Another annuity question

[brewer12345]

Okay, I am still honestly confused. I HAVE googled and read the annuity threads. That was why I asked, because nobody seemed to explain what the problem is, just "run"! Putting money in the stock market means you have to have MUCH more money because it may pay 0 in any given year, and you could also lose principal. And of course we have a significant amount in mutual funds. It still seems that the downside protection of the EIA is worth losing a hair off the upside. But thank you for your thoughts.

I personally do not understand the appeal, but if you like the idea of an EIA I would do it yourself rather than take credit exposure to a potentially shaky insurer and get locked into an inordinately expensive, very complex contract that hits you with a large early withdrawal penalty if you need the money sooner than the insurer tells you it is OK. If you search the forum, I took the trouble in a past post to explain in detail how you can "roll your own" EIA. With the high VIX, these strategies will be locking in a modest return at best.

Personally, I would just stick with a balanced, diversified portfolio and skip the option theatrics, but to each their own. Just take 5 minutes a year and save yourself the expense and credit exposure brought on by an EIA.

 

[FinanceDude]

Does Vanguard still offer a VA underwritten by AIG??

 

[brewer12345]

Does Vanguard still offer a VA underwritten by AIG??

Your point is?

 

[Gone4Good]

However, EIA also come with 200+ page insurance contract that describes in highly technical legalese how the products actually work.

The only question you need to ask is "Can I have the contract" mentioned by clifp. Get it. Read it. If you understand it and are comfortable with how the product works, buy it.

 

[FinanceDude]

Your point is?

Why would VG promote a product that seems to be universally hated as an overpriced fee-loaded expensive product? Doesn't seem very Bogle-like...........

 

[chinaco]

There are several types of insurance contracts that fall into the annuity category. Make sure you understand the type of annuity and all of it features, benefits, restrictions and costs.

The costs related to almost any annuity contact is high.

Like others have stated.... don't buy something you do not understand.

I am intending to buy an annuity for income purposes. We will stick with a plain vanilla nominal SPIA (from a highly rated insurer). Our goal is to build a guaranteed base income using SSx2 + Pension + SPIA. I will handle the inflation adjustment on income myself.

But, I am not putting all of our money into a SPIA. Just enough to insure a base income. The majority of it will remain in our control invested in securities.

I going wait to make the SPIA purchase till the fed is done with its heavy handed rate manipulation.... which could be a few years (according to recent developments).

 

[mystang52]

Palomalou - I am NOT expert on annuities. But, based on your expressed concerns, I think a SPIA is what you're looking for. Concept and pay-out is simple, and gives you the peace of mind you are apparently seeking.
The product you originally were considering seems to be chock full of pitfalls, as noted by so many of the responders.

 

[palomalou]

Now I understand much better! Thank you all!

 

[Berkshire_Bull]

If you buy a CD, you're giving your money to a bank, they loan it out, subtract their expenses and profits, and give you the remainder in a stated rate.

If you buy a traditional deferred annuity, you're giving your money to an insurance company, they're investing it in a portfolio of bonds and maybe some real estate, subtracting out their costs and profits, and give you the remainder in a stated rate. Obviously a SPIA is the same drill, just with actuarial assumptions about life expectancy.

If you buy an index annuity, the insurance company takes your money, invests it in bonds and real estate, subtracts their costs and profit, and then buys options from a market maker like Goldman Sachs or Morgan Stanley on a stock market index, most likely the S&P 500. Rather than opting for a stated rate of return such as a CD or traditional fixed annuity, you're opting for a variable rate of return with your upside being the maximum of your crediting choice and the floor being zero. If the index rises the contract owner receives a percentage of the upside, or 100% of the upside to a certain cap, or a monthly averaging of the closing values of the index. A positive index means you're credited interest to the extent of your participation rate or cap, you can choose. If the index is negative the options the insurance company bought on your behalf expire worthless so your return is zero. This is worst case scenario.

All contracts carry a "reset" which is usually annual. Any interest credited is permanent, and the insurance company buys a new round of options for you instead of crediting you a stated rate as with a CD or traditional fixed annuity. Your money is never actually in the stock market, thus fixed index annuities are not a security, although some salespeople may represent them as such, and well as misinformed message board members. Fixed annuities do not carry an expense either. None of them, and neither do CD's.

