Annuities

[jug]

I was looking at annuities on various web sites, and noted the various payments for a fixed 30 year annuity paying out monthly for both my wife and my self as "co-annuitants"

The best deal I found was with Vanguard as compared to the other finance/insurance companies.

I know many out there probably pooh pooh the annuity concept, but I was thinking of taking half of the nest egg, and getting monthly payment for 30 years and the other half using the concept of investing found in ESG bob's book. This way one gets the money needed to live without worrying about th e ups and downs of the market, and also has the oppurtunity to let the other half of the nest egg grow over this course of 30 years.

I realized that the payout from the annuity, combined with my pension will put us in good shape, with a second bump up in 9 years when both wife and I collect SS.

Thoughts on this

jug

 

[grumpy]

jug,

Just so you realize that the annuity payout will be seriously erroded by inflation over a 30 year period. Otherwise I see nothing wrong with your proposed plan.

Grumpy

 

[brewer12345]

jug, I think you are letting yourself be lulled into the security trap, which annuities are designed to feed. As I understand it, the annuity you priced is a fixed payout 30 year annuity certain. That means that you are getting a set dollar amount every month that does not change, and he annuity pays out for 30 years and then goes away (i.e. no more payments). If this is the case, youare describing the purchase of a bond, and with the risk that half of your nest egg is tied up in a bond 1) you cannot sell if you wish to do so in the future and 2) is issued by one company, leaving you with an outsized credit risk exposure. Its up to you to decide whether this is a smart move, but it doesn't sound attractive to me.

 

[cute fuzzy bunny]

Annuities are a good idea if you're going to live longer than the IRS says you're likely to, in good health.

A bad idea if your family tends to pass on at or below that life expectancy.

They're also a good idea in small doses, sort of a roll your own pension. If you inflation index it, the payment will be really small. If you dont, the payment when you get it 20 years from now will seem really small.

If I had a bigger bucket of money, I'd consider putting 10-15% of it into an inflation indexed annuity. People in my family frequently venture into the 85-95 range. My fathers-fathers-mother lived past 100. Given what i've got, I know I can beat the returns an annuity would pay over the long haul.

I was recently tempted for about six minutes by the Consumer Reports annuity package. For five grand they pay you the annuity and you get the magazine for free for life. Hell, 50 years of free consumer reports is worth a lot all by itself! Plus a portion of the investment was deductible and a portion of the payout is tax free as CR is a non-profit.

 

[LEX]

An annuity, especially those with lower loads and panalties such as those at Vanguard, make sense as a part of your cash flow structure. Avoid Metlife, any virtually any of the insurance company products as they are all very expensive and contractually biased to punish you with high fees.

If you have say two hundred thousand that you can afford to deplete due to inflation over a twenty year period, buying a single premium annuity at Vanguard would give you a defined floor of monthly cash, depending on the term and rate, of as much as say 600-700/month. There is a more prudent means to accomplish the same result without tyining up your funds permanantly, useing a CD ladder, say placing 50 K into CD's at 6-12-24-36 terms, and rolling with each maturity. This is just for example.

 

[jug]

An annuity, especially those with lower loads and panalties such as those at Vanguard, make sense as a part of your cash flow structure.  Avoid Metlife, any virtually any of the insurance company products as they are all very expensive and contractually biased to punish you with high fees.

If you have say two hundred thousand that you can afford to deplete due to inflation over a twenty year period, buying a single premium annuity at Vanguard would give you a defined floor of monthly cash, depending on the term and rate, of as much as say 600-700/month.  There is a more prudent means to accomplish the same result without tyining up your funds permanantly, useing a CD ladder, say placing 50 K into CD's at 6-12-24-36 terms, and rolling with each maturity.  This is just for example.

First, thank you all for your thoughts, and for those that will come.

Ive always wondered what was better, a steady stream of money, or the cash equivalent to generate that money.

I have a combo of the 2, if I stay another 4 years or so on the job, there would be no debate on what to do with my nest egg, the pension would take care of it all. But so far Im choosing to "buy" the 4 years of life.

