Bogleheads

[tc101]

I have been reading here about immediate annuities and thinking about putting some money into one, but I wonder how safe they really are over the 30-40 years I might live.

The laws and government might totally change in 20 years. It might be possible for some wealthy powerful well connected individual or corporation to buy the insurance company who I have the annuity with, pay the top CEO's billions of dollars in salaries for a few years and then declare bankruptcy, avoiding payouts on the annuities.

This may seem far out today, but think about the things similar to this that have happened in the last 20 years that everyone would have said were impossible 30 years ago.

If I have money in Vanguard or some other brookerage and see something like this coming I can move the money somewhere that seems safer. If I have money in an annuity it is stuck there and there is nothing I can do as I watch laws change, insurance regulation change, rich corrupt corporations looting annuities and so on.

[dm200]

I am interested in the same question as well.

It seems to me that this is an issue of insurance company solvency or financial stability, since (I believe) immediate annuity payments come from the assets of the insurance company. I believe those are different than an investment company potentially mismanaging investments. I don't know how much future laws and Congressional actions will have on this.

While there have been a few insurance company failures over the decades, I think they have been rare. I also don't know what kind of safety net there might be if a company failed.

dan

[Blackhawkzone]

http://www.fundadvice.com/arti....-deal.html

[alvinsch]

Sure seems like a very valid concern. Similar to the advice not to invest in Barclay's ishares commodities ETN, even though it has nice tax advantages, because of the single company risk.

However, one could mitigate the risk by buying annuities from a lot of different insurance companies. Also since this is longevity insurance, one could lower the risk by waiting much later in life (80?), to minimize the expected time frame giving the insurance company less time to screw up and go bankrupt.

- Al

[mephistophles]

One thing to consider is that most states, if not all, guarantee consumers protection from insurance company insolvency up to a certain amount. Check with your State Insurance Department for a copy of their law on this. As long as you are comfortable with this you can then buy up to your State limit.

Regards,

ole meph

[Wagnerjb]

[Mel Lindauer]

Hi tc101:

Al and Old Meph both pointed out things I would have posted, so I'll just summarize what I would have said:

1. Your income stream will be much lower if you take the immediate annuity when you're younger, and when interest rates are lower, as they are now. If you can, wait until perhaps your 70s or even 80s.
2. Buy your income streams from different highly-rated companies, with each one only up to the amount of your state's guarantee.

Regards,

Mel

[tc101]

[Valuethinker]

[tc101]

[dm200]

1. Executive Life. In 1991, I went to work for a company that used Executive Life for certain of its employee investment programs (401k I think). Shortly after I started investing, the trouble hit, and employees who had funds in this Executive Life investment had it frozen. I only had a few hundred dollars at risk, but it took years to get it all back. Some folks at other companies had large amounts at risk. Apparently, Executive Life had good ratings until close to the problems surfaced. So, bad things can happen to insurance companies.

2. Immediate annuities can provide what other investments can not. That is, an "investment" that (unless the unlikely happens) you can not outlive. Investments in stocks, bonds, mutual funds, etc. can not provide the same return for your life.

dan

[Ron]

Here's another reference on this subject:

http://money.cnn.com/2006/09/0..../index.htm

As for me, I will be converting 10% of my portfolio within the next few months to an immediate annuity. I realize the interest rate "problem" at this time (as stated by Mel) but I'm also looking long term to take some of "the money off the table" and reduce my exposure to stock funds (with the gains over the last few years, I'm being a bit cautious).

I'm 59, and just retired this month. I'm planning on converting a total of 20-25% of my existing portfolio to an immedate annuity, but again refering to Mel's comment, the additional conversion will come "later in life"...

- Ron

[Orion]

Annuities seemed somewhat attractive to me at first, but the more I looked, the more I became annoyed at how little data I could find about them. For example, how many fail (ie if you held annuities over all the periods in the trinity study), how do you create a diversified portfolio of annuities, can you even reasonably diversify when they're all in the same basic business, can you diversify annuities internationally and does that really get you anything, were those state guarantees around during times of large annuity failures and were they able to meet their commitments, etc.

