Annuities and their role in our investing plan

[REWahoo]

Man, Rich. You've sure joined the board modulator clique that attacks me at the slightest provocation. Where's REWahoo to pile it on?

I'm right here.

I've been steering a wide path around you since your last little 'episode', and while it is tempting to provide you with the attention you are seeking, I think I'll pass.

 

[jdw_fire]

One of my options with the federal government's 401K (our "TSP") is to put all or part into a fixed lifetime annuity with MetLife. You don't get the money back, but you get fixed monthly payments for life. At 62, I would get $681/month on every $100,000. Another option is actually the same thing, but inflation adjusted to a limited extent. That one would pay me $494/month on every $100,000. (This is just for me as a single person with no ten year guaranty or other frills.)

Using the numbers you gave, if you don't buy the annuity, to get $494/mo from a $100,000 portfolio would be a WR of >5.9% which would be very risky for a 40 year retirement. So I think your thought of buying an annuity to "insure" your minimum retirement is worth consideration. I would suggest you check out other annuity companies to find the one that best fits your needs for security and payout. The problem with the TSP's inflation protection annuity is the inflation adjustments are capped at 3% which is low. (However from a security aspect I wonder if the US gov would feel any obligation to protect the company providing their retirees with annuities since they picked the company in the first place. They did do something to protect their employees and retirees when the largest health insurer in their pool pulled out some time ago.)

So far, 100% of the advice I have received elsewhere has been vehemently opposed, so I am still up in the air on this one. The main reasons I have been given are that you lose control of the money, and that interest rates are low compared with historical values so I would be getting less than I might have in other times.

I submit that these are not good reasons for you to not purchase the anniuty.

When buying an immediate annuity you are buying an income stream. In your case you would be buying it with money that you must use to produce said income stream anyway. The only control you have now with the money is how to invest it to produce said income stream. If for planning purposes you use a tool like FIRECalc to determine a SWR for your portfolio you will see that to get an equal income stream from a portfolio you will need to have ~$170K (or more) invested for every $100K of annuity purchased. Therefore if you buy a $100K annuity you freed up $70K that you now have greater control over since it does not have to produce you any income for you to keep your income level the same. If you leave it in your portfolio and you don't increase your WD amount, you have made your portfolio safer since you lowered your WR. Or you could keep the same WR thus increasing your WD amount. Lots of flexibility.

As to the interest rate I submit that when you retire you should be more concerned with a SWR. Don't get me wrong I am not saying that rate of return are not important when you retire. On the contrary, getting a good rate of return on your portfolio will be your job in retirement. However the point of getting a good rate of return on your portfolio is just a means to an end, the end being providing a safe cash flow for you to live on, thus your primary concern is to continue to maintain a SWR and as I show in the previous paragraph an annuity can help to do this.

 

[sgeeeee]

nm

 

[unclemick]

sqeeeee

Don't weaken and give them a Curmudgeon Certificate like mine.

heh heh heh heh heh heh heh ehh - Validictorian Whoopee!

 

[wabmester]

I always enjoy a passionate debate about annuities.

 

[Rich_by_the_Bay]

Man, Rich. You've sure joined the board modulator clique that attacks me at the slightest provocation. Where's REWahoo to pile it on? Read my post above, modulators. I miss-spoke in the previous post (complete with smileys by the way) but it really doesn't change my argument. Parsing "sense" makes no sense.

Sgee, you labeled every else as a piece of s###, then went ahead and misread the very thing you were so judgmental about for everyone else. My comments reflect how out of place I thought that was in an otherwise civil discussion.

Do you think that maybe, just maybe, in some small way, it might be you (or more accurately your posts), rather than everyone piling on? Take a deep breath and reread your posts - the irony here was a bit too much to resist.

You can insult people around here as much as you want (though I admit I don't understand why and usually don't even notice), but don't get upset if they occasionally push back.

No hard feelings, but you did set yourself up. If you give it out...

P.S. I hereby certify that I did not receive any reimbursement or encouragement by any other moderator. The opinions expressed herein are strictly those of the poster. Don't try this at home.

 

[laurence]

Looks like I missed all the fun, sg deleted his posts.

My friend is looking into an annuity, he promised to bring in the literature today so I can take a look at it. I'll probably start a thread once I do to see if anyone has an opinion. no but really.

 

[wabmester]

I don't know much about annuities, but let's try to be constructive here and suggest a new wording for the poll.

