Annuities? Have you been talking to someone who want to sell you something?

[Kimo]

Hey Kimo, I have an identical investment through Great West life. I hate the .9% fee, but love the "floor" it puts under my mutual fund investment. Mine is in a pre tax account

My fund guarantees a 3.75% withdrawal will be available from the fund for the longer of my or my wifes life span. The investment is in a balanced fund, and the 3.75% is based on the balance at the time I start taking withdrawals (base) . Every year on the anniversary date the base that the 3.75% is calculated against is reset to the current balance in the fund, if the balance has grown. If the balance has not grown, the base stays at the original level, so the withdrawal amount will never go down.

Best case the fund performs well enough to overcome the 3.75% withdrawal and .9 % fee. (plus mutual fund fees also). In this case the balance grows and the amount that I can withdraw grows also. Of course in this case, the 1% fee is wasted because I did not need the guarantee.

Worse case, the fund does not perform well and gets eaten up by the withdrawals and fees. Then you still are guaranteed a withdrawal amount at least as large as the original one. (unless the company goes belly up)

The fund balance is mine to do with as I please, I can get out of the program at any time and move the money to a different investment, and take a chunk out for a special need (which decreases my base) Also the balance passes on to heirs if my wife and I get run over by a beer truck tomorrow.

Not for everybody, but I like it

Pinejake, I agree, there are people who hate them but I would never give mine up. I hold a lot of different investments in my portfolio and this is the one I worry about the least......good for you!!!

 

[nun]

Hey Kimo, I have an identical investment through Great West life. I hate the .9% fee, but love the "floor" it puts under my mutual fund investment. Mine is in a pre tax account

My fund guarantees a 3.75% withdrawal will be available from the fund for the longer of my or my wifes life span. The investment is in a balanced fund, and the 3.75% is based on the balance at the time I start taking withdrawals (base) . Every year on the anniversary date the base that the 3.75% is calculated against is reset to the current balance in the fund, if the balance has grown. If the balance has not grown, the base stays at the original level, so the withdrawal amount will never go down.

Best case the fund performs well enough to overcome the 3.75% withdrawal and .9 % fee. (plus mutual fund fees also). In this case the balance grows and the amount that I can withdraw grows also. Of course in this case, the 1% fee is wasted because I did not need the guarantee.

Worse case, the fund does not perform well and gets eaten up by the withdrawals and fees. Then you still are guaranteed a withdrawal amount at least as large as the original one. (unless the company goes belly up)

The fund balance is mine to do with as I please, I can get out of the program at any time and move the money to a different investment, and take a chunk out for a special need (which decreases my base) Also the balance passes on to heirs if my wife and I get run over by a beer truck tomorrow.

Not for everybody, but I like it

TIAA-Traditional is an interesting product. It guarantees a minimum return of 3%, there are no fees that the investor sees, they are baked into the annual interest rate. Each year an additional rate is declared and this year it's 1.74% so I'm getting 4.74%. I can also get at principal by making a series of equal withdrawals over 10 years. Alternatively I could buy a fixed annuity through TIAA-CREF and get a 7% payout rate. It's an interesting choice between an SPIA with it's lower costs and higher payout rate and a variable annuity with an income rider that will initially pay out less and have higher fees. Your gambling on a rising market......which sort of negates the reason I'd have for buying an annuity. Of course you have to account for inflation which is the simple SPIA's big drawback.

For people who ER a fixed term SPIA might be a good choice to bridge the gap to SS or 59.5. I considered one to fund the years between 52.5 and 59.5, but I ended up just putting money into a Stable Value fund in my Great Life 457 that returns 2.6%. I increased the equity percentage in my AA. I get some interest and lots of flexibility.

 

[Kimo]

I have always thought of this forum as a way to possibly explain personal experiences so that others can entertain the though as to whether it may or may not be something they are interested in.

There appears to be some very misguided information regarding annuities that are actively searched for as I did as opposed to a salesperson calling you at dinner to sell something he is going to make a lot of money on.

I would like to offer a comparison between the actual annuity I bought vs. an actual mutual fund I bought. Because this is my true experience I can't vouch for other products but because both are Vanguard products I believe a lot of people will be able to follow this because of their familiarity with Vanguard.

I decide on June 1, 2012 to buy Wellington Fund and a variable annuity that's only holding is the same Wellington Fund. I enter the order for 100,000.00 dollars each. The next morning I awake to find x number of shares in both holdings each valued at 100,000.00. I hold both of these in my Vanguard account, side by side.

