Scott Burns Article........

[Dawg52]

Annuities make sense for some people. If a person attempting to fund retirement is not a financial planning wizard... an annuity for a top rated company is not a bad way to go. It is self purchased pension.

For example you might have a couple that is somewhat disciplined in sticking with a budget, but know little about stocks, bonds, etc... and do not know/will not learn... the use of an annuity could be their best approach to a secure retirement. They just need to purchase the right annuity with a Top Rated company (Triple A rate with 3 or more key rating agencies) that has a long, conservative, predictable track record. It is best if they groom the CEO and much of top management from inside the company after 25 to 30 years of proving themselves. There are a few insurance companies out there that have a strong balance sheet (i.e., net worth) and are conservative.

Annuities can be structure to leave money to beneficiaries in some form or fashion. Newer annuity products are coming out (and the features are changing rapidly) that allow the annuitant to restructure the annuity to get at some or all of the remaining principle. Of course this comes with a price tag.

Makes sense to me. Not sure I will ever buy one though. Heck, I'm doing fine right now living off of interest and dividends. When SS kicks in, my cash flow will be even better. But who knows how I will feel when I'm 65. An annuity would help put things on autopilot. But as you said, at a price.

 

[Art G]

Yep, this struck me as quite a "coincidence" too. Another good guy goes over to the dark side.

I didn't mind when he started working as a broker/advisor/whatever. For years he's been telling folks how to set up their investments, and that it isn't really that hard. Which is true. But, I think he finaly came to the same conclusion as William Bernstein-even though it's not hard, most people can't or won't set up their investments and do the things needed to get ahead financially. So, he has offered to do the work for people for a few percent. That seems fair, provided he's not selling products on commission. But now this pre-pitch for annuities . . not a good sign.

Interesting, Scott is charging a fee to put people into mutual funds and forget them, even though his whole point for years was that you didn't need a broker to do this very thing. Surprisingly, you feel it's now fair for him to charge for these services?
As to his change on annuities, I'd say it has more to do with the changing of annuities. Paying income for life is a fairly new benefit and one that even he recognizes the value of. JMO

 

[FinanceDude]

So, he has offered to do the work for people for a few percent. That seems fair, provided he's not selling products on commission.

Doing work for a "few percent"? FEES are comissions in another form..... Sorry folks, your "hero" is just an FA now...............

 

[cjking]

Insurance is transference of risk, plain and simple. Buying a life annuity means transferring the risk from you to someone with more money. there is of course a cost to that.

I slightly object to the assertion that there is a cost, on the grounds that though it may be true in practice, it isn't true in theory.

OK, it is true in theory as well, but not very.

The only necessary marginal cost of providing an annuity is the admin of collecting payments, making payments and tracking deaths, etc. If we imagine some mutual financial company set up on the web to do this, I can imagine the costs could be less than $100 a year to each annuitant. The really valuable thing an annuity gives you, extra income you would simple never have if you "self-insure", is obtained in exchange for you surrendering your unused capital in the event you die early. For most people, the utility of money that keeps them from being broke is higher than that of money they bequeath, therefore the surrender of potential bequests in exchange for potential income is actually an exchange we should be willing to pay a premium to participate in, but we can (in theory) participate for free. The capital we surrender is the price of a fair exchange which leaves all parties better off. The surrendered capital should not be thought of as part of the cost of (a theoretical fair) annuity.

For my favourite annuity (in Britain) the insurance company charges 1% up front and then 0.55% of assets per year. (Those are reduced charges based on buying the annuity without paying commision to an advisor.) Given that one actuarial table I found on the web shows death rates of 4.34% at 75 rising to 11.25% at 85, and these percentages are the extra income you should get from having your money inside an annuity, buying one seems a pretty good deal to me. This particular annuity allows me to keep my funds invested more or less as I would outside an annuity, using a very limited range of funds, including share, property, and corporate bond funds. Note that the quoted 0.55% is also the fund management charge, so given that similar funds would cost me circa 0.5% outside of an annuity it's arguable that the annuity only costs 0.05% per year.

