immediate annuity (again)

[youbet]

Agree on the analysis Brewer.

I still wonder how many folks currently receiving a DBP pension or going to recieve one in the future realize that taking the income stream in lieu of the lump sum is equivalent to buying an annuity?

 

[FinanceDude]

Agree on the analysis Brewer.

I still wonder how many folks currently receiving a DBP pension or going to recieve one in the future realize that taking the income stream in lieu of the lump sum is equivalent to buying an annuity?   

Not many.........yet many of these SAME folks hate all life insurance and annuities............

 

[FinanceDude]

Since options typically change % value much faster than the underlying, I presume you wouldn't want/need to hedge the entire notional amount of your equity position.  You also might be in the position of owning the S&P500 but buying puts on the QQQQ.  You would likely require less of the much more volatile QQQQ protection to protect your S&P500 position.

But, yes, buying insurance does cost money.  That's why you generally don't come out ahead buying insurance.  But we were talking about sleep-at-night alternatives that might be less costly and irreverible than a SPIA.

Good point, but not all folks are as savvy about the markets as you...........

The fact remains that products are "invented" to meet "perceived needs", and then marketed to the masses..........certainly a backwards approach to the need...........but prevalent in Wall Street.............

I can count on NO HANDS the number of immediate annuities I've written.........I guess that means ZERO............

 

[LOL!]

A little off topic, but I saw a reasonable use of annuities mentioned in the NYTimes article on folks who get lots of money and squander it (Mike Tyson, Michael Jackson, lottery winners, etc)
Fortune's Fools: Why the Rich Go Broke
http://www.nytimes.com/2006/09/17/business/yourmoney/17broke.html

One idea was for folks who blow through money easily and perhaps wrecklessly, they should invest windfalls and good fortune into annuities just because that would prevent them from blowing it all at once and give them a steady future income stream.

 

[brewer12345]

A little off topic, but I saw a reasonable use of annuities mentioned in the NYTimes article on folks who get lots of money and squander it (Mike Tyson, Michael Jackson, lottery winners, etc)
Fortune's Fools: Why the Rich Go Broke
http://www.nytimes.com/2006/09/17/business/yourmoney/17broke.html

One idea was for folks who blow through money easily and perhaps wrecklessly, they should invest windfalls and good fortune into annuities just because that would prevent them from blowing it all at once and give them a steady future income stream.

Which works great until they hear an ad from JG Wentworth or similar promising them a lump sum in return for their annuity.

 

[donheff]

I would look at two things:

- Can I buy the same annuity for less money than the lump sum?
- Can I reasonably expect to draw a larger inflation-adjusted stream of money out of the lump sum than from the annuity payments?

Obviously, if you aren't sure that the entity paying the pension out is a very solid credit, it might be wise to ignore all of this and just take the money and run.

I would look at those also. But on the second item OP demonstrated at the beginning of the thread that he can do better with the annuity than with a standard 4% SWR. The same may very well apply to the DBP vs lump sum question. The chooser is faced with the same basic question any portfolio holder faces - does the likely substantial remaining principal I will keep by self directing outweigh the assurance I get from the annuitized income stream.

A good example is the Federal Thrift program. For anyone mid fifties or older, you can leave you money in the TSP with very good expenses and do it your self (lump sum). Or you can buy an annuity (inflation protected with survivor if desired) and exceed the 4% SWR by a little bit.

I will say this - I have seen posters consider skipping health or LTC insurance so they can boost current spending by a few thousand/yr. I would rather annuitize if I could boost the income stream enough to fund those items rather than forgo them so I could leave a nest egg behind.

 

[JohnEyles]

As a though exercise, try sticking in a plain vanilla 60/40 portfolio into firecalc.  Make the same amount as what you are thinking about ptting into the annuity and assume a 4% inflation-adjusted wthdrawal ver 30 years.  Check out teh range of ending portfolio vales, paying special attention to the high, median, average, bottom and the range.  

Absolutely a good point.  FIRECalc gives an average of about $320K remaining,
depending on what the fixed-income choice is, and a tolerable 3.8% chance
of ruination (one minus the "success rate").