Then I started thinking that maybe annuities looked good because I didn't know nearly as much about them as I do the stock market.

And my father told me that during the great depression, most annuities that he knew of disappeared. Of course, that's an anecdotal and distant memory but that's about as good as I've found when it comes to annuities.

Is there anything like a Trinity study for annuities?

[Valuethinker]

[Ron]

[nick22]

What about an immediate fixed annuity that adjusts annually with inflation based on the CPI. This would provide you with protection for both longevity and inflation risks. I think the main pain is that most state governments only protect you for $100,000 per insurance company, so you may have to spread you dough around.

Just running the Vanguard calculator for a joint immediate annuity with 100% survivor benefit, you can get a 4.6% yearly payout with yearly CPI adjustment or 6.8% without CPI adjustment. I guess if your income needs are more immediate you may opt for the higher initial payout, but unless you have a nice dolop of TIPS I would take the CPI adjustment. You can single handedly take out 2 of the biggest risks of retirement.
_________________
Nick22

[mephistophles]

Orion,

I agree with you completely. Except in special situations I consider Immediate Income Annuities as an investment of last resort mainly for those who have not saved enough for retirement and have to stretch their assets to make ends meet.

Simply put, with an IIA you give your assets, irrevocably, to an insurance company. In exchange they provide you with a lifetime income in which each payment is a return of interest and principle. A variety of survivor guarantees can be purchased by reducing the amount of monthly income received.

Ironically, annuities of all types have become a primary component of agent incomes and insurance company profits in recent years. Of course these commissions and profits are paid for by the consumer and essentially result in a reduction of monthly benefit paid. Interestingly, one does not get a break buying from a company direct nor are no-load IIA's available to the best of my knowledge. You pretty much get a similar benefit amount in return for premium paid. A little shopping can get you the best value with a highly rated company.

Regards,

ole meph

[tc101]

[mephistophles]

Yes, you can trust that promise by staying with the State Guarantee Program as discussed above.

Regards,

ole meph

[tc101]

But couldn't the state guarantee program change? Or is that something that is set in stone like a treasury bill? Is there any case in the past of a state guarantee of any type not being honored? I don't know the answer to these questions which is why I am asking.

[nick22]

I assume a state guarantee is about as good as an FDIC guarantee. Sure it could change, but why would it. All a state needs to do to meet obligations is increase taxes, so why would they abandon the program. Maybe if you enter your contract when the guarantee exists, that contract would always be guaranteed by the state, regardless of future law changes.
_________________
Nick22

[Orion]

My state has been having problems making ends meet for years now. And the voters still tend to think that taxes are high. And large-scale annuity failures seem most likely when everything else is going wrong too, so I wonder if it will really come through when you need it.

By the way, if you move, are you covered by the old state or the current state?

[mephistophles]

Of course, the only thing in life that is guaranteed is that we all die someday.

For those who want the safest of the safe, as we understand it today I would recommend Treasuries so you can sleep well at night.

Regards,

ole meph

[Quasimodo]

Even a conservative, highly rated insurance company can blow up. In the early 1980s I worked for Sayre and Toso, an insurance broker subsidiary of Mission Insurance companies. Mission companies had the highest possible casualty-property insurance rating - AXV, but Sayre and Toso engaged in some practices with their reinsurers that were outright fraudulent in order to gain a competitive price advantage in selling high limit excess liability policies. The Sayre and Toso managers made nice bonuses for awhile, but eventually the reinsurers found out about the falsification of applications and denied some big claims and the parent company went from the highest possible security rating to bankrupt. Policyholders who thought they had a solid, blue-chip insurance carrier behind them are finally getting some of their claims paid after twenty years of litigation.

I guess part of diversification might include spreading your assets around so you aren't totally reliant on a single financial institution.
_________________
A beautiful thing is never perfect.

