WSJ article - Variable Annuities were a good investment

[ziggy29]

Quote:

Originally Posted by pensionrecovery In an EIA, the owner takes no risk.

Had they existed in the 1970s and early 1980s, most EIAs would have done little more than return the initial investment even as inflation was 6%, 8%, 10% or more for many years. It wasn't much different than cash under a mattress. In REAL dollars, someone who put money into an EIA for 10 years starting in about 1972 would have been slaughtered.

Yes, my choice of period is admittedly biased to make a point, but my point is that these are NOT riskless. Even today if we have a long-term stagflationary scenario, in terms of REAL return EIA holders are probably going to get creamed.

There is more to "risk" than just loss of nominal principal.

[kaneohe]

Quote:

Originally Posted by pensionrecovery Variable Annuties are not cousins to EIA'a. They are no way like an EIA. In a VA, the owner takes all the risk. In an EIA, the owner takes no risk. Plus, you can still make excellent returns with no risk in an EIA. The KEY in this and in anything pertaining to investing is simple: Don't lose money in down years. john

Here's a quote from the referenced article:
Variable annuities still have some notable drawbacks. Among the biggest: There is no lump-sum option for cashing out the guaranteed amount. Instead, the higher guaranteed amount is payable by the insurer over time, with 5%-a-year payouts common for those in their 60s when they start receiving checks. If you cash out all at once, you get only the shrunken sum that remains in your funds.
************************************************** ************
My interpretation of this is that if you want a lump sum, the guaranteed
return is non-existent and the owner takes all the risk. However if the
VA is annuitized, then the guarantees come into play and the owner is
no longer at risk. Is this a correct interpretation? Do EIAs have the
no loss, only gain if a lump sum withdrawal is requested before annuitizing?

[audreyh1]

Yeah, I'm really confused about VAs too.

In 1999 when I retired, I remember the Fidelity person suggesting we look at one of the new Fidelity VAs which had much lower expenses than the typical VAs. He recommended it so our portfolio could appreciate tax-free. It didn't make sense to me for many reasons, not the least of which was how young we were at the time.

But I do NOT remember any kind of guarantee or guaranteed income.

And then a couple of years later, 2001, 2002, I remember a lot of crying and horror stories on various investment sites about how people had just been killed in these VAs and were pretty much stuck. I was glad I had avoided VAs.

So, how did I miss any kind of guarantees? Seem like the folks in 2001, 2002 would be crowing, not crying.

Audrey

[kaneohe]

Perhaps the guarantees evolved because of the horror stories in 2001, 2002. I was hoping to find a time history to confirm that but could not. Here's something about the
mind-numbing array of guarantees The Cost Of Variable Annuity Guarantees

DW has a VG VA acquired before 2000. It had just a principal guarantee.....that you
wouldn't have less than the amount invested regardless of market performance.
In 2002, they offered a supplemental guarantee at a price. The guarantee would ratchet upward w/ market performance. Just last night I was wondering why,
if we were paying for that guarantee, the value was 50% of last yr. Memory does degrade........I'm sure I read it but don't remember understanding that.........
the guarantee is a death guarantee only if owner dies but not if you try to withdraw funds while living. Interest tho the timing of the 2002 VG offering so I'm guessing these guarantees evolved after the tech bubble in 2000-1.

[pensionrecovery]

Great post Ziggy. I am glad you picked that time frame. If you started one in 1972 you may have gotten creamed for ten years in terms of not keeping up with inflation. But at the end of ten years, at least you had a small profit and all your principal.
That is better than you would have done in most other alternatives. Actualy, the
place to be in that time frame was in GOLD.

Now that brings me to what I really want to say. You will not find a better strategy
in my opinion for today than this: Take 75% of your investable funds and buy my
favorite EIA witht the right strategy (not all EIA's are equal) and take the other25%
of your investable funds and buy my favorite gold stocks ( about 15 of them ).

I say this because I have done some back testing on just this strategy over several
periods of time, and the performance is breathtaking. Bear in mind, this is extremely
conservative: 75% of your money is well protected no matter what happens and the
principal within is guaranteed. This gives you peace, security, and great growth, more than enough to keep up with inflation.

[ziggy29]

Quote:

Originally Posted by pensionrecovery Great post Ziggy. I am glad you picked that time frame. If you started one in 1972 you may have gotten creamed for ten years in terms of not keeping up with inflation.