However, the SPIA I'm looking at would pay me 4.4% or so.  Then, applying
FIRECalc again, the average ending portfolio value is still quite high (higher than
my premium), but the chance of ruination rises to 13%.

But, of course, per your suggestion, these are all for 30yr payouts, about my
median life expectancy. However, when I up the payout to 36yrs (about my
90%-tile expectancy), the average ending portfolio value is actually higher
(no surprise I guess), but the chance of ruination is 26%.

So I think this exercise argues FOR the SPIA.  Is the chance of a major
highly-rated insurance company failing within 36 years greater than 26% ?
Also, my state guarantees for more than the typical $100K, covering my
$250K.  It guarantees me nothing if my portfolio performs badly.

John

P.S. And to clarify, yes I have no pension (other than SS). I have the
TIAA-CREF retirement account, one payout option being a lifetime
annuity. But there's nothing gauranteed about it, as best I can tell.

 

[brewer12345]

So I think this exercise argues FOR the SPIA.  Is the chance of a major
highly-rated insurance company failing within 36 years greater than 26% ?
Also, my state guarantees for more than the typical $100K, covering my
$250K.  It guarantees me nothing if my portfolio performs badly.

John

P.S.  And to clarify, yes I have no pension (other than SS).  I have the
TIAA-CREF retirement account, one payout option being a lifetime
annuity.   But there's nothing gauranteed about it, as best I can tell.

I don't come to the same conclusions about firecalc outputs, but you are the one who has to sleep at night. Thats why I suggested you play with the tool and see what the results said to you.

So which company is this annuity with? TIAA-CREF or Vanguard/AIG? I think very highly of TIAA-CREF. AIG, not so much. And I would not put a lot of stock in the state guaranty funds. They are a far, far cry from FDIC insurance.

 

[JohnEyles]

The one I've been quoting is Vanguard/AIG. TIAA-CREF does not
do SPIAs, unless I'm mistaken.

I also have a batch of quotes from WebAnnuities.com, and would be
curious what you think of these insurers: American General, Aviva,
Fidelity and Guaranty Life, Genworth Life, and Integrity Life. Thanks !

John

 

[brewer12345]

I also have a batch of quotes from WebAnnuities.com, and would be
curious what you think of these insurers: American General, Aviva,
Fidelity and Guaranty Life, Genworth Life, and Integrity Life.   Thanks !

John

The only one of these I would even contemplate buying an annuity from is Integrity, and even then I would rather buy it from one of their companies that actually had the Western & Southern name on it.

 

[JohnEyles]

I don't come to the same conclusions about firecalc outputs, but you are the one who has to sleep at night.  Thats why I suggested you play with the tool and see what the results said to you.

I am curious as to why you don't come to same conclusions.  Do you believe
that the risk of one of these insurers becoming insolvent is higher than the
risk of my portfolio underperforming into the FIRECalc "failure" zone (13-26%
depending upon living to median versus 90% life expectancy) ?  Or do you
believe this risk of failure is worth it for the "expected" ending portfolio
value of $250-300K ?

John

 

[Nords]

Anyone else suffer from this separation anxiety disorder?

Heck, yeah.  If annuities are such a good deal, how many executives of insurance companies own them-- and why are they selling them to us?

Sometimes things are the same even though they are named differently. I'm generally not interested in immediate fixed annuities, although I understand their pros and cons and that they have a legitimate purpose under some circumstances.
However, it dawned on me that when I choose whether to take my DBP pension as a lump sum or a monthly income stream for life, I'll actually be chosing between buying an annuity or not! I had been planning on taking the income stream or "annuity." Suddenly, I realize that I better go do an analysis and decide if I would buy an immediate annuity that pays equal to my pension with an amount equal to the lump sum payout. If not, then I guess I should take the lump sum from my pension...

A lump sum is generally a better deal in periods of low interest rates (like today) so that the lump is bigger.

It's also a better deal if you're capable of & interested in managing your own money and if you don't want a survivor option.

It's a great deal if you suspect that your company is going to go down the tubes in the next 10-50 years, use the bankruptcy court to dump your pension check on the PBGC, and leave you with a salami string.

My FIL took a lump sum from CBS in 1994. 12 years later, he's still thrilled that he did so.

