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

[Kimo]

What I did regarding AA, because it is so easy to look at what the Wellington fund is holding I just add the bond portion to my bond allocation and do the same for the stock portion.

I do keep some more aggressive funds, Health Care Managed, High Dividend Yield (Vanguards version of junk bonds) Dividend Growth managed (holds 50 stocks) as well as Prime Cap core, Wellington (I hold this to compare with my annuity performance, I bought the same amount on the same day I opened my annuity) and all the "regular" funds I see mentioned here often.

 

[ejman]

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.

AA really is a very interesting question. I have considered the scenario you propose but this is what worries me: I don't really believe that a Zimbabwe or Weimar republic type of inflation is likely in the US but I think that a 70's like environment with a very high inflation diminishing the value of an annuities payment and stagnation in the equities markets is a real possibility. Under those circumstances, the annuity payments would dramatically fall in purchasing power while the 100% equity component fails to keep up.

Obviously if there are other sources of income, particularly CPI adjusted income streams to tide one over these concerns need not apply.

The stagflation scenario is a tough one and I am not sure there are any sure fire solutions other than being diversified over many types of investments.

 

[nun]

AA really is a very interesting question. I have considered the scenario you propose but this is what worries me: I don't really believe that a Zimbabwe or Weimar republic type of inflation is likely in the US but I think that a 70's like environment with a very high inflation diminishing the value of an annuities payment and stagnation in the equities markets is a real possibility. Under those circumstances, the annuity payments would dramatically fall in purchasing power while the 100% equity component fails to keep up.

Obviously if there are other sources of income, particularly CPI adjusted income streams to tide one over these concerns need not apply.

The stagflation scenario is a tough one and I am not sure there are any sure fire solutions other than being diversified over many types of investments.

There's no full-proof solution. Look at all the Europeans who had their state pensions cut when the financial crisis hit. That could happen in the US. The UK has recently changed it's state pension scheme to save money by making it a flat rate and removing any connection with someone's income level. So low earners got a big boost in their payment and high earners (who presumably have other sources of retirement income) had to take a big cut. It worked out for me as I only qualify for the basic state pension, but that is 23% larger under the new scheme.

I believe that diversity is the best policy in generating retirement income. So have a rental property, social security, a defined benefit pension or SPIA and also invest in low cost mutual funds.

 

[pb4uski]

What I did regarding AA, because it is so easy to look at what the Wellington fund is holding I just add the bond portion to my bond allocation and do the same for the stock portion.

I do keep some more aggressive funds, Health Care Managed, High Dividend Yield (Vanguards version of junk bonds) Dividend Growth managed (holds 50 stocks) as well as Prime Cap core, Wellington (I hold this to compare with my annuity performance, I bought the same amount on the same day I opened my annuity) and all the "regular" funds I see mentioned here often.

I'm not sure if you are seeing my point though.

I'm suggesting that to the extent that the annuity writer allows it, you would be better off to have the higher volatility investments in your VA and then hold Wellington outside the VA because even if the higher volatility investments underperform the guarantee would cover any underperformance. Your overall AA would not change at all, but you would be getting better value from what you are paying for the guarantee because the guarantee is covering more volatile assets.

It seems a waste of money to pay for the guarantee for the bonds you are holding in Wellington in the VA.

OTOH, if the volatile assets do well, then you would have higher balances and pay higher guarantee fees, but IMO that isn't a bad problem to have.

 

[Kimo]

Ah, I see what you are saying now.....I do remember Vanguard has a long list of options if you are not taking the GLWB but when you decide to act on that, the selection becomes much smaller....I actually don't remember the choices but I do understand you now...I should go back and look at the choices, thanks.

 

[nun]

Ah, I see what you are saying now.....I do remember Vanguard has a long list of options if you are not taking the GLWB but when you decide to act on that, the selection becomes much smaller....I actually don't remember the choices but I do understand you now...I should go back and look at the choices, thanks.

I read that the Wellington analog was the most aggressive option in the Vanguard annuity.

 

[Kimo]

That would make sense, probably why I chose it....interesting it is the most aggressive option, I use it in my taxable account as kind of like one of the mainstays in my account.