The charges are detailed in this link. http://www.pruadviser.co.uk/content/acrobat/ANNM0131.PDF

I'll summarise that again. In exchange for an up-front cost of 1% and an ongoing cost of 0.05% per year, this annuity increases your returns above the "self-insured" level by 4.35% at 75 rising to 11.25% at 85 and twenty-something percent in your nineties.

The kind of modern annuity I'm talking about here may not be available in the USA - I really don't know. Note that in a modern annuity the insurance company doesn't take any risks or make any guarantees. Their function is purely administrative.

 

[FinanceDude]

I slightly object to the assertion that there is a cost, on the grounds that though it may be true in practice, it isn't true in theory.

OK, it is true in theory as well, but not very.

The only necessary marginal cost of providing an annuity is the admin of collecting payments, making payments and tracking deaths, etc. If we imagine some mutual financial company set up on the web to do this, I can imagine the costs could be less than $100 a year to each annuitant. The really valuable thing an annuity gives you, extra income you would simple never have if you "self-insure", is obtained in exchange for you surrendering your unused capital in the event you die early. For most people, the utility of money that keeps them from being broke is higher than that of money they bequeath, therefore the surrender of potential bequests in exchange for potential income is actually an exchange we should be willing to pay a premium to participate in, but we can (in theory) participate for free. The capital we surrender is the price of a fair exchange which leaves all parties better off. The surrendered capital should not be thought of as part of the cost of (a theoretical fair) annuity.

For my favourite annuity (in Britain) the insurance company charges 1% up front and then 0.55% of assets per year. (Those are reduced charges based on buying the annuity without paying commision to an advisor.) Given that one actuarial table I found on the web shows death rates of 4.34% at 75 rising to 11.25% at 85, and these percentages are the extra income you should get from having your money inside an annuity, buying one seems a pretty good deal to me. This particular annuity allows me to keep my funds invested more or less as I would outside an annuity, using a very limited range of funds, including share, property, and corporate bond funds. Note that the quoted 0.55% is also the fund management charge, so given that similar funds would cost me circa 0.5% outside of an annuity it's arguable that the annuity only costs 0.05% per year.

The charges are detailed in this link. http://www.pruadviser.co.uk/content/acrobat/ANNM0131.PDF

I'll summarise that again. In exchange for an up-front cost of 1% and an ongoing cost of 0.05% per year, this annuity increases your income above the "self-insured" level by 4.35% at 75 rising to 11.25% at 85 and twenty-something percent in your nineties.

The kind of modern annuity I'm talking about here may not be available in the USA - I really don't know. Note that in a modern annuity the insurance company doesn't take any risks or make any guarantees. Their function is purely administrative.

I think you are 100% wrong that there's no risk to an insurer who guarantees income streams.

 

[cjking]

I specified an annuity in which the insurer does not guarantee income streams.

Maybe I didn't make that clear enough?

I thought I'd implied this by explaining that the annuity mortality bonuses came by exchanging risk with other annuitants, however that's not clear enough. For the record, in this annuity the role of the insurance company in paying mortalily bonuses is purely administrative, they redistribute assets from deceased annuitants to other annuitants after death. If nobody dies, nobody gets a bonus.

I accept this is very different kind of annuity to the kind most Americans might consider in reality though.

By "modern annuity" I meant the particular, very unusual annuity I described, as opposed to the 99% of actual other annuity products available, which I label "traditional" annuities.

 

[Art G]

OK, here's a real life result.....
Vanguard ........YTD......................1 year
500 Index VFINXStock–12.05%–11.17%




Allianz Variable Annuity portfolio +6% 1 year guaranteed step up base for future income

Which would you rather own today?

 

[FinanceDude]

I specified an annuity in which the insurer does not guarantee income streams.

Maybe I didn't make that clear enough?