An EIA is a lousy alternative to mutual funds or stocks, but can be a great alternative to CD's or bonds. I wouldn't buy one becausebI don't buy CD's or bonds.

 

[REWahoo]

Clarification in blue...

If you buy a CD, you're [-]giving[/-] loaning your money to a bank, they loan it out, subtract their expenses and profits, and give you the remainder in a stated rate, without charging you a sales commission.

If you buy a traditional deferred annuity, you're giving your money to an insurance company, who pays the annuity salesman a commission from the money you gave them.

If you buy an index annuity, the insurance company takes your money and pays the annuity salesman a big commission from the money you gave them.

 

[REWahoo]

I didn't mean to hurt your feelings with my Vanuard comment...

You didn't hurt my feelings nor did you respond to any of my questions - and in not doing so, perhaps you did provide the information I was seeking.

On we go...

 

[Berkshire_Bull]

So the cost of the bank paying multiple branch vice presidents to surf the net and cashiers to chew bubblegum and gossip while waiting for someone to walk up doesn't affect CD rates? That's just free?

Fixed Annuities don't charge any loads or expenses, were you under the impression they do?

 

[REWahoo]

So the cost of the bank paying multiple branch vice presidents to surf the net and cashiers to chew bubblegum and gossip while waiting for someone to walk up doesn't affect CD rates? That's just free?

Fixed Annuities don't charge any loads or expenses, were you under the impression they do?

Sorry, I didn't mean to hurt your feelings.

 

[Berkshire_Bull]

Sorry, I didn't mean to hurt your feelings.

You didn't, and if you had it wouldn't be a problem at all. I like a little banter back and forth as long as everyone is civil about it =)

 

[brewer12345]

If you buy a CD, you're giving your money to a bank, they loan it out, subtract their expenses and profits, and give you the remainder in a stated rate.

If you buy a traditional deferred annuity, you're giving your money to an insurance company, they're investing it in a portfolio of bonds and maybe some real estate, subtracting out their costs and profits, and give you the remainder in a stated rate. Obviously a SPIA is the same drill, just with actuarial assumptions about life expectancy.

If you buy an index annuity, the insurance company takes your money, invests it in bonds and real estate, subtracts their costs and profit, and then buys options from a market maker like Goldman Sachs or Morgan Stanley on a stock market index, most likely the S&P 500. Rather than opting for a stated rate of return such as a CD or traditional fixed annuity, you're opting for a variable rate of return with your upside being the maximum of your crediting choice and the floor being zero. If the index rises the contract owner receives a percentage of the upside, or 100% of the upside to a certain cap, or a monthly averaging of the closing values of the index. A positive index means you're credited interest to the extent of your participation rate or cap, you can choose. If the index is negative the options the insurance company bought on your behalf expire worthless so your return is zero. This is worst case scenario.

All contracts carry a "reset" which is usually annual. Any interest credited is permanent, and the insurance company buys a new round of options for you instead of crediting you a stated rate as with a CD or traditional fixed annuity. Your money is never actually in the stock market, thus fixed index annuities are not a security, although some salespeople may represent them as such, and well as misinformed message board members. Fixed annuities do not carry an expense either. None of them, and neither do CD's.

An EIA is a lousy alternative to mutual funds or stocks, but can be a great alternative to CD's or bonds. I wouldn't buy one becausebI don't buy CD's or bonds.

Laughable. I do not like the strategy, but it is a no brained to just roll your own eia. Buying one means you pay the commission, the insurer's overhead, and their profit, while getting inflexibility and a huge lack of transparency. All that for a product anyone with a brokerage account can replicate in 15 minutes.

 

[FinanceDude]

So the cost of the bank paying multiple branch vice presidents to surf the net and cashiers to chew bubblegum and gossip while waiting for someone to walk up doesn't affect CD rates? That's just free?

Those so-called "special" CD rates are just a line entry in the marketing budget, nothing more. If a bank could pay you zero and loan it out on car loans and credit cards they would.........

