Annuities and Social Security

[Marketneutral]

The increase in life expectancy may not be all that much.  Over the last however many years, life expectancy from birth has increased greatly because of reduced infant mortality.  On the other hand, the life expectancy of a 65 YO has increased, but not nearly as much.  Probably not 12 years! 

People who actually work at work, for example bricklayers, cannot normally work until age 72. So raising the retirement age that much is probably not going to happen.

More generally, the projections that show SS "in crisis" assume a (real) productivity growth rate of 1.2% for the US economy.  This is significantly less than the actual productivity growth rate of the US economy over the last 100 years, which period of course included boom times and also the great depression.  Even at 1.2%, however, SS is solvent until about 2040-2050.  If you use the actual hundred-year historical growth rate of 2.0% in making projections, SS is solvent for many, many, many years into the future without any changes at all.  Moreover, there is no reason to assume that real productivity growth will decrease -- it may just as well increase, based on technological and business-process improvements.

The problem that people need to think about is the cost of medical care.  This is showing evidence of being a real concern TODAY, as opposed to a theoretical problem that might happen in 2042.  There is no way that Medicare can be sustained as it now operates.  Unless we have some thoughtful progress in containing the cost of medical care, we are in real trouble as retirees and would-be retirees.

Bottom line -- If SS fails, it will fail for ideological reasons, not financial reasons.  OTOH, Medicare will almost certainly fail unless something is done fairly soon.

I was speaking about the future.

Can you really say 30 years from now the social security retirement age will not be 12 years higher then now?

My point is if you based your retirement calculations on now - when the actual time comes you may be caught with your pants down.

An extra $50 a month now towards retirement could means thousands that need to saved years from now.

Just for the discussion.  I am 31 and retired two years ago.  So the retirement age of 62 now seems very far off.  My guess is my social security age will be close to 70-75.

This figure is based on the rate of social security payments makes up against GDP and the ratio of workers to retirees now...................

Besides what the ratio to brick layers to paperpushers?

We are turning into a service based economy from a manufactoring (producing) economy.  With advances in health care the age for min retirement benefits will probably increase 6-12 months for every 3 years in the future.

 

[brewer12345]

True.  Wonder how the annuitity companies are doing with the current yield curve?

Having 100% of your nuts in one hole makes me nervous.   

With that said, who says an annuity company can not go bankrupt?

Plan for the worse, hope for the best.   

OK, time for a little remedial education.  First, let's contrast a pension and an annuity.  A pension is a claim on a pension fund.  Most pensions sponsored by corporate employers have assets (stocks, bonds, etc.) and liabilities (what they have to pay out in the future).  The feddle gummint requires some minimum levels of pension funding (assets to liabilities), but in actual fact, corporate pensions are allowed to run with assets to liabilities at 50% or less for years.  In contrast, annuities are sold by life insurers.  Like pension funds, insurers have assets and liabilities.  Unlike pension funds, assets must be considerably above liabilities (106 to 110% is typical), and insurers have far less discretion than corporate pensions over how they compute the liability.  Insurers also usually have portfolios mostly of high grade bonds, versus lots of equities, RE, hedge funds and other volatile stuff in pension portfolios.  So while pensions are commonly underfunded, insurers are not allowed to be, and regulators will step in long before they even get to 100% funding.

Second: Can annuity insurers go BK?  They sure can.  But what happens inthat case is that the regulator takes over and any debt holders usually get stiffed.  Policyholders get whatever there is, and any shortfalls (rare) are backed up by state guaranty funds.  Policyholders usually get 100 cents on the dollar plus accrued.  In contrast, when a corporate pension sponsor defaults on an underfunded pension, the retirees get the PBGC-capped payout.  This can be a 50% or greater loss in many cases.  Big difference between 50+% loss and zero loss.

Would it be smart to put every last penny in a single insurer's products?  Obviously not, but the level of risk one runs is a LOT smaller than that of a pensioner.

 

[Marketneutral]

OK, time for a little remedial education.  First, let's contrast a pension and an annuity.  A pension is a claim on a pension fund.  Most pensions sponsored by corporate employers have assets (stocks, bonds, etc.) and liabilities (what they have to pay out in the future).  The feddle gummint requires some minimum levels of pension funding (assets to liabilities), but in actual fact, corporate pensions are allowed to run with assets to liabilities at 50% or less for years.  In contrast, annuities are sold by life insurers.  Like pension funds, insurers have assets and liabilities.  Unlike pension funds, assets must be considerably above liabilities (106 to 110% is typical), and insurers have far less discretion than corporate pensions over how they compute the liability.  Insurers also usually have portfolios mostly of high grade bonds, versus lots of equities, RE, hedge funds and other volatile stuff in pension portfolios.  So while pensions are commonly underfunded, insurers are not allowed to be, and regulators will step in long before they even get to 100% funding.

