Another annuity question

[rescueme]

Annuities are very much sorta designed to be a personal pension plan.

However, there is the possibility to have something left in the account for yourself or your heirs. In other words, you do have more options than a traditional pension plan.

Exactly...

It is a personal pension plan that is self-funded, but has advantages over a company supplied DB plan...

 

[FinanceDude]

Hopefully I will not get too long-winded with regards to clearing up a few points regarding VAs. mathjak did an excellent over view of the product. While I realize most people on this board recoil in horror at any discussion of this product, it might have merit for some people in some circumstances.

Based on the posts here, it sounds like mathjak was presented a Nationwide LINC VA (Lifetime Income Rider)

There are 2 "columns" that are of interest. The first is the contract value (CV). This represents "your real money". The amount changes on a daily basis due to market fluctuations. At any time, much like other products, your value could be less or more than what you invested. The second column is the one that is more confusing. Most companies refer to it as an "income base" or "guaranteed withdrawal base" or something like that. It is NOT an amount you can walk with if you decide to cash in the policy, and it is higher than the contract value.

In Nationwide's case, they credit your "income base" by 2.5% a quarter or 10% a year for the first 10 years. So, in effect, they are promising that if you put in $100,000, after 10 years they will let you take a guaranteed payment of 5.25% (assuming you are 65 or older) of the $200,000 base, even if your contract value is $100,000 or $150,000 or even zero. You do NOT have to annuitize (give up the contract to Nationwide) to get the 5.25% of the $200,000. If your contract value is higher than $200,000 at the time you take income (unlikely), you get 5.25% of that number, or $10,500 a year for your life and your spouse's life. If there is any money left over, it goes to the contingent beneficiary.

We must keep in mind that Nationwide does NONE of this for free. The internal expenses end up around 4% or so. So, the asset drag is significant. In order the get the "10%", you have to pay 4% in fees and expenses. The 10% is not a REAL number, it is a percentage applied to the income base. The real way to look at it is that you are paying 4% in fees every year to get 5.25% in income payments, albeit guaranteed for life. Pretty hefty cost for a guarantee. Despite that, these products have hundreds of billions invested in them and people continue to buy (are sold) them. With pensions all but gone, it allows someone to get guaranteed income for life. It is however a spendy proposition. In effect, like brewer has illustrated, one could do this themselves if they use a fairly simple option strategy and index funds, and do it a lot cheaper. But, most investors don't understand or like options, so they won't do that.

VAs today are more expensive than ever. Insurance companies underpriced their risk significantly pre 2008 and now have raised their fees and expenses considerably since most of them took huge losses in the financial market debacle. They do work in a number of respects like a pension. Folks that have COLA's pensions in effect have a SPIA with favorable rates. However, a lot of pensions ahve a variable component that can affect their monthly payments up or down. That is similar to a VA, except the VA has higher cost, but is available to everyone. YMMV..........

 

[brewer12345]

A good summary, FD. I see limited applicability for most people, but that does not stop the sales of these things.

 

[jIMOh]

Ask if they are promising a 10% return, or 7% compounded, or if they give you stacking.

For example
one product might be
7% compounded returns (doubles in 10 years) or the value of the VA (whichever is higher) in 10 years.

A different product might be
5% compounded returns each year or the value of the VA, evaluated each year on the anniversary. At end of each year the contract gives you either 5% on top of previous anniversary value, or the value of the mutual funds (whichever is higher).

There is a third product I am aware of which stacks daily (not yearly).

Not all products are the same, so generalizing they are "all bad" seems to be ignorance on part of some of the posters. In addition many VAs are "nursing home friendly" meaning if you need the money to fund something like a nursing home stay, that can be done at minimal to no additional cost.

If a person puts a high amount of bond funds into a VA, they are probably not using the product correctly. Choose high beta type investments (volatile investments).

 

[mathjak107]

Hopefully I will not get too long-winded with regards to clearing up a few points regarding VAs. mathjak did an excellent over view of the product. While I realize most people on this board recoil in horror at any discussion of this product, it might have merit for some people in some circumstances.