I thought I'd implied this by explaining that the annuity mortality bonuses came by exchanging risk with other annuitants, however that's not clear enough. For the record, in this annuity the role of the insurance company in paying mortalily bonuses is purely administrative, they redistribute assets from deceased annuitants to other annuitants after death. If nobody dies, nobody gets a bonus.

I accept this is very different kind of annuity to the kind most Americans might consider in reality though.

By "modern annuity" I meant the particular, very unusual annuity I described, as opposed to the 99% of actual other annuity products available, which I label "traditional" annuities.

The type of annuity you are describing was made illegal in the USA back ion the 20's. It led to the development of Social Security in the 30's.............

 

[FinanceDude]

OK, here's a real life result.....
Vanguard ........YTD......................1 year
500 Index VFINXStock–12.05%–11.17%




Allianz Variable Annuity portfolio +6% 1 year guaranteed step up base for future income

Which would you rather own today?

yeah, but my -12.05% is liquid.............

 

[cjking]

The type of annuity you are describing was made illegal in the USA back ion the 20's. It led to the development of Social Security in the 30's.............

That's very interesting, why was that? (Any links?)

In Britain, this type of annuity has only become available in the last few years, there are literally only a couple of products on the market, that I'm aware of. I'm assuming there will be more (including better and cheaper) products of this kind in future.

They're being invented as a more attractive and more transparent alternative to traditional annuities, which are as unpopular here as they seem to be in America, if comments on forums like these are representative of general opinion.

One difference between Britain and the USA is that in Britain people with tax-privileged pension savings are forced to use 75% of them to buy an annuity by age 75. This is bad for annuity-haters, but good for people like me, as it gives me the option to buy traditional annuities in a more competitive market where there's less profit for insurance companies and where the people with poor life expectancies haven't opted out of the risk pool. (Assuming their poor life expectancy wasn't known early enough to influence the amount of their pension savings.)

 

[Marquette]

OK, here's a real life result.....
Vanguard ........YTD......................1 year
500 Index VFINXStock–12.05%–11.17%




Allianz Variable Annuity portfolio +6% 1 year guaranteed step up base for future income

Which would you rather own today?

Of those two, the VFINX.

 

[Art G]

Of those two, the VFINX.

How about if you just send me the difference? Since you don't mind the losses. Do you realize what it takes to make up the difference between 6% to the positive vs. 11% to the negative? Add that to next years guaranteed growth rate of 6%.......well, perhaps you're not familiar with the purpose of investing.

 

[cute fuzzy bunny]

Of those two, the VFINX.

Hmmm...in this hypothetical situation am I actually in control of my faculties? I need to know these little tidbits before giving any sort of answer.

Clearly unless I was deathly ill or had been in some type of accident with severe head trauma, I'd never have bought a variable annuity.

 

[Marquette]

How about if you just send me the difference? Since you don't mind the losses. Do you realize what it takes to make up the difference between 6% to the positive vs. 11% to the negative? Add that to next years guaranteed growth rate of 6%.......well, perhaps you're not familiar with the purpose of investing.

How about if we agree to continue this discussion in two years?

 

[Abreutime]

OK, here's a real life result.....
Vanguard ........YTD......................1 year
500 Index VFINXStock–12.05%–11.17%




Allianz Variable Annuity portfolio +6% 1 year guaranteed step up base for future income

Which would you rather own today?

Of those two, the VFINX.

I agree.

How about if you just send me the difference? Since you don't mind the losses. Do you realize what it takes to make up the difference between 6% to the positive vs. 11% to the negative? Add that to next years guaranteed growth rate of 6%.......well, perhaps you're not familiar with the purpose of investing.

I'd love to have annuities in the down years and stocks in the up years, but that's not how these products work, is it?

 

[Art G]

How about if we agree to continue this discussion in two years?

It's a date! Hope neither of us dies though, because then the annuity comes out way ahead.