Finding a company/insurer that has a guarentee fund in it's State is essential to safeguard the principle. This is one factor.

In order to settle this question, Im going to have to "know" myself. One thing I do know is that Im not very good at stomaching big swings in the market and I do believe that the market is a bit overpriced, but that is my view on it. Intellectually I know things usually recover, however I cant tell my nerves this.

I also know I like to sleep at night.

Now as for laddering CD's, that is another option, and Im weighing heavily in that direction once I get the large inflow of cash when I sell my house, this should be in 6 months or so, then I relocate to my house in Vegas.

I figure the CD at about 4 percent over 2-4 years should hold me over before I scan the horizon and make another decision on what to do with the nest egg.

As for inflation, I figure SS will take care of that by giving me a bump up in 9 years. I own my own home.

As for life span, I figure on being average, so about 80 at most, Im just turning 53 now. Both parents are in mid 70's with no big time disabilities, just usual stuff, and they dont get around as good. Im more active, I exercise and jog. But I do have bad nerves that effects my bp somewhat. So who knows as far as life span goes, its up in the air.

I like the concepts in Bob's book, Work Less, live more, as far as diversifying things, but when wife hears stock market, she gets sick, and she getting sick makes me more nervous.

As I said, the market IMHO still has to come back to reality since to me the prices that zoomed up beyond the value of the underlying companies either have to let time catch up with the price as the company grows naturally, or the market price has to go down to reflect the actual value, not the "exuberant" value. This is just my opion in general

So, what to do, hmmmmm, if the rates are still at 4% or above in 6 months or so, dump the mother there lode for a few years and move on.

I think just quitting my job, and moving to the West is enough for a few years in my case. Thinking about it makes me jittery. ER in itself, along with a move to a different region is a major jolt to one's system. Best to postpone any heavy duty financial decision until I get over the shock of change in my life.

thank goodness for this board.

jug

 

[ats5g]

Hey Jug,

John Ameriks and Mark Warshawsky wrote an article on including immediate fixed annuities in retirement in 2001:

Making Retirement Income Last a Lifetime

Some thought provoking findings. Note however, that they assumed one was 65, not 53, as you're now. With immediate annuities, the payouts [or mortality credits] rise with the age of the person because the older pool of people tends not to live as long. Also note that this analysis was done in 2000-2001, when immediate annuity payouts were higher due to higher long term interest rates.

Luckily, Gummy has a tool to help you out. See the spreadsheet in Sensible Withdrawals, and Part III. You can enter the current payout quotes and see if the will help or hinder your portfolio's survival.

My guess would be because you're rather young, the immediate annuity probably won't help with porfolio survival.

- Alec

 

[brewer12345]

jug, if you do decide to buy an annuity, ask me if you want an opinion on the soundness/safety of any particular insurer. I used to evaluate the creditworthiness of life insurers for a living.

 

[jug]

jug, if you do decide to buy an annuity, ask me if you want an opinion on the soundness/safety of any particular insurer.  I used to evaluate the creditworthiness of life insurers for a living.

Thanks Alec for your input and thank you brewer.

I guess looking in Best's would do it, and I guess a company like metropolitan, ny life, or one of the biggies are not likely to go belly up. Im actually looking at Vanguard, they seem to have the best deals.

Also, since I somewhat deal with insurance too, Ive never really noticed any big time life insurers going belly up in the 20 or so years Ive been looking. I would think they are "quiet" giants. Do you know of any going belly up?

thanks
jug

 

[brewer12345]

I guess looking in Best's would do it, and I guess a company like metropolitan, ny life, or one of the biggies are not likely to go belly up.  Im actually looking at Vanguard, they seem to have the best deals.

