54 ry old looking to ER and wondering about annuities

[ETFs_Rule]

States do require all admitted insurors to participate in a pool for the lines of business they write business in that provides some protection to policyholders. If I purchase an annuity from a company that goes under the other insurors in the state that provide annuities all of the other annuity providers have to participate in making me whole up to a certain limit which varies by state.

The argument is that in the event of an industry wide systemic failure the state's insurance guarantee fund may become tapped. The irony is that market crash (which could lead to systemic failure) is the exact thing that lures investors to annuities in the first place. So are you really protected by an annuity?

They are not an investment so by comparing them to stock and bond returns is running off of the track.

But you must compare the annuity with normal investments. You want the most bang for the bucks that you have saved up. They have to ask, given the amount of risk that they want to take, which is likely to give them the highest return?

One may purchase an annuity because while a mixed stock and bond portfolio may return 8%+ the market may also go down and it may do so for a long period of time. Then what?

But how likely is that over a long time period of 10, 15 or 20 years? After the insurance industry stacks the deck in their favor (through caps and participation, and doing so after they pay Mr. Annuity salesman his big commission, pay for all of their overhead, and STILL make a profit! They know it's a safe bet.

To the argument that the insurors make money. Of course they do as that's what the free enterprise system is about.

That's not what deep discount brokerage firms like E Trade, AmeriTrade, Regal Securities, and ScottTrade are all about. No comparison. I can buy 100K of BND and 100K of VOO for less than $20! An annuity usually turns out to be the most expensive "free dinner" you will ever eat at some "free retirement seminar".

 

[brewer12345]

The argument is that in the event of an industry wide systemic failure the state's insurance guarantee fund may become tapped. The irony is that market crash (which could lead to systemic failure) is the exact thing that lures investors to annuities in the first place. So are you really protected by an annuity?

But you must compare the annuity with normal investments. You want the most bang for the bucks that you have saved up. They have to ask, given the amount of risk that they want to take, which is likely to give them the highest return?

But how likely is that over a long time period of 10, 15 or 20 years? After the insurance industry stacks the deck in their favor (through caps and participation, and doing so after they pay Mr. Annuity salesman his big commission, pay for all of their overhead, and STILL make a profit! They know it's a safe bet.

That's not what deep discount brokerage firms like E Trade, AmeriTrade, Regal Securities, and ScottTrade are all about. No comparison. I can buy 100K of BND and 100K of VOO for less than $20! An annuity usually turns out to be the most expensive "free dinner" you will ever eat at some "free retirement seminar".

According to my solunar calculator website, the sun and moon will not be in position for all the critters to be hopping around and all the extra special people to be acting the way they do for a couple more days.

Yep, systemic crashes can hurt insurers. That is why you pick the very strongest ones rater than doing business with the fly by nights. There are several insurers that will still be around after the asteroid strike and it is not hard to figure out which ones they are.

You keep talking about participation rates and the like, which tells me you do not understand what a SPIA is. SPIAs are some of the simplest insurance products available. I slide a pile of ducats across the table to the insurer and they agree to pay me an agreed sum every month as long as I live. That is it. There are no caps, participation rates, etc. Anyone can compare the attractiveness of SPIAs from different insurers, as there is only one variable (how much do you get for a given lump sum).

Do some reading if you want to have these discussions.

 

[MRG]

...... good stuff deleted.....

That's not what deep discount brokerage firms like E Trade, AmeriTrade, Regal Securities, and ScottTrade are all about. No comparison. I can buy 100K of BND and 100K of VOO for less than $20! An annuity usually turns out to be the most expensive "free dinner" you will ever eat at some "free retirement seminar".

Not that I disagree with your points.
Yes you can do what you suggest.

Here's my question, if you're 85 or 90 with dementia, will you know what BND or VOO is, what AA is, or what's a broker? I can tell you from personal experiences that's a real situation.

I realize it's a context switch, but I believe some folks use decent annuities to balance when they need to put things on autopilot. Not for LTC, just living costs. YMMV.
MRG

 

[Ready]

Here's my question, if you're 85 or 90 with dementia, will you know what BND or VOO is, what AA is, or what's a broker? I can tell you from personal experiences that's a real situation.

I definitely worry about that since I don't have any children to worry about me when I get old. It's an interesting way to think about annuities outside of the financial return analysis. I just wonder if I'll know when it's time to stop trying to manage my money and get some help, or if it will be too late to ask for help by the time I need it.

 

[Gill]

Brooks Saddle,

Thanks very much for entering this discussion and your well reasoned discussion of the issues. As is indicated by the subsequent comments, we'll never convince a certain group that SPIA's have merits for some individuals.
Bruce

 

[Gill]

You keep talking about participation rates and the like, which tells me you do not understand what a SPIA is. SPIAs are some of the simplest insurance products available. I slide a pile of ducats across the table to the insurer and they agree to pay me an agreed sum every month as long as I live. That is it. There are no caps, participation rates, etc. Anyone can compare the attractiveness of SPIAs from different insurers, as there is only one variable (how much do you get for a given lump sum).

Do some reading if you want to have these discussions.

Thanks! This is what I tried to tell him yesterday. He clearly has no understanding of an SPIA.
Bruce

 

[ETFs_Rule]

Yep, systemic crashes can hurt insurers. That is why you pick the very strongest ones rater than doing business with the fly by nights. There are several insurers that will still be around after the asteroid strike and it is not hard to figure out which ones they are.

