Annuity vs investment

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xpy1999
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Annuity vs investment

Post by xpy1999 » Wed Aug 01, 2018 7:20 pm

It seems most people are talking about 3% or 4% withdrawal rate here.

I am wondering why not just buy immediate annunity and get let's say 6% rate annunity. isn't it better rate than these so called safety withdrawal rate?

Thanks.

Dottie57
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Re: Annunity vs investment

Post by Dottie57 » Wed Aug 01, 2018 7:23 pm

xpy1999 wrote:
Wed Aug 01, 2018 7:20 pm
It seems most people are talking about 3% or 4% withdrawal rate here.

I am wondering why not just buy immediate annunity and get let's say 6% rate annunity. isn't it better rate than these so called safety withdrawal rate?

Thanks.
Annuity - generally nothing left for inheritance to others...

Gill
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Re: Annunity vs investment

Post by Gill » Wed Aug 01, 2018 7:27 pm

Yes, it is. Many of us have done just that. I have an annuity returning 12%, $12,000+ a year on a $100,000 purchase.
Gill

Nate79
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Re: Annunity vs investment

Post by Nate79 » Wed Aug 01, 2018 7:51 pm

xpy1999 wrote:
Wed Aug 01, 2018 7:20 pm
It seems most people are talking about 3% or 4% withdrawal rate here.

I am wondering why not just buy immediate annunity and get let's say 6% rate annunity. isn't it better rate than these so called safety withdrawal rate?

Thanks.
Inflation. SWR is inflation adjusted. Your 6% is not.

wolf359
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Re: Annunity vs investment

Post by wolf359 » Wed Aug 01, 2018 8:02 pm

xpy1999 wrote:
Wed Aug 01, 2018 7:20 pm
It seems most people are talking about 3% or 4% withdrawal rate here.

I am wondering why not just buy immediate annunity and get let's say 6% rate annunity. isn't it better rate than these so called safety withdrawal rate?

Thanks.
Single Premium Immediate Annuity:
Pros:
- Higher return than bonds. This is because you will benefit from "mortality credits," the money from people who died early.
- More predictable income.
- Pretty safe return, especially if you stay below your state's insurance limits. You will sleep well because your money will not be subject to market whims.

Cons:
- No liquidity. While you get current income, you lose the money you paid. If you don't have additional assets and need to raise a large amount of money at once (such as to buy a car, make a downpayment for a house, replace your roof, or pay for a surgery) you will have a liquidity problem.

- Lower long-term returns than the stock market.

- Annuity terminates at death. Money spent on the annuity is removed from inheritance.

- Most annuities are not adjusted for inflation. The ones that are cost significantly more.

The approach I am toying with is to wait as long as possible before buying an annuity, then to use a SPIA to cover core expenses. This maximizes my liquidity and potential estate, reduces the amount of time I own the annuity (when you buy it later you benefit more from the mortality credits), and still gains the benefits of peace of mind (I know where I'll get the money for food, shelter, and basic expenses if the market tanks.)

Interest rates are still historically low. I'm still waiting before buying a SPIA.

Dottie57
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Re: Annunity vs investment

Post by Dottie57 » Wed Aug 01, 2018 8:50 pm

You can also buy multiple SPIA - years apart to help with inflation.

DC3509
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Re: Annunity vs investment

Post by DC3509 » Wed Aug 01, 2018 10:11 pm

I've debated this over and over and posted on multiple threads on this subject, including some where I probably come off as anti-annuity and others where I come off as pro-annuity.

I think the answer really depends on extremely individualized circumstances; but something an elder law attorney recently told me really stuck and probably counsels against it, at least for some people with modest assets but who are otherwise able to manage their money. When you buy an annuity, you are giving up whatever is in your bank account. It is gone. There is no way to get it back. When you are trying to plan retirement/long term health care/and the like -- especially if you have modest means -- as long as you have money in your bank account, you have options. This attorney really stressed to me that the name of the game is trying to stretch out that money as long as you possibly can and that having money in the bank is more important than having a steady paycheck, IF you can otherwise manage the money. If you are liable to blow it all in Vegas or fall prey to silly money schemes, then perhaps an annuity is better.

