New-style annuity offers guaranteed income, access

New-style annuity offers guaranteed income, access -- Newsday.com

[Independent]

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Originally Posted by Tiger New-style annuity offers guaranteed income, access -- Newsday.com

You posted the link, but didn't comment. What do you think?

[NotSoonEnough]

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"Boomers don't want to cut back in retirement," says Rocco Carriero, senior financial adviser at Ameriprise in Southampton. "They want to spend more."

[Spanky]

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And don't get confused: A 6 percent lifetime income guarantee is not a guarantee that your principal will grow 6 percent every year. In fact, the lifetime income is being drawn down from your principal. If your account makes more than 6 percent a year, you'll be ahead. If the stock market hits a prolonged downturn, you could find your principal has vanished after 10 years. But even if your principal goes to zero, you will still get your guaranteed income payment.

What will be the guaranteed income payment if the principal becomes zero?

[mickeyd]

New-Style...well it must be better than all of the rest.

[FinanceDude]

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Originally Posted by Spanky What will be the guaranteed income payment if the principal becomes zero?

The guaranteed income payment............

[FinanceDude]

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Originally Posted by Independent You posted the link, but didn't comment. What do you think?

These have been around for almost 8 years......not a new story............

[W2R]

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"Boomers don't want to cut back in retirement," says Rocco Carriero, senior financial adviser at Ameriprise in Southampton. "They want to spend more."

I admit it! I confess. Beat me with a wet noodle - - I'm guilty. I am a baby boomer (1948 ), and I want to spend more in retirement than I am spending now.

I suppose they think I am LBYM'ing for the fun of it?

Not that I want a slick new sportscar and a McMansion, but gee, I still have my eye on that full digital cable package instead of my bare bones basic cable. And, I plan to get it after ER when my budget is bigger.

[Spanky]

I am thinking about getting a HD LCD TV, but I will postpone it until 2009.

[saluki9]

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Originally Posted by Spanky What will be the guaranteed income payment if the principal becomes zero?

the 6% is a floor, if you do better you get the better result. If the principal goes to zero you still get the 6%.

[saluki9]

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Originally Posted by FinanceDude These have been around for almost 8 years......not a new story............

The new part is being able to take a guaranteed income 5-6% depending on the vendor without having to annuitize.

It's pretty nifty, I'm still trying to figure out how they can hedge so cheaply.

[Spanky]

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Originally Posted by saluki9 the 6% is a floor, if you do better you get the better result. If the principal goes to zero you still get the 6%.

Thanks. I assume it will be 6% of the initial account balance.

[aaronc879]

The deal breaker for me is not being able to collect benefits until age 68. With a 6% withdrawal rate you better live well into your 90's to make it worth it. With my family's past life expectancy's i'll be lucky to reach 80 or even 75. My grandfather was the oldest male member of my family ever and he died a few years ago at age 76. My dad is the next oldest but at age 58.5 is having major health problems and may not make it to retirement at 62-63. So I personaly wouldn't even consider an annuity.

[FinanceDude]

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Originally Posted by aaronc879 The deal breaker for me is not being able to collect benefits until age 68. With a 6% withdrawal rate you better live well into your 90's to make it worth it. With my family's past life expectancy's i'll be lucky to reach 80 or even 75. My grandfather was the oldest male member of my family ever and he died a few years ago at age 76. My dad is the next oldest but at age 58.5 is having major health problems and may not make it to retirement at 62-63. So I personaly wouldn't even consider an annuity.

Understood, as long as you know that pensions are annuities, and so is Social Security..........

[FinanceDude]

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Originally Posted by Spanky Thanks. I assume it will be 6% of the initial account balance.

It depends on the amount it has grown too before the income benefit is "turned on" with some insurers.

The big change is that you don't have to annuitize the contract to get the guaranteed benefit, unlike an SPIA.................

[chinaco]

Insurance Companies, Mutual Fund Companies, etc will be coming up with all kinds of products targeted at boomers and the retirement market that will add new features.

The problem will be that no one will quite understand all of the implications (or unintended consequences). IMHO it will be a bit like the ocean of structure products out there... kinda confusing.

Insurance companies (generally speaking) are masters of managing risk and putting a cost on risk. The issue is that they will not take on your risk unless you pay for it and for them to make a handsome profit. Plus you will be constrained within the contract.

I am not totally against annuities... I am considering buying a small one to ensure a base income level (cost will be less than 10% of the portfolio). I am on the fence about it. However, I have decided that I would be best setting back a (do not touch) reserve fund and make the purchase when interest rates are favorable and probably when I am older (say around 65).

[OAG]

The way I understand this thing is (and feel free to correct me if I have it wrong). I "give" the Annuity Company say $100,000 at age 68 - they give back $6,000 every year AND if the balance in the account exceeds the initial contribution 6% of that amount BUT (assuming the account does not earn a greater than 6% return) NEVER less than that initial 6% amount, in this case $6,000 per year. So, if this is the case, you have insured the downside and could profit from the upside (ignoring inflation). Dosen't sound too bad.

[Independent]

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Originally Posted by R Wood The way I understand this thing is (and feel free to correct me if I have it wrong). I "give" the Annuity Company say $100,000 at age 68 - they give back $6,000 every year AND if the balance in the account exceeds the initial contribution 6% of that amount BUT (assuming the account does not earn a greater than 6% return) NEVER less than that initial 6% amount, in this case $6,000 per year. So, if this is the case, you have insured the downside and could profit from the upside (ignoring inflation). Dosen't sound too bad.

As FinanceDude says, these things have been around for a number of years. The details have been changing. I've heard that some companies are trying to add this feature to regular mutual funds, which could dramatically increase sales.

I think it's useful to think of this thing as a traditional mutual fund with a side guarantee.

Today, you can put $100,000 into any mutual fund and have the fund send you a monthly check for $500 (which amounts to $6,000 per year or 6%).

At the end of the first year you look at your fund balance. If it is below $100,000, you continue the $500 per month (no inflation increase). But if it's above $100,000, you tell them to increase the monthly check. Say the balance is $110,000, then you change your check amount to $550.

You continue this "ratchet" pattern as long as your money holds out.
It's nearly certain that if you do this long enough you will eventually hit a bad string of years and your account will go into a downward spiral. However, if you start at 68, odds are you will die before you hit that bad string.

All of the above is possible on any mutual fund today. The new feature would be that the fund sells you insurance which pays off only if your fund balance hits zero before you die. If that happens, the insurance continues your monthly payments, without any more adjustments, as long as you live. My guess is that insurance regulators say that this extra feature really is "insurance", and they get to regulate it.

So, if you want to buy this guarantee today you have to buy the whole package from an insurance company. I think they sell it as a rider on a variable annuity. At least that's what I think the article is talking about.

Of course the advantage over a traditional pay-out annuity is that you can cancel the deal any time you want and walk away with your fund balance. I'd assume the disadvantage is that the monthly payments aren't as big, but I can't say for sure. That comparison is kind of complex because of the ratcheting nature of the monthly checks with this approach.

[OAG]

Thanks that was my impression and I was, in no way, going to buy one of these things. Just curious what others thought. Basically, this is what I have done with PENFED CD's (at least for the next 6 years or so I will have 6-6.25% withdrawals) with no loss of principal.

[haha]

I think we should be prepared to look closely and with an open but careful mindset at any of these innovations. Actuaries are smart but not perfect; risks do get mispriced in the early going. Look how cheap LTC insurance started out.

We have a tendency to say "Bah, humbug!" Usually but not always a good stance.

Ha