Fixed annuity with a guaranteed lifetime withdrawal benefit

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billthecat
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Fixed annuity with a guaranteed lifetime withdrawal benefit

Post by billthecat » Wed Oct 10, 2018 10:24 am

My dad asked me about this annuity. I know nothing about annuities, except the recurring point here that SPIAs are OK. I searched for more info online about this annuity but all I could find was a "non-elite" version. This brochure was emailed to him from VALIC Financial Advisors, Inc. (I don't think unsolicited).

My dad is 79, married. I don't know the details of his finances but he has a pension (I don't know how much) and a lot of real estate equity (home in HCOLA and a vacation home, albeit way below purchase price). I also don't know, yet, what his motivation was to consider this.

I suspect you'll need more detail to provide definitive guidance - let me know what details would help - but absent that, are you able to provide a general view of this particular annuity?

jdsky
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Re: Fixed annuity with a guaranteed lifetime withdrawal benefit

Post by jdsky » Wed Oct 10, 2018 10:42 am

The marketing brochure is completely vague and based on a lot of "hypothetical" returns and no actual specific numbers or details. In that regard it is an excellent selling tool. Appears there is an additional pamphlet that contains those actual details and finer print. The lady in the pool and fellow sitting on the sofa with the kids seem to be fairly happy and pleased overall but I'm not certain they actually own the product. There is a high probability that this is why they appear to be ecstatic.

All kidding aside. I am sure someone will have some better advice about this specific product but you may have to do some digging on your end to supply some additional details. If I were in your shoes I would want to know at a minimum who the advisor is that is selling him this product. I would also encourage him to seek out other opinions from larger firms like Fidelity who have the ability to offer a vast array of options and are less likely to steer him in a single direction and toward a single product or at least this particular product over all others.

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David Jay
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Re: Fixed annuity with a guaranteed lifetime withdrawal benefit

Post by David Jay » Wed Oct 10, 2018 10:54 am

Wrong product for an individual who is 79 years old. I suspect that the 5.5% and the 7.5% numbers are the attraction. Note that neither of these numbers is an interest rate, lest he be confused.

At his age, if he wants an income stream for life, an SPIA would be appropriate and the payout is quite high at his age due to mortality credits.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

rgs92
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Re: Fixed annuity with a guaranteed lifetime withdrawal benefit

Post by rgs92 » Wed Oct 10, 2018 10:58 am

Stay away from it. It's marketing gobbledygook designed to hide something.
They are trying to cover up the fact that it is not a simple SPIA which is the only good annuity to buy.
I'm sure it has a high commission for whoever is selling it. I'm sure there are lots of hidden costs.

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David Jay
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Re: Fixed annuity with a guaranteed lifetime withdrawal benefit

Post by David Jay » Wed Oct 10, 2018 11:00 am

It looks like an SPIA quote from immediateannuities.com gives your dad an 11.2% payout (put in 100,000, get $934 per month/11,200 per year).

That is the equivalent number to the brochure's 5.5% payout.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

billthecat
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Re: Fixed annuity with a guaranteed lifetime withdrawal benefit

Post by billthecat » Wed Oct 10, 2018 11:28 am

David Jay wrote:
Wed Oct 10, 2018 10:54 am
Wrong product for an individual who is 79 years old. I suspect that the 5.5% and the 7.5% numbers are the attraction. Note that neither of these numbers is an interest rate, lest he be confused.

At his age, if he wants an income stream for life, an SPIA would be appropriate and the payout is quite high at his age due to mortality credits.
rgs92 wrote:
Wed Oct 10, 2018 10:58 am
Stay away from it. It's marketing gobbledygook designed to hide something.
They are trying to cover up the fact that it is not a simple SPIA which is the only good annuity to buy.
I'm sure it has a high commission for whoever is selling it. I'm sure there are lots of hidden costs.
Thank you!

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David Jay
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Re: Fixed annuity with a guaranteed lifetime withdrawal benefit

Post by David Jay » Wed Oct 10, 2018 11:48 am

The one and only reason for an annuity at his age is to create a lifetime income stream.

If he is concerned about managing his portfolio in the event of cognitive decline, or if he is worried about his spouse being able to do the same, an annuity may make sense. Joint annuities are available, so the survivor continues to receive the income stream.

If they are "set" financially (or if you have power of attorney, for instance) then there is no reason for an annuity.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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ObliviousInvestor
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Re: Fixed annuity with a guaranteed lifetime withdrawal benefit

Post by ObliviousInvestor » Wed Oct 10, 2018 12:05 pm

To understand how a GLWB works, it's important to first understand how a deferred variable annuity works in general.

If you already understand that, then the idea of a GLWB rider is that you get a guaranteed source of lifetime income, without having to "annuitize" the annuity.

The downside is that the cost of the rider itself is not trivial (0.95% per year according to the brochure in question*) -- and you will have additional costs (relative to a simple mutual fund portfolio) due to simply being invested in a variable annuity in the first place.

So the net effect is essentially that:
a) depletion of the account becomes both more likely and faster (due to all the costs), but
b) you get to keep taking income for rest of your lifetime if the account is depleted.

I'm not a big fan of them in general. If a person really wanted such a rider, I'd be inclined to suggest the Vanguard Variable Annuity with its GLWB rider.

*And this 0.95% is going to be more than 0.95% of the account value, in a scenario in which account value is falling over time. (And if it isn't falling, the rider is providing no value in the first place...)
Mike Piper, author/blogger

RickBoglehead
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Re: Fixed annuity with a guaranteed lifetime withdrawal benefit

Post by RickBoglehead » Wed Oct 10, 2018 12:07 pm

I'd strongly recommend that the OP take this opportunity to sit down with their parent(s) and become more familiar with their finances.

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