Fixed Annuities don't charge any loads or expenses, were you under the impression they do?

Is a 1-year fixed annuity paying a guaranteed 2% with full liquidity at the end a worthwhile product?

 

[rescueme]

You can learn it all here:

Senior Annuity Alert

Heck, if they are running ads on this site, they must be worth something!

The main page states "8% for life"; what's not to like?

Everybody who has used this "valuable resource", please raise your hand...

 

[FinanceDude]

You can learn it all here:

Senior Annuity Alert

Heck, if they are running ads on this site, they must be worth something!

The main page states "8% for life"; what's not to like?

Everybody who has used this "valuable resource", please raise your hand...

"Looking to buy an annuity"..............right away it sound suspicious.......

 

[Chuckanut]

The main page states "8% for life"; what's not to like?

Do they take into account that you don't get your capital back at maturity like you do with a CD or bond? I bet that 8% included return of capital as well as earnings. Is it inflation indexed? And how secure is the company that backs the annuity.

In the end, an annuity means you are giving a company your money and they are promising to make certain payments for the rest of your life (or other predetermined time period.) If the company is not well run and goes down the tubes, you probably won't get your money back. At the very least I would diversify annuities over several companies and over time since current interest rates are very low.

 

[dgoldenz]

There are many income annuities that are fixed instead of variable. I've explained them here before but don't really feel like searching my post history to find it. You can think of a fixed deferred income annuity as guaranteeing a future SPIA based on the rates available today. Note that taxation of income annuity withdrawals may be different than a SPIA.

A 5-6% guaranteed income growth "bucket" is on the low side as there are some companies in the 7-7.5% compounded range, haven't looked at the rates in a little while. The actual withdrawal amount is factored as a combination of the income "bucket" value and the withdrawal percentage allowed.

I did one a couple years ago for someone that had an 8% compounded growth on the income side. He was 54 years old and wanted guaranteed income starting at age 65-66, so the 12-year surrender was fine with him and he had plenty of other assets, so he didn't need to touch the money. They offered a higher payout percentage at the age 65-69 band, so he was in the sweet spot for payouts and their lifetime guaranteed payout amount was about 10% more than any other company. He was well aware of the contract provisions and read everything in full. The policy was about 35 pages long and terms spelled out very clearly. Everything comes down to specifics.

 

[rescueme]

Do they take into account that you don't get your capital back at maturity like you do with a CD or bond?

That's where most people go wrong in their thinking.

An annuity (specifically an SPIA) is not an investment, but rather than an income vehicle.

You can't touch the money you invested in a CD, to be used for current income needs. Not to say that it should not be considered, but look at an annuity in a manner that says that you can draw down both originial investment (e.g. preimum) along with earnings to provided current income.

It's not the same product nor is it used in the same manner, over a long term...

 

[FinanceDude]

You can't touch the money you invested in a CD, to be used for current income needs.

I don't agree......

First of all, a CD is NOT an investment........

 

[chinaco]

I don't agree......

First of all, a CD is NOT an investment........

Ok...

Define an investment! Go ahead.

 

[GregLee]

Ok...

Define an investment! Go ahead.

Oh, I just love definitions: "putting money into something with the expectation of gain, but which is not a speculation and not a deposit (such as a CD)."
See Investment - Wikipedia, the free encyclopedia which, however, does not say this.

 

[dgoldenz]

EIA have only been sold in large numbers in the last 6 or 7 years and because there is typically at least a 10 year holding period, there is virtually no real data about how much income they provide in retirement. I asked DGoldenz to give me an example of how much income they provide to his past clients and he said that none of the EIA he sold had matured (wrong word)

The EIA's I've sold are "walk-away" annuities where you can just walk away after the surrender period. Annuitizing is an option, not a requirement. The income annuities guarantee a future income that is stated at the beginning of the contract instead of being variable based on future interest rates. I would not sell an EIA that requires annuitization or that has a surrender period longer than the accumulation period.

The income annuities give the owner the option of annuitizing, using the guaranteed income rider, or walking away with their accumulated value. There is a difference between annuitizing and using the income rider.