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UpsetRaptor
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Re: Annunity vs investment

Post by UpsetRaptor » Thu Aug 02, 2018 12:00 am

How much do you value liquidity? Annuities can be good, but it could also cost you the ability to, say, buy a winter-season Florida condo while doing VWR.

rgs92
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Re: Annunity vs investment

Post by rgs92 » Thu Aug 02, 2018 12:23 am

I like to split the difference.
Get an income foundation with 1 or more SPIAs (and social security) to cover about 60% of needed income.
(Count the fixed SPIA income at about 70% of its value and consider that the inflation-adjusted amount.)

Then, use a 4% SWR from a 3-fund or 2-fund portfolio for the rest of your needed income. I like a constant 60/40 stock/bond allocation for this. VBIAX is good for this (Vang. Balanced Index).

FBN2014
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Re: Annunity vs investment

Post by FBN2014 » Thu Aug 02, 2018 2:09 am

The SPIA you want to buy is one with an installment refund which means that the named beneficiary gets what is left in the account if you die prematurely. The idea is to use the smallest amount of funds to buy a SPIA to cover your expenses and put the rest of your assets in a growth portfolio that over time will grow to replace the funds depleted by the SPIA income. You could also use a portion of the SPIA income to purchase a life insurance policy for legacy.
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

FBN2014
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Re: Annunity vs investment

Post by FBN2014 » Thu Aug 02, 2018 2:16 am

Gill wrote:
Wed Aug 01, 2018 7:27 pm
Yes, it is. Many of us have done just that. I have an annuity returning 12%, $12,000+ a year on a $100,000 purchase.
Gill
At what age was your purchase in order to get such a high payout percentage?
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

Gill
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Re: Annunity vs investment

Post by Gill » Thu Aug 02, 2018 5:58 am

FBN2014 wrote:
Thu Aug 02, 2018 2:16 am
Gill wrote:
Wed Aug 01, 2018 7:27 pm
Yes, it is. Many of us have done just that. I have an annuity returning 12%, $12,000+ a year on a $100,000 purchase.
Gill
At what age was your purchase in order to get such a high payout percentage?
78 with the first payment deferred for one year.
Gill

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arcticpineapplecorp.
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Re: Annunity vs investment

Post by arcticpineapplecorp. » Thu Aug 02, 2018 6:58 am

FBN2014 wrote:
Thu Aug 02, 2018 2:09 am
The SPIA you want to buy is one with an installment refund which means that the named beneficiary gets what is left in the account if you die prematurely. The idea is to use the smallest amount of funds to buy a SPIA to cover your expenses and put the rest of your assets in a growth portfolio that over time will grow to replace the funds depleted by the SPIA income. You could also use a portion of the SPIA income to purchase a life insurance policy for legacy.
yes but that will cost more than a SPIA without a death benefit (either in less monthly income or higher initial premium). Every rider will cost something. There's no free lunch. Telling someone to get a death benefit may be helpful if they haven't thought of it or aren't aware such SPIA's exist but then they should also be aware of the additional cost for the additional benefit, so as to not think it's an apples to apples comparison.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

FBN2014
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Re: Annunity vs investment

Post by FBN2014 » Thu Aug 02, 2018 7:04 am

wolf359 wrote:
Wed Aug 01, 2018 8:02 pm
xpy1999 wrote:
Wed Aug 01, 2018 7:20 pm
It seems most people are talking about 3% or 4% withdrawal rate here.

I am wondering why not just buy immediate annunity and get let's say 6% rate annunity. isn't it better rate than these so called safety withdrawal rate?

Thanks.
Single Premium Immediate Annuity:
Pros:
- Higher return than bonds. This is because you will benefit from "mortality credits," the money from people who died early.
- More predictable income.
- Pretty safe return, especially if you stay below your state's insurance limits. You will sleep well because your money will not be subject to market whims.