Based on the posts here, it sounds like mathjak was presented a Nationwide LINC VA (Lifetime Income Rider)

There are 2 "columns" that are of interest. The first is the contract value (CV). This represents "your real money". The amount changes on a daily basis due to market fluctuations. At any time, much like other products, your value could be less or more than what you invested. The second column is the one that is more confusing. Most companies refer to it as an "income base" or "guaranteed withdrawal base" or something like that. It is NOT an amount you can walk with if you decide to cash in the policy, and it is higher than the contract value.

In Nationwide's case, they credit your "income base" by 2.5% a quarter or 10% a year for the first 10 years. So, in effect, they are promising that if you put in $100,000, after 10 years they will let you take a guaranteed payment of 5.25% (assuming you are 65 or older) of the $200,000 base, even if your contract value is $100,000 or $150,000 or even zero. You do NOT have to annuitize (give up the contract to Nationwide) to get the 5.25% of the $200,000. If your contract value is higher than $200,000 at the time you take income (unlikely), you get 5.25% of that number, or $10,500 a year for your life and your spouse's life. If there is any money left over, it goes to the contingent beneficiary.

We must keep in mind that Nationwide does NONE of this for free. The internal expenses end up around 4% or so. So, the asset drag is significant. In order the get the "10%", you have to pay 4% in fees and expenses. The 10% is not a REAL number, it is a percentage applied to the income base. The real way to look at it is that you are paying 4% in fees every year to get 5.25% in income payments, albeit guaranteed for life. Pretty hefty cost for a guarantee. Despite that, these products have hundreds of billions invested in them and people continue to buy (are sold) them. With pensions all but gone, it allows someone to get guaranteed income for life. It is however a spendy proposition. In effect, like brewer has illustrated, one could do this themselves if they use a fairly simple option strategy and index funds, and do it a lot cheaper. But, most investors don't understand or like options, so they won't do that.

VAs today are more expensive than ever. Insurance companies underpriced their risk significantly pre 2008 and now have raised their fees and expenses considerably since most of them took huge losses in the financial market debacle. They do work in a number of respects like a pension. Folks that have COLA's pensions in effect have a SPIA with favorable rates. However, a lot of pensions ahve a variable component that can affect their monthly payments up or down. That is similar to a VA, except the VA has higher cost, but is available to everyone. YMMV..........

much thanks. im going to print this out and re-read it until i fully understand all your points.


are the mutual fund expenses you paid in that 4% figure? i dont think so ....

thanks again

 

[FinanceDude]

much thanks. im going to print this out and re-read it until i fully understand all your points.


are the mutual fund expenses you paid in that 4% figure? i dont think so ....

thanks again

Should be, rarely does a VA hit 5% unless you pay for both a living benefit and an enhanced death benefit. Since I do now know the carrier I can' be more precise.......

 

[braumeister]

Or to put it a bit more simply:

 

[FinanceDude]

Or to put it a bit more simply:

Where did you get that picture of Nords?

 

[mathjak107]

so the real deal is put in 100k and get 5.25% on 200k as a lifetime payment assuming 65 with about 4% in fees.?

it looks like the fact that you only put in 100k but are collecting on a 200k base does make that 1.25% your clearing actually more than it appears , correct ?

 

[FinanceDude]

so the real deal is put in 100k and get 5.25% on 200k as a lifetime payment assuming 65 with about 4% in fees.?

Yes

it looks like the fact that you only put in 100k but are collecting on a 200k base does make that 1.25% your clearing actually more than it appears , correct ?

Yes, the literature makes it look like a win-win situation for the client. They usually run a scenario based on backtesting a portfolio or two, and also one scenario at 0%. The 0% one is the most interesting.

Yes, but you are paying an internal cost of 4% to get that 5.25%. The $200,000 is not principal you can walk with.

 

[73ss454]

This is all over my head but it seems that the ins company is taking the 4% SWR and hoping you die soon.

 

[Sarah in SC]

Finance Dude, thanks for taking the time to explain that all so well. Like most people, I believe (and Brewer noted) there isn't a whole lot of applicability of these things to the vast majority of people. But it is helpful to explain what is actually in the devils sometimes!

 

[FinanceDude]

This is all over my head but it seems that the ins company is taking the 4% SWR and hoping you die soon.

Actually, they hope you die right before you start taking income, because then you might live another 25-30 years, and they might lose money.

