Allianz Vision Deferred Variable Annuity

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DorchesterMa
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Allianz Vision Deferred Variable Annuity

Postby DorchesterMa » Sun Jun 18, 2017 5:40 pm

My Brother in law (BIL) is a single male 64 years of age no children. He was sold an Allianz Vision Deferred Variable Annuity by a financial broker in March of 2011. He is in the 0% Federal tax bracket. Here are the current values of the annuity as of 6/15/17:
Date Purchased: 3/3/2011
Total Premium: $100,000.
Gross Contract Value: $115,590.91
Surrender Value: $112,508.10
Death Benefit: $117,704.44
Free Amount Available: $12,000.

After reading Jane Bryant Quinn's great book "How to Make Your Money Last" I have about a second grade understanding of variable annuities. It is apparent to me that there is absolutely no way the "contract value" or market value of the securities purchased in the annuity would ever amount to anything close to what an investor would receive from a low cost index fund. The initial $100,000 (before commission and fees) was invested as follows:
10% Intermediate Term Bonds-PIMCO VIT Real Return, PIMCO VIT Total Return
70% Specialty-BlackRock Global Allocation, AZL Franklin Templ FS Plus, AZL INV Equity and Income
20% Fund of funds- AZL Balanced Index Strategy
So from 3/3/11 to 6/15/17 the contract value is $115,590.91, up $15,590.91 in over 6 years in a bull market. If my BIL had put his $100,000 into an S&P 500 index with dividends reinvested, his investment would be worth $206,955 as of the end of May 2017. (DQYDJ S&P 500 Return Calculator with Dividend Reinvestment).
The only somewhat saving grace with these deferred variable annuities appears to be the income protector. This income protector starts off with the $100,000 initial base investment and increases 8% per year. Poor slob investors hear 8% increases per year and they think this is a great deal! So the annuity's benefit base is now $150,000 made up of the original $100,000 and 6 years of 8% increases of $8,000 plus one quarter of a year at $2,000. ($100,000+$48,000+$2,000= $150,000.) Of course you can't take out the $150,000. That is a figure only used to calculate your estimated annual payment. If you are under age 65 you can take 4% of $150,000 or $6,000 per year for life. At age 65 the 4% increases to 4.5%. So if my BIL waits until 3/3/18, his base will increase to $156,000 and his withdrawal percent will be 4.5% for an annual payment of $7,020.

Question 1) Do I advise my BIL to wait until 3/3/18 and take out the surrender value which hopefully will be @ $114,000 and treat this whole thing like he just invested in a 7 year CD which paid him almost 2% interest per year and put the money in a Vanguard low cost S&P 500 Index?
2) Do I advise him to wait until 3/3/18 and take the annuity of $7,020 a year for life? This sounds tempting because there is a death benefit of the remaining balance but the $7,020 is mostly made up of his money that he put in, not Allianz monies.
3) What other suggestions do you have?

Uniballer
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Re: Allianz Vision Deferred Variable Annuity

Postby Uniballer » Sun Jun 18, 2017 6:00 pm

I don't see how any good answers could be given without more complete information about his income, assets, and expenses. Here is the link to the standard format.

itstoomuch
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Re: Allianz Vision Deferred Variable Annuity

Postby itstoomuch » Sun Jun 18, 2017 6:45 pm

Not advice. I don't give advice.
We have 8 GLWB annuities, 2008-2012, laddered in value and time. They were purchased for insurance to the market and Income to supplement a small pension. The other reasons are to mimick a PER tier1 pension, death benefit, RMD friendly, and flexibility to take Income or terminate and redirect.
Our first purchased in 2008, the strategy was to be most aggressive in the fund selections, since there is a guaranteed minimum Income growth factor (Income Account). Our last purchase 2012, the goal was to maximize the backend or Income taken and to prolong the guaranteed period (15 years). Goal was to have a secure funded ratio (FR) >1.1

Our GLWB VAs, have done well. The Account Value is 2.1x the original deposit in an all-equity portfolio and we have taken 5% withdrawal in 2016. Contrast, if I had invested in VTI, I would have today, about 3x original value or about 2x using a 60/40 allocation.

See notes below
YBrother'sMMV
Last edited by itstoomuch on Sun Jun 18, 2017 7:40 pm, edited 2 times in total.
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

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nedsaid
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Sun Jun 18, 2017 7:29 pm

There are several threads on Variable Annuities and I have posted extensively on these as well as Itstoomuch. Do a search for "Nedsaid Variable Annuities" and read through the threads. There are at least four threads. This is a question that comes up again and again and I have written very detailed posts analyzing these products.

My general advice is to avoid Variable Annuities because of their high fees which typically run 3.5% to 4.0% a year. However, many of these products had such things called "living benefits" which are principal guarantees and/or future income guarantees. A lot depends on why you bought this in the first place. The idea of the "living benefits" is to in effect put a put option on the stock market. In other words, you are buying protection from experiencing a bear market right before you retire.