Cons:
- No liquidity. While you get current income, you lose the money you paid. If you don't have additional assets and need to raise a large amount of money at once (such as to buy a car, make a downpayment for a house, replace your roof, or pay for a surgery) you will have a liquidity problem.

- Lower long-term returns than the stock market.

- Annuity terminates at death. Money spent on the annuity is removed from inheritance.

- Most annuities are not adjusted for inflation. The ones that are cost significantly more.

The approach I am toying with is to wait as long as possible before buying an annuity, then to use a SPIA to cover core expenses. This maximizes my liquidity and potential estate, reduces the amount of time I own the annuity (when you buy it later you benefit more from the mortality credits), and still gains the benefits of peace of mind (I know where I'll get the money for food, shelter, and basic expenses if the market tanks.)

Interest rates are still historically low. I'm still waiting before buying a SPIA.
The annuity that you should consider is a variant of the SPIA called a deferred income annuity (DIA). You purchase it today for a smaller lump sum, it accumulates interest, then starts payout at a year in the future that you designate. Stan the Annuity Man's website has lots of educational material on all the different types of annuities.
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

FBN2014
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Re: Annunity vs investment

Post by FBN2014 » Thu Aug 02, 2018 7:08 am

arcticpineapplecorp. wrote:
Thu Aug 02, 2018 6:58 am
FBN2014 wrote:
Thu Aug 02, 2018 2:09 am
The SPIA you want to buy is one with an installment refund which means that the named beneficiary gets what is left in the account if you die prematurely. The idea is to use the smallest amount of funds to buy a SPIA to cover your expenses and put the rest of your assets in a growth portfolio that over time will grow to replace the funds depleted by the SPIA income. You could also use a portion of the SPIA income to purchase a life insurance policy for legacy.
yes but that will cost more than a SPIA without a death benefit (either in less monthly income or higher initial premium). Every rider will cost something. There's no free lunch. Telling someone to get a death benefit may be helpful if they haven't thought of it or aren't aware such SPIA's exist but then they should also be aware of the additional cost for the additional benefit, so as to not think it's an apples to apples comparison.
Surprisingly when I have compared SPIAs with and without the death benefit there wasn't a significant difference in payout. At least not enough to warrant not buying the death benefit. Same result when buying a joint payout, not a significant difference. Thanks
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

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goodenyou
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Re: Annunity vs investment

Post by goodenyou » Thu Aug 02, 2018 8:52 am

The aversion to annuities (for legacy reasons) reminds me of a quote from Milton Friedman many years ago (paraphrased):

“For reasons I don’t truly understand, we value the ability of our children to consume much more than we value our own”.

I get it. We love our kids, but it may cloud good financial decisions for ourselves.
Last edited by goodenyou on Thu Aug 02, 2018 9:06 am, edited 1 time in total.
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Sandtrap
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Re: Annunity vs investment

Post by Sandtrap » Thu Aug 02, 2018 9:06 am

wolf359 wrote:
Wed Aug 01, 2018 8:02 pm
xpy1999 wrote:
Wed Aug 01, 2018 7:20 pm
It seems most people are talking about 3% or 4% withdrawal rate here.

I am wondering why not just buy immediate annunity and get let's say 6% rate annunity. isn't it better rate than these so called safety withdrawal rate?

Thanks.
Single Premium Immediate Annuity:
Pros:
- Higher return than bonds. This is because you will benefit from "mortality credits," the money from people who died early.
- More predictable income.
- Pretty safe return, especially if you stay below your state's insurance limits. You will sleep well because your money will not be subject to market whims.

Cons:
- No liquidity. While you get current income, you lose the money you paid. If you don't have additional assets and need to raise a large amount of money at once (such as to buy a car, make a downpayment for a house, replace your roof, or pay for a surgery) you will have a liquidity problem.

- Lower long-term returns than the stock market.

- Annuity terminates at death. Money spent on the annuity is removed from inheritance.