Also, since I somewhat deal with insurance too, Ive never really noticed any big time life insurers going belly up in the 20 or so years Ive been looking.  I would think they are "quiet" giants.  Do you know of any going belly up?

thanks
jug

Ahhh, AM Worst. No, I would not just look at the AM Best rating. Different companies with widely different profiles have the same rating, so it is best to pick and choose. I personally would look for a large life insurer rated Aa3/AA- (Moody's/S&P respectively) or better, preferably a mutual company. A larger company may be better simply because they are more likely to be considered "too big to fail" in the event thing go really pear-shaped (i.e. better chance of a gummint bailout for the titans), but there are very solid smaller companies as well (Penn Mutual, for example).

I sincerely doubt that Vanguard writes the policies; another insurer almost certainly writes the annuities. Anyone know who it is?

I can think of a few life insurer failures, but the biggest ones I know of are Executive Life (a few years back) and more recently Conseco. I believe that in both cases policyholders did OK (full recovery or close to it), but you are ostensibly buying an annuity so that you don't have to worry. That presumably includes the headaches and concerns that go with exposure to a troubled or insolvent insurance company.

 

[Nords]

An annuity, especially those with lower loads and panalties such as those at Vanguard, make sense as a part of your cash flow structure.  Avoid Metlife, any virtually any of the insurance company products as they are all very expensive and contractually biased to punish you with high fees.

I think any annuity discussion should be filed under "insurance", not "investment".

 

[brewer12345]

Ahah, looks like Vanguard uses AIG to underwrite the policies they sell. Hmmm...

 

[Outtahere]

Is that a good Hummm brewer?

 

[jug]

Ahah, looks like Vanguard uses AIG to underwrite the policies they sell.  Hmmm...

Oh, Mr. Greenberg's company, Ace Greenberg!!!!!! Do you think I should be concerned with a name like Ace?

jug

 

[brewer12345]

Is that a good Hummm brewer?

I think that AIG is probably money good on policies many years into the future, but I do not care for the way they run their business or their ethics. I personally would do business with someone else.

 

[eridanus]

Wouldn't a preferred stock of an insurance company do the same as an annuity? Pay out a % and, depending, be senior debt in case of a bankruptcy? The only fee would be commission. If it's non-callable, is there any disadvantage?

 

[brewer12345]

Wouldn't a preferred stock of an insurance company do the same as an annuity? Pay out a % and, depending, be senior debt in case of a bankruptcy? The only fee would be commission. If it's non-callable, is there any disadvantage?

Completely different animal. An insurer's preferred stock would probably be totally blown out (or nearly so) in the event of a BK. The policyholder would get 90 to 100 cents on the dollar (possibly plus accrued).

 

[Nords]

... or their ethics.  I personally would do business with someone else.

Ethics?  Mo Greenberg has ethics?  Have we actually seen any evidence of this?!?

 

[eridanus]

Completely different animal. An insurer's preferred stock would probably be totally blown out (or nearly so) in the event of a BK. The policyholder would get 90 to 100 cents on the dollar (possibly plus accrued).

Ok. So the policyholder is more senior then the preferred.

If it's a devasting bankrupcty (i.e., nothing in the accounts. required reserve spent on booze and women), would the policyholders also be left empty handed? Or is there a government agency for annuities?

 

[brewer12345]

Ok. So the policyholder is more senior then the preferred.

If it's a devasting bankrupcty (i.e., nothing in the accounts. required reserve spent on booze and women), would the policyholders also be left empty handed? Or is there a government agency for annuities?

There are state guaranty funds that all insurers are required to pay into, but they are not big enough to bail out any material amount of policyholder loss and they do not have the implied or formal backing of any gummint agency (IOW, nothing like the FDIC). Fortunately, most life insurers are tightly enough regulated that the issue rarely if ever comes up.

 

[eridanus]

There are state guaranty funds that all insurers are required to pay into, but they are not big enough to bail out any material amount of policyholder loss and they do not have the implied or formal backing of any gummint agency (IOW, nothing like the FDIC). Fortunately, most life insurers are tightly enough regulated that the issue rarely if ever comes up.

Thanks, brewer.

 

[Helen]

Wouldn't TIPS or Ibonds be better over 30 years than an annuity ?

Actually, I would think a Wellsley, Wellington, TIPS, Ibonds combination would be a good conservative play.
In the down years of the stock market you could draw from TIPS and Ibonds and rebalance in up years.