I decide I want to take out 4.5% of my MF so that it coincides with the 4.5% I am having taken out of my annuity.

There are three ways the market can preform, up down or stay the same, lets look at each scenario.

Over the next 10 years the market, on average, continues to rise. I continue to sell shares from the MF to keep my return the same as my annuity payout and in addition to selling shares in my annuity to keep the same return I am also selling shares to cover the .95% fee in the annuity. So, after 10 years I have less in my annuity that in my MF. I also have a lot more money in my other mutual funds because of the rise in the market. At this point, if I wish, I can close my annuity at no cost and collect the entire balance because I have determined I now have more money than life left. While I did lose the .95% I don't mind as I will be gone prior to running out of money. (Remember I kept raising the withdrawal in dollar amount to keep it a steady 4.5% withdrawal rate for the 10 years in both accounts.

Now lets consider the other 2 scenarios. If the market stays flat or declines for the next 10 years as I continue to take my 4.5% out of both accounts there is a real possibility I run both accounts to zero, with the annuity getting there first because of the additional money taken out for the fee. So eventually, I have 2 accounts with no money in them. This is not an end of the world scenario, it is a fund that can't keep up with the 4.5% withdrawal rate.The MF account is closed because obviously I can't continue to take my 4.5% from it. On the other hand, I continue to receive my 4.5 percent from my annuity and, as an added benefit, they stop charging me the fee (That is in the contract). So, for the rest of my life I get this 4.5% vs. nothing from the MF.

This is why I personally can relate buying this particular annuity as the same as buying a mutual fund.

FYI, I receive all dividends, capital gains, etc. in both accounts. Both are held in taxable accounts so I pay the same taxes on both.

Where is the problem?

 

[RetireAge50]

Who gets all the money at your death?

 

[Kimo]

My wife gets everything, exactly what ever is the balance, it transfers to her Vanguard account with no fee.

 

[RetireAge50]

Ok so that is not the problem. Maybe it is you are not out surfing right now!

 

[Kimo]

On my way to the North Shore to meet friends in 2 hours!!!! It is only 6:31 AM as I write this! And so, you are right!!!!!!!!!!!!

 

[brewer12345]

Where is the problem?

It is your money, so apparently it is not a problem for you.

For me, the problem is that it is effectively a mutual fund with a 1+% expense ratio, a guarantee that is useless, and worse tax treatment than simply holding a mutual fund in a taxable account. But since it is not my money, I don't much care if you think this is a great proposition.

 

[Kimo]

This is a small portion of my total portfolio. If the worst happens I add my return from the annuity with my SS and I will always have enough to eat something beside Alpo. If the best happens I don't care what extra I paid, I will have so much money in my other accounts I won't be able to spend it all....

 

[brewer12345]

This is a small portion of my total portfolio. If the worst happens I add my return from the annuity with my SS and I will always have enough to eat something beside Alpo. If the best happens I don't care what extra I paid, I will have so much money in my other accounts I won't be able to spend it all....

So you drink enough Kool Aid that your blood type is "punch?"

 

[Kimo]

LOL...And I drink all different flavors!!!!!!

 

[Kimo]

If you end up with more than you need you have won the game, for all I care it can go under the mattress at that point....please...sarcasm....it would go under my wife's bed...

 

[nun]

It is your money, so apparently it is not a problem for you. For me, the problem is that it is effectively a mutual fund with a 1+% expense ratio, a guarantee that is useless, and worse tax treatment than simply holding a mutual fund in a taxable account. But since it is not my money, I don't much care if you think this is a great proposition.

That's my opinion too. If you want flexibility and stock market returns buy a mutual fund. If you want guaranteed income go for the lower cost and higher payout rate of an SPIA over a variable annuity. I'd combine mutual funds and SPIAs to fund my retirement.

I'm just about to pay $260k into the MA state pension fund to buy what is basically a very generous annuity. I'm only doing that because it's such a good deal ( assuming I have a long enough retirement). My $260k gets me $21k starting at age 55 and 3/4 of the income has an annual COLA. This year the COLA was 3%. I'd be a fool to tun down a starting payout rate of 8% with inflation adjustment.

 

[bmcgonig]

It is your money, so apparently it is not a problem for you.

For me, the problem is that it is effectively a mutual fund with a 1+% expense ratio, a guarantee that is useless, and worse tax treatment than simply holding a mutual fund in a taxable account. But since it is not my money, I don't much care if you think this is a great proposition.