It's all actuarially-based.........

The product exists because there is demand for it, no demand, no product.........

We could always have a discussion about the merits of Whole Life insurance, which is often looked at much more favorably than VAs, for reasons I do not understand..........

 

[73ss454]

Do you think there's a demand for it because people are out looking to buy it or could it possibly be because it's being sold. (heh)

Whole Life Ins., now there's something I know all about. I was smart enough to only buy 3 of them.^&*%$#%^%....

 

[FinanceDude]

Do you think there's a demand for it because people are out looking to buy it or could it possibly be because it's being sold. (heh)

Both. People are looking for guarantees, and the insurance industry knows that, and are marketing that.........

 

[TN_INVEST]

I believe (and Brewer noted) there isn't a whole lot of applicability of these things to the vast majority of people.

I'm not so sure about that. Most people are broke. As much as I think folks around here would be fine to stay away from variable annuities, the Average Joe has a lousy track record of being able to ride the storm out.

Lots of folks lost lots of money with their investments and then locked in those loses by buying CDs. They'll never get that money back. If they had paid for the annuity, they might have watched ridden it out because the downturn didn't effect their income.

These things are not magic bullets, but they aren't snake oil either.

 

[dgoldenz]

There are similar fixed and fixed-indexed annuities with income riders that are charged only ~0.5%-1% of the income base against principal each year for including the guaranteed income rider. You have to pay attention to the interest rate guaranteed on the income base, whether it is simple or compounded, and the withdrawal percentage based on age.

For example, a 55 year old person wants to guarantee a specific income at age 65. Company A is offering 10% simple interest with a withdrawal rate of 4.5% at age 65. Company B is offering 7% compound interest with a withdrawal rate of 5.5% at age 65. The person has $100k to buy the contract with.

After 10 years, Company A will guarantee a lifetime income of $9,000 ($200k * .045). After 10 years, Company B will guarantee a lifetime income of $10,819 ($196,715 * .055). So Company A's marketing fluff of 10% interest is clearly inferior to Company B's compounded interest rate and higher withdrawal percentage.

What happens if Company A offers 20% simple interest for additional marketing fluff, but reduces the withdrawal percentage to 1%? Surely, 20% simple is better than 7% compounded over 10 years! Now you have a WHOPPER of a $300k income base, compared to the lowly $196k from Company B! Too bad you can only withdraw $3k/year for the rest of your life and can't walk away with the $300k (which has nothing to do with your accumulated value that you can walk away with). This is why it is important to understand the entire picture of how the rates are calculated.

 

[mathjak107]

more and more im becoming a fan of immeadiate annuities as part of a well balanced conservative mix for those with no pensions.

academic studies are now showing big jumps in success rates by incorporating 20 to 25% pensionized income into the mix.

this decade we have actually lived the 10% failure rate all these calculators speak of. with a typical 50/50 mix you got a down stock market the last decade and no to low rates on the cash and bond side.

we are totaly held captive to the whims of the markets and rates.

well i find shifting some of that risk to a 3rd party who invests in something i never can is a wonderful thing. dead bodies...they arent held hostage to markets..

studies show that while more aggressive portfolios will benefit the least ,the more conservative portfolios can benefit a whole lot from an immeadiate annuity in the mix.

i have been researching the last 6 months about working this into the master plan. its still something i am learning about utilizing.

 

[easysurfer]

IMO, it's tough to pull the trigger and go with an immediate annuity at this time with interest rates so low. Remember, get one now, and every month for the rest of your life is a reminder of locking in the low rate.

 

[jIMOh]

IMO, it's tough to pull the trigger and go with an immediate annuity at this time with interest rates so low. Remember, get one now, and every month for the rest of your life is a reminder of locking in the low rate.

I think annuities are more tied to withdraw rates than interest rates. I doubt an annuity would ever pay out less than 4% because the insurance companies KNOW that is what the market gives them- they need to promise better than the market.

 

[jIMOh]

There are similar fixed and fixed-indexed annuities with income riders that are charged only ~0.5%-1% of the income base against principal each year for including the guaranteed income rider. You have to pay attention to the interest rate guaranteed on the income base, whether it is simple or compounded, and the withdrawal percentage based on age.