A fixed annuity to me is very risky as delflation is very rare, but inflation is fairly common. After even 15 years, the payout on the annuity is likely to be quite small. In addition, you've tied up a chunk of change that isn't growing or keeping pace with inflation.

-helen

 

[Dawg52]

I plan to buy a ladder of treasury strips, just enough to get me to social security age. The balance of my portfolio will be in a mix of stock funds, reits, commodites, i-bonds and cd's. When I reach social security I will re-evaluate my cash flows needs and supplement social security with some fixed income investments.

Many ways to skin a cat but this a conservative plan that I can sleep with that also allows for some growth. Good luck with whatever you decide. 

 

[jug]

Wouldn't TIPS or Ibonds be better over 30 years than an annuity ?

Actually, I would think a Wellsley, Wellington, TIPS, Ibonds combination would be a good conservative play.
In the down years of the stock market you could draw from TIPS and Ibonds and rebalance in up years.

A fixed annuity to me is very risky as delflation is very rare, but inflation is fairly common.  After even 15 years, the payout on the annuity is likely to be quite small.  In addition, you've tied up a chunk of change that isn't growing or keeping pace with inflation.

-helen

I hear you on this, perhaps the annuity is not the way to go.

Many ways to skin this cat, the optimum is to generate a decent cash flow, and keep the nest egg intact and adjusted for inflation over the course of retirement.

However, there is risk in doing this just as there is risk in letting the portfolio being reduced by inflation.

Today I went over to the Fidelity guy in manhattan, and I put everything on the table, my relocation, my impending home purch in vegas, and pending home sale in NY.

I told him Im a plain person, no big taste, live on less than 40K cash a year, have a db pension needed to be supplemented by another 20 from nestegg generated after home sale in ny, and payoff of cheaper home in vegas.

He got the message, he said he will run all sorts of scenarios, gave me the pitch why fidelity is better than the others, and acknowledged that they will help me park money in Cd's if I need to ladder them.

I told him that the first few years I want to go very conservative since I will be getting over the stress of leaving a job, buying a home, selling a home, and moving to the other end of the country. To me this is big time.

Again he got the message, he even ran an annuity check, and told me what I would need to generate 20K for a 15 year period.

I just smiled, my own research got the same figures of imput and output with Vanguard and a few others for a 25 year period. Yes there are big differences out there in the insurance world. But he has to make a buck.

So in sum, there is no good answer, since we cannot predict the future with accuracy, and whether it be a stock/bond mix, a bunch of CD's, annuities, I believe the main thing is that we should all have some level of comfort, since it is not worth worrying what we could or should have done if things do not turn out perfect.

I still think the market in general is too high, so I'll stay in CD's as long as they are paying 4%+ for the next few years. No use putting myself in a position that will drive me batty. Im taking ER to keep from going batty to begin with.
jug

 

[LEX]

Jug:

I have both an annuity (I parked a bonus I received with my former employer during my last two years in one of Vanguard's single premium annuities) that throws off $1250/Month for my life and my spouse as survivor, and CD’s in a ladder going out 60 months, at three month (Quarterly) tiers.  I am rolling CD’s over now and getting rates in the 4.5 – 4.8 % range for 60 month maturity at my Credit Union (I prefer Credit Unions to Banks), which is close to my target of 5% overall for life of the ladder.  The annuity was easier for me since it was “found” money that I did not originally count on as part of my long term retirement “critical mass”, so if it was eaten up by inflation after the first half, I felt it had still bought me an earlier stable cash flow with which to ER. 

As to AIG’s ethics, they are about the same as everyone else, which means you do your homework prior to insurance placement.  I placed a corporate client’s annual Risk Programs anchor CGL policy with them when Greenberg was running the organization.  Most of their insurance lines are just fine.  I would be concerned if I was purchasing CGL variables with them or anyone else such that they had a premium rebate product.  These are the insurance lines where there was some issue with AIG and everyone else playing with their reserve accounting that made the press the last year or so.