Typically, these products are bad investments but might offer decent guarantees of future income. If you wanted to lock in future retirement income, it might be worth keeping. Pretty much, after 10 years, you will have paid 40%-50% of your initial investment in fees to protect your investment from a stock market crash and to guarantee future income for the rest of your life. The fees put a big damper on your investment returns but that is the price for the guarantees.

I have had these offered to me but I have declined. I just thought the fees were too much. Itstoomuch bought a few of these as a way of locking in a pension but he bought these when the guarantees were more generous than today.

If you promise to read through the threads, I would be happy to help analyze what you have. I want you to do some homework first. Again, I have posted very extensively on this topic and don't want to repost it all over again.
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nedsaid
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Sun Jun 18, 2017 7:42 pm

What you will find here at Bogleheads is a lot of negativity about Variable Annuities. Taylor Larimore used to sell insurance products for a living and does not recommend them. There is a now deceased poster called "Ole Meph" whose screen name was mephistophles. Ole Meph was a career insurance professional and he said that his conscience would not allow him to sell these products. Mel Lindauer also knows a lot about annuity products and has written articles about them in Forbes Magazine. Mel is pretty negative on these as well.

There is Professor Moshe Milevsky, who teaches at York University in Toronto, Canada. He is an expert on such products. He says that there are cases where the "living benefits" are worth the fees. So that is a contrary opinion. Even at that, he think that many Variable Annuities are not a good deal.

This should help with your research as well.
A fool and his money are good for business.

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nedsaid
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Sun Jun 18, 2017 7:53 pm

There is another thread where a poster had us analyze his brother-in-law's variable annuity. Very similar to your scenario. I spent a lot of time analyzing that annuity. See if you can find it and probably a lot that is there will apply to you.
A fool and his money are good for business.

itstoomuch
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Re: Allianz Vision Deferred Variable Annuity

Postby itstoomuch » Sun Jun 18, 2017 8:41 pm

DorchesterMA wrote: If you are under age 65 you can take 4% of $150,000 or $6,000 per year for life. At age 65 the 4% increases to 4.5%. So if my BIL waits until 3/3/18, his base will increase to $156,000 and his withdrawal percent will be 4.5% for an annual payment of $7,020.]

Today's annuities of the same type offers 3.0-3.5% at 65 yo.
Our VAs is 5.0% at 60yo+
Our FI is 6.5% at 70yo + 5 years holding.
Our state's (OR) PER, FR=0.72, It may not run out of money but the taxation to the public is in controversy.
Your bro's choice is take 3.5% "SWR" on real cash on $115K in a surrender with the possibility of outliving the $115k. or take this annuity at 4.5% on $156K Income account and never run out of Income.
There are other outcomes.
Remember, Annuity is by definition a "stream of income," https://www.bogleheads.org/wiki/Category:Annuities :oops:
Remember, Investing is taking an amount of risk to achieve higher returns in the Markets. You can lose money and you should expect to periodically see a decrease in the value of your holdings :oops:
So, what is your bro's FR? Is he investing or looking for a future guaranteed Income :confused .

Suggest you see an annuity consultant.
Get a copy of how annuities works, from Immediateannuities.com (Hersh Stern)
Last edited by itstoomuch on Sun Jun 18, 2017 11:47 pm, edited 2 times in total.
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

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Bogle_Feet
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Re: Allianz Vision Deferred Variable Annuity

Postby Bogle_Feet » Sun Jun 18, 2017 9:26 pm

Variable annuities along with index annuities are 2 of the most inferior financial products on earth. Get out and stop the high fees and stop the ordinary income taxes on future gains. Also take Mr Advisor's name off the contract so that he doesn't continue to earn his trailer commissions quarter after quarter. Don't further reward the con man. https://www.youtube.com/edit?o=U&video_id=ZulYOxPaoA8

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nedsaid
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Sun Jun 18, 2017 9:42 pm

Bogle_Feet wrote:Variable annuities along with index annuities are 2 of the most inferior financial products on earth. Get out and stop the high fees and stop the ordinary income taxes on future gains. Also take Mr Advisor's name off the contract so that he doesn't continue to earn his trailer commissions quarter after quarter. Don't further reward the con man. https://www.youtube.com/edit?o=U&video_id=ZulYOxPaoA8


I pretty much determined that I would do better to take my chances in the market keeping my investments and passing on the Variable Annuity. The price of 40% to 50% or my original investment over 10 years to put a put option on the stock market was just too high for me. If I want a Single Premium Immediate Annuity, I will buy in retirement.

I need my own YouTube Channel to go with my Boglehead user name so that I can drive traffic to my own channel. Link to my own videos.
A fool and his money are good for business.

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nedsaid
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Sun Jun 18, 2017 9:59 pm

itstoomuch wrote:
DorchesterMA said: If you are under age 65 you can take 4% of $150,000 or $6,000 per year for life. At age 65 the 4% increases to 4.5%. So if my BIL waits until 3/3/18, his base will increase to $156,000 and his withdrawal percent will be 4.5% for an annual payment of $7,020.

