Creating your own annuity

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Creating your own annuity

Postby EternalOptimist » Mon Feb 11, 2013 2:03 pm

Have any of you had the experience or have a point of view on creating your own annuity from your portfolio's stock dividends, bonds, CDs, etc?
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Re: Creating your own annuity

Postby Johm221122 » Mon Feb 11, 2013 2:16 pm

The main part of an annuity is the mortality credits, an insurance company can provide this thru many people.How could one person do this?
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Re: Creating your own annuity

Postby EternalOptimist » Mon Feb 11, 2013 2:19 pm

What I've read is that you take you own portfolio of stock funds, bond funds, CDs etc and build your own source of yearly income. It's probably not as exact/guaranteed as an insurance co annuity but you never release your portfolio assets to anyone.
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Re: Creating your own annuity

Postby john94549 » Mon Feb 11, 2013 2:21 pm

While I have not (yet) done it, you can with a PenFed IRA CD.

Here's how. You buy a PenFed IRA CD. If you are over 59 1/2, partial withdrawals are permitted with no EWP. Then go to the Bankrate website, and bring up their mortgage calculator with the amortization schedule. Pretend your IRA CD is the mortgage balance and type in that amount (less $1000, or the minimum for that CD) for the mortgage amount. Type in the interest rate you are receiving on the CD in the block for the mortgage interest rate. For the "loan term", use the term of the CD. Bring up the amortization schedule. Voila. A DIY term annuity. Just ask PenFed to send you a check every month for the "monthly payment".

Unless I am mistaken, PF will, each month, first use the interest accrued and then nibble at the principal for the balance. The CD should be exhausted (except for the minimum balance) at the end of the CD term.
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Re: Creating your own annuity

Postby NYBoglehead » Mon Feb 11, 2013 2:22 pm

EternalOptimist wrote:What I've read is that you take you own portfolio of stock funds, bond funds, CDs etc and build your own source of yearly income. It's probably not as exact/guaranteed as an insurance co annuity but you never release your portfolio assets to anyone.


When articles list this is "creating your own annuity" they mean using your own assets to create an income stream instead of surrendering them to an insurance company. You are not actually creating an annuity but merely living off the income of your portfolio. There are also articles about "creating your own pension" that have the same sentiment.
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Re: Creating your own annuity

Postby Johm221122 » Mon Feb 11, 2013 2:24 pm

EternalOptimist wrote:What I've read is that you take you own portfolio of stock funds, bond funds, CDs etc and build your own source of yearly income. It's probably not as exact/guaranteed as an insurance co annuity but you never release your portfolio assets to anyone.

Use something like age in bonds and withdraw 4%
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Re: Creating your own annuity

Postby EternalOptimist » Mon Feb 11, 2013 2:26 pm

NYBoglehead wrote:
EternalOptimist wrote:What I've read is that you take you own portfolio of stock funds, bond funds, CDs etc and build your own source of yearly income. It's probably not as exact/guaranteed as an insurance co annuity but you never release your portfolio assets to anyone.


When articles list this is "creating your own annuity" they mean using your own assets to create an income stream instead of surrendering them to an insurance company. You are not actually creating an annuity but merely living off the income of your portfolio. There are also articles about "creating your own pension" that have the same sentiment.



OK thanks, just wondering if anyone has done this for a decent period of time.
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Re: Creating your own annuity

Postby serbeer » Mon Feb 11, 2013 2:26 pm

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Re: Creating your own annuity

Postby webslinger » Mon Feb 11, 2013 2:32 pm

Eternal Optimist,

I think its a great idea. I came across it first in Allan Roth's aptly titled "Build Your Own Annuity" article: http://www.cbsnews.com/8301-505123_162-37741879/build-your-own-annuity/

For us, it is an additional (psychological) tool for how we rationalize and view our investments and portfolio.

Personally, we are implementing it by using CDs as well as tax-exempt bonds.

