Annuities as an Investment

[FIRE'd@51]

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Originally Posted by RockOn On your cost concern, please see my comments to Independent concerning other investment vehicles. I'd like to know why insurance companies making a profit (even if it is pretty high) is so distasteful. Look at a ordinary Mutual Fund... say it has a 1% annual total cost, if I make 10% (gross) on average they are taking 10% of all of my gains for life. That is not expensive?

No objection - I was just pointing out that those who want an annuity can get a cheaper and safer one by delaying (repaying) SS. Of course, this will be limited to the maximum SS one can get, so, if you want 100K a year you will need to purchase most of it from a commercial entity.

[RockOn]

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Originally Posted by Sarah in SC Moderator helpful tip of the day: Be sure if you are going to quote other posters, that you add any of your own comments under the quoted material (meaning separate and outside of the quoted box) and not just bolding them as part of the quoted material. This prevents other posters from having "words in their mouths" that aren't theirs. Now back to your regularly scheduled annuity debate...

Sarah, I'm sorry about that, I haven't figured out how to break up the quote like you suggest. Putting my comments inside the quote in bold seemed easier than a few other choices I had. I will not do that again. I wouldn't want to put my words in Independents mouth, that's for sure.

[HFWR]

Use quote in brackets at the beginning, and /quote in brackets at the end.

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Their text...

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[RockOn]

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Originally Posted by FIRE'd@51 No objection - I was just pointing out that those who want an annuity can get a cheaper and safer one by delaying (repaying) SS. Of course, this will be limited to the maximum SS one can get, so, if you want 100K a year you will need to purchase most of it from a commercial entity.

I'll likely be doing the repaying SS option also, if it is still available. I haven't run the IRR of investing money into that plan but I suspect it's pretty high. An idea for another thread!

[RockOn]

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Originally Posted by HFWR Your text... Your text... Use quote in brackets and /quote in brackets at the end.

Thanks

[HFWR]

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Originally Posted by RockOn Thanks

Yes, each quote must start with [ quote] and end with [ /quote], without the space I put in to keep from quoting myself...

[Notmuchlonger]

I really want to learn more about annuities.

[RockOn]

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Originally Posted by Notmuchlonger I really want to learn more about annuities.

Here we go again, is this really that much fun for you?

[Notmuchlonger]

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Originally Posted by RockOn Here we go again, is this really that much fun for you?

Oh I think you are having a great time aren't you Why all of us here want to know about annuities. Go ahead Im sitting and learning

Why are you so hostile to people who want to learn about annuities?

[RockOn]

I have read in the past that Whole Life policies only have an IRR of 2% or so. Term Life is now known to be a much better deal for most. For me, what makes SPIA's somewhat atractive is the higher IRR's within the product and finding that out was actually a big surprise for me. I expected to find the 2% to 3% again. I wonder if some of the negativity on SPIA's is a hangover from the public learning about the horrible IRR on Whole Life.

[RockOn]

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Originally Posted by Notmuchlonger Oh I think you are having a great time aren't you Why all of us here want to know about annuities. Go ahead Im sitting and learning Why are you so hostile to people who want to learn about annuities?

Great post, such love.

[Notmuchlonger]

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Originally Posted by RockOn I have read in the past that Whole Life policies only have an IRR of 2% or so. Term Life is now known to be a much better deal for most. For me, what makes SPIA's somewhat atractive is the higher IRR's within the product and finding that out was actually a big surprise for me. I expected to find the 2% to 3% again. I wonder if some of the negativity on SPIA's is a hangover from the public learning about the horrible IRR on Whole Life. Any thoughts on that?

I agree with you 100%. So then you have found your answer to the great annuity question. See me and you are on the same page 100% fight the good fight!

[RockOn]

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Originally Posted by Notmuchlonger I agree with you 100%.

You do! God, I give up! On to the IRR of the repaying SS plan! We'll both be rich soon!

[RockOn]

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Originally Posted by 2B Almost all of his posts have been SPIA related and all repeating the same beaten to death themes.

I missed that one. I take exception the the SPIA related statement. Don't you follow the the CPI threads?

Actually I've commented on many things.

I'll be moving on to a few new ideas soon. I bet you can't wait.

[Rich_by_the_Bay]

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Originally Posted by RockOn I'll be moving on to a few new ideas soon. I bet you can't wait.

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You do! God, I give up! On to the IRR of the repaying SS plan! We'll both be rich soon!

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Great post, such love.

RockOn, you comments are taking on a baiting and sarcastic quality. This is against community rules pertaining to trolling.

In fairness, I also urge the responders to not rise to the bait; either reply to the points or move on. If you have complaints, report them to the mods using the little triangle icon at the lower left.

We are trying to be fair to all sides, but frankly, this thread is circling the drain.

[Independent]

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Originally Posted by RockOn thanks for the response

RockOn, your comments are in bold. I didnt' copy my whole post.
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I understand the bottom line of that to mean that the expected return has risk and is a better deal for some than for others. I think I knew that. :confused:

I think you're saying that if you look at annuity buyers, some will end up with a better result than others. That is a true statement, but it's not my point.

I was trying to say that if you add up the results of all the annuity buyers of one company, their total result will always be less than they could have gotten by pooling their money and buying the same mix of assets that the insurance company buys. (Since insurers buy bonds, and you can get similar bonds through many mutual funds, you can realistically get something close to what an insurance company can get.)