 

[brewer12345]

I am curious as to why you don't come to same conclusions.  Do you believe
that the risk of one of these insurers becoming insolvent is higher than the
risk of my portfolio underperforming into the FIRECalc "failure" zone (13-26%
depending upon living to median versus 90% life expectancy) ?  Or do you
believe this risk of failure is worth it for the "expected" ending portfolio
value of $250-300K ?

John

I clearly have a risk appetite very different than yours, so any actual fact-based arguments I might put forward are not likely to matter.  Having said that, I don't like the trade off because I think that firecalc is inherently extremely conservative, the more diversified portfolio I (and most retirees) have is highly likely to be "safer" than what firecalc indicates, and I know how insurers design their products so I know that any annuity you buy is an inherently bad deal.

And I am really, really, really picky about which life insurers I will do business with.  You are buying a guarantee that will only be really important to you if things get very bad.  If I actually part with the money to buy a guarantee, I want to know that there is just about no chance that the guarantee will not be honored.  My experience dealing with these companies and their management teams suggests that very few companies meet that standard.  Unfortunately, many of the companies selling SPIAs are exactly the type of company I won't do business with.

 

[JohnEyles]

I clearly have a risk appetite very different than yours, so any actual fact-based arguments I might put forward are not likely to matter.  Having said that, I don't like the trade off because I think that firecalc is inherently extremely conservative, the more diversified portfolio I (and most retirees) have is highly likely to be "safer" than what firecalc indicates ...

And I am really, really, really picky about which life insurers I will do business with.  You are buying a guarantee that will only be really important to you if things get very bad.  If I actually part with the money to buy a guarantee, I want to know that there is just about no chance that the guarantee will not be honored. 

I guess I have less faith in the markets than you, and perhaps more faith in the
insurance companies.

You want "just about no chance" that the SPIA terms will not be honored,  but
there's not anywhere close to zero chance that the portfolio being withdrawn
at 4.4% will not vanish.  So again, do you really think there's a 13-26% chance
that AIG will become insolvent ?

Is FIRECalc really "extremely conservative" ?  The default portfolio that I'm using
is 40% treasuries and 60% "total market", which sounds like something like VG
Total Stock Mkt Index to me.  Sounds like a pretty conservative portfolio to me.

No question that the insurance company failing and the portfolio failing are
highly correlated outcomes.  But have not many of these insurance companies
survived many of the historical periods which lead to one of the 13-26% likely
"failure" outcomes in FIRECalc ?

Not trying to pick a fight here - I respect that fact that you know a lot more
about insurance companies than me, and probably more about FIRECalc and
investing in general - but I'm trying to be very analytical and UN-emotional
in comparing SPIA versus invested portfolio.

John

scenarois

 

[donheff]

And I am really, really, really picky about which life insurers I will do business with. You are buying a guarantee that will only be really important to you if things get very bad. If I actually part with the money to buy a guarantee, I want to know that there is just about no chance that the guarantee will not be honored. My experience dealing with these companies and their management teams suggests that very few companies meet that standard. Unfortunately, many of the companies selling SPIAs are exactly the type of company I won't do business with.

This is why, if I ever decide to actually look seriously at annuities, I hope Brewer (or some reasonable facsimile) is around to tell me what the good companies are.

Interestingly Brewer, I have always considered myself to be in a relatively high risk category. I have a nice pension to cover the essentials. So I have been comfortable keeping the portfolio in a diversified group of stock funds. Little cash, no bonds. Now that I am ER and DW is close I am starting to be a bit more conservative by building some "Lucia" buckets to carry us throuh a few down years.

My compulsive posting in the annuity threads results from my initial surprise that one could potentially get a "safe" piece of income at or above the standard SWR we talk about all the time. It intrigues me as a way to lock in some extra income to cover non-essentials like travel if everything goes to hell in a handbasket. My biggest concern with annuities continues to be whether the companies can survive well in a major, protracted downturn. But, if I remember right, you or someone else advised that the "good" companies have been able to weather some bad periods before pretty well.

 

[Rich_by_the_Bay]

Buy the annuity now. I mean right away. I'm so tired of telling people how f******g stupid they are that I have come to realize that I own stocks in many of the companies selling them.