Today's annuities of the same type offers 3.0-3.5% at 65 yo.
Our VAs is 5.0% at 60yo+
Our FI is 6.5% at 70yo + 5 years holding.
Our state's (OR) PER, FR=0.72, It may not run out of money but the taxation to the public is controversy.
Your bro's choice is take 3.5% "SWR" on real cash on $115K in a surrender with the possibility of outliving the $115k. or 4.5% on $156K Income account and never run out of Income.
So, what is your bro's FR?

Suggest you annuity consultant.
Get a copy of how annuities works, from Immediateannuities.com (Hersh Stern)


My rule of thumb is that if you have older annuities, purchased 2007-2008 or before, that you carefully analyze them before cashing them in. The older annuities had more generous "living benefits" than they do now and thus some of them might be worth keeping.

But notice, that the Original Poster's Brother-In-Law's Annuity purchased in 2011 is less generous than a comparable one that itstoomuch purchased a few years earlier. The guaranteed annual withdrawal rate for a 65 year old was cut from 5.0% in 2008-2009 to 4.5% in 2011 and now down to
3.0% to 3.5% in 2017. A sustainable withdrawal rate from an investment portfolio is probably now 3.5%, identical to what the insurance companies are offering. The case for buying these is getting weaker and weaker as insurance companies cut the benefit.

With these type of annuities, it is in the interest of the annuity holder to invest the sub-accounts as aggressively as possible. Your guaranteed withdrawals come from the income base anyway so really there isn't too much to lose. But notice that the insurance companies are now limiting how aggressively you can invest the monies and the companies reserve the right to change your investment allocation when it suits them. Again, the guarantees have been cut.
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Bogle_Feet
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Re: Allianz Vision Deferred Variable Annuity

Postby Bogle_Feet » Sun Jun 18, 2017 10:22 pm

nedsaid wrote:If I want a Single Premium Immediate Annuity, I will buy in retirement.

You might want to study up on these products to before you put money into them. Like deciding that taking a vacation now is more important than having food and shelter later.

https://www.youtube.com/watch?v=QDUbQeZvJ9g

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nedsaid
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Sun Jun 18, 2017 10:46 pm

Bogle_Feet wrote:
nedsaid wrote:If I want a Single Premium Immediate Annuity, I will buy in retirement.

You might want to study up on these products to before you put money into them. Like deciding that taking a vacation now is more important than having food and shelter later.

https://www.youtube.com/watch?v=QDUbQeZvJ9g


The annuity slayer at it again. He raises some good points and I largely agree with him. There are valid reasons for buying Single Premium Immediate Annuities and I have gone over them ad naseam. Definitely not for everyone but they do have their place.

Best of luck on your YouTube Channel.
A fool and his money are good for business.

DorchesterMa
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Re: Allianz Vision Deferred Variable Annuity

Postby DorchesterMa » Mon Jun 19, 2017 7:37 am

Nedsaid wrote:
There is another thread where a poster had us analyze his brother-in-law's variable annuity. Very similar to your scenario. I spent a lot of time analyzing that annuity. See if you can find it and probably a lot that is there will apply to you.


I found the post about TransAmerica GLWB Annuity-Transfer to Vanguard and I learned a ton from you, itstoomuch, and the poster.

As you have said not many people like these products and I would never advise my BIL to buy one. Unfortunately he purchased it before we knew about this wonderful Boglehead forum. Since he did purchase the variable annuity over 6 years ago I am leaning towards advising him to keep the annuity for the future guaranteed income which he could use. With the fees so high it seems like a fools errand to count on the investment portion. So if my BIL waits until 3/3/18, his base will increase to $156,000 and his withdrawal percent will be 4.5% for an annual payment of $7,020. I have to find out if there are any fees that reduce this annual amount of $7,020. I will call Allianz to find this out. I fear talking to the Advisor because I may tell him off or worse yet he may sell us another product!

Thank you so much for the great advice.

itstoomuch
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Re: Allianz Vision Deferred Variable Annuity

Postby itstoomuch » Mon Jun 19, 2017 10:16 am

nedsaid wrote: If you are under age 65 you can take 4% of $150,000 or $6,000 per year for life. At age 65 the 4% increases to 4.5%. So if my BIL waits until 3/3/18, his base will increase to $156,000 and his withdrawal percent will be 4.5% for an annual payment of $7,020.


Looking at Vanguard's offering, their payout is 4.0% at age 65.
https://personal.vanguard.com/us/whatwe ... al-benefit
They have a nice explanation since this is essentially a Vanguard site.
We knowingly bought a pension. As Vanguard states:
"If you need secure, dependable income consider an annuity.* It can help reduce the risk that you'll outlive your money."
"Guaranteed income for life through the Vanguard Variable Annuity"
"If you withdraw your retirement assets without a clear plan, you increase your risk of running out of money. Secure Income™, the optional Guaranteed Lifetime Withdrawal Benefit (GLWB) rider available through the Vanguard Variable Annuity, offers you protection from market volatility and guaranteed payments for life.*

hint: Investigate current SPIA at age 65, if there is no legacy motive.
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

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nedsaid
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Mon Jun 19, 2017 11:55 am

DorchesterMa wrote:
Nedsaid wrote:
There is another thread where a poster had us analyze his brother-in-law's variable annuity. Very similar to your scenario. I spent a lot of time analyzing that annuity. See if you can find it and probably a lot that is there will apply to you.