- Most annuities are not adjusted for inflation. The ones that are cost significantly more.

The approach I am toying with is to wait as long as possible before buying an annuity, then to use a SPIA to cover core expenses. This maximizes my liquidity and potential estate, reduces the amount of time I own the annuity (when you buy it later you benefit more from the mortality credits), and still gains the benefits of peace of mind (I know where I'll get the money for food, shelter, and basic expenses if the market tanks.)

Interest rates are still historically low. I'm still waiting before buying a SPIA.
+1
Well said and outlined.

Also .. . initially. . your own money is being returned to you. It "feels" like income, but it's your own money.
j :happy

international001
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Re: Annunity vs investment

Post by international001 » Thu Aug 02, 2018 9:44 am

Nate79 wrote:
Wed Aug 01, 2018 7:51 pm
xpy1999 wrote:
Wed Aug 01, 2018 7:20 pm
It seems most people are talking about 3% or 4% withdrawal rate here.

I am wondering why not just buy immediate annunity and get let's say 6% rate annunity. isn't it better rate than these so called safety withdrawal rate?

Thanks.
Inflation. SWR is inflation adjusted. Your 6% is not.
So an annuity is 6% return when you are 65, right? If you assume expected inflation of 4%, you are even on your retirement income
If you don't want to leave any inheritance, it seems an awesome deal to me.

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corn18
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Re: Annunity vs investment

Post by corn18 » Thu Aug 02, 2018 9:49 am

FBN2014 wrote:
Thu Aug 02, 2018 7:08 am
arcticpineapplecorp. wrote:
Thu Aug 02, 2018 6:58 am
FBN2014 wrote:
Thu Aug 02, 2018 2:09 am
The SPIA you want to buy is one with an installment refund which means that the named beneficiary gets what is left in the account if you die prematurely. The idea is to use the smallest amount of funds to buy a SPIA to cover your expenses and put the rest of your assets in a growth portfolio that over time will grow to replace the funds depleted by the SPIA income. You could also use a portion of the SPIA income to purchase a life insurance policy for legacy.
yes but that will cost more than a SPIA without a death benefit (either in less monthly income or higher initial premium). Every rider will cost something. There's no free lunch. Telling someone to get a death benefit may be helpful if they haven't thought of it or aren't aware such SPIA's exist but then they should also be aware of the additional cost for the additional benefit, so as to not think it's an apples to apples comparison.
Surprisingly when I have compared SPIAs with and without the death benefit there wasn't a significant difference in payout. At least not enough to warrant not buying the death benefit. Same result when buying a joint payout, not a significant difference. Thanks
Agree. $1,000,000 SPIA, age 60

$4,143 / month with no death benefit (4.97% payout)
$4,084 / month with 100% survivor benefit (4.9% payout)

The cost is $708 / year (1.4% of payout) for the death benefit.

smitcat
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Re: Annunity vs investment

Post by smitcat » Thu Aug 02, 2018 9:55 am

Sandtrap wrote:
Thu Aug 02, 2018 9:06 am
wolf359 wrote:
Wed Aug 01, 2018 8:02 pm
xpy1999 wrote:
Wed Aug 01, 2018 7:20 pm
It seems most people are talking about 3% or 4% withdrawal rate here.

I am wondering why not just buy immediate annunity and get let's say 6% rate annunity. isn't it better rate than these so called safety withdrawal rate?

Thanks.
Single Premium Immediate Annuity:
Pros:
- Higher return than bonds. This is because you will benefit from "mortality credits," the money from people who died early.
- More predictable income.
- Pretty safe return, especially if you stay below your state's insurance limits. You will sleep well because your money will not be subject to market whims.

Cons:
- No liquidity. While you get current income, you lose the money you paid. If you don't have additional assets and need to raise a large amount of money at once (such as to buy a car, make a downpayment for a house, replace your roof, or pay for a surgery) you will have a liquidity problem.

- Lower long-term returns than the stock market.