If you have half a brain you wouldn't have asked so since you are dumber than dog dung I suggest you put 100% of your money in it and then promptly slit your own throat after realizing how stupid you are.

How tactful.

Donheff, take a look at Gummy's analysis (here) for an interesting if somewhat technical discussion about this.

Like you, I could see a place for this type of assurance some day. I found it helpful to compare self-annuitizing with insurance company annuities by using a mortgage calculator (see how much you'd have to self-annuitize to get the same monthly payments as a commercial product would pay). I've found that the commercial IA always wins in the scenarios I have analyzed. This is despite their expenses.

I think the main reaosn is that they can invest for the mean life expectancy payout, whereas an individual must assume the longest plausible lifespan to make this work (say 5-10 years more than the mean).

The unavoidable IA risk is losing the money for your estate if you die young.

 

[donheff]

Buy the annuity now. I mean right away. I'm so tired of telling people how f******g stupid they are that I have come to realize that I own stocks in many of the companies selling them.

If you have half a brain you wouldn't have asked so since you are dumber than dog dung I suggest you put 100% of your money in it and then promptly slit your own throat after realizing how stupid you are.

Well thought out and nicely defended. From now on 2B is my goto guy for rock solid investing advice.

 

[JohnEyles]

... you are dumber than dog dung I suggest you put 100% of your money in it ...

Bummer, seemed to be a pretty high level of civility here, but I guess
there are resident assholes on every forum.

 

[Khan]

Bummer, seemed to be a pretty high level of civility here, but I guess
there are resident assholes on every forum.

I think it's required ( spelled out somewhere in the bylaws ).

 

[Gone4Good]

Would that CPI adjustment be for every CPI, or would it by any chance be capped at a figure like 10%?

I wonder how that kind of SPIA went over during the '70s & '80s.  But of course this time it's different...

Not too bad, actually. There were only a handful of years where inflation was over 10%. Using the 10% cap, it looks like you would have escaped the 70's and early 80's with about 95% of your purchasing power (as measured by CPI) intact.

Now if you lived in Brazil . . .

 

[Texas Proud]

What I mentioned was basically buying put options on an equity index ETF. The one I use most often is QQQQ because it is very liquid and you get relatively good pricing on options on this ETF. A put option gives you the right, but not teh obligation, to sell something at a specific price. So, for example, you could buy a put on QQQQ yesterday for about 60 cents that would allow you to sell the ETF at 37 any time between now and the third friday of January, 2007, regardless of what the open market price of QQQQ is. Obviously, the farther QQQQ might drop the more valuable the put would be. If QQQQ is above the strike price (37 in this case) by the time the option expires (January in this case), the option expires worthless. But you might not care, since that would mean that no disaster scenario heppened in your portfolio. Basically, you pay a smallish insurance premium to limit your losses while preserving your upside.

Obviously, more reading and a thorough understanding of the basics of options is required before doing any of this, but that's about what it boils down to.

Just a quick question on these things... as I have never traded them.. but know what they are and do... so it is only a trading question..

You say it cost 60 cents... is this 'per share'? And if so, how many shares does one option represent? I am thinking 100.. so if you bought one option you would pay $60 plus fee??

 

[2B]

Folks, I apologize, but I cannot let this one rest.  Sorry.   In my 'critique
my plan' thread, many of you expressed disapproval of SPIA, and pointed
me to some papers which  analyze why they don't make sense, at least
for a 53yo.  But, leaving aside the academic issues like "mortality credits"
and such, the bottom line for me is as follows ...

AIG (via Vanguard) will sell me a SPIA with initial payout equal to 4.4% of
my principal, and which is adjusted every year by the CPI.  This sounds a
LOT like the criterion for a SWR with "constant spending power".
Given the conventional wisdom of a 4% "safe withdrawal rate" (SWR),
this seems pretty good to me.  Especially given that my median life expectancy
is about 30yrs (the number for which the 4% SWR is usually specified) - but of
course my 90-percentile expectancy is more like 36 yrs.   And this 4.4% is not
THOUGHT to be safe by a historical analysis.  No.  It IS safe.  It's guaranteed - at
least unless AIG becomes insolvent (but of course, if I invest the money in other
fixed-income, besides Treasury, insolvency is still a risk).