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Re: Creating your own annuity

Postby Grt2bOutdoors » Mon Feb 11, 2013 2:34 pm

I have relatives who've done this. What does it require? Some or all of the following: start early,strong intestinal fortitude that enable you to stay the course, a significant level of savings ability and the will to not view those assets as your personal piggybank for a vacation, lifestyle upgrade, etc. Oh, and if married, staying married - a divorce is the quickest way to deep-six your annuity. Essentially, they live off of dividend income, some have accumulated so much in income, and yet, the income they don't spend, they continue to invest for legacy purposes. They don't own mutual funds, but if you looked at their portfolio you could say they are the S&P 500 plus the Extended Market and they are non-discriminating, if they find a bargain according to their parameters they will pick it up. The funny thing is, they never relied on "professional advice or financial salesman". The one time they had a broker give them advice, they lost money. They've stuck to what they know and it worked out for them. Of course, they also had a traditional blue collar job that paid awesome pension and healthcare benefits, and worked side jobs as well. All monies earned above living expenses went into the market, up, down, sideways they stuck with it. Like I said, intestinal fortitude.
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Re: Creating your own annuity

Postby Faith20879 » Mon Feb 11, 2013 4:16 pm

Once many years ago someone over the old M* board came up with an idea to use the Savings Bond to construct an annuity. I don't remember how the other posters rated it but the concept stucked with me. As I recall it is very similar to Allen Roth's.

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Re: Creating your own annuity

Postby Cut-Throat » Mon Feb 11, 2013 4:55 pm

Johm221122 wrote:Use something like age in bonds and withdraw 4%
John


+1
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Re: Creating your own annuity

Postby Mel Lindauer » Mon Feb 11, 2013 5:26 pm

Faith20879 wrote:Once many years ago someone over the old M* board came up with an idea to use the Savings Bond to construct an annuity. I don't remember how the other posters rated it but the concept stucked with me. As I recall it is very similar to Allen Roth's.

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Yes, you can start when you're around 30-35 if you plan to retire at 60-65 (earlier if you plan to retire early) and invest $20,000 per couple in I Bonds per year and $20,000 per couple in EE Bonds each year (they're guaranted to double in 20 years). And don't forget the $5000 that you can get in paper I Bonds via your tax refund each year. Together with your SS, any pension and your 401k and/or IRA, you should be set.
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Re: Creating your own annuity

Postby Grt2bOutdoors » Mon Feb 11, 2013 5:38 pm

Mel Lindauer wrote:
Faith20879 wrote:Once many years ago someone over the old M* board came up with an idea to use the Savings Bond to construct an annuity. I don't remember how the other posters rated it but the concept stucked with me. As I recall it is very similar to Allen Roth's.

Faith


Yes, you can start when you're around 30-35 if you plan to retire at 60-65 (earlier if you plan to retire early) and invest $20,000 per couple in I Bonds per year and $20,000 per couple in EE Bonds each year (they're guaranted to double in 20 years). And don't forget the $5000 that you can get in paper I Bonds via your tax refund each year. Together with your SS, any pension and your 401k and/or IRA, you should be set.


Ideal - yes. Practical - for many people, not so much simply because their earnings aren't high enough to generate that much in savings. Still, it's not a bad idea to use what you suggest as the "floor", any investments in other vehicles like the IRA/401k plan can be the "gravy" portion.
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Re: Creating your own annuity

Postby Toons » Mon Feb 11, 2013 5:39 pm

NYBoglehead wrote:
EternalOptimist wrote:What I've read is that you take you own portfolio of stock funds, bond funds, CDs etc and build your own source of yearly income. It's probably not as exact/guaranteed as an insurance co annuity but you never release your portfolio assets to anyone.


When articles list this is "creating your own annuity" they mean using your own assets to create an income stream instead of surrendering them to an insurance company. You are not actually creating an annuity but merely living off the income of your portfolio. There are also articles about "creating your own pension" that have the same sentiment.



I started young,invested monthly without fail for decades(the maximum in tax advantaged or tax free vehicles,401k,roth)after maxing those accounts I invested in taxable accounts,rarely sold any investments,reinvested the dividends and cap gains,along the way(Compounding) with the GOAL in mind from the beginning of having an income stream via dividends and cap gains one day(not reinvest) to supplement SS and pension income so that I would not need to "sell" investments to live on,so far it has worked out.If this is what you mean by creating your own annuity. :happy
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Re: Creating your own annuity