I found the post about TransAmerica GLWB Annuity-Transfer to Vanguard and I learned a ton from you, itstoomuch, and the poster.

As you have said not many people like these products and I would never advise my BIL to buy one. Unfortunately he purchased it before we knew about this wonderful Boglehead forum. Since he did purchase the variable annuity over 6 years ago I am leaning towards advising him to keep the annuity for the future guaranteed income which he could use. With the fees so high it seems like a fools errand to count on the investment portion. So if my BIL waits until 3/3/18, his base will increase to $156,000 and his withdrawal percent will be 4.5% for an annual payment of $7,020. I have to find out if there are any fees that reduce this annual amount of $7,020. I will call Allianz to find this out. I fear talking to the Advisor because I may tell him off or worse yet he may sell us another product!

Thank you so much for the great advice.


It looks to me that his portfolio is worth about $115,000 and that he will be able to take out $7,000 a year. That gives him a guaranteed withdrawal rate of about 6.0%. Going to http://www.immediateannuities.com I find that a 65 year old male in my state can get $548 a month for $100,000 or $6,576 a year for a withdrawal rate of 6.6%. Essentially, your brother-in-law locked in and annuity seven years in advance and got an adjustment for inflation.

If rates back in 2011 were the same as right now and were he 65 back in 2011, he would have purchased about $6,576 a year. Now in 2018, he will be 65 and will be able to lock in $7,020. So he got a 6.75% "inflation adjustment." Problem is, this is all a moving target. Interest rates are probably higher now than in 2011, so you can buy more income now than you could have bought then. So the "inflation adjustment" on what a 65 year old could have purchased in 2011 probably matched or beat inflation by a hair. Of course you brother in law was probably 58 years old back then and he would have had to buy an annuity at whatever his age was back in 2011,

I hope you are making sense of this, my inexact comparison. But pretty much, he locked in a future income stream about seven years in advance. Let's do one more step. Your brother in law could take the $115,000 and buy $630 a month in my state. That would be $7,560 a year. Problem is that brother-in-law surrenders his principal forever in exchange for his lifetime payments.

Did brother-in-law get ripped off? Not necessarily. He has a guaranteed withdrawal of $7,020 in 2018 for the rest of his life even if he exhausts his investment from those guaranteed withdrawals. My guess is that it would take him 17 years or so to exhaust his principal. If BIL has an emergency, he can take additional principal out of his annuity though it will reduce his guaranteed payments there after. So he is giving up the extra $540 a year for the additional flexibility. In other words, he gets both the guaranteed payments and his principal, at least until the guaranteed payments exhaust his principal. Not quite eating your cake and having it too, but as close to that as the insurance companies can make it.

So you can see why these are such complex instruments to analyze.
Last edited by nedsaid on Mon Jun 19, 2017 3:19 pm, edited 1 time in total.
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DorchesterMa
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Re: Allianz Vision Deferred Variable Annuity

Postby DorchesterMa » Mon Jun 19, 2017 2:55 pm

itstoomuch wrote:
Looking at Vanguard's offering, their payout is 4.0% at age 65.
https://personal.vanguard.com/us/whatwe ... al-benefit
They have a nice explanation since this is essentially a Vanguard site.
hint: Investigate current SPIA at age 65, if there is no legacy motive.


Thank you very much for all the help with this complicated issue. My big fear was that I would give my BIL bad advice. I now feel that at least I know a bit on how these variable annuities work and If he decides to take the annual payment of $7,020, it would not be an irrational choice.

I looked at Vanguard's Income Estimator for a SPIA for a single male age 65 with $115,000. The immediate income annuity pays out $636.17 per month or $7,634.04 per year. This is $614.04 per year more than the annual payment on the variable annuity of $7,020. My BIL will have to decide if giving up control of his principal is worth the $614.04 per year with the income annuity vs the variable annuity. No one wants to be the annuitant who buys the SPIA and then expires soon after and the insurance company gets all the gravy. But I guess if you are gone you won't know the difference.

Thank you again for all your help and may you have good health and a long and happy life.

DorchesterMa
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Re: Allianz Vision Deferred Variable Annuity

Postby DorchesterMa » Mon Jun 19, 2017 3:10 pm

Nedsaid wrote:
Did brother-in-law get ripped off? Not necessarily. He has a guaranteed withdrawal of $7,020 in 2018 for the rest of his life even if he exhausts his investment from those guaranteed withdrawals. My guess is that it would take him 17 years or so to exhaust his principal. If BIL has an emergency, he can take additional principal out of his annuity though it will reduce his guaranteed payments there after. So he is giving up the extra $540 a month for the additional flexibility. In other words, he gets both the guaranteed payments and his principal, at least until the guaranteed payments exhaust his principal. Not quite eating your cake and having it too, but as close to that as the insurance companies can make it.

