensus I have seen on the boards of 60/40 stock bonds as a good conservative starting point leads me to wonder how all this would succeed in a Japanese type enviroment where the population is aging and poor growth prospects at home.

My question is in that circumstance what is the best defense for that?  Is it IA's?  Stocks in that scenario would be an unmitigated disaster, yet there is an equal chance the US might try and inflate it's way out of the problem such as some South American countries did with their Social Security problems, in that case IA's are the absolute worse investment because even with 10% inflation protection you are not protected.

For now I am saving 20-25% of my salary in a combination of 30% stocks and 70% fixed income securities since I see no immediate  threat on the horizon.

My personal history has seen my father take a lump sum on his pension from Amoco Oil and then spend it all in 10 years.  A sibling who bet all on a single stock in the 401K - Comdisco and then have her 401K go from 900K to 0 in 2 years as Comdisco took company stock in lieu of cash for their A/R and went from Fortune 500 to worthless in 2 years.   Yet one coworker attending a company dinner function and was told by our CEO that he should put all his money in company stock becasue it was going to soar in the next 10 years - he did 25% of his salary and he retired at 42 with over a million dollars.   A personal college roommate working at NY Stock Exchange lose 1.5 million in the stock market in 6 months out of a 2 million dollar portfolio.  All of these people are very smart.  I also have known another co-worker who had 100% of his retirement money invested in Exxon stock and be able to retire at 55 with over 2 million in bank having  never made more than 50,000 in a year.  I have in the past urged each of them to invest at least 1/2 of their money in IA after reaching large sums for fear they would lose their money.

From watching actual investments of very smart people I have known noone has had the discipline to hold to one logical conservative investment philosophy over a prolonged period to success.  Eventually someone with a success story they know from work convinces them either about companies in Thailand that are set to fly or the head of the finance division convincing the company stock has never had a down year and will make her rich ala Microsoft.  Sometimes they make a killing sometimes they go down, but they all have taken incredible risks.   Perhaps it is the knowledge they will like my father always have at least social security.

With all of these life experiences I find it difficult to assume what is the correct path for the future...  

 

[Nords]

I have a questiuon for you "an annuity is insurance, and not an investment" boys.
Say Rich buys an annuity, to try to guarantee that he will certainly have income for as long as he lives. He has paid up front for a future stream of cash flows, with certain specified contingencies. Now to me, this also sounds a lot like an investment. Much like owning a note secured by a mortgage. The contingencies are different, but in each case there is a contract or indenture, and some contingencies are spelled out in that contract.
Now further suppose that a few years later Rich has a need for some ready cash- maybe Willie Nelson is selling the Bud- Mobile and Rich wants to buy it.
So Rich sells his annuity contract to HaHa, who loves cash but cares not for Homes on Wheels.
So HaHa thinks he has an investment. He has had Rich undergo a physical, and the price is right for Ha’s perceived risk.
So if an annuity is insurance, and only insurance, what the heck is HaHa insuring? It appears to me that he is doing the opposite of insuring- he is bearing risk in hopes of attaining a higher than risk free return.
But both Rich and HaHa have done the same thing- buy an annuity contract!
So does an annuity magically change its character from solely insurance to solely an investment when it changes hands 
Ha

This is like asking if a stock is a stock unless it's traded as an option.

Rich bought insurance. The aspect of the transaction that gives it away is that he bought it from an insurance company.

Heaven help you, you bought a derivative contract from a physician. In the 1990s you would have resold it to General Re, but today you'd have to sell it to AIG... or to the San Diego County pension fund.

 

[Running_Man]

From Google search #1 return:
-------------------------------------------
"Definition of Investment"
From Econterms

Definition: Investment is defined as any use of resources intended to increase future production output or income.


A logical definition of investment

in·sur·ance  (n-shrns)
n.
1.
a. The act, business, or system of insuring.
b. The state of being insured.
c. A means of being insured.
2.
a. Coverage by a contract binding a party to indemnify another against specified loss in return for premiums paid.
b. The sum or rate for which such a contract insures something.
c. The periodic premium paid for this coverage.
3. A protective measure: biking helmets that provide insurance against a head injury.