Second: Can annuity insurers go BK?  They sure can.  But what happens inthat case is that the regulator takes over and any debt holders usually get stiffed.  Policyholders get whatever there is, and any shortfalls (rare) are backed up by state guaranty funds.  Policyholders usually get 100 cents on the dollar plus accrued.  In contrast, when a corporate pension sponsor defaults on an underfunded pension, the retirees get the PBGC-capped payout.  This can be a 50% or greater loss in many cases.  Big difference between 50+% loss and zero loss.

Would it be smart to put every last penny in a single insurer's products?  Obviously not, but the level of risk one runs is a LOT smaller than that of a pensioner.

Boy that is a riot.

The guy that started this threat is complaining his contract for life has changed and now you want me to believe this "contract for life" is safe.

Sorry - I am not a Kool Aide Drinker.  When someone tries to pull me to their busom and tell me all is right and sign here....I puker up.  

 

[Marketneutral]

Hi, MN -- The only reason I responded to your comments was that I see so much bad information here of an emotional nature from geezers like me regarding SS that I wanted to put my two cents worth on the record.  A lot of people read this forum, even though they don't post.

I had no idea you were so young.  Most of the people who frequent this forum are, I think, a lot older.  Someone who retires at 29 needs to have a different kind of retirement plan than someone who retires at, say, 55 or older.  The 29 YO needs, in some sense, to finance two retirements back-to-back.  

Best wishes!

Plan for the worse, hope for the best - works for any age.

Maybe a fresh perspective other then all will be all right and just base my retirement plan in the future on NOW figures, is needed here.

But what do I know?

 

[brewer12345]

Boy that is a riot.

The guy that started this threat is complaining his contract for life has changed and now you want me to believe this "contract for life" is safe.

Sorry - I am not a Kool Aide Drinker.  When someone tries to pull me to their busom and tell me all is right and sign here....I puker up.  

I'm not trying to sell you anything, MN, just give you the facts. FWIW, I don't think a payout annuity is that great an idea for most FIREd folks. However, buying one exposes you to a lot less credit risk than an underfunded pension.

 

[Marketneutral]

I'm not trying to sell you anything, MN, just give you the facts.  FWIW, I don't think a payout annuity is that great an idea for most FIREd folks.  However, buying one exposes you to a lot less credit risk than an underfunded pension.

Facts I give you facts:

The Next Retirement Time Bomb

http://www.nytimes.com/2005/12/11/b...l=1&adxnnlx=1134655485-AFQVRKUCIp9wbyv2WS9Uyw

Bottom line: Nothing is safe. If you base your retirement plans on it is iron clad - then Gold help you when it explodes and you are working the counter at McDonald's at age 73.

 

[brewer12345]

OK MN, then let us now when you decide its OK to come out from your hiding place under your bed.

 

[Marketneutral]

I will as soon as I see people stop putting 100% of their retirement assets into one investment.

Because an annunity is just another investment - covered by a wrapper that generates people like you huge fees.

 

[brewer12345]

I will as soon as I see people stop putting 100% of their retirement assets into one investment.

Because an annunity is just another investment - covered by a wrapper that generates people like you huge fees.

You haven't been around here for very long, so I will be nice (this time). I am not now and never have been in the business of selling any investment product. I have experience analyzing insurance products and companies and I am more than happy to share the benefits of my experience (for free). I have never and will never get a fee for selling anyone an insurance product.

 

[Martha]

I will as soon as I see people stop putting 100% of their retirement assets into one investment.

I don't know anyone here who is doing this. We aren't all a bunch of idiots.

 

[Marketneutral]

You can also just cut to the chase by buying from a single company that is never going to have problems (barring some of Greg's deranged fantasies coming true combined with a meteor strike).  Ask me about specific companies hwen the time comes - I used to evaluate the creditworthiness of life insurers for a living.

 

[Mr._johngalt]

I gotta say it "buying from a single company that's never going to have problems"? Impossible to predict. Even I couldn't do it.

JG

 

[brewer12345]

MN, give it a rest.  Don't quote me out of context and I won't point out that you appear to be both rude and wet behind the ears.

 

[wildcat]

MN -

We like and appreciate Brew's advice.  He has never crosses any boundaries and is very well respected.  It would be great if you could chill out a bit and ease into the posting process instead of trying to ruffle feathers.

 

[brewer12345]

I gotta say it "buying from a single company that's never going to have problems"?  Impossible to predict.  Even I couldn't do it. 