Egyptian proverb

[G12]

Although states regulate and examine insurance companies they can still fail as evidenced by past results. If it were me I would look for multiple highly rated companies that write vanilla business and spread the risk among them like has been mentioned, in that instance above average payout is not as important as longevity. Many insurance companies have been performance challenged when issuing VA's with return guarantees and esoteric products. I am familiar with one P&C company which was one of the 3 oldest in the country going down 3-4 years ago with little to no warning, stuff happens. I would personally have much more comfort with a FDIC insured product compared to a state guarantee, but that won't get you a lifetime income.

[Phil]

I like the idea of annuities, and still don't understand why so many in this forum aren't stronger supporters.

I agree that one has to worry about the insurance company going bust. I think the Guarantee Fund coverage is 100K in CT, so when I decide to do one, I'll make sure not to put more than that in any one company.

I still haven't decided whether to go with the inflation protection or not. I saw one argument against the inflation option – namely that an insurance company can use the law of large numbers to take away your mortality risk, but the law of large numbers doesn't give them any special advantage when it comes to covering the inflation exposure. As a consequence, they may be making a conservative estimate when it comes to inflation. OTOH, if I opt to accept the inflation risk I have to decide whether keeping it makes sense. I'm still a few years away from the decision, so I can give it some thought.

[hudson2]

Annuity Guarantee in NC: $300,000.

See Page 7:

http://www.ncdoi.com/consumer/....ities~.pdf

[Barry Barnitz]

In regard to credit default risk with immediate annuities. We know that fixed, graded, and inflation-indexed annuities based on the insurer's general accounts are dependent on the ongoing solvency of the insurance company.

However, since a variable immediate annuity is based on the separate account would it, as in the case of deferred variable annuities, be insulated from credit risk?

With most of the American population destined to have retirement wealth accumulations (measured in real dollars) in the 0 to 1,000,000 dollar zone, partial annuitization of the nest egg is likely to be a near optimal decumulation strategy for most of these fellow citizens.

I would also argue, that for an early retiree (55-65), assuming reasonable health, and potential long joint life expectancy, a case can be made for partial annuitization, based on a mix of inflation-indexed and low cost immediate variable annuities (with a low AIR), designed to provide the essential required base survival income. The reason for the addition of the IVA is in consideration of the possibility that one's personal inflation rate may prove higher than the CPU index factor, and that a partial equity based income stream is more likely, although in no way certain, to hedge this inflation risk over the long run.

Note that I am thinking of an early retiree (late 50's early 60's) that might have a joint life expectancy that could reach 30 or 40 years. A retiree delaying the annuitizaton into the late 70's or 80's would more than likely opt for a nominal fixed immediate annuity.

It would be nice to know if the IVA remains insulated from credit risk. If so, the combination of the IVA with an inflation indexed (or nominal) IA funded to the limit of state guaranty insurance limits would lower the default risk.

regards,
Barry
_________________

blb
December Birthday Celebration: Ludwig van Beethoven

[stipeman]

[bob u.]

I ask this question respectfully. On what basis do you assume that an IVA in a TIPS fund would necessarily be superior (I assume you mean in return) to an inflation-indexed annuity?

I haven't crunched the numbers (perhaps you have) but here are a few things you would need to consider. The payout from the IVA would be based on your age and the AIR and the costs attached to the IVA. After the first year your IVA would have to clear the AIR hurdle before your payment went up. In other words, there could be years your payments stayed level or even decreased, depending on the AIR and return.

On the other hand, an an inflation-indexed IA would provide (one assumes) a steadily increasing payment--a growing income stream not subject to the vagaries of an AIR.

Again, perhaps you or Meph or Barry or Mel have made cash flow comparisons comparing a TIPS IVA versus an inflation-indexed IA. I realize there's not much history in this country (but there is in the UK and Canada I believe) for TIPS funds or inflation-indexed annuities. Still, I'd love to see any numbers you've worked out.. Bob U.

[bolt]

[removed at request of poster]

[Allan]

[stipeman]

[nisiprius]

[nisiprius]

First, let me note that this comparison can be interpreted in either of two ways.