So you can see why these are such complex instruments to analyze.


Thank you for the education and the peace of mind you have given me. I feel that I can give my BIL an educated opinion and that there is not wrong answer here. He can go with the Variable Annuity and at least keep his principal until it is exhausted or go with the SPIA and get the extra $540 per year.

Thank you so much and bless you for all the time spent on this.

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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Mon Jun 19, 2017 3:22 pm

Glad to help. Thanks for doing the homework that I suggested. You are a good student. Come back with any further questions and I will answer to the best of my ability.
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HomerJ
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Re: Allianz Vision Deferred Variable Annuity

Postby HomerJ » Mon Jun 19, 2017 4:31 pm

DorchesterMa wrote:The only somewhat saving grace with these deferred variable annuities appears to be the income protector. This income protector starts off with the $100,000 initial base investment and increases 8% per year. Poor slob investors hear 8% increases per year and they think this is a great deal! So the annuity's benefit base is now $150,000 made up of the original $100,000 and 6 years of 8% increases of $8,000 plus one quarter of a year at $2,000. ($100,000+$48,000+$2,000= $150,000.) Of course you can't take out the $150,000. That is a figure only used to calculate your estimated annual payment. If you are under age 65 you can take 4% of $150,000 or $6,000 per year for life. At age 65 the 4% increases to 4.5%. So if my BIL waits until 3/3/18, his base will increase to $156,000 and his withdrawal percent will be 4.5% for an annual payment of $7,020.


And that's how they get you. 4.5% for over 65? Checking immediate annuities, you can get 6.7% SPIA. Which means it only costs $105,000 to get that $7020 annual payment.

Ugh... The perfect example of junk policy. They promise you "guaranteed 8%", but instead you actually get 0.6% return. Less than 1%. They send you a statement showing your money has grown to $156,000, but in actual reality, the $100,000 has only grown to $105,000.

Question 1) Do I advise my BIL to wait until 3/3/18 and take out the surrender value which hopefully will be @ $114,000 and treat this whole thing like he just invested in a 7 year CD which paid him almost 2% interest per year and put the money in a Vanguard low cost S&P 500 Index?
2) Do I advise him to wait until 3/3/18 and take the annuity of $7,020 a year for life? This sounds tempting because there is a death benefit of the remaining balance but the $7,020 is mostly made up of his money that he put in, not Allianz monies.
3) What other suggestions do you have?


Definitely do not take annuity. Far better to take the surrender value, and then reinvest.

You'd have to give us a lot more information about him for us to recommend investments. I doubt I'd suggest he go 100% Stock Index Fund. That's extremely risky on the other side.

If he wants guaranteed income for life, take the surrender value, and buy a SPIA.
Last edited by HomerJ on Mon Jun 19, 2017 4:47 pm, edited 3 times in total.

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Re: Allianz Vision Deferred Variable Annuity

Postby HomerJ » Mon Jun 19, 2017 4:34 pm

itstoomuch wrote:
DorchesterMA wrote: If you are under age 65 you can take 4% of $150,000 or $6,000 per year for life. At age 65 the 4% increases to 4.5%. So if my BIL waits until 3/3/18, his base will increase to $156,000 and his withdrawal percent will be 4.5% for an annual payment of $7,020.]

Today's annuities of the same type offers 3.0-3.5% at 65 yo.
Our VAs is 5.0% at 60yo+


And these are bad deals. 65 year old can get more than that on the open market with simple SPIA. I know you love your VAs, but they are not great deals. Better than most. You got pretty lucky buying at the exact right time. But even still, not good investments.

The ones offered today are absolute theft. 3%-3.5% annuity payout at 65? Ugh.
Last edited by HomerJ on Mon Jun 19, 2017 4:41 pm, edited 1 time in total.

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Re: Allianz Vision Deferred Variable Annuity

Postby HomerJ » Mon Jun 19, 2017 4:38 pm

nedsaid wrote:Did brother-in-law get ripped off? Not necessarily. He has a guaranteed withdrawal of $7,020 in 2018 for the rest of his life even if he exhausts his investment from those guaranteed withdrawals.


He got ripped off. Specifically because he was sold "8% minimum guaranteed".

He would have more income even if he had just invested in CDs all this time.

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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Mon Jun 19, 2017 5:12 pm

HomerJ wrote:
nedsaid wrote:Did brother-in-law get ripped off? Not necessarily. He has a guaranteed withdrawal of $7,020 in 2018 for the rest of his life even if he exhausts his investment from those guaranteed withdrawals.


He got ripped off. Specifically because he was sold "8% minimum guaranteed".

He would have more income even if he had just invested in CDs all this time.