- Annuity terminates at death. Money spent on the annuity is removed from inheritance.

- Most annuities are not adjusted for inflation. The ones that are cost significantly more.

The approach I am toying with is to wait as long as possible before buying an annuity, then to use a SPIA to cover core expenses. This maximizes my liquidity and potential estate, reduces the amount of time I own the annuity (when you buy it later you benefit more from the mortality credits), and still gains the benefits of peace of mind (I know where I'll get the money for food, shelter, and basic expenses if the market tanks.)

Interest rates are still historically low. I'm still waiting before buying a SPIA.
+1
Well said and outlined.

Also .. . initially. . your own money is being returned to you. It "feels" like income, but it's your own money.
j :happy
Yes, good lists - all the above and you also need to take the resultant tax situation into consideration.

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Re: Annunity vs investment

Post by Nate79 » Thu Aug 02, 2018 9:58 am

international001 wrote:
Thu Aug 02, 2018 9:44 am
Nate79 wrote:
Wed Aug 01, 2018 7:51 pm
xpy1999 wrote:
Wed Aug 01, 2018 7:20 pm
It seems most people are talking about 3% or 4% withdrawal rate here.

I am wondering why not just buy immediate annunity and get let's say 6% rate annunity. isn't it better rate than these so called safety withdrawal rate?

Thanks.
Inflation. SWR is inflation adjusted. Your 6% is not.
So an annuity is 6% return when you are 65, right? If you assume expected inflation of 4%, you are even on your retirement income
If you don't want to leave any inheritance, it seems an awesome deal to me.
The value of the income from an SPIA will be significantly eroded late in life so while you will be getting more than the 4% SWR early in retirement it will significantly lag late in retirement. The 4% initial withdrawal is adjusted up each year with inflation. Even worse is if we have a bout of very bad inflation the SPIA income could be very significantly hit.

That is why it is generally recommended to only use a SPIA for a percentage of your nest egg. Putting all your money in an SPIA to me is a high risk gamble.

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Re: Annunity vs investment

Post by The Wizard » Thu Aug 02, 2018 10:19 am

international001 wrote:
Thu Aug 02, 2018 9:44 am

So an annuity is 6% return when you are 65, right? If you assume expected inflation of 4%, you are even on your retirement income
If you don't want to leave any inheritance, it seems an awesome deal to me.
It varies. I got 6.53% payout at age 63 with ten year guarantee, and 7.04% at age 67.
My immediate annuities are with TIAA and while some are "fixed" (TIAA Traditional) others are based on TIAA Real Estate Account or CREF Stock and tend to increase payouts most years.
So I'm not too worried about inflation.

My annuity + eventual age 70 SS income covers my needs nicely, so my remaining portfolio grows as the market permits and isn't needed for routine expenses...
Attempted new signature...

Dottie57
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Re: Annunity vs investment

Post by Dottie57 » Thu Aug 02, 2018 11:00 am

rgs92 wrote:
Thu Aug 02, 2018 12:23 am
I like to split the difference.
Get an income foundation with 1 or more SPIAs (and social security) to cover about 60% of needed income.
(Count the fixed SPIA income at about 70% of its value and consider that the inflation-adjusted amount.)

Then, use a 4% SWR from a 3-fund or 2-fund portfolio for the rest of your needed income. I like a constant 60/40 stock/bond allocation for this. VBIAX is good for this (Vang. Balanced Index).
+1. I would not give up all my money. B

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Re: Annuity vs investment

Post by goodenyou » Thu Aug 02, 2018 11:37 am

There are investment strategies that recommend annuitizing the essential spending portion of your portfolio so that essential needs are always (closely) met. It allows for more aggressive investment for the remaining discretionary spending portfolio. Like everything, there is a counter-argument against this strategy.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

FBN2014
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Re: Annuity vs investment

Post by FBN2014 » Thu Aug 02, 2018 12:10 pm

"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May March, June, December, August and February." - M. Twain

Stormbringer
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Re: Annuity vs investment