 

[cute fuzzy bunny]

Pssst...(no, not wellesley)...if you die the annuity stops paying and thats that. If Marquette dies, his heirs get the VFINX stepped up in basis to the day of his death.

Seems like the latter is somewhat better. Unless of course an insurance company is the best recipient of your wealth that you can think of.

 

[HFWR]

Ding! Ding! Ding!

 

[cute fuzzy bunny]

That'll be a check for 50c for royalties, please.

 

[Helena]

He discusses using part of your money to buy a life annuity
to help you not outlive your money........

How solvent are the annuity companies ?


~

 

[samclem]

Doing work for a "few percent"? FEES are comissions in another form..... Sorry folks, your "hero" is just an FA now...............

I was referring to commissions/fees/holdbacks/incentives or whatever other euphemistic term FA's now use to describe the kickbacks they receive from the mutual fund companies and other purveyors of financial products. These payments, which clearly encourage FA's to recommend products that are not in the best interests of clients, are much more egregious than a simple (and openly declared) fee of a fixed percentage of assets under management.

And, no, I don't have any problem with Burns charging people for the service he provides. I think it is very refreshing that he admits they could do it themselves, tells them how to do it, then lets them decide if they want to pay him to do it for them. It's more honest than "You could never in a million years do this for yourself. Pay me 2% and I'll go behind the magic curtain, turn on my proprietary asset transmogrifier, and hand you the wonderful finished package. Please don't look inside."

 

[clifp]

How about if you just send me the difference? Since you don't mind the losses. Do you realize what it takes to make up the difference between 6% to the positive vs. 11% to the negative? Add that to next years guaranteed growth rate of 6%.......well, perhaps you're not familiar with the purpose of investing.

Art which would your kids (or your favorite charity) want you to own?

Pretty sure that would be VFINX.

 

[Finance Dave]

What the article states is that because of the dying out of pensions, a life annuity is beneficial. Can we all agree on that?

Depends. I say you can create your own annuity. If we define annuity as "any mathematical scheme that insures income for longer than any reasonable measure of life expectancy", then I say I agree. (that's just a definition I made up ).

If I can put my money in an investment held to maturity and get 5%, I'm very close to what any annuity can pay, and I can withdraw 4% per year and maintain my revenue stream until I die. I don't see annuities as doing very much that we can't all create ourselves with a little upfront work.

 

[samclem]

How about if you just send me the difference? Since you don't mind the losses. Do you realize what it takes to make up the difference between 6% to the positive vs. 11% to the negative? Add that to next years guaranteed growth rate of 6%.......well, perhaps you're not familiar with the purpose of investing.

Those thoughtful insurance companies. How do they do it!!? They apparently pay out more to their clients than they take in, and still have enough money to buy skyscrapers to provide shade for those poor urban dwellers.

 

[samclem]

Surprisingly, you feel it's now fair for him to charge for these services?

Yep. And a lot more honest than the approach of many FA's.

A client goes to Mechanic A complaining because his dashboard lights don't work. Mechanic A says "First, check your fuses. If they are okay, it's probably the rheostat that controls the brightness of your lights--they burn out a lot on Chevys like yours. Get the Hanes manual and it will show you how to change it, it will take you about 30 minutes. If it's not that, it might be a wire, which will take you a long time to find. If you want me to just check the fuses, change the dimmer if needed, and see if it's something more involved, that will cost $30."

He then goes to mechanic B: "Well, electronics are really complicated on these new cars. The electronic waves inside the wires travel almost the SPEED OF LIGHT, and nothing goes faster than that! I know how to fix these dash lights--you would be smart not to mess with them yourself. Let me put my expertise to work to solve your problem. $30 please."

I like Mechanic A.

As to his change on annuities, I'd say it has more to do with the changing of annuities. Paying income for life is a fairly new benefit and one that even he recognizes the value of. JMO

Annuities that provide an income for life are a new thing? To who? What did they do in the past--kick you in the belly and take your lunch money?