Not sure that CD's offered very much back in 2011. His actual return was not quite 2.4% a year which sounds pretty competitive with CDs. I just took 100,000 and multiplied it by 1.024 six times and got $115,292.

The promised 8% growth was on the income base and not on the actual investment. Do some research on these and find out how they actually work. I wish you wouldn't just make flippant comments. No one is going to guarantee an 8% growth of principal.

My belief is that these are very marginal products, as the guarantees have been cut there is less and less reason to buy them. The problem in trying to analyze these is that everything is a moving target.
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nedsaid
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Mon Jun 19, 2017 5:54 pm

HomerJ wrote:
itstoomuch wrote:
DorchesterMA wrote: If you are under age 65 you can take 4% of $150,000 or $6,000 per year for life. At age 65 the 4% increases to 4.5%. So if my BIL waits until 3/3/18, his base will increase to $156,000 and his withdrawal percent will be 4.5% for an annual payment of $7,020.]

Today's annuities of the same type offers 3.0-3.5% at 65 yo.
Our VAs is 5.0% at 60yo+


And these are bad deals. 65 year old can get more than that on the open market with simple SPIA. I know you love your VAs, but they are not great deals. Better than most. You got pretty lucky buying at the exact right time. But even still, not good investments.

The ones offered today are absolute theft. 3%-3.5% annuity payout at 65? Ugh.


He was not buying a Single Premium Immediate Annuity. What brother in law was doing was locking in a future income stream seven years into the future with the flexibility of being able to tap the principal in an emergency even after the guaranteed payments started.

What I was trying to show was the difference if BIL had invested his money, waited seven years, and then purchased an SPIA. In most cases, you are ahead if you invest, wait, and buy the SPIA later. Chances are pretty good that he could have beaten his 2.4% return but we don't know that for sure.

In another thread, I showed how BIL could have used TIPS with a constant duration of about 10 to essentially do the same thing at lower cost. This is an idea floated by Bobcat2 aka BobK in his retirement income threads. This is what the DFA Target Date Retirement funds attempt to do.
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Frugal Al
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Re: Allianz Vision Deferred Variable Annuity

Postby Frugal Al » Tue Jun 20, 2017 8:44 am

nedsaid wrote:The promised 8% growth was on the income base and not on the actual investment. Do some research on these and find out how they actually work. I wish you wouldn't just make flippant comments. No one is going to guarantee an 8% growth of principal.

Most regular posters here KNOW HOW VA's WORK, and I know that Homer knows how they work. I don't consider his comment flippant whatsoever. It's the unfortunate schmucks who are unknowledgeable with investments that think these lousy products actually produce these types of "returns." FOR MOST PEOPLE THESE PRODUCTS ARE INAPPROPRIATE.

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Re: Allianz Vision Deferred Variable Annuity

Postby HomerJ » Tue Jun 20, 2017 8:48 am

nedsaid wrote:The promised 8% growth was on the income base and not on the actual investment. Do some research on these and find out how they actually work. I wish you wouldn't just make flippant comments. No one is going to guarantee an 8% growth of principal.


Read my numerous posts on variable annuities. I know exactly how they work. I have no idea why you consider my comments flippant. I've explained a hundred times that the "6% guaranteed" and the "8% guaranteed" are bogus promises made to fool investors. Yes, I know it only applies to the magical made-up number called "the income base". That's the core problem with these "investments". They get you in with high guarantees on the income base, then cheat you with much lower than market payout rates, resulting in net very poor returns.

Absolutely, millions of people buy these PRECISELY because they are sold "6% guaranteed" growth on their money, without understanding what it really means. The salespeople absolutely pretend to guarantee an 6% or 8% growth on principal. They won't say it outright, but yes, they do misrepresent what they sell all the time. These products should be illegal.

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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Tue Jun 20, 2017 10:15 am

HomerJ wrote:
nedsaid wrote:The promised 8% growth was on the income base and not on the actual investment. Do some research on these and find out how they actually work. I wish you wouldn't just make flippant comments. No one is going to guarantee an 8% growth of principal.


Read my numerous posts on variable annuities. I know exactly how they work. I have no idea why you consider my comments flippant. I've explained a hundred times that the "6% guaranteed" and the "8% guaranteed" are bogus promises made to fool investors. Yes, I know it only applies to the magical made-up number called "the income base". That's the core problem with these "investments". They get you in with high guarantees on the income base, then cheat you with much lower than market payout rates, resulting in net very poor returns.

Absolutely, millions of people buy these PRECISELY because they are sold "6% guaranteed" growth on their money, without understanding what it really means. The salespeople absolutely pretend to guarantee an 6% or 8% growth on principal. They won't say it outright, but yes, they do misrepresent what they sell all the time. These products should be illegal.


I do know that these get misrepresented. I also suspect that the agents don't always understand how these things really work. I think the fees are very high compared to whatever benefit the income guarantees provide. I also think that these are sold and not bought. They certainly are very aggressively marketed.