For example, a 55 year old person wants to guarantee a specific income at age 65. Company A is offering 10% simple interest with a withdrawal rate of 4.5% at age 65. Company B is offering 7% compound interest with a withdrawal rate of 5.5% at age 65. The person has $100k to buy the contract with.

After 10 years, Company A will guarantee a lifetime income of $9,000 ($200k * .045). After 10 years, Company B will guarantee a lifetime income of $10,819 ($196,715 * .055). So Company A's marketing fluff of 10% interest is clearly inferior to Company B's compounded interest rate and higher withdrawal percentage.

What happens if Company A offers 20% simple interest for additional marketing fluff, but reduces the withdrawal percentage to 1%? Surely, 20% simple is better than 7% compounded over 10 years! Now you have a WHOPPER of a $300k income base, compared to the lowly $196k from Company B! Too bad you can only withdraw $3k/year for the rest of your life and can't walk away with the $300k (which has nothing to do with your accumulated value that you can walk away with). This is why it is important to understand the entire picture of how the rates are calculated.

All of above is true.

One reason VAs will be popular is they have lots of moving parts- long term care riders, death benefits, accumulation benefits, early withdraw benefits and more. Not all riders are used in any one situation, but some people might want to retire with 400k and "that is all they have", they need that money to provide income for 2 spouses, last a lifetime and also provide long term care, especially for the first spouse which needs it.

 

[easysurfer]

I just know that doing an annuity quote while interest rates are so low bring back a much lower quote than when interest rates are higher.

 

[clifp]

IMO, it's tough to pull the trigger and go with an immediate annuity at this time with interest rates so low. Remember, get one now, and every month for the rest of your life is a reminder of locking in the low rate.

Another factor is that the older you are higher income you'll get from annuities and the less you'll be penalized for a lower interest rates. So there is always somewhat of an incentive to wait.

The other concern I have with annuities is lack of diversification. When you buy an annuities you are in effect buying a bond from an insurance company. Now it maybe safer that typical corporate bond, but at the end of the day it is still a promise from Insurance company that in return for your money today, we will give you money for the rest of your life.

As Finance Dude points out insurance companies underpriced many EIAs, and probably some VA and lost money on them. (They probably had no more idea back in 2006 what the next 5 years were going to look like than the rest of us.) They are facing the same dismal investing world the rest of us are facing low interest rates, a fairly priced equity market, and morbid real estate market. My perception is that the shakier an insurance company is financially the higher their lifetime guarantees. So not only do you have to figure out to use dgoldenz example that B is offering a much better deal than A, you also have to factor in the difference in credit rating. So if B's deal is better but B has A3 rating and company A is rated AA2, than going with company A's lower guaranteed income maybe wise.

 

[FinanceDude]

My perception is that the shakier an insurance company is financially the higher their lifetime guarantees. .

Actually, just the opposite is true. As "weaker companies" are in full defensive mode, those companies that have a large percentage of their overall business in life and P&C and small VA business are more generous than those who have committed a large amount to VA. SO, Nationwide has better withdrawal rates than Transamerica, for example.........

 

[mathjak107]

IMO, it's tough to pull the trigger and go with an immediate annuity at this time with interest rates so low. Remember, get one now, and every month for the rest of your life is a reminder of locking in the low rate.

its really all about the plan and withdrawl amount you need.
its no no longer about not growing richer but about not growing poorer through retirement.

its always nice to have higher rates but they may not be needed. that pensionized income coming in may be just the thing to fill in those valleys and dips we have like now just to keep you from killing off to many of those geese laying the golden eggs by spending to much down.

thats why new studies are showing that injecting as little as even a 20% non inflation adjusted pensionized income greatly brings up your success rate.

it works best in conservative portfolios 30-35% equity where equity gains may be alot less long term than more aggressive portfolios .

as i said many times the order our gains and losses come in plays a much larger part in our success rate than how high our gains are. the same is true here. if the amount of pensionized income is keeping you from selling more equities and the numbers work for you than its better than not having that income.

what your really trying to do is get some protection from those gains and losses coming in at really bad combinations.


http://assetbuilder.com/blogs/scott...y-Income-May-Increase-Portfolio-Survival.aspx