Post by Stormbringer » Thu Aug 02, 2018 12:26 pm

I don't really get why anyone would buy an annuity that isn't inflation adjusted. Say we go through a stretch like the 1970's -- your income stream would lose a huge amount of purchasing power and you would be too old to do much about it. An annuity is supposed to be insurance (not an investment) against running out of money, but to me it makes more sense to buy insurance against running out of purchasing power.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Annunity vs investment

Post by bberris » Thu Aug 02, 2018 12:35 pm

FBN2014 wrote:
Thu Aug 02, 2018 2:09 am
The SPIA you want to buy is one with an installment refund which means that the named beneficiary gets what is left in the account if you die prematurely. The idea is to use the smallest amount of funds to buy a SPIA to cover your expenses and put the rest of your assets in a growth portfolio that over time will grow to replace the funds depleted by the SPIA income. You could also use a portion of the SPIA income to purchase a life insurance policy for legacy.
If you want to use the smallest amount to buy an annuity that meets your requirements, you should forego such a protection as installment refund, or minimum payout. That can't come for free. Those are things people pay for to put their mind at ease.

I also don't get the life insurance/SPIA combo. You are betting against your death and for your death. Taking both sides of the death gamble is something insurance companies like to do, but generally they are on different people.

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Re: Annuity vs investment

Post by garlandwhizzer » Thu Aug 02, 2018 2:04 pm

I admit up front that I'm not objective about annuities. I believe investors who have balanced portfolios aligned to their risk tolerance will achieve better long term returns at lower cost with more flexibility than those who choose annuities for a large percentage of their assets. The annuity market survives and thrives mostly on fear and insecurity which is common in the elderly population. Those who convince the fearful elderly to buy them often receive generous sales commissions and the products themselves are structured to deliver high and reliable profit margins to the companies who design them. What they offer is not safety but the illusion of safety because they are extremely vulnerable to inflation. There's a reason why few companies offer or push inflation-indexed annuities because, like TIPS ladders, they offer real inflation adjusted protection which always comes at a very high cost. Selling the illusion of safety, however, is relatively easy. Annuities are an especially bad deal for those with health issues whose longevity is likely less than average.

Two things annuities do offer are longevity protection which is helpful if you expect to live to 100, and dementia protection that incapacitates your ability to handle your portfolio. As long as you've got your marbles and nerve I don't recommend them. SPIAs may have a role for a small/modest portion of the portfolio for those reasons but my advice is to defer purchase as long as possible and use SPIAs only. Deferring purchase limits the ability of inflation to destroy the value of your future nominal return and offers higher annual return rates. SPIAs typically carry lower fees and sales commissions than more exotic products which as you might guess, are more complex and therefore offer the potential for greater profits coming out of your pocket for the those who create. market, and sell them.

Garland Whizzer

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Re: Annuity vs investment

Post by Jeff Albertson » Thu Aug 02, 2018 2:25 pm

It's worth listening to Robert Merton on "The New Retirement" podcast.
https://www.newretirement.com/retiremen ... etirement/
Episode 11 of the NewRetirement podcast is an interview with Nobel Prize winner Robert Merton. Professor Robert Merton is a globally recognized economist and expert on life cycle and retirement finance (among other things). We discuss what’s wrong with the current focus on just building assets and why we should focus on retirement income instead. We also cover ideas that can help main street people prepare for and live better in retirement. Some of his research on these topics include:
The overall challenges around retirement planning
Why we should focus on Income over Assets for retirement planning
Liability driven investing
Other ways of funding & hedging retirement income: Annuitization & Home Equity, Target Date Funds & how to improve them
Listen to find out more on all of these topics and get Professor Merton’s thoughts on steps people can take to fix their own retirement plan.

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Re: Annuity vs investment

Post by sschullo » Thu Aug 02, 2018 2:38 pm

This has been a good discussion on the proper role of annuities is in the distribution stage. I don't need an annuity because I have a pension plan and a small SS benefit.