How about:

How much of your investments would you allocate to a complex opaque investment product with hidden loads, hidden annual fees, and unknown issuer risk?

 

[Cb]

I don't know much about annuities, but let's try to be constructive here and suggest a new wording for the poll.

How about:

How much of your investments would you allocate to a complex opaque investment product with hidden loads, hidden annual fees, and unknown issuer risk?

It would pretty much depend on whether or not it made sense or not.

Cb

 

[cute fuzzy bunny]

There is more to a choice than numbers. I would never put all my money into an annuity product even if the numbers looked good because of the risk that something goes bad with the insurance company or something else bad happening that would make it a poor investment. A diversification issue. So the numbers can make sense but the investment still not make sense.

DING! DING! DING!

But any jackass can avoid looking for the value in something. After all, the wan negative view is so much more beneficial

Note that "the numbers" suggest that you put 100% of your money in small cap value stocks...or maybe based on recent returns, REITS. After all, the numbers say that'd be the highest returning option.

 

[cute fuzzy bunny]

Agree the risk is MARKET RISK (mutual fund), not SOLVENCY RISK (insurance comany)...........perhaps the main difference between a mutual and an insurance company.........different risks.............

DING! DING! DING!

A smart person recognizes and acknowledges the risks in each investment. Capital risk, loss risk, volatility risk, returns risk, lockout risk, death risk, inflation risk, etc.

While a mutual fund carrys possible loss of capital and volatility risks, insurance based products carry bankruptcy risk, lockout risk, death risk and inflation risk.

Its a nice idea to recognize the risks, balance your investments accordingly, and make sure you understand all of the investments ups and downs before making life decisions.

Or just multiply them by 25 and call anyone that suggests otherwise "prickley".

 

[W2R]

Using the numbers you gave, if you don't buy the annuity, to get $494/mo from a $100,000 portfolio would be a WR of >5.9% which would be very risky for a 40 year retirement. So I think your thought of buying an annuity to "insure" your minimum retirement is worth consideration. I would suggest you check out other annuity companies to find the one that best fits your needs for security and payout. The problem with the TSP's inflation protection annuity is the inflation adjustments are capped at 3% which is low. (However from a security aspect I wonder if the US gov would feel any obligation to protect the company providing their retirees with annuities since they picked the company in the first place. They did do something to protect their employees and retirees when the largest health insurer in their pool pulled out some time ago.)

I submit that these are not good reasons for you to not purchase the anniuty.

When buying an immediate annuity you are buying an income stream. In your case you would be buying it with money that you must use to produce said income stream anyway. The only control you have now with the money is how to invest it to produce said income stream. If for planning purposes you use a tool like FIRECalc to determine a SWR for your portfolio you will see that to get an equal income stream from a portfolio you will need to have ~$170K (or more) invested for every $100K of annuity purchased. Therefore if you buy a $100K annuity you freed up $70K that you now have greater control over since it does not have to produce you any income for you to keep your income level the same. If you leave it in your portfolio and you don't increase your WD amount, you have made your portfolio safer since you lowered your WR. Or you could keep the same WR thus increasing your WD amount. Lots of flexibility.

As to the interest rate I submit that when you retire you should be more concerned with a SWR. Don't get me wrong I am not saying that rate of return are not important when you retire. On the contrary, getting a good rate of return on your portfolio will be your job in retirement. However the point of getting a good rate of return on your portfolio is just a means to an end, the end being providing a safe cash flow for you to live on, thus your primary concern is to continue to maintain a SWR and as I show in the previous paragraph an annuity can help to do this.

Thank you!! This is most definitely food for thought. What you are saying makes sense to me, and I intend to read it several times more and think. It's a big decision to me, even if it's only around 25% of my TSP balance. It really helps to read what others think.

 

[cute fuzzy bunny]

Looks like enough votes for me to draw the following conclusions, agree or disagree.

- A vast majority of people who post and vote here would consider an annuity if the numbers made sense. This tells me that there is no standing board-wide bias against annuity products as part of a balanced early retirement portfolio strategy.

- About seven percent would never consider an annuity. Sleazy salespeople, complicated contracts, loss of principal on death, difficulty in determining credit risk of the insurer, and loss of access to the principal seems to be the most commented on concerns.

- About three percent would consider putting most or all of their money into an annuity. Perceived safety of a guaranteed income stream for life seems to be the most commented on benefit.

- In an exceptionally small sample size, 43% of the people who bought an annuity didnt like it and wouldnt do it again while 57% who bought one thought it was a good investment and would do it again.