Postby dhodson » Mon Feb 11, 2013 5:48 pm

i find these conversations a little odd since these concepts never actually produce the only good features of an annuity. You might be able to create an income stream by different methods but none really provide the insurance protection that you cant outlive your investments. Many who are saving diligently, investing approrpiately, and withdrawling conservatively wont need to purchase an insurance product especially if we have a pension and/or social security (possibly "improve" by delaying to age 70). There is of course baggage with an insurance annuity (primarily that it can be irrevocable depending on which type of annuity we are talking about and the payout may be lower then desired as well as the concern that they wont be able to make good on the guarantee.). Still these DIY arent an annuity. I personally plan to delay SS to age 70 for the increased yearly income and increased survivor payout as well as purchase a SPIA or two just for basic needs. The rest is a DIY plan not to run out of money but it isnt an annuity.
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Re: Creating your own annuity

Postby Sheepdog » Mon Feb 11, 2013 5:55 pm

Cut-Throat wrote:
Johm221122 wrote:Use something like age in bonds and withdraw 4%
John


+1

+1 more
Basically, that is what I have done since 1998, but I withdrew an average of 4.5%. Even my original balance increased. Can't say this would work for someone else in the future, though. An annuity is a guarantee, this way is not. I am pleased ,nevertheless.
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Re: Creating your own annuity

Postby Bustoff » Mon Feb 11, 2013 6:35 pm

I wonder if Vanguards Managed Payout Funds would work for something like this ?
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Re: Creating your own annuity

Postby Khanmots » Mon Feb 11, 2013 6:46 pm

dhodson wrote:i find these conversations a little odd since these concepts never actually produce the only good features of an annuity. You might be able to create an income stream by different methods but none really provide the insurance protection that you cant outlive your investments. Many who are saving diligently, investing approrpiately, and withdrawling conservatively wont need to purchase an insurance product especially if we have a pension and/or social security (possibly "improve" by delaying to age 70). There is of course baggage with an insurance annuity (primarily that it can be irrevocable depending on which type of annuity we are talking about and the payout may be lower then desired as well as the concern that they wont be able to make good on the guarantee.). Still these DIY arent an annuity. I personally plan to delay SS to age 70 for the increased yearly income and increased survivor payout as well as purchase a SPIA or two just for basic needs. The rest is a DIY plan not to run out of money but it isnt an annuity.

Came here to say this.

I think we all plan to take distributions from our savings such that we have a stream of money to live from. The problem is that we don't know how long we're going to live so it makes it hard to figure out when to let it run out... and if you plan to only live off of the *real* return, you're going to need a *lot* more saved. For example, if inflation is 2%, and your investments are throwing 2.5% dividends/interest, you're reinvesting (2/2.5) 80% of your income stream just to allow the principle to keep up with inflation (so that next years income stream will be the same in "real" dollars!) and are trying to live off of a 0.5% return.

Does have the advantage of ensuring you don't outlive your money and that your heirs get a nice chunk of cash I guess.

Personally I'd rather buy a SPIA to ensure that I have a base income stream for as long as I live (sharing the "risk" of living for a long time with lots of other people), and then implement a reasonable draw-down plan on the remainder to spend on luxuries/travel/whatever knowing I have a fallback position for if I live too long.
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Re: Creating your own annuity

Postby dhodson » Mon Feb 11, 2013 8:25 pm

of course SPIAs have the same inflation problem. If you happen to buy one of the few inflation adjusted annuities, they just give you less to begin with.
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Re: Creating your own annuity

Postby Johm221122 » Tue Feb 12, 2013 3:45 am

dhodson wrote:of course SPIAs have the same inflation problem. If you happen to buy one of the few inflation adjusted annuities, they just give you less to begin with.

Definitely is a problem, that's why waiting till your 70 or 80 is better for inflattion protection.Plus at 70 or 80 the chance of having difficulties with managing money become greater, so annuity is also safety net for those who not normally need the benefits of mortality credits
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Re: Creating your own annuity

Postby 555 » Tue Feb 12, 2013 3:57 am

OP
EternalOptimist wrote:"Have any of you had the experience or have a point of view on creating your own annuity from your portfolio's stock dividends, bonds, CDs, etc?"

1st reply.
Johm221122 wrote:"The main part of an annuity is the mortality credits, an insurance company can provide this thru many people.How could one person do this?"