Purchasing an annuity is premised on the idea that one a) needs, b) a specified lifetime income stream. The alternative to purchasing one would seem to be an investment plan that supports a withdrawal strategy allowing the same income stream.

One well-articulated plan is described in Paul Grangaard's book The Grangaard Strategy: Invest Right During Retirement. On pp. 178-199 he works through a specific example of his strategy, with dollar numbers. He assumes that "you bring $739,129 with you into retirement." He then makes the following list of assumptions:

[nisiprius]

[I'm deleting my own flip and poorly-considered remark]

[Allan]

[nisiprius]

[SamB]

I did not see it mentioned here, but not only is insurance company solvency a problem for annuities, it is also a problem for LTC policy holders. If you buy LTC insurance when you are most likely 20 to 30 years away from a nursing home, there is also the possibility that Federal and State law change, and what is covered or not covered by medicare and medicaid, or the general approach to LTC has changed, and your policy is basically irrelevant to the new, changed circumstances.

I bought LTC insurance, but a primary reason was protection over the near term from a debilitating accident. I expect that there is a high probability that if I live another 30 years that my LTC insurance, even if the insurance company is solvent, will be irrelevant. I think that there is a high probability I will be paying anyway.

The best insurance is having assets well in excess of your needs. You can pay the premiums, but you will always have a plan B.

Sam

[stipeman]

[Barry Barnitz]

If one were to fund the Vanguard Variable SPIA with the Vanguard Inflation Indexed Securities fund one must keep the following points in mind;

1. The Fund's returns will be reduced by the 0.52% annual insurance fee for the SPIA.

2. The income stream will be determined by the annual total return of the underlying fund (in this instance, the inflation indexed bond fund) and the selected AIR for the annuitization. This results in an income stream which will not mirror the CPI. I have prepared a brief monograph demonstrating how the Fund would have provided an income stream from 2001 to 2006 (the full years of the fund's existence) assuming a 3.5% AIR. Income streams would have surpassed inflation during the first four years of fund returns; would have lagged inflation over the next two years; and, indeed, would have actually fallen during these two years. The point to realize is that a marked-to-market inflation indexed mutual fund is not going to provide an income stream that correlates precisely with inflation.

Vanguard Variable SPIA: Using Vanguard’s Inflation Indexed
Securities Fund for Inflation Protection

regards,
_________________

blb
December Birthday Celebration: Ludwig van Beethoven

[nisiprius]

[bob u.]

Here's a link to the Michigan Life & Health Insurance Guaranty Association. http://www.milifega.org/docume....erage2.pdf

Note the section on "Limits on Amount of Coverage." It includes $300,000 in LTC benefits. I don't know whether this is unusual, but it's nice to have it in the home state. Bob U.[url][/url]

[bob90245]

[nisiprius]

Re bob's posting immediately above on NOLHGA covering LTCI: Thanks. I stand corrected... and informed. Apologies to all for my casually posting misinformaiton without checking.

I've been looking into the history of SIPC since posting above, and I still think there's a certain animus against insurance companies. The situations with regard to insurance companies and brokerages seem to me to be rather parallel.

In the years 1968 to 1970, there was a wave of something like a hundred brokerage failures and a number of scandals. There had, it turns out, been long-standing rumors that the Mafia had gotten involved in brokerage back-office operations. There was a high-profile incident in which a million dollars of IBM stock vanished from the offices of Hayden, Stone, then a large and respected brokerage, and mysteriously appeared in the Harrisburg Bank and Trust company in a Bankers Telephone Company Employees Insurance Fund. An alleged Mafia figure was subequently indicted in connection with the event.

Several other big firms went under. In one case the problem was that too much of the firm's own assets were in holdings such as Four Seasons Nursing Homes.

The SIPC was formed. Brokerage failures quietly continued over the years with the SIPC quietly taking care of customers.

A 2003 GAO report says that "SIPA liquidations are rare in general and claims in excess of the SIPA limit are even more rare. For example, since 1998, more than 4,000 firms have gone out of business, but less than 1 percent or 37 firms became part of a SIPA liquidation proceeding. This is consistent with historical data dating back to the 1970s."