You claimed it was without risk. If it fails utterly to keep up with inflation, then, how is it risk-free?

Seems to me that the possibility of losing real purchasing power IS a very real form of risk -- risk isn't only the volatility of nominal value. Long-term cash under the mattress has a lot of inflation risk, too.

[REWahoo]

Pensionrecovery, perhaps you missed my question when I posted it earlier. Are you selling many EIA's these days?

[pensionrecovery]

REWahoo, no I did not miss your question but I wanted to answewr it correctly. It is not fair to give you an answer based on one or two individuals. I mean I have one agent who has written zero and another who wrote $1,000,000 in the first three months. What is relevant is what are your major companies doing with ALL their agents as a group?

I checked with my top two companies and they both have written a ton of business this year. Between the two of them, they have over 2.9 billion dollars in paid premium this year. They both are up 17% over the same period last year. Are a lot of EIA's being sold today? Without a doubt.

But the real boom is ahead of us. I think the next nine months will be an all time record for fixed, indexed annuity sales. Like I said in an earlier post, my number one
strategy is to place 75% of funds in my favorite EIA and the remaining 25% of the funds in a collection of gold stocks.

[deserat]

Sort of on topic:

I've noticed that the WSJ articles on personal finance have not been very good lately (except the one on the Rot conversion) - very generic and at times bad advice - anyone else notice this?

[Independent]

Quote:

Originally Posted by pensionrecovery REWahoo, no I did not miss your question but I wanted to answewr it correctly. It is not fair to give you an answer based on one or two individuals. I mean I have one agent who has written zero and another who wrote $1,000,000 in the first three months. What is relevant is what are your major companies doing with ALL their agents as a group? I checked with my top two companies and they both have written a ton of business this year. Between the two of them, they have over 2.9 billion dollars in paid premium this year. They both are up 17% over the same period last year. Are a lot of EIA's being sold today? Without a doubt. But the real boom is ahead of us. I think the next nine months will be an all time record for fixed, indexed annuity sales. Like I said in an earlier post, my number one strategy is to place 75% of funds in my favorite EIA and the remaining 25% of the funds in a collection of gold stocks.

Maybe you'd like to post the details of your favorite EIA and your backtesting here. The typical belief on this board is that the loads on deferred annuities usually outrun any benefits. That's how I lean, too, but I like to think I have an open mind.

[brewer12345]

Quote:

Originally Posted by Independent Maybe you'd like to post the details of your favorite EIA and your backtesting here. The typical belief on this board is that the loads on deferred annuities usually outrun any benefits. That's how I lean, too, but I like to think I have an open mind.

Don't hold your breath.

These products are overly complicated, absurdly expensive, have huge commissions for the salescritters and have surrender penalty periods of up to 10 years. On top of that, the same strategy can be duplicated by a retail investor with 15 minutes of effort (tops). Stay away from EIAs.

[Rich_by_the_Bay]

How are dividend earnings credited in an EIA?

[FUEGO]

Quote:

Originally Posted by Rich_in_Tampa How are dividend earnings credited in an EIA?

Sometimes they aren't. One product I saw at the local credit union gave you the quarterly return of the SP 500 before dividends in any amount from 0% to 3%. In other words, you could get 0% in any quarter up to 3%. Throughout the year, if there were two big up quarters and two down quarters, you get 6%.

[kaneohe]

I thought the referenced link by OP was actually quite favorable to VAs (and by similarity,
also to EIAs). Here is another article by the same WSJ writer that balances that later article: Guaranteed Variable Annuities Aren’t as Safe as You Think - WSJ.com
The writer is still writing about VAs but
I think the same ideas would pertain to EIAs.......the guys who wrote the thick document that describes the product are probably lawyers who know much better than you how to weave document into words that you may think you understand but probably don't (at least not all of it). The one time I attempted to read such a document, I quit after I found some words to the effect that the company could change the terms at any time (after I bought it??). Too much for my simple mind.

[pensionrecovery]

Quote:

Originally Posted by Independent Maybe you'd like to post the details of your favorite EIA and your backtesting here. The typical belief on this board is that the loads on deferred annuities usually outrun any benefits. That's how I lean, too, but I like to think I have an open mind.