Yes, I realize nothing will be left over.  But given I will still have my house,
plus the remains of the other 75% of my portfolio, to be bequeathed to as
yet undefined survivors, I'm comfortable with that.  It seems like a fair
exchange for a GUARANTEED inflation-adjusted 4.4% SWR !

Please don't humor me just to make me shut up  , but doesn't this make
sense ?

Thanks, John

For those that didn't remember how this thread started, I thought I'd remind you. In my prior post I refrained from "humoring" him.

Being more specific --

John is looking at buying a product that has a high initial commission and high annual fees built into the product. For any other financial product brought up on this board the poster would be encouraged to avoid it. Somehow, annuities have been determined by some to be more "sophisticated" than load mutual funds.

If you use FIRECalc, you can see that a SWR of around 4.3% can be achieved and usually leave a substantial residual many times the original investment so comparing an annuity withdrawl rate to 4% is inappropriate. When you die with an annuity, it will have no residual. FIRECalc is the most conservative of the investment calculators I've come across so if you'd like to use a different "base" it would almost have to be higher.

The interest rate used to calculate the payout for an annuity is probably less than 4%. If you created your own personal annuity you would have to live more than 15 years longer than your mortality table before the annuity would have yielded a better payout. I realize most annuity fans think they will live forever so the annuity is a great deal for them.

We are currently experiencing near record low interest rates. This doesn't seem like a good time to tie my money up for the rest of my life.

My FIL has Alzheimer's and I've talked with a number of people where their parent(s) have a similar problem. It is very common for us to admit that shortly before "Dad" was diagnosed he went out and sunk a big hunk of money into an annuity. My FIL did. My father did not too long before he died. He was never diagnosed with the big A although my sisters had noticed other odd behaviors. I've come to associate buying annuities with brain disorders.

So, I had assumed ol' John had read some of the earlier annuity threads and was simply fully infected with the "gotta have an annuity" bug. Since I own insurance company stocks in my index mutual funds, I wanted to know that he will be helping me financially if not himself.

 

[donheff]

My FIL has Alzheimer's and I've talked with a number of people where their parent(s) have a similar problem. It is very common for us to admit that shortly before "Dad" was diagnosed he went out and sunk a big hunk of money into an annuity. My FIL did. My father did not too long before he died. He was never diagnosed with the big A although my sisters had noticed other odd behaviors. I've come to associate buying annuities with brain disorders.

2B: What happened with your father is a shame and quite possibly criminal. But you should not let it lead to to viciously attack anyone who doesn't think like you. You might note that many of the people who are interested in certain types of inflation protected annuities are doing very well financially. They are not as dumb as (whatever) and just may be smarter than you.

 

[brewer12345]

Just a quick question on these things...  as I have never traded them.. but know what they are and do...  so it is only a trading question..

You say it cost 60 cents... is this 'per share'?  And if so, how many shares does one option represent?  I am thinking 100.. so if you bought one option you would pay $60 plus fee??

Ah, yes, the mechanics. Optons are traded in "contracts", with each contract representing an option on 100 shares of teh underlying. The prices are quoted in per share amounts, so you would multiply price times 100 to get the price of a contract.

You are right in your recollection.

 

[2B]

2B: What happened with your father is a shame and quite possibly criminal.  But you should not let it lead to to viciously attack anyone who doesn't think like you.    You might note that many of the people who are interested in certain types of inflation protected annuities are doing very well financially.  They are not as dumb as (whatever) and just may be smarter than you.

People can do very well financially and still make poor investments.  I have not seen one annuity product that I would consider anything but a "poor" investment.  I realize that annuity salesmen do a great job in showing how "sophisticated" investors utilize various annuities to assure their financial security.  Mostly, annuity salesmen assure their own personal financial security.  

We've had multiple annuity threads here and its always the same story.  "Hey!  I can get a higher SWR with an annuity!"  I'm tired of pointing out their errors.  It's not a question of who is smarter.  It's a question of who does the basic math necessary to show that the insurance companies didn't build those big fancy buildings and hire all those people just to make you rich.  

If you think they did, you probably also believe all those casinos in Las Vegas were built to make people rich.  The big difference between them is that in Las Vegas you get free drinks while they are taking your money.