I believe 37 SIPC bailouts from 1998 to 2003 is not terribly different from the rate of NOLHGA bailouts.

I don't think anyone even thinks of checking a brokerage's balance sheet. Does Moody's even rate brokerages for financial strength? Brokerages certainly don't publicize them. When people ask for recommendations about brokerages and mutual fund companies, I never hear financial strength even entering into the picture. Nobody says "Aren't you worried about putting your life savings into the hands of a brokerage"

It might seem that you could see trouble coming at a brokerage and take your assets out before it hit, whereas you're stuck with an SPIA, but I doubt that it really works that way. It didn't work that way for the investors who were caught up in the troubled brokerages before SIPC.

1968-1970. Wave of financial scandal and insolvencies hit brokerages. SIPC formed. During subsequent years, a small but significant number of brokerages continue to fail, SIPC continues to quietly bail them out, nobody worries about it.

1983. High-profile problems with insurance-company insolvencies. State guaranty associations formed. During subsequent years, a small but significant number of insurance companies continue to fail, the guaranty associations continue to quietly bail them out...

Certainly something to know about, but not to worry about too much?

[MikeA01730]

In my more innocent and trusting days, when Jimmy Carter was president and interest rates and inflation were sky high, I bought four single premium deferred annuity policies from four different companies. One company was Executive Life of California, and another Fidelity Bankers Life Insurance Company. Both had top ratings from Best, and one had an excellent S&P rating as I recall. The broker said that all the companies were financially strong. I periodically checked the Best and S&P ratings and never saw any problems. Nevertheless both companies failed, costing me a significant amount of money and grief.

I later found out about Weiss Ratings. Weiss had given both companies problematic ratings well before they failed. If I had known about Weiss back then, I'd be a bit richer now. Weiss is not paid by the companies they rate, and they rate everyone. Unlike some other ratings companies Weiss ratings are distributed reasonably, as opposed to the top heavy distributions (i.e. almost everyone gets an A+) often seen. Consequently they're the only ratings I feel I can rely on.

Vanguard offers a CPI-adjusted annuity (and also variable annuities) through AIG. The last time I checked the Weiss rating for AIG was C+, which means "Fair Financial Strength”. C+ may be OK for a 5 year horizon, but for 30+ years (I hope) it doesn't sound so safe. If I ever annuitize, I’ll transfer my funds to a company with a better Weiss rating.

The annuity specialists at Vanguard tell me that for a variable annuity the financial strength of both the investment fund and the insurer affect the payments received. It’s the insurance company that provides the annuity feature: the payments continue as long as the underlying fund performs well, even if you live much longer than your life expectancy. That risk (i.e. of your long life) is assumed by the insurance company, and if the company fails your payments could be reduced.

With a standard fixed annuity the state insurance fund (MA for me) would probably provide decent compensation, but who knows what they'd do with a true inflation-adjusted annuity or even a variable annuity. My 1970's experience could have been better and could have been worse: they paid the principle plus the policy-guaranteed rate, ~4% instead of the 15%-20% I thought I'd been accruing for several years. It's an experience I'd rather not repeat.

Mike

[bob90245]

Mike,

Thanks for the information about Weiss. I did a Google search and found their website with their ratings for annuity insurers.

http://www.weissratings.com/HL_annuity.asp

They only show "Strongest and Weakest Annuity Insurers". Looks like they want you to sign up (and pay for) a subscription if you want to view the whole list of insurers.

Do libraries carry a subscription?

[MikeA01730]

Bob,

It wasn't long ago when you could pay $15.95 (as I recall) for a report on an individual company from their web site. When I look now I don't see that option. You might give them a call to see if they sell individual reports on the phone.

Weiss has a publication titled "Consumer Guide to Variable Annuities". I just ordered a copy of last years guide (for $2.95 instead the $49 for the 2007 version) that I think, but don't know for sure, shows the ratings. I know that some libraries have this publication.

If you find out more it would be helpful if you posted what you learn here.

Good luck.

Mike

[stipeman]

[Richie Noveau]