Help - Pru Highest Daily Lifetime 6 Plus GLiB

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Help - Pru Highest Daily Lifetime 6 Plus GLiB

Postby ricb » Fri Feb 22, 2013 12:58 am

Per previous posts, Prudential Spousal Highest Daily Lifetime 6 Plus guaranteed withdrawal rider may not have been a good investment (we purchased it Dec.2010 in wife's Roth when she was age 63). Using a $100,000 example purchase amount, in two years the Contract Value has increased by 5.7% to 105,700; Surrender Charges remaining is 6% = $106,000 , so I presume we can sell now for a 0.30% loss = -$300. The Estimated Protected Withdrawal Value has increased by 20% to $120,000, so the Estimated Annual Income Amount, now @ 5% is $6,000. If she waited until Dec.2020 to begin withdrawal at her age 73, the 200% Protected Withdrawal Value Guarantee Value would be $200,000 and her Estimated Annual Income Amount @ 5% would then be $10,000 (11 years later at age 84 it would be guaranteed double again @ 6%=$24,000).

Admittedly, I was trying to partially fill the Milevsky "gap" above our guaranteed pension with this Prudential GLiB Variable Annuity, instead of an SPIA but I didn't then see Milevsky's 2009 calculations for this kind of product showing a measly 1% cash-equivalent yield.

So, does she sell now at almost break-even level; wait another 5 years to sell until no more Surrender Charges; or start now to withdraw (using $100,000 purchased example) @ $6,000 annually, or wait another almost 8 years and withdraw guaranteed at no less than $10,000 annually at her age 73 (or wait until her age 84 and withdraw guaranteed at no less than $24,000 (6% of 400%=$400,000).

Also, I can make a case for funding our LMP safe portfolio (Liability Matching Portfolio ala Bernstein) without any annuities and still have some funds left over for a Risk Portfolio.

Thank you in advance for any advice - most Bogleheads have a distinct dislike for this kind of VA GLiB product because of its high expenses and Vanguard has been getting active with similar products at less expenses and no Surrender Charges. But we purchased it just before Prudential reduced the Lifetime 6 Plus to Lifetime 5 Plus and I think they're about to change it to Lifetime 4.5 Plus.
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Re: Help - Pru Highest Daily Lifetime 6 Plus GLiB

Postby MN Finance » Fri Feb 22, 2013 11:59 am

Of course these are hard to figure out before or after the fact.

The first thing you mention is that you put (theoretically) invested $100k and now it's about $106k. If your surrender charge is 6% which sounds about right, you lose a lot more than $300, you lose $6300.

IMO, there's very little you can do to "fix" this at this point. You are so handicapped by fees that you can essentially assume that your portfolio will not grow as you wait out the surrender. As such, you'll be forced to take the payout based on the guaranteed income amount. The guaranteed income amount is calculated so you only "get" for example a 5% effective payout, when maybe a 7% effective payout is the going rate for someone that age. I really believe the only time these products work is when they're purchased and the market tanks and then you take advantage of the guaranteed payout (again, that's ONLY when the market tanks). My parents have some really good friends I helped a few years ago. The had a modest amount in a VA sold through another family friend. At the time it was 2009 and the market was right at the bottom and we concluded at that point that taking the lifetime payout was at least decent. I don't have the calculations, but we concluded that the payout was merely "decent" after the contract cash surrender value had lost 40%. In any more normal market, there aren't decent options.
Code: Select all

                              Market is Good                           Market is Bad
                              (10% / year)                               (0% / year)
                             ------------------------------------------------------------------------------
Keep in force:            Grows to $220K                            Cash surrender = $82K (lost 2% / yr in fees)
                            (Won't use the annuity option)       Or take $10000 / year annuity

Surrender:                 Grows to $252K (includes              Value: $94K
                             paying 6% surrender up front)       Or buy a new SPIA for $7500 / year                     



I don't know if the numbers are good / accurate, but you can adjust to fit what you think will happen. If the market is bad and you surrender and invest yourself, you may end up with a SPIA that pays less (maybe). In most other circumstances getting out and investing yourself and later buying a SPIA will work out better.
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Re: Help - Pru Highest Daily Lifetime 6 Plus GLiB

Postby ricb » Fri Feb 22, 2013 9:36 pm

Thank you for your thoughtful response - I can't disagree intuitively and through a lot of reading, like the one I copied below per Wade Pfau.

Wade Pfau on 'The Toughest Retirement Decision'
by speedbump101 » Wed Sep 19, 2012 10:40 am

This covers most of the material Dr. Pfau covered in his recent webinar. Unfortunately the archive isn't available without a paid subscription:

The bottom line:

Given the complexities described above, in this debate I tend to side with noncombatants
such as York University finance professor Moshe Milevsky, who advocates retirement
portfolio construction that consists of allocating resources among a traditional diversified
portfolio, SPIAs, and variable annuities with guarantee riders. Only in a rare case would a
retiree’s optimal strategy rely on just one of these components.
Rather than choosing sides, advisors can best serve their clients by becoming familiar with
the benefits and disadvantages of each retirement income tool.

http://tinyurl.com/94zx88m

SB...

Last edited by speedbump101 on Wed Sep 19, 2012 11:24 pm, edited 1 time in total.

