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

[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]

Quote:

Originally Posted by brewer12345 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]

Quote:

Originally Posted by brewer12345 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]

Quote:

Originally Posted by bmcgonig 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]

Quote:

Originally Posted by brewer12345 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]

Quote:

Originally Posted by 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...

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]

Quote:

Originally Posted by 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.

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.

[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]

Quote:

Originally Posted by nun 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]

Quote:

Originally Posted by ejman 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]

Quote:

Originally Posted by 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.

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.