That's it. The thread might as well end right there. What the OP is wanting can't be done.
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Re: Creating your own annuity

Postby Browser » Tue Feb 12, 2013 12:31 pm

Here's another article on setting up a DIY annuity. Author examines using market call options vs. long-only for the equity component, which may be a better approach.

http://www.advisorperspectives.com/newsletters11/pdfs/Do-It-Yourself_Equity-Indexed_Annuities.pdf
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Re: Creating your own annuity

Postby TomatoTomahto » Tue Feb 12, 2013 1:03 pm

555 wrote:OP
EternalOptimist wrote:"Have any of you had the experience or have a point of view on creating your own annuity from your portfolio's stock dividends, bonds, CDs, etc?"

1st reply.
Johm221122 wrote:"The main part of an annuity is the mortality credits, an insurance company can provide this thru many people.How could one person do this?"

That's it. The thread might as well end right there. What the OP is wanting can't be done.

What John said. With all due respect, unless you get a large group of people to join in (which is probably illegal, I don't know), what you have at best is some kind of bond/CD ladder which will provide income. It has nothing to do with a SPIA except that payments are made.
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Re: Creating your own annuity

Postby epimedium » Tue Feb 12, 2013 2:11 pm

You might find this discussion of interest:

http://www.early-retirement.org/forums/ ... 34656.html
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Re: Creating your own annuity

Postby Browser » Tue Feb 12, 2013 2:17 pm

When you think about it, the DIY annuity idea is just a smaller subset of the general strategy of dividing your retirement portfolio into two parts, as discussed by Bill Bernstein: (1) a Liability-Matching Portfolio (LMP) and (2) a Risk Portfolio (RP). The LMP is structured to provide an adequate "safe" income match your basic spending needs, and would include Social Security/Pension income, TIPS/I-Bonds/CD ladders, and the like. The RP is intended to provide an opportunity for growth to provide for luxuries and bequests, and would include stocks, real estate, and other "risky" assets with growth potential. The LMP should be funded first, and requires an amount that is approximately 20-25 times your anticipated annual liability spending needs in retirement. Any excess can be invested in the RP. As an example, a 65 year-old retiree with $1M in retirement savings, who needs $60K annually to meet basic spending needs and has social security benefits of $20K annually would need a minimum of $800K in retirement savings to fund his LMP. He would invest that $800K in some combination of annuities, bond and CD ladders, and the like. Then he would have $200K remaining to invest in his RP, which could be invested in stocks, real estate, commodity futures, etc.
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Re: Creating your own annuity

Postby SSSS » Tue Feb 12, 2013 2:26 pm

epimedium wrote:You might find this discussion of interest:

http://www.early-retirement.org/forums/ ... 34656.html


So let us assume you can buy a 1 year CD that yields (APY) 4%,


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Re: Creating your own annuity

Postby 555 » Tue Feb 12, 2013 6:39 pm

There are two very different types of annuities being discussed here.

The "DIY annuity" articles are talking about are mimicking Equity Indexed Annuities, with your own combination of stocks, bonds, CDs, etc. . The upshot is, that you can do it. This shows that there's no point in buying such annuities, so the concept of these annuities becomes irrelevant. But there's also no point even trying to mimic one. Just invest in some stocks, bonds, CDs, etc. .

On the other hand, what you really need from an annuity in retirement is longevity insurance, and the simplest way to get it is an SPIA. You cannot mimic longevity insurance yourself. You have to be pooled together with a large group of people. Then it's a free lunch that you can get only if you're willing to have it in a large cafeteria with a bunch of other people.
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Re: Creating your own annuity

Postby Bustoff » Tue Feb 12, 2013 6:46 pm

Browser wrote: As an example, a 65 year-old retiree with $1M in retirement savings, who needs $60K annually to meet basic spending needs and has social security benefits of $20K annually would need a minimum of $800K in retirement savings to fund his LMP. He would invest that $800K in some combination of annuities, bond and CD ladders, and the like.


Browser, how do you get $800K to throw off 5% a year ?
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Re: Creating your own annuity

Postby dbr » Tue Feb 12, 2013 7:02 pm

Bustoff wrote:
Browser wrote: As an example, a 65 year-old retiree with $1M in retirement savings, who needs $60K annually to meet basic spending needs and has social security benefits of $20K annually would need a minimum of $800K in retirement savings to fund his LMP. He would invest that $800K in some combination of annuities, bond and CD ladders, and the like.