Executive Life was one of the world's largest insurers. Insolvent.
AIG was the world's largest insurer. Insolvent, but fortunately bailed out. Will there be a bail out next time something like this happens?

You keep talking about participation rates and the like, which tells me you do not understand what a SPIA is.....
Do some reading if you want to have these discussions.

No. I was speaking about indexed annuities in my previous post.
Back to SPIA's... You can't "rebalance" a SPIA. If the market crashes you can't weight more into stocks (when stocks are essentially "on sale"). A SPIA is over-taxed. Immediate annuity calculators offer false promises.

Here's my question, if you're 85 or 90 with dementia, will you know what BND or VOO is, what AA is, or what's a broker? I can tell you from personal experiences that's a real situation.

They don't have to know what an index fund is or study earnings reports. Index funds are not trading vehicles. Buy and hold.

 

[Gill]

I'm afraid we have a troll on our hands. The username says it all. I've given up wasting my time.
Bruce

 

[ETFs_Rule]

I'm afraid we have a troll on our hands. The username says it all. I've given up wasting my time.
Bruce

All you've done is try to marginalize. When you don't want to debate the facts then just name call. That's when you're out of material.

 

[Gill]

All you've done is try to marginalize. When you don't want to debate the facts then just name call. That's when you're out of material.

I've stated my case above if you care to read it. Also, you might attempt to educate yourself on the nature of an SPIA and how it differs from other types of annuities. You have them confused.
Bruce

 

[brewer12345]

Executive Life was one of the world's largest insurers. Insolvent.
AIG was the world's largest insurer. Insolvent, but fortunately bailed out. Will there be a bail out next time something like this happens?

Executive Life was always a squiddly piece of crap. AIG was always basically a giant, dysfunctional family. Anyone discriminating would never have bought a policy from either. At least in the case of AIG, the insurance operating companies always remained solvent thanks to the vigilant NYS insurance department.

 

[bmcgonig]

But how realistic is it that over a long time period of 10 or more years an age appropriate bond / stock portfolio is going to under perform the true return of an annuity? Keep in mind that in the first X amount of years the annuity simply pays you back your original principal.
The False Promises of Annuities and Annuity Calculators - Forbes

I googled annuities a few times and since then my webpages are inundated with "I hate annuities and you should too" ads from Fisher, who of course is in direct competition with annuities as he's a 1% man. And so is Marotta, the author of the article you quote here from Forbes. So it doesn't do much good to quote him here as he hates them because they cost him part of his 1%

I like them for part of my portfolio just in case this happens:

http://finance.yahoo.com/q/bc?s=^N225&t=my&l=on&z=l&q=l&c=

 

[WestLake]

I think I'd rather have a charitable remainder trust which must pay 5% or more - upon death the principle/balance goes to a good cause.

 

[Gill]

I think I'd rather have a charitable remainder trust which must pay 5% or more - upon death the principle (sic)/balance goes to a good cause.

There are no guarantees from a CRT. If the trust principal declines your 5% declines & if the principal is exhausted you get nothing.
Bruce

 

[ETFs_Rule]

Here's one more chart that I found which looks at how a 50% S&P 500 / 50% 10-year Treasury portfolio did versus the highest paying SPIA that Marotta found and which happened to pay 5.51% per year. True this is not a Japan bear market that we've been through but by US standards it's been some of these worst stretch of years. The senior citizen couple got their $5,513.80 per year, didn't lose their principal, and even gained about 13K.

 

[zinger1457]

I have an immediate annuity and I'm very happy with it but I did purchase it many years ago when interest rates were much higher, not sure I would with today's low rates. Immediate annuities also come with survivor and cost of living options if desired but it will lower the effective interest rate. To get the income the OP needs from an annuity he would have to purchase an annuity (without inflation protection) using almost all his assets and that would be a mistake. Even annuity salesman will tell you to put no more than 50% of your assets into an annuity. That is on the high side IMO, I wouldn't go more than 25%.

 

[Gill]

I have an immediate annuity and I'm very happy with it but I did purchase it many years ago when interest rates were much higher, not sure I would with today's low rates. Immediate annuities also come with survivor and cost of living options if desired but it will lower the effective interest rate. To get the income the OP needs from an annuity he would have to purchase an annuity (without inflation protection) using almost all his assets and that would be a mistake. Even annuity salesman will tell you to put no more than 50% of your assets into an annuity. That is on the high side IMO, I wouldn't go more than 25%.

SPIA's don't pay "interest".
Bruce

 

[ETFs_Rule]

I like them for part of my portfolio just in case this happens:

^N225 Basic Chart | Nikkei 225 Stock - Yahoo! Finance

Another thing to think about is how much will stocks be yielding if we were to experience another great depression type bear market? When stocks take a dive, dividend yields generally go up. Do you really need to worry about stocks dropping in value as long as you are getting your 5.5% to survive retirement. Here's what the S & P was paying back in the 30's: Jan 1, 1933 7.05%, Jan 1, 1932 9.52%, Jan 1, 1931 6.07%, Jan 1, 1930 4.47%
S&P 500 Dividend Yield by Year

 

[zinger1457]

SPIA's don't pay "interest".
Bruce

I didn't say they did but insurance companies do use an interest rate that's loosely based on current rates when calculating what your annuity payment will be.