Annuity post to end all annuity posts...
- Thread starter Midpack
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Maybe, call them, they should be easy to get the information from.
The second-to-die clause is the one that says the annuity keeps paying as long as one of you is alive. Yeah -- 100k would get you (a 50-year-old) 7k a year, inflation-adjusted as long as one of you is alive. The actual rates are more like high 3%s or low 4%s, and most of us here can't bring ourselves to give up the cookies at these sorts of rates, but get up to 7%? Oh yeah! Think of how much safe-withdrawal-stuff you could ignore for the rest of your life!
ps: this is all fantasy -- 7% wouldn't happen -- at least not from a firm you could actually trust.
One idea, though, would be to do annuities inside your family. The gov't has some guidelines, but it can be a way to gift money from one generation to another without gift taxes, since the annuity is a fair-on-both-sides contract. At the end of the day, the receiver of the capital keeps it, which is a nice way to dodge some estate taxes, and avoid the buyers' remorse factor of the person who buys the annuity and then dies soon thereafter. But do you trust your kids to keep paying? Maybe an insurance company doesn't look so bad after all!
Haven't checked, but one might be able to get the 7% at age 65 or 70.
I found 4.2% for my current age of 53 with 100% survivorship and CPI-U COLA at Vanguard.
On the family annuity, now that's thinking outside the box! I haven't heard of that before but I like the concept. Maybe a chapter in your next book? (I think I trust my kids more than an insurance company. At least I know where they live.)
Texas Proud
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On the family annuity, now that's thinking outside the box! I haven't heard of that before but I like the concept. Maybe a chapter in your next book? (I think I trust my kids more than an insurance company. At least I know where they live.)
This has been an estate planning tool for many decades... so not really thinking outside the box as much as you think...
It is used for other assets (like a family owned company)... you sell it to your children... for a 'low' price with the agreement they have to make payments for the rest of your life... and then you can 'gift' them the payments they need to make as they don't have the money...
These are not used by the people who will not have an estate tax to pay... but if you are very well off... used all the time...
FWIW, I took the masters degree estate planning course from the College of Financial Planning. Specifically "Family Annuities" were not included there, I thought they had it all covered.
That's my TOTAL frame of reference on Estate Planning. On passing other assets, quite understandable. As far as the Family Annuity idea, it sure would cut the complaints about annuity fees! Are Family Annuities common? It seems like a pretty good concept to me, income for the parents while alive, the kids getting the remainder, no need to annuitize to an insurance company. The withdrawal rate could be set reasonably high and COLA'd with 100% survivorship and the assets could then be invested fairly agressively since the kids would have long term bias. If things go well, it's a win-win. If not, oh well, the kids had a decent shot. Everyone would be in it together. Anything wrong with that?
It might be due to the limitations on acquiring an annuity (specifically an SPIA).
Yes, I have one (quite pleased, thank you).
No, I didn't wait till I was "too old" (purchased at age 59).
Part of the application was questioning how much of your retirement portfolio would be "cashed in" to purchase the annuity. The company I used (Fidelity) had a limitation of not more than 50% of your base retirement portfolios be used for an SPIA (one or many, for those who will be "laddering", as I plan).
Anyway, here's another article (although more general in scope) for your edification:
Money Magazine, Retirement Guide. Income plan - Sep. 12, 2006
- Ron
You don't wake up every night in terror and live a horrible life of self-doubt?
It has to be at least as stressful as having a pension plan.
What were you thinking?
haha
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Are annuity writers allowed to charge a 60 year old woman more for her annuity than they would charge a 60 year old man for the same thing?
If not, women should perhaps feel more positively toward these than men should, since women have a considerably greater life expectancy.
Ha
If not, women should perhaps feel more positively toward these than men should, since women have a considerably greater life expectancy.
Ha
Ed_The_Gypsy
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Does anyone remember Baldwin United?
It has to be at least as stressful as having a pension plan.
Let's see - one of my area's major employers (e.g. Beth Steel) is no longer in business along with another local company (formerly known as Western Electric/Bell Labs)
Guess where their pensions are? (Hint: taken over by the government at a fraction of their former monthly benefit).
Purchased with 10% of my/DW's retirement portfolio, we are "guaranteed" (everybody knows nothing in life is guaranteed
) to have monthly income for the next 28 years (longer if we live beyond that time, with the remainder benefit paid to our estate if we live less) in a contract that will at least make total payments of 2x what we originally "gave up".Could we do better? Maybe. That's why we still "retained" 90% (of course, with the pullback in the market, its a bit less) to keep up with inflation and expected market increase in value in the future.