Browser, how do you get $800K to throw off 5% a year ?


Today it seems you could get the $40,000 by putting about $590K in an SPIA and have $220K left over, as one example.
How one would cope with continued inflation of cost of living would be a different issue.
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Re: Creating your own annuity

Postby crowd79 » Tue Feb 12, 2013 7:14 pm

Not too crazy about the possibility of buying Annuities when I retire at hopefully 60. I'll create my own annuity of buying EE Bonds every year and then redeeming them at double their value starting at age 80. Whatever's left over goes to my heirs and not the insurance company.
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Re: Creating your own annuity

Postby Browser » Tue Feb 12, 2013 8:30 pm

Bustoff wrote:
Browser wrote: As an example, a 65 year-old retiree with $1M in retirement savings, who needs $60K annually to meet basic spending needs and has social security benefits of $20K annually would need a minimum of $800K in retirement savings to fund his LMP. He would invest that $800K in some combination of annuities, bond and CD ladders, and the like.


Browser, how do you get $800K to throw off 5% a year ?

Your plan is to consume the $800K over your remaining lifetime. Bernstein suggests that you need about 20 - 25 times your planned annual income to have enough to invest in your LMP to do that. You should invest that amount in SPIAs, Bond/CD ladders, etc.
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Re: Creating your own annuity

Postby NYBoglehead » Tue Feb 12, 2013 8:36 pm

Sheepdog wrote:
Cut-Throat wrote:
Johm221122 wrote:Use something like age in bonds and withdraw 4%
John


+1

+1 more
Basically, that is what I have done since 1998, but I withdrew an average of 4.5%. Even my original balance increased. Can't say this would work for someone else in the future, though. An annuity is a guarantee, this way is not. I am pleased ,nevertheless.


The value of your holdings has increased as interest rates have come down. While we assume that rates will eventually go back up, people that are retiring right now cannot expect to get more than the 2-3% that their bond fund holdings are paying. There will be a drop in NAVs once rates recover, so anyone who is gradually selling their bond holdings and not just living off their interest need to be aware of this.
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Re: Creating your own annuity

Postby Johm221122 » Tue Feb 12, 2013 8:42 pm

Trying to build a Homemade SPIA with bonds, cd's or dividend paying stocks won't change this.Buying a real SPIA may help with low interest rates
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Re: Creating your own annuity

Postby ClosetIndexer » Wed Feb 13, 2013 7:37 am

What I think would be interesting is actually creating your own annuity. Theoretically you could gather a group of like-minded people and create a holding corp. The corporate articles would contain an IPS and dividend policy (as well as a mechanism to revise each). Basically it would pay out a fixed real amount to all living shareholders, just like a standard annuity. Since it would not have any external backing, there would also need to be a mechanism by which the payments would be reduced proportional to assets if assets dropped below a safety threshold, which would be calculated based on safe withdrawal rates and life expectancies (as stipulated in the initial dividend policy). Finally, in the initial setup it would be specified what to do with remaining funds at the death of the final shareholder - presumably either divided amongst all heirs proportional to initial investments, or perhaps priority given to the heirs of the first to die, in order to make the distribution more uniform. Whatever the creators decided was fair.

So it wouldn't quite be a true annuity, but you would still get the mortality credits benefit (thereby increasing SWR compared to individual investments), and you would cut out the (significant) profits of the insurance company.

Of course, you would need a fair number of people in the same age range and with similar investing philosophies for this to work and be worthwhile. And most of the folks who might be interested in something like this would probably have the means to very safely fund their retirements individually. So most likely not workable, but an interesting concept, at least to me!
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Re: Creating your own annuity

Postby john94549 » Wed Feb 13, 2013 10:09 am

ClosetIndexer, I think what you described is generally called a Defined Benefit Plan (aka pension). In the olden days, businesses had them. I hear tell public entities still do. Your last sentence is correct. The penultimate sentence, not so much.
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Re: Creating your own annuity

Postby dhodson » Wed Feb 13, 2013 10:25 am

a lifetime annuity and a pension are the same thing. Its just that the annuity is typically run by an insurance company and a pension or defined benefit by the company that you work for or whoever they hire to do it.