So in short, it appears to be the consensus determination that most people would consider an annuity as a portfolio component, but not with most or all of their money, yet almost half of the people who have done so have regretted it.

Note the demographics of the board, largely well to do people with a decent knowledge of financial matters and at least the intention of becoming financially independent. Polling less financially savvy people might produce very different results...possibly a much higher acceptance rate of a higher percentage of funds and a higher satisfaction rate.

Which certainly raises many more interesting questions...anyone want to take a stab at them?

 

[sgeeeee]

Okay. The moderators feel like I was nasty. I feel attacked unfairly by the moderators. I did try to correct this mis-communication by PMing each of them, promising to remove my posts from this thread, and asking that they remove their posts attacking me also. I removed my posts. The response I have received from them was not completely warm and so far, none of them have removed their posts. One moderator suggested I deserved whatever I got after questioning the level of censorship they have applied in previous threads.

I would point out that I used lots of smiley's in the posts in this thread that the moderators found so offensive. I thought that was internet lingo for "this is a joke." I notice they don't always use the smileys when they post back. Two moderators have told me that they do not accept my smileys to mean "this is a joke, don't take offense". So, I will move on by trying to make my point from scratch and work to avoid further attempts at humor.

Well I voted for two, not three. Both options say "if the numbers make sense." There is more to a choice than numbers. I would never put all my money into an annuity product even if the numbers looked good because of the risk that something goes bad with the insurance company or something else bad happening that would make it a poor investment. A diversification issue. So the numbers can make sense but the investment still not make sense.

When I read CFBs poll choices, I thought he was trying to catch people on his little trick. By using the qualifier "if the numbers make sense", he was testing to see who had a hairball about annuities. Clearly very few people on this board would consider putting all of their money in an annuity. But by asking would you do it if it makes sense, he traps you into having to answer "yes" or admitting that you have a hairball. Apparently I was wrong about CFB's motives and also wrong about the readers taking my over the top language infused with smileys as a joke.

I compounded the problem by mistakenly misreading the poll choice and using the misquote in a posted comment to Martha's post above. My post was inaccuate and didn't even get to the real point I was trying to make. I was too eager to get in a cheap attorney joke. (There had to be at least 6 smileys in that post, guys. Get a sense of humor). Martha was not amused (at least she didn't use smileys in her response) and before I could complete a post acknowleding my mistake, two other moderators posted negative comments about me. I tried to make the best of the bad situation by implying that still another moderator might want to pile on and within an hour or so, he provided yet more abuse.

Here's the point I intended to make stated as dry and free of jokes as possible. If the value proposition makes sense, the numbers make sense. If the value proposition does not make sense, the numbers do not make sense. It is not valid and reasonable to say the numbers make sense but the risk is unacceptable. If the risk is too high, then the value proposition is not acceptable and the numbers don't make sense.

Consider these two cases:

1) If someone offers you $2M to cut off all your limbs, do the numbers make sense? For almost all of us the answer is clearly "no". The numbers can only make sense if all aspects of the value proposition are considered. Being given two million dollars seems like a good thing but that number makes no sense if it requires us to cut off all our limbs. Our limbs are worth more than $2M. We don't say, "the numbers make sense" but the limblessness does not.

2) If you could put all your investment money into an annuity that was guaranteed by the US government, paid back the entire investment amount in two months, and continued to pay at that same rate until you and your spouse were both dead -- would the numbers for option 3 make sense? I think most people would think those numbers (if they could believe them) would make sense. If the risk were too great or the payback rate too small, then the numbers would not make sense.

Now you can argue with the way I read the poll. You can say that my interpretation of "the numbers make sense" is not the same as yours. You can decide that my posts were nasty and the smileys are not sufficient to avoid the wrath of the moderators. . . but that was my only point. As I read the poll choice, "the numbers makes sense" gave away the answer. It's really no big deal. I am not too concerned with how others choose to invest their money or how this poll turns out. I am more concerned with the moderator attacks on me.

And thanks to those that emailed or posted in support.

 

[cute fuzzy bunny]

Apparently I was wrong about CFB's motives

That happens a lot. But to be fair I invite it sometimes.

As far as the rest, man am I glad I stopped reading about the middle of page 3, made a few comments and went from there. Now I have to make a bowl of popcorn and go re-read the whole thing.

The wording was quite particular and for a reason. I wanted to isolate the people who would never buy an annuity, the ones that would throw a considerable amount or all of it into one, and those who would consider one in an open minded manner as part of an asset allocation strategy.