The thing is, my view on such things is more nuanced. I have just never had the "never" mentality. There was a time that the living benefits might have been worth consideration but the guarantees have been cut back. What I was doing was breaking the pieces apart piece by piece with careful analysis to show what the original poster's brother-in-law was actually buying. I also said that I had passed on these in the past.
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Tue Jun 20, 2017 10:45 am

Homer, I largely agree with you but you didn't do the math. I laid it all out for the original poster to analyze so that he could make his own decision. You just jumped in with both feet after all my careful posts with broad and sweeping statements. Your math was wrong and you didn't check the numbers before posting.

First of all, the compounded return on this policy was about 2.4% and competitive with CDs. He didn't get 0.6% return.

The 4.5% withdrawal rate was calculated off the income base. When you take the guaranteed withdrawal and compare it to the actual portfolio value, the withdrawal rate against the principal is more like 6.0%. Yes, this is lower than what you would get with the SPIA but in return you get access to principal in an emergency.

Again, what the brother-in-law did was lock in a future income stream seven years in advance. When you have a guaranteed withdrawal rate and an income base that grows at a guaranteed rate, it is pretty easy to calculate what those future payments will be.

We don't know for sure how the deal will work out because such things like inflation and interest rates and market returns are very dynamic. It is sort of a comparing a moving target vs. another moving target. These products are complex and it almost takes an actuary to understand them. I don't recommend these because of their cost and complexity.

So the guy was 6 years into one of these things. The question wasn't whether to buy or not to buy, that decision had been made. The decision is whether or not the fellow should keep the policy.
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Re: Allianz Vision Deferred Variable Annuity

Postby itstoomuch » Tue Jun 20, 2017 10:45 am

Why are BH comparing Annuities to Investments? They are Not the same in equivalence. They are Not the same in function.

Annuities are a poor investment and we have a lot of annuities. We did not buy annuities with the 1st purpose being investing ( investing was the 3rd ranked reason). Our annuities may have done better than most BH's 60/40 investments (same time frame) and with less risk and higher probability of sustained Income. Some annuities are better for investment purposes than others; Just as some investments are better than others in reaching investment goals. Some annuities are better in assuring a desired level income better others (which is the primary function of an annuity), as some allocations in a S/B are better than other S/B allocation at any point in time of the Market or a person's life cycle. At any given day on BH forum, there are threads on allocation and today's flavor is no bonds if you've reached your Number, which in my opinion is the Best risk management provided you have reached that Number { Google here, "no bonds in retirement portfolio", viewtopic.php?f=10&t=221391&start=50 } At some time, condition and place, every BH who have an IRA/401k/403b/etc, Will convert that retirement/tax deferred investment into income, partly because they have to convert by Law and partly because they need the cash flow.

I have made some fairly bold statements here and have already put up the values in this thread.
Ymmv. YannuityMV :oops:
:dollar :greedy
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Re: Allianz Vision Deferred Variable Annuity

Postby HomerJ » Tue Jun 20, 2017 11:28 am

nedsaid wrote:Homer, I largely agree with you but you didn't do the math. I laid it all out for the original poster to analyze so that he could make his own decision. You just jumped in with both feet after all my careful posts with broad and sweeping statements. Your math was wrong and you didn't check the numbers before posting.

First of all, the compounded return on this policy was about 2.4% and competitive with CDs. He didn't get 0.6% return.


My math was correct if he takes the $7020 annuity payment. The $100,000 only grew to the equivalent of $105,000 over 8 years. Which is only a 0.6% return.

Edit: I may have done the math slightly wrong using 8 years instead of 7 years. So 0.7% return if the OP actually keeps the policy an annuitizes it after 7 years. Still terrible.

Your figure of 2.4% is correct if he surrenders the policy and collects the surrender value of around $115,000 in a year.

The 4.5% withdrawal rate was calculated off the income base. When you take the guaranteed withdrawal and compare it to the actual portfolio value, the withdrawal rate against the principal is more like 6.0%.


Look, I understand what you are doing. You are dividing 7,020/115,000 to get 6.0% withdrawal.

I'm always willing to learn something. Does he get more than the $7,020 a year if he annuitizes it? I mean, can he pull some cash out of the policy too? The OP mentioned "free amount available". Can he pull $12,000 out of the policy, and still annuitize for $7,020 a year? That would change my numbers.

But if he can't, the $115,000 is meaningless if he annuitizes the policy. It's only a real number if he cashes out.

I already wrote this, but I'll write it again.

OP buys an annuity for $100,000. 7 years later, the income base is $156,000, and he annuitizes it, and gets $7,020 a year for life. If you'd like, you can say it grew to $115,000 actual cash value, he annuitizes it, and gets $7,020 a year for life.

But to buy a $7,020 annuity today for a 65 year old male only costs $105,000. So the $100,000 really only grew to the equivalent of $105,000 if he annuitizes it. 0.7% return. NOT $156,000, NOT $115,000, and certainly not the "guaranteed 8%" that was probably misrepresented to him when it was sold.