JG

JG, my comment was in the context of grumpy's annuity, which appears to be a very small part of his net worth.

Its not hard to pick a company that won't fail unless the entire financial system or our society goes kablooie.  If that happens, you will be a lot more worried about eating and staying alive than your monthly annuity check.

 

[Marketneutral]

MN, give it a rest.  Don't quote me out of context and I won't point out that you appear to be both rude and wet behind the ears.

Those are your words.  That is in context.  "Just cut to the chase and buy from a single company."  

Telling Greg he was having daranged fantasies was rude.  Telling Greg he was waiting for a meteor strike was rude.    

 

[Mr._johngalt]

JG, my comment was in the context of grumpy's annuity, which appears to be a very small part of his net worth.

Its not hard to pick a company that won't fail unless the entire financial system or our society goes kablooie.  If that happens, you will be a lot more worried about eating and staying alive than your monthly annuity check.

Okay. I agree with this.

JG

 

[brewer12345]

MN -

We like and appreciate Brew's advice.  He has never crosses any boundaries and is very well respected.  It would be great if you could chill out a bit and ease into the posting process instead of trying to ruffle feathers.

Actually, I did get pissed off at Azanon and unload on him, so I'm not sure you could say I have never crossed boundaries (not that I regret telling that little pisher off).

I'm going to be magnanimous and let this one go with MN.  I think Greg knows that I am a fellow traveler WRT the scary outlook for the market and economy and that I respect him.  I just disagree on the use of gold as some sort of universal constant.  Having said that, restricting Au (or anything) to 10% of your portfolio is unlikely to ever cause any serious harm.

 

[Danny]

Telling Greg he was having daranged fantasies was rude. Telling Greg he was waiting for a meteor strike was rude.

Well actually Greg and I are waiting and a hoping for a meteor or an asteroid to come our way, so we can test out our new Starship Enterprise!

Humans live in a vast solar system where 2,000 feet seems a razor-thin distance.

Yet it's just wide enough to trigger concerns that an asteroid due to buzz Earth on April 13, 2029 may shift its orbit enough to return and strike the planet seven years later.

Scene: Starship USS Enterprise on mission to alter asteroid's course

Kirk: Captain's log, stardate 2029 - 0 - 4 - point - 12.
Our mission, to intercept Asteroid "99942 Apophis", nudge it off-course to avoid a disasterous impact on earth...

Chekov: "I think we're in a lot of trouble."
Kirk: "That's a great help Mr. Chekov. Bones?"
Bones: "Well I think Mr Chekov is right, we are in a lot of trouble."
Kirk: "Spock? And if you say we're in a lot of trouble..."
Spock: "We are captain. We're in a heap of a lot of trouble"

Scotty: Captain! What do we do?

Kirk: Sulu, forward phasers?
Sulu: "Forward phasers locked and ready to fire sir."

Spock: "Without facts, the decision cannot be made logically. You must rely on your human intuition."

Kirk: Scotty, full power.
Scotty: Aye Captain.
Kirk: "Scotty. As good as your word."
Scotty: "Ay sir. The more they overtake the plumbing, the easier it is to stop up the drain."
Spock: "Fascinating!"
Bones: "Are you out of your Vulcan mind, do you know what Scotty's talking about?"

Kirk: Scotty, your background with the Glascow Rangers soccer club makes you ideal for solving this problem, I've decided that using phasers may jeopardize the ship. I want to beam you on to the asteroid and have you nudge it some, like say about half a mile or so....
Scotty: Aye, Sir. A bit like soccer hey captain? Except I'll be kicking an asteroid....

Computer: "Level please."
Scotty: "Tranporter room."
Computer: "Thankyou."
Scotty: "Up your shaft!"

After the commercial:

Scotty: It didn't work! What do we do now?
sub-sergeant Tien: I've got an idea. Let's stick Spock's head out the window, and he can do a mind-meld with the asteriod as we go by and then pull it off course.
Bones: Great idea Tien. It's . . . it's . . . like a tractor beam.
Kirk: Make it so! (oops, wrong show)
Sub-sub corporal Greg: He needs a hat or it won't work.

 

[Texas Proud]

MN,

One of the problems is you keep saying 'plan for the worse and hope for the best'....

I doubt if you have planned for the worse.... nobody really does.. and you being as young as you are you can not possiibly know what inflation will be in 30 to 40 years.... a 1/2% difference can make a huge difference down the road...

What would happen to your retirement if the stock market dropped 40% next year and never recovered... and inflation shot up to 15%?  Can you live another 60 years on what you would have left?