Then I wanted to know what % of people who bought them liked the result and would repeat. The latter was really interesting and I'm disappointed we didnt get a decent sample size, but then again in a self-motivated financially savvy collective, the results are reasonable. Theres nothing like actual buyers acceptance/remorse to give you a good picture of what to expect.

A person or two thought I was doing it to dick them, as if they're that important and as if they have a hope in hell of out-jackassing me for a longer period of time and still feeling good about the whole process at the end.

Some people looked for the hidden meaning in the questions. Fair enough, there was meaning to them. Just not the ones postulated and far too much read into the wording.

I suppose I'm honored to be perceived as far more clever and devious than I actually am.

Sometimes a cigar is just a cigar.

 

[Mysto]

Is this a warm moment?

 

[cute fuzzy bunny]

Only if you peed yourself while reading this stuff.

SG deleted all his posts before I read them. Bummer. Sounds like he was in rare forms only previously seen when betting the farm was the topic of du jour...

 

[rs0460a]

Here's some more "fuel for the fire" ...

http://news.morningstar.com/article/article.asp?id=184786&pgid=rss&t1=1170205696

- Ron

 

[unclemick]

Soooo - if we get bored with 'mortgages' or 'Social Security' we pull out 'Annuities' and we have a skins and shirts game off and running.

heh heh heh heh heh heh - Took early SS and a small defined pension - could cover a 'hard times' budget at 14 yrs into ER. So - who's skins and who's shirts - I got to the bleachers late?

 

[REWahoo]

One moderator suggested I deserved whatever I got after questioning the level of censorship they have applied in previous threads.

Since you obviously feel it's OK to post information from PM's, I suppose we should allow those reading this thread from Hell to see the full text so they can decide for themselves how to interpret what was said.

I can't speak for the other mods, but your past very strong reaction to the issue of "censorship", your assertions that moderators have somehow changed your posts, and your habit of ending every post with multiple smiley faces have clouded my ability to perceive when you are joking.

My comment about steering a wide berth around you since your 'free speech' posts is sincere. And my animated smiley summed up my reaction to being called out when I was not involved in any way with your current issues.

SG, you say "we" are out to condemn and belittle you. Another point of view might be that you have a very sharp tongue (OK, maybe sharp keyboard is more accurate), and are reaping what you sowed.

My best advice is to simply chill out and try refuting some of those (real or perceived) personal attacks with non-biting humor or just ignoring the comment.

 

[Jarhead*]

Gals Skins, Guys Shirts. What else?

 

[sgeeeee]

Only if you peed yourself while reading this stuff.

SG deleted all his posts before I read them. Bummer. Sounds like he was in rare forms only previously seen when betting the farm was the topic of du jour...

Actually, I wish I had not deleted them. I deleted my posts in order to get everyone to delete the posts we each saw as offending. I figured it was a good gesture to unilaterally delete my own before requesting the same of others.

I truly had no evil or mischievous intent when I posted. My first post was over the top accusing everyone of being full of sh#t for not recognizing the "if the numbers make sense" gotcha in the poll. But I thought it was clear I had no axe to grind and was just tweaking the board a little. I think it was my second post that set off the moderators (I've been corrected and told that “modulators” is not a good word to use). To be fair, I was completely wrong in that post, but I errored while making a joke about attorneys (Don't worry, no attorneys were killed or wounded during any part of this exchange. )

I don't even have strong feelings about annuities. I seem to be about like most posters. It probably makes sense for some people at some times. It is a very expensive investment, but if you have a need to purchase longevity insurance, it might make sense.

I'll tell you this: I have angered the gods (maybe not all of them, but at least a couple). On the other hand, I do not believe it is about what happened in this thread. There is some residual anger out there dating back to my challenge of the moderator's level of censorship.

 

[cute fuzzy bunny]

I'm just pissed that you got all lathered up and it didnt really have anything to do with me.

That I was the initial cause makes me feel at least a little better, even if you misread my intentions.

I feel jilted.

 

[Nords]

I'll tell you this: I have angered the gods (maybe not all of them, but at least a couple). On the other hand, I do not believe it is about what happened in this thread. There is some residual anger out there dating back to my challenge of the moderator's level of censorship.

Try to see another point of view: it's not about you, SG.

 

[HFWR]

So - who's skins and who's shirts

Gals Skins, Guys Shirts. What else?

Finally... BOOBS!!