It's as if you are saying that if a thousand people all play roulette in Las Vegas, they will all get different results. However, I am saying we also know that as a group they will walk away from the tables with less money than they brought in, because the odds are set so the house can cover its expenses and make a profit. When you buy insurance, the company is the house.

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In an insurance policy, a couple important questions are "What's the most I could get out if this, if the really bad thing happens? And, how much will I get out of this if a kind of bad happens?" I think that's what you're doing with your live-to-86 example, calculating how the thing looks if a "kind of bad thing" (strictly in the financial sense) happens. I think that's a good question to ask and answer. But it's not the whole picture on a close decision.

I agree, I would either buy life insurance to hedge against the bad or maybe buy a 30 year guaranteed plan to handle the "what if the bad happens" question. Anything wrong with that?

I think we've got different definitions of "bad" here. For life insurance, bad event that will cause the big insurance payoff is dying too soon. For an annuity, the "bad" event that will cause the big payoff is living too long.

I'm simply saying that when you consider buying an annuity, it's logical to look at the payoff in cases where you live past your life expectancy. You are doing that. It's also wise to look at other cases where you die early. You can end up with a lot of cases - Ha's method was a systematic way to average all the cases together.

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I think I understand, there are always risks. I could pick a bad company or die early. As far as the SamClem comment, I agree that I am giving up profit and expenses to the insurance company but they are providing a no volatility return and a 6% (or whatever) floor. If I am willing to accept that, that doesn't mean it "will always show as a loss" to me.

I hope this is getting to be semantics. I'll state this principle: The "expected value" of the payoff on an annuity (SPIA) is less than the premium, if you calculate expected value using the interest rate and the mortality table the insurer uses in pricing. If that makes sense to you, then there's no point in worrying about other words that can describe that fact.

I'm at a loss for the "6% floor". I'm sure that you know that you can get much less than 0% if you die too soon.

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Think about this, no matter what the investment is there are costs, how much do brokers get when there is a MA deal? How much do brokers get in a new bond sale? What about stock options to employees diluting my shares? It goes on and on in the Finance Business. Why are insurance companies thought of as different?

I think the issue here is that a "pure investment" will outperform an insurance product "on average". (That's the "principle" above.) The reason is that insurers assume extra risks that pure investment intermediaries don't assume. This means they commit more capital and have bigger expenses. You can get a feeling for how much you're paying to have them assume these risks by doing Ha's calculation.

The title of the thread, and some of your comments, seem to suggest that you think there is no extra cost.

I'm not saying that it's irrational to pay an insurance company to assume risks for you (I have a number of insurance policies and I think that I'm rational). I am saying that it's worthwhile to remember that you are paying a fee to have them assume those risks. In the case of an SPIA, it is NOT true that you are getting the full investment return you might get on a pure investment vehicle while having them take the risks as a freebie.

[RockOn]

Rich,

Sorry it was only because of who jumped into the Thread with the "I really want to learn more about annuities" comment. Most obviously that was not a sincere statement.

I thought my responses were appropriate responses to that. I thought in fun.

It won't happen again but I think it should be a two way street.

Maybe I wasn't clear on one thing, the was intended toward me. I thought 2B would enjoy that if he happens to catch it.

[RockOn]

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Originally Posted by Independent .

All good comments as always. The only comment I have is when I said floor I mean the IRR is guaranteed to be there if I live as long as I think I will.

If it's a satisfactory minimum rate, it's a pretty good deal to be able to lock it in for life.

I can't think of another investment that does that.

I definitely do not think annuities are a freebie in any way. I would pay a good price for the non-volatile return just like you might pay a good price for a Mutual Fund if you add up all the fees throughout the years. I am not saying the ultimate annuity expense is less or more than the mutual fund, it really depends on what the markets do in regard to Mutual Fund returns.

[Sarah in SC]

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Originally Posted by HFWR Yes, each quote must start with [ quote] and end with [ /quote], without the space I put in to keep from quoting myself...

And then this image of HFWR singing came into my mind, unbidden:

Excuse me, while I quote myself

(sung to the tune of "Excuse me, while I kiss the sky
with sincere apologies to the late J. Hendrix)

[haha]

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Originally Posted by Independent I was trying to say that if you add up the results of all the annuity buyers of one company, their total result will always be less than they could have gotten by pooling their money and buying the same mix of assets that the insurance company buys. (Since insurers buy bonds, and you can get similar bonds through many mutual funds, you can realistically get something close to what an insurance company can get.) It's as if you are saying that if a thousand people all play roulette in Las Vegas, they will all get different results. However, I am saying we also know that as a group they will walk away from the tables with less money than they brought in, because the odds are set so the house can cover its expenses and make a profit. When you buy insurance, the company is the house..

This is an unusually lucid explanation of what is for many people a difficult concept. Independent's entire post is excellent; I just didn't quote all of it.

I hope the thread will not be closed, because a) the topic is very important to retirees, even those who don't yet realize that it may be important; and b) people are being quite civil.

FYI, I don't have an annuity even though I think there is a lot to be said for them, because I have a hard time trading possible reward for risk abatement-even when the trade is free which as independent has shown the purchase of an annuity is not. Delaying SS is as close as I will come so far.

Ha