What would happen if for some reason we had hyper-inflation?  It has happened to third world countries... so that is the worse...  way back when in Argentina people were paid twice a day because they needed to go buy things before the price went up later that day?  

 

[Marketneutral]

MN,

One of the problems is you keep saying 'plan for the worse and hope for the best'....

I doubt if you have planned for the worse.... nobody really does.. and you being as young as you are you can not possiibly know what inflation will be in 30 to 40 years.... a 1/2% difference can make a huge difference down the road...

What would happen to your retirement if the stock market dropped 40% next year and never recovered... and inflation shot up to 15%?  Can you live another 60 years on what you would have left?

What would happen if for some reason we had hyper-inflation?  It has happened to third world countries... so that is the worse...  way back when in Argentina people were paid twice a day because they needed to go buy things before the price went up later that day?  

I am positioned to profit from all these scenarios.

I am better at playing the short side of the market.

Some countries that have experienced hyperinflation were running debts less to their GDP then we are.

As long as we invade countries that want to stop taking USDs for their oil we will be ok.

 

[sgeeeee]

If the COLA index is going to undercut the true inflation rate by 2-5% a year by the time you retire your SS will not matter.  . . .

Where do you get figures like that?

Planning for the downside makes sense. There have been a lot of folks with political motives trying to convince people that ss is going to go away and that CPI grossly underestimates inflation. The facts tell a slightly different story. SS is likely to get wittled down -- maybe as much as 25%. Some estimates indicate it won't be that bad. If, sooner or later, legislators modify the ss tax/benefit equations, the required reductions in ss would be even less. We've talked about CPI and inflation on this board several times. There are a lot of posters that seem to think that CPI is a vast government conspiracy to cover up the true inflation rate. You won't have any trouble finding journalists and think-tankers that will support this idea. But the US BLS is incredibly transparent and open about CPI. Go to their web site and you can find months worth of reading material in the form of their studies, surveys, methods, data, etc. There are plenty of reasons why any particular individual's personal inflation rate will be different than CPI. You can find articles on the BLS site that talk about these reasons. I'm convinced that the CPI methods are very sophisticated and well-motivated.

So, plan for the downside. But planning for worse than that will simply cause you to have to work longer or deprive yourself of things you could really be enjoying while you're younger.

 

[Marketneutral]

Where do you get figures like that?   

Planning for the downside makes sense.  There have been a lot of folks with political motives trying to convince people that ss is going to go away and that CPI grossly underestimates inflation.  The facts tell a slightly different story.  SS is likely to get wittled down -- maybe as much as 25%.  Some estimates indicate it won't be that bad.  If, sooner or later, legislators modify the ss tax/benefit equations, the required reductions in ss would be even less.  We've talked about CPI and inflation on this board several times.  There are a lot of posters that seem to think that CPI is a vast government conspiracy to cover up the true inflation rate.  You won't have any trouble finding journalists and think-tankers that will support this idea.  But the US BLS is incredibly transparent and open about CPI.  Go to their web site and you can find months worth of reading material in the form of their studies, surveys, methods, data, etc.  There are plenty of reasons why any particular individual's personal inflation rate will be different than CPI.  You can find articles on the BLS site that talk about these reasons.  I'm convinced that the CPI methods are very sophisticated and well-motivated. 

So, plan for the downside.  But planning for worse than that will simply cause you to have to work longer or deprive yourself of things you could really be enjoying while you're younger.   

COLA increase 4.1%
Government I Bonds 6.73%

We know that the govt massages the economic data so they can pay less interest.

I believe inflation is double digits now but food, energy and housing do not count. And when housing counts it is based on being a renter. No property tax and less insurance.

 

[brewer12345]

COLA increase 4.1%
Government I Bonds 6.73%

We know that the govt massages the economic data so they can pay less interest.

I believe inflation is double digits now but food, energy and housing do not count.  And when housing counts it is based on being a renter.  No property tax and less insurance.

Couple of probmlems with that comparison. A) i-bonds include an additional 1% yield over inflation, B) I suspect you are quoting an annual CPI number vs. a 6month I-bond annualized yield.

 

[Marketneutral]

Couple of probmlems with that comparison.  A) i-bonds include an additional 1% yield over inflation, B) I suspect you are quoting an annual CPI number vs. a 6month I-bond annualized yield.

Good point about the other 1%.

I still believe 4.1% is way low as a COLA increase.

Interesting reading here:
http://www.bls.gov/cpi/cpifact5.htm

Talk about brain freeze material.

God bless Hedonic and Seasonility Adjusted Accounting Practices! Great interest saver.

I just want to shop where these BLS guys do.