You cant really get a bunch of friends together and have a closed end contract lifetime annuity. You just dont have enough friends. There are fraternal organizations that have insurance products which are open ended contracts and not backed by the state insurance guaranty program. What in essence happens is the members either need to pay more or receive less if things dont work out as expected. It typically has a lower "cost of insurance".
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Re: Creating your own annuity

Postby dbr » Wed Feb 13, 2013 10:28 am

Wouldn't the plan would be incorporation of a mutual insurance company, subject to regulations, which could work but not likely on a small number of people, or would be a tontine, which I think is not legal everywhere in the US.
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Re: Creating your own annuity

Postby Socrativestor » Wed Feb 13, 2013 10:51 am

dbr wrote:Wouldn't the plan would be incorporation of a mutual insurance company, subject to regulations, which could work but not likely on a small number of people, or would be a tontine, which I think is not legal everywhere in the US.

Never heard of tontines before. Thanks.
FWIW:
* A Short History of Tontines
* The Wrong Box
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Re: Creating your own annuity

Postby ClosetIndexer » Wed Feb 13, 2013 7:06 pm

Socrativestor wrote:
dbr wrote:Wouldn't the plan would be incorporation of a mutual insurance company, subject to regulations, which could work but not likely on a small number of people, or would be a tontine, which I think is not legal everywhere in the US.

Never heard of tontines before. Thanks.
FWIW:
* A Short History of Tontines
* The Wrong Box


Huh, neither had I. Thanks for the references. After a quick skim that does sound very much like what I had in mind. Perhaps they'll make a resurgence!
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Re: Creating your own annuity

Postby Bustoff » Thu Feb 14, 2013 7:18 am

Browser wrote:
Bustoff wrote:
Browser wrote: As an example, a 65 year-old retiree with $1M in retirement savings, who needs $60K annually to meet basic spending needs and has social security benefits of $20K annually would need a minimum of $800K in retirement savings to fund his LMP. He would invest that $800K in some combination of annuities, bond and CD ladders, and the like.


Browser, how do you get $800K to throw off 5% a year ?

Your plan is to consume the $800K over your remaining lifetime. Bernstein suggests that you need about 20 - 25 times your planned annual income to have enough to invest in your LMP to do that. You should invest that amount in SPIAs, Bond/CD ladders, etc.


If spending down the 800K over a lifetime, why not substitute Vanguard Managed Payout funds rather than SPIA ?
“There are two times in a man's life when he should not speculate: when he can't afford it, and when he can.” | ― Mark Twain
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Re: Creating your own annuity

Postby ndchamp » Thu Feb 14, 2013 10:14 am

Bustoff wrote:If spending down the 800K over a lifetime, why not substitute Vanguard Managed Payout funds rather than SPIA ?


"However, the inflation adjusted value of the fund shares and payment amounts is expected to decline over time. Additionally, if the fund’s investment returns are low, the fund may distribute capital as part of its payout, which could lead to a decline in the dollar amount of monthly payment amounts and in the value of fund shares over time."

https://personal.vanguard.com/us/funds/snapshot?FundId=1499&FundIntExt=INT
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Re: Creating your own annuity

Postby dbr » Thu Feb 14, 2013 10:15 am

Bustoff wrote:
If spending down the 800K over a lifetime, why not substitute Vanguard Managed Payout funds rather than SPIA ?


Because the managed payout funds are not in any way annuities. This has been discussed many times in spite of the misleading advertising presented by Vanguard on their web pages, the above disclaimer notwithstanding.
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Re: Creating your own annuity

Postby donall » Thu Feb 14, 2013 10:56 am

dhodson wrote: There are fraternal organizations that have insurance products which are open ended contracts and not backed by the state insurance guaranty program. What in essence happens is the members either need to pay more or receive less if things dont work out as expected. It typically has a lower "cost of insurance".


Dhobson, thanks for the heads up, I did not realize this was the case with fraternal organizations.
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Re: Creating your own annuity

Postby Browser » Thu Feb 14, 2013 2:04 pm

dbr wrote:
Bustoff wrote:
If spending down the 800K over a lifetime, why not substitute Vanguard Managed Payout funds rather than SPIA ?


Because the managed payout funds are not in any way annuities. This has been discussed many times in spite of the misleading advertising presented by Vanguard on their web pages, the above disclaimer notwithstanding.

Gee, why not just use a Target Fund? These are foolproof aren't they? (you may be the fool)
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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