Will we buy additional SPIA's in the future? Don't know. However the "investment" I paid will yield a greater numerical payback than the former pension plan payments I was to receive (former company converted to a cash balance plan to replace the pension plan) when I started working there 25+ years ago. Like most pension programs, it reduced monthly payments when you started receiving SS (level plan benefit, as most non-government pension programs went). The SPIA payments will not be reduced when I start collecting SS in 10 years (another reason I chose the SPIA - the ability to delay SS till age 70).
- Ron
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explanade
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Article comparing annuities to "payout funds."
Mutual Funds Pitch Alternative to Annuities - MarketWatch
Some sample payments between SPIA and payout funds in the chart at the bottom.
Mutual Funds Pitch Alternative to Annuities - MarketWatch
Some sample payments between SPIA and payout funds in the chart at the bottom.
W2R
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Yes, but the comparisons are apples and oranges to my way of thinking.
For example, with Vanguard's Growth and Distribution Managed Payout Fund, which yields a stead 5%, I would expect the share price to grow at least somewhat through the decades, wouldn't you? Would it? Who knows? I wouldn't buy it for retirement otherwise, but so far as I know that is still up in the air. My guess on the answer to that is "probably?"
And the immediate annuities they quote are not inflation protected. Likewise, I would be hesitant to buy one that wasn't inflation protected, and I don't think it would be comparable to the G&D managed payout fund.
To me it would be more relevant to see a comparison of an inflation protected immediate lifetime annuity with the options given, to the G&D managed payout fund, for example, maybe even with a projection of expected G&D share prices over 35 years or so.
Not apples to apples, one is guaranteed by an insurance company, the other is just wishful thinking.
Rich_by_the_Bay
Moderator Emeritus
I know that VG doesn't offer the living benefit annuities through AIG, but AIG is still giving VG the normal 4-5% commissions on the product, so I guess "someone" at VG is getting the commisions??
I think "someone" is us, the Vanguard share owners. Just like various fees (frequent trading, etc) they should go back into Vanguard's pockets and benefit all the investors in the form of lower expense. Seems to be working...
explanade
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WSJ had a couple of features on annuities including this general article:
How to Bulletproof Your Nest Egg: Financial News - Yahoo! Finance
Also had a podcast in which they interview an annuities advisor (you can get it for free from iTunes). The advisor comes from incomesolutions.com.
She suggested that income-protected annuities should return about 6% in payments versus around 7% for single-life with no options. Income-protection is the only worthwhile option, the rest reduce payments, in which case you're better off just keeping some cash out of the annuity purchase to retain financial flexibility.
How to Bulletproof Your Nest Egg: Financial News - Yahoo! Finance
Also had a podcast in which they interview an annuities advisor (you can get it for free from iTunes). The advisor comes from incomesolutions.com.
She suggested that income-protected annuities should return about 6% in payments versus around 7% for single-life with no options. Income-protection is the only worthwhile option, the rest reduce payments, in which case you're better off just keeping some cash out of the annuity purchase to retain financial flexibility.
I'm not following that, can you explain that more clearly. Are you (she) just saying inflation adjusted annuities are the way to go?
Good article.
haha
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This is definitely an interesting article. I think we will see a lot more of this type of article, particularly if markets stay volatile. People will come to realize that the portfolio liquidation model is a piece of academic bull-market spawned BS, and not a real world all season plan.
I have one quibble.
Strategy No. 1, relying solely on income from dividends and/or interest, simply "makes no sense," Mr. Evensky says. Such a nest egg requires a hefty percentage (typically 50% or more) of bonds or bond funds to generate needed cash, and, thus, limits one's stock holdings. Stocks, of course, have historically provided the growth needed in a portfolio to guard against the loss of purchasing power.
This is false. It is quite easy today to set up a high-equity allocation, reasonably diversified portfolio that yields in the neighborhood of 4%. Case closed. The only thing that can damage this portfolio seriously would be extreme business stress that caused multiple dividend cuts among the portfolio stocks.
This approach requires some knowledge, and some effort, but no meaningful load or sales charges or ongoing expenses. One could easily get all the information needed to handle say a $1.5 portfolio for less than $1000, and maybe much less. At the max level of $1000, that amounts to a .07% expense ratio.
Ha
I have one quibble.
Strategy No. 1, relying solely on income from dividends and/or interest, simply "makes no sense," Mr. Evensky says. Such a nest egg requires a hefty percentage (typically 50% or more) of bonds or bond funds to generate needed cash, and, thus, limits one's stock holdings. Stocks, of course, have historically provided the growth needed in a portfolio to guard against the loss of purchasing power.