"Man is not a rational animal, he is a rationalizing animal" -Robert A. Heinlein
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Re: Help - Pru Highest Daily Lifetime 6 Plus GLiB

Postby MN Finance » Fri Feb 22, 2013 10:46 pm

If the question posed was someone considering the new purchase of a VA in part because of the income riders, I'd be in unwaivering opposition. The rationale is what I mentioned above, that you are not allowed even the most remote chance of "normal" growth because of the fees, so you are ulitmately forced to take the annuitized payout, which is based on a theoretical number with a payout not appropriately linked to life expectancy. SPIAs (which are not, even in part, linked to the VA discussion) are an entirely different story. I personally beleive a SPIA should be a key discussion topic for every retiree; though not everyone will ultimately need/want one.

Now that the question is what to do once purchased, the options are much harder to lay out becuase whatever happens, there's a surrender. You ONLY keep the annuity if you anticipate a very high probability of using the annuitized payout. Since if you just take the straight cash value, the decision is to pay 6% surrender today, or pay an extra 10% in fees over 5 years. 10% > 6%.

One other option is to take as much risk as humanly possible with the investment chioces given, trade/time the market, whatever. And that risk should be taken without counter balancing the risk in other investments - ie, you are now much more agressive than otherwise. If the risk pays off, great. If not, then there's the annuity back up.

Becuase these are complex, I think one helpful way to view it is to look at the product from the side of the insurance company. In aggregate they obviosuly don't lose money on these. How do you allow someone to particpate in the market, yet promise them a lifetime income. It's not just that they take the 2%/yr in fees and buy leverage since a lot of this goes to the sales agent as commission. It's that the payout number (by definiation) has to be less than somewhere else.

IMO, like a lot of things, if someone is trying to use a complex prodcut to mitigate risk, they are just plain better off taking less risk. (And SPIAs clearly arent complex).
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Re: Help - Pru Highest Daily Lifetime 6 Plus GLiB

Postby ricb » Sat Feb 23, 2013 2:57 am

MN Finance wrote,
"One other option is to take as much risk as humanly possible with the investment choices given, trade/time the market, whatever. And that risk should be taken without counter balancing the risk in other investments - ie, you are now much more agressive than otherwise. If the risk pays off, great. If not, then there's the annuity back up."

Yup - got aggressive (included alternatives too) - so much so that Prudential exercised its prerogative to significantly increase the Bonds portion. Hence after the faster 9% initial drop, the slower climb to the current 6% above cost.

One can also consider this GLWB VA as somewhat of a diversification.

Further, unlike a SPIA, the contract value is safeguarded from the possible demise of the insurance company and we didn't just turn over a lump sum vs buying a mutual fund with much higher expenses to pay for some great perks.

Your last comment is spot on; the KISS principle applied to annuities and to the 3-fund portfolio. Even more so with Wade Pfau substituting SPIAs for TBM for better results.
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Re: Help - Pru Highest Daily Lifetime 6 Plus GLiB

Postby Frugal Al » Sat Feb 23, 2013 9:35 am

Ricb, I'd be curious as to what attracted you to this product initially. If it was Pfau's and Milevsky's theoretical approaches to SWR, the trick is in the proper execution and right product. Similar to the fact that a whole life insurance policy can make sense in certain scenarios, it also usually requires the product be purchased properly and priced right from the beginning. It would seem that most, if not all, of these variable annuity products aren't priced right to be a value for any investor capable of handling even a modicum of risk.

If it is a risk aversion that prompted your choice of this product, you're in it now with sunk cost. Maybe you should stay with it. But it's important to recognize your opportunity cost has been significant in just two years. Even a conservative portfolio would have returned over 60% more than your
Current Contract Value. As you know, the "Estimated Withdrawal Value" itself means little until withdrawal, and then doesn't mean as much as it sounds.

If concern about longevity prompted your purchase of the product, there will be opportunity to annuitize at a later date if necessary. If it were me, I'd bail on this product as soon as possible and just lick my wounds.
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Re: Help - Pru Highest Daily Lifetime 6 Plus GLiB

Postby ricb » Thu Feb 28, 2013 8:55 pm

Frugal Al, your response requires a lot of soul-searching, hence me taking the time to reply but yes, it did seem like the right thing to do at the time for some of the reasons you mentioned: Filling the Milevsky gap with a guaranteed product; "insuring" our market investments; diversifying with a variable annuity that includes a guaranteed Living Benefit, as well as the step-up feature; the Contract Value is safe from the insurer's possible default, you can cash out vs not with an SPIA.

BTW, Erin Botsford's 1/1/2012 book "The Big Retirement Risk: Running Out of Money Before You Run Out of Time" has a favorable section about Variable Annuities like the ones we purchased.

I'm going to need some time before I can call myself a Boglehead, as I transition from actively managed portfolio to probably a 3-Fund Total Market portfolio; if I choose to wait for the penalty phase to expire, at least it will keep me in the market. (BTW, our somewhat similar Metlife Variable Annuity that we purchased October, 2011 is up 14% in Contract Value (which yielded a nice step-up).

As I said, I still need more time to decide, so thank you for making me think as much as I obviously still need to.
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