Independent, that is a great idea. I will be happy to give you the details of my favorite EIA so you can understand how it works and what it has done. Your approach is refreshing. Too many people make opinionated statements with nothing to back it up and many take them as facts.
The post Brewer made is a good example.

I'm off to church now but I will get back later and give it a shot. I will do my best to lay out the facts and what it has done. Whether or not it is
for you or not, that is up to you. But at least you will know what it is and
be able to correctly ascertain if this particular EIA makes sense or not.

Everyone should have an open mind. But I understand that is not easy to do. Our bias and prejudices get in the way very easily and far too many financial decisions are made emotionally rather than logically.

[ERD50]

Quote:

Originally Posted by pensionrecovery Everyone should have an open mind. But I understand that is not easy to do. Our bias and prejudices get in the way very easily and far too many financial decisions are made emotionally rather than logically.

Or sometimes it is just based on on experience/knowledge.

Every person who has tried to convince me that they have a perpetual motion machine has told me to keep an open mind. There is a limit.

So, fire away, but keep an open mind by not assuming we have closed minds. For me, that is RED FLAG #1. The "off to church" comment I'll count as just outside the box. Three strikes and you're out (for me)

-ERD50

[brewer12345]

Quote:

Originally Posted by pensionrecovery Independent, that is a great idea. I will be happy to give you the details of my favorite EIA so you can understand how it works and what it has done. Your approach is refreshing. Too many people make opinionated statements with nothing to back it up and many take them as facts. The post Brewer made is a good example.

Uhuh. Well, show us some facts or policy details please. I am pretty sure that your favorite EIA is the one that pays you the fattest commissions, but go ahead and lay it out.

As for my post, within the past year or so I expained how these products worked and how anyone with a brokerage account could easily replicate them and save themselves a lot of money. Any insurer who is giving a better deal than any of us could pull off by ourselves is probably a solvency risk.

[pensionrecovery]

An EIA (equity index annuity) is NOT a security. It is an insurance product and is
better called a fixed, indexed annuity. Like all fixed annuities, it earns an interest rate
every year. In case of index annuities, the interest rate is determined by the performance of an index, usually an equity index.

The interest rate is determined by how the Index does for a particular 12 month period. However, unlike a Variable Annuity where you can lose money if the market declines, the worst you can do with a fixed, indexed annuity is earn zero for that year. Your balance remains the same as it was at the end of the previous year.

I went to Yahoo Finance and pulled up the last ten years for the S&P 500 Index showing monthly quotes and used June figures. The table below gives you the actual quotes of each year for June. It also shows the index change from year to year and how the index changes affect the interest rate on the annuity. I used a stragegy for the index annuity of annual point to point with a 7% cap for simplicity sake. There are other strategies that we will discuss later in another post.

It is important to understand what a fixed index annuity is and what it is desgined to do before I get into the details of what I am looking for in the best indexed annuity .
I will look at the details of my favorite plan in the next post. Meanwhile, be sure and
take a good look at the table below and understand it.
DATE S&P 500 INDEX EIA INTEREST ANNUITY BALANCE
CHANGE RATE
June 1999 1372.71 $100,000.00
June 2000 1454.60 5.97% 5.97% $105,965.57
June 2001 1224.38 -15.83% 0% $105,965.57
June 2002 989.82 -19.16% 0% $105,965.57
June 2003 974.50 -1.55% 0% $105,965.57
June 2004 1140.84 17.07% 7.00% $113,383.16
June 2005 1191.33 4.43% 4.43% $118,401.14
June 2006 1270.20 6.62% 6.62% $126,239.69
June 2007 1503.62 18.38% 7.0% $135,076.47
June 2008 1280.00 -14.87% 0% $135,076.47
June 2009 912.32 -28.73% 0% $135,076.47

[brewer12345]

I know exactly what an EIA is. Doesn't make it a good product and doesn't mean that there is some magic that the carriers underwriting this crap can access that individuals cannot. A simple package of bonds and call options easily replicates an EIA without a huge commission to a [mod edit] agent, a ridiculously long surrender penalty period, or the credit risk one takes to the often marginal insurers writing this stuff.

[REWahoo]

I recall one of many prior discussions on this subject: http://www.early-retirement.org/foru...eia-34656.html