Surrendering the policy to get the $115,000 and buying a market-price SPIA is a better move. Keeping the policy and annuitizing is the wrong move.

Again, unless I'm wrong and he can cash out $12,000 and still annuitize for $7020. That will change the numbers.

Look, I may be wrong in this case, but I'm not jumping in with two feet and making broad sweeping statements without any thought at all. I'm willing to admit that I may be wrong - but don't characterize me as non-thinking.
Last edited by HomerJ on Tue Jun 20, 2017 11:42 am, edited 4 times in total.

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Re: Allianz Vision Deferred Variable Annuity

Postby itstoomuch » Tue Jun 20, 2017 11:29 am

It's all about Risk Management, not Investments, not annuities.
Think about it. :wink:
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Tue Jun 20, 2017 11:49 am

Homer, now I see what you did. You took the $7,020 and calculated how much it would take to buy such an income stream, you came up with $105,000. So I can see how you came up with the 0.6% return. His actual principal though is the $115,000. I took the $115,000 and at immediateannuities.com found that in my state he could get $7,560 a year. The difference in the $7,020 and the $7,560 a year is the price of being able to access the principal in an emergency. Once you buy an Single Premium Immediate Annuity, the principal is lost forever.

The other piece of this is that the guaranteed payments come out of the principal. It would take probably 17 years to exhaust the principal. So you don't start playing with the house's money until probably year 18. Many retirements don't last 17 years. The flip side of this is that if BIL died early, his heirs would receive the remaining principal. Another factor is that though brother-in-law would be retired, inflation doesn't retire. So that $7,020 buys less and less every year.

This is not a deal I would have taken back in 2011.

One reason I passed on these is that market performance, interest rates, and inflation rates are very dynamic. $7,020 guaranteed income stream on $100,000 might sound good as a rock bottom guarantee if the markets tanked badly but what happens if inflation really cranked up between 2011 and 2018? The $7,020 would not look impressive at all under that circumstance. In other words, too many things can change. My view is that if things went right, this might be a marginal deal. Markets though have a way of blowing things up.

I was offered a Prudential product and I would have held for 10 years or so. Spending 45% of my original investment over 10 years seemed too high of a price to pay. Plus, too many things could happen over that 10 year period. So I passed.

Fortunately, inflation was tame. The brother-in-law made 2.4% or so on his money. Not a disaster. He could roll it into a lower cost annuity or buy a Single Premium Immediate Annuity. So it worked out okay. Not what I would have recommended back in 2011 but that is what he did. Brother-in-law didn't do badly but he possibly could have done a lot better with something else.
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Re: Allianz Vision Deferred Variable Annuity

Postby DorchesterMa » Tue Jun 20, 2017 12:10 pm

I am going to follow the adage: Better to remain silent and thought a fool than to speak and remove all doubt.
I really am learning a lot from this post and I appreciate everyone's input. I know that you are all trying to give the best
advice on what was a bad purchase and how to minimize the damages. Lessons that have been learned:
1) Never buy a variable annuity.
2) Treat the broker like he is a leper and keep my BIL away from him.

Thanks everyone!

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nedsaid
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Re: Allianz Vision Deferred Variable Annuity

Postby nedsaid » Tue Jun 20, 2017 12:16 pm

My guess is that the all-in fees on this product are about 3.5% to 4.0% a year. So to get the 2.4% return after fees, the portfolio needed a return of 6% to 6.5% a year which he could have gotten with a balanced portfolio of stocks and bonds. In reality, he took a fair amount of risk to get that 2.4%.

On the other hand, if the markets had crashed really badly, he still had the guaranteed payments of $7,020 for the rest of his life on his $100,000 investment. This would have worked out if markets crashed but inflation stayed very low. If we had a 1973-1974 stagflation scenario where both stocks and bonds did poorly and inflation was relatively high, this annuity would have been a disaster. He would still have the guaranteed income but inflation would have eaten away a lot of the purchasing power.

A better idea would be to use TIPS funds with an average duration of probably 10 years to hedge inflation and to keep the ability to buy an income stream in the future. I suppose a scenario could happen that would blow even that up. Nothing is guaranteed in life.
A fool and his money are good for business.

itstoomuch
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Re: Allianz Vision Deferred Variable Annuity

Postby itstoomuch » Tue Jun 20, 2017 2:07 pm

DorchesterMa wrote:I am going to follow the adage: Better to remain silent and thought a fool than to speak and remove all doubt.
I really am learning a lot from this post and I appreciate everyone's input. I know that you are all trying to give the best
advice on what was a bad purchase and how to minimize the damages. Lessons that have been learned:
1) Never buy a variable annuity.
2) Treat the broker like he is a leper and keep my BIL away from him.

Thanks everyone!

1/ never say never.
My BIL (Corp officer, cpa, actuary) wishes that his Annuity Co, never sells another VA too.
Your BIL allocated his funds within the annuity poorly. Just as many people will allocated their indexed S/B poorly
2/
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70


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