I think this gets to the nub of the issue. Kimo is saying that he's willingly paying 1% for the guarantee. Brewer is saying that the guarantee is useless. Brewer can u explain to Kimo why his guarantee is useless? It may be expensive, but I don't understand it being useless.

Thanks

 

[Kimo]

Thanks bmcgonig, I thought I was missing something...

 

[brewer12345]

I think this gets to the nub of the issue. Kimo is saying that he's willingly paying 1% for the guarantee. Brewer is saying that the guarantee is useless. Brewer can u explain to Kimo why his guarantee is useless? It may be expensive, but I don't understand it being useless.

Thanks

The product available today offers a 4% guaranteed withdrawal rate in exchange for an expense ratio about 150BP higher than it needs to be. They only offer this to people who are old enough that a 30 year draw period is about sufficient for the vast majority of cases. Sound familiar? Trinity study, perhaps? Except that:

- The guaranteed draw is not inflation indexed
- If TSHTF the guarantee is subject to the ability of the guarantor to stand up to it. Guess what shape they will likely be in?
- The terminal value of your account is likely to be way lower than with a simple mutual fund owing to the outsized expenses.

YMMV.

 

[Kimo]

The one thing I agree on is I don't think I would do it with a 4% rate and a 150BP that is higher than it needs to be. What I bought from them is better than what they are offering today. I went and looked and now I would probably wait until I am older to get the 5% rate.

The 30 year draw means nothing when you are taking the draw immediately as I posted in my thread. If something happens to me it is transferred at no cost to my wife, 10 years younger.

Also, I wasn't talking about TSHTF, I was referring to a mutual fund not being able to keep up with the 4.5% drawdown over a 10 year period. That is definitely not a SHTF scenario.

If a really big TSHTF, probably everything you and I own will be in trouble.

 

[nun]

The product available today offers a 4% guaranteed withdrawal rate in exchange for an expense ratio about 150BP higher than it needs to be. They only offer this to people who are old enough that a 30 year draw period is about sufficient for the vast majority of cases. Sound familiar? Trinity study, perhaps? Except that:

- The guaranteed draw is not inflation indexed
- If TSHTF the guarantee is subject to the ability of the guarantor to stand up to it. Guess what shape they will likely be in?
- The terminal value of your account is likely to be way lower than with a simple mutual fund owing to the outsized expenses.

YMMV.

The big drawback of a variable annuity is the lack of inflation adjustment; the strength of the guarantee and the terminal value of the account are arguable, but the costs are definitely higher than I'd like to pay. If someone wants "guaranteed" income it seems to me that a variable annuity is not the right product, a SPIA would be better.

 

[Kimo]

The reasons I chose variable over SPIA are twofold, I wanted access to my money if I changed my mind and if the markets go up, my payments go up which helps with the inflation adjustment. I know I haven't had them long enough for any type of "study" but so far my payments have gone up far more than the rise in inflation. If the market decides to go down, I still keep my higher payment to continue helping on that front...

 

[brewer12345]

The reasons I chose variable over SPIA are twofold, I wanted access to my money if I changed my mind and if the markets go up, my payments go up which helps with the inflation adjustment. I know I haven't had them long enough for any type of "study" but so far my payments have gone up far more than the rise in inflation. If the market decides to go down, I still keep my higher payment to continue helping on that front...

Enjoy the sizzle. I will eat the steak.

 

[Kimo]

I am doing both and thank you!

 

[pb4uski]

Actually, this debate raises a question. Kimo, what is the fund that has the GMWB invested in? I apologize in advance if it is somewhere in the previous 8 pages of this thread - I concede that i didn't bother to look.

I think part of the "game" with these VAs is to invest the sub-account funds as aggressively as the insurer allows and you can stand since if it underperforms you have the guarantee as a backstop.

 

[Kimo]

Actually, it is in the Vanguard Wellington fund. That is another reason I went through with this, I like that fund.

 

[pb4uski]

Interesting. Do you have more aggressive assets elsewhere in your retirement portfolio? I'm just wondering if you might be better off swapping them since you are already paying for the backstop.

 

[nun]

Interesting. Do you have more aggressive assets elsewhere in your retirement portfolio? I'm just wondering if you might be better off swapping them since you are already paying for the backstop.

The question of AA when you have an annuity is interesting. If I had an SPIA I'd be 100% equities with the rest of my allocation. Once my SS and DB plan start I plan to be 100% equities. Having guaranteed income allows for greater risk taking with the rest of the portfolio....the uncertainty and lower payout of a variable annuity when compared to a SPIA would worry me.