Seems to me IA's meet both defintions

 

[FinanceDude]

From Google search #1 return:
-------------------------------------------
"Definition of Investment"
From Econterms

Definition: Investment is defined as any use of resources intended to increase future production output or income.


A logical definition of investment



















in·sur·ance  (n-shrns)
n.
1.
a. The act, business, or system of insuring.
b. The state of being insured.
c. A means of being insured.
2.
a. Coverage by a contract binding a party to indemnify another against specified loss in return for premiums paid.
b. The sum or rate for which such a contract insures something.
c. The periodic premium paid for this coverage.
3. A protective measure: biking helmets that provide insurance against a head injury.

Seems to me IA's meet both defintions

Not in the eyes of the SEC...............

 

[greg]

Running_Man: I agree. Here's an article I visit now and again:

http://www.gold-eagle.com/editorials_05/mauldin041506.html

 

[mathjak107]

An annuity is exectley the same as life insurance but in reverse.

life insurance is insurance against dying

an annuity is insurance against living

my vote annuities are insurance not an investment.

 

[Dawg52]

I'll say one thing, discussing anything concerning annuties seems to be as controversial as any topic on politics or religion.

 

[FinanceDude]

I'll say one thing, discussing anything concerning annuties seems to be as controversial as any topic on politics or religion.

agreed................

 

[brewer12345]

My question is in that circumstance what is the best defense for that?  Is it IA's?  Stocks in that scenario would be an unmitigated disaster, yet there is an equal chance the US might try and inflate it's way out of the problem such as some South American countries did with their Social Security problems, in that case IA's are the absolute worse investment because even with 10% inflation protection you are not protected.

Probably not an IA, if you are worried about extreme scenarios like Japan and Argentina. Most of the Japanese life insurers are scraping along by the skin of their teeth, hoping like hell interest rates rise some day. None of them are what I would consider to be an attractive credit risk. In a hyper-inflationary scenario/default a la Argentina, you'd also be looking at the failure of many/most life insurers.

But I think you are definately into tinfoil hat territory...

 

[haha]

An annuity is exectley the same as life insurance but in reverse.

life insurance is insurance against dying

an annuity is insurance against living

my vote annuities are insurance not an investment.

I think some of you boys are a bit narrow minded on this one. Even the insurance companies think there products are often both insurance and investment. Here's the old standard for insurance- whole life:

"Advantages of a Whole Life Insurance Policy
Interest accumulated through the investment portion of the policy is tax-free until withdrawn. "
From

http://www.lifequote.com/htm/wholelife.asp

Or here is another one, this about fixed annuities:

fixed annuity
Definition

An investment vehicle offered by an insurance company, that guarantees a stream of fixed payments over the life of the annuity. The insurer, not the insured, takes the investment risk. also called fixed dollar annuity.

The above from:

http://www.investorwords.com/1987/fixed_annuity.html

The italics are mine, to help you boys find the important parts.

Ha

 

[FinanceDude]

I think some of you boys are a bit narrow minded on this one. Even the insurance companies think there products are often both insurance and investment. Here's the old standard for insurance- whole life:

"Advantages of a Whole Life Insurance Policy
Interest accumulated through the investment portion of the policy is tax-free until withdrawn. "
From

http://www.lifequote.com/htm/wholelife.asp

Or here is another one, this about fixed annuities:

fixed annuity
Definition

An investment vehicle offered by an insurance company, that guarantees a stream of fixed payments over the life of the annuity. The insurer, not the insured, takes the investment risk. also called fixed dollar annuity.

The above from:

http://www.investorwords.com/1987/fixed_annuity.html

The italics are mine, to help you boys find the important parts.

Ha

Well...............it DOESN'T MATTER what I think, the regulators didn't fine NML and a renegade rep $1 million for "failure to supervise", when he was running seminars touting NML's split dollar insurance as a tax-deferred investment vehicle............. apparently they thought whole life WAS NOT an investment..............

 

[brewer12345]

Ha, I think that both investments and insurance are just discounted cash flows. The main difference in my ind is that I expect an investment to be a positive NPV proposition, while I expect (and hope) that insurance will be a negative NPV proposition.