This is false. It is quite easy today to set up a high-equity allocation, reasonably diversified portfolio that yields in the neighborhood of 4%. Case closed. The only thing that can damage this portfolio seriously would be extreme business stress that caused multiple dividend cuts among the portfolio stocks.
This approach requires some knowledge, and some effort, but no meaningful load or sales charges or ongoing expenses. One could easily get all the information needed to handle say a $1.5 portfolio for less than $1000, and maybe much less. At the max level of $1000, that amounts to a .07% expense ratio.
Ha
FinanceDude
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I beleive this has already happened to a number of companies..........
You could do it with ETFs for cheap.............
Ha[/quote]
Ha,
You might have your system spelled out elsewhere, but could you give us a sampler of how you'd go about it? Are there funds/ETFs that could get you most of the way there or does it rely on individual issues? What is the ultimate % split between stocks and bonds? Thx.
You might have your system spelled out elsewhere, but could you give us a sampler of how you'd go about it? Are there funds/ETFs that could get you most of the way there or does it rely on individual issues? What is the ultimate % split between stocks and bonds? Thx.
haha
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Bob, I don't consider it a system, just an approach. There may well be funds and or ETFs that could be used. Those are part of an alternate universe that I rarefy venture into. I think Finance Dude and others may be expert in this area.
I have been as much as 95+% in equities. Not sure what my low limit is, but maybe 20%. I depend mostly on stocks and to some extent inflation indexed bonds, unless everything is just too expensive. Then I might just sit it out, except I almost never sell out a position that is only overpriced and not troubled, if I stand to pay a big tax. I consider a high cash position a sort of "time arbitrage", as nothing in markets in permanent.
I own some MLP GPs, at times REITs, and at times such as now mostly high yielding blue chip stocks. These high yields may be because there are low expectations for future earnings and dividend increases. I pay almost no attention to these sorts of predictions, for example as are now being applied to mega-pharma. This to me appears to be an almost random marketplace where expectations are only one clinical trial away from being either smashed or inflated.
When I buy a high yielding stock which has come down significantly in price, I want to see good financials and perhaps more importantly heavy and recent insider buying by CEO, CFO, etc. A buy of a few thousand shares does not count.
In my taxable account I have a few issues that have been there close to 25 years. I turn over more rapidly in IRA.
As for yield, I want the overall portfolio to yield around 4% or so under today’s conditions. There may be a few stocks with no dividend, but mostly they will be between 3 and 5%.
In traditional "income stock" areas, I do not reach for yield, as I think that is what many investors in this space are likely doing. I prefer an equity with a middling yield but demonstrated consistent growth in yield, sales, and earnings.
No high yield bonds, except funds or ETFs occasionally as specs on spread-to-treasuries. IMO these issues are usually overpriced by yield hunters and asset allocators.
If I had a greater lifestyle/income cushion, I would go up the quality ladder. Quality as defined by business strengths and market position. But as I said, I never buy dogs, except as defined by residence in the doghouse.
Cheap is important, at least going in.
Now Bob, I'd like to ask a favor of you. If people post to this thread to tell me how risky, stupid, or impossible this approach is, would you please remind them that you asked for this explication? I make no warranties, claims, or anything else remotely positive for this way of investing. In fact, it is probably completely idiotic and especially when coupled with my low IQ and rotten personality will eventually see me into the poorhouse.
Ha
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explanade
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Interesting point made about annuities in a podcast interview with a policy professor discussing 401k plans and retirement plans in general:
Preserving Your Pension In Tough Times : NPR
About 20-25 minutes in, she makes the point that people who buy annuities have a good idea that they will have a long lifespan, because they know their family history or the lifestyle choices they've made.
Insurance companies, knowing this, will not offer the best payouts to this self-selected group of annuity buyers in the individual annuities market. So they don't offer as good a payout as they would over a larger pool, where actuaries can spread the risk.
So the better way for annuities to work for retirees is if everyone was pooled into the annuity market. She's an advocate of the govt. taking over retirement plans and providing a defined benefit (she cited reasons such as lower costs, professional management and studies showing people who were too actively managing 401k accounts tended to fare worse).
Preserving Your Pension In Tough Times : NPR
About 20-25 minutes in, she makes the point that people who buy annuities have a good idea that they will have a long lifespan, because they know their family history or the lifestyle choices they've made.
Insurance companies, knowing this, will not offer the best payouts to this self-selected group of annuity buyers in the individual annuities market. So they don't offer as good a payout as they would over a larger pool, where actuaries can spread the risk.
So the better way for annuities to work for retirees is if everyone was pooled into the annuity market. She's an advocate of the govt. taking over retirement plans and providing a defined benefit (she cited reasons such as lower costs, professional management and studies showing people who were too actively managing 401k accounts tended to fare worse).