IMO they should be outlawed in the accumulation stage because investors will never get stock market returns. There have been hundreds of articles, and books showing how most annuity plans (except TIAA) does not keep pace with inflation, so investors are slowly losing money.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: Annuity vs investment

Post by willthrill81 » Thu Aug 02, 2018 2:42 pm

Stormbringer wrote:
Thu Aug 02, 2018 12:26 pm
I don't really get why anyone would buy an annuity that isn't inflation adjusted. Say we go through a stretch like the 1970's -- your income stream would lose a huge amount of purchasing power and you would be too old to do much about it. An annuity is supposed to be insurance (not an investment) against running out of money, but to me it makes more sense to buy insurance against running out of purchasing power.
Even during periods of low inflation, it can still make a significant dent in your purchasing power. $100 in the year 2000 is only worth $67 today (i.e. you would need $1.49 to buy what $1.00 would have in 2000). Conversely, retirees who would have used the '4% rule' since the year 2000 (the worst year to begin using this approach since the 1970s), are in good shape today with 65% of their starting portfolio intact in inflation-adjusted dollars.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Annuity vs investment

Post by The Wizard » Thu Aug 02, 2018 2:48 pm

sschullo wrote:
Thu Aug 02, 2018 2:38 pm
This has been a good discussion on the proper role of annuities is in the distribution stage. I don't need an annuity because I have a pension plan and a small SS benefit.

IMO they should be outlawed in the accumulation stage because investors will never get stock market returns. There have been hundreds of articles, and books showing how most annuity plans (except TIAA) does not keep pace with inflation, so investors are slowly losing money.
Just curious, is your pension COLAd?
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sschullo
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Re: Annuity vs investment

Post by sschullo » Thu Aug 02, 2018 2:56 pm

The Wizard wrote:
Thu Aug 02, 2018 2:48 pm
sschullo wrote:
Thu Aug 02, 2018 2:38 pm
This has been a good discussion on the proper role of annuities is in the distribution stage. I don't need an annuity because I have a pension plan and a small SS benefit.

IMO they should be outlawed in the accumulation stage because investors will never get stock market returns. There have been hundreds of articles, and books showing how most annuity plans (except TIAA) does not keep pace with inflation, so investors are slowly losing money.
Just curious, is your pension COLAd?
Sort of. I get a fixed 2% based on my first year of benefits, so I get a fixed $72 per month increase every October.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

The Wizard
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Re: Annuity vs investment

Post by The Wizard » Thu Aug 02, 2018 3:09 pm

sschullo wrote:
Thu Aug 02, 2018 2:56 pm
The Wizard wrote:
Thu Aug 02, 2018 2:48 pm
sschullo wrote:
Thu Aug 02, 2018 2:38 pm
This has been a good discussion on the proper role of annuities is in the distribution stage. I don't need an annuity because I have a pension plan and a small SS benefit.

IMO they should be outlawed in the accumulation stage because investors will never get stock market returns. There have been hundreds of articles, and books showing how most annuity plans (except TIAA) does not keep pace with inflation, so investors are slowly losing money.
Just curious, is your pension COLAd?
Sort of. I get a fixed 2% based on my first year of benefits, so I get a fixed $72 per month increase every October.
Well, we need to get Immediate Annuities to offer this sort of increase as well then.
Inflation can certainly be higher than 2% per year, but trying to get insurance companies to bear the risk of future inflation with true COLAd annuities is just plain silly and will not be cost-effective.

TIAA does offer something like that, of course, though I've not chosen it...
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sschullo
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Re: Annuity vs investment

Post by sschullo » Thu Aug 02, 2018 3:21 pm

The Wizard wrote:
Thu Aug 02, 2018 3:09 pm
sschullo wrote:
Thu Aug 02, 2018 2:56 pm
The Wizard wrote:
Thu Aug 02, 2018 2:48 pm
sschullo wrote:
Thu Aug 02, 2018 2:38 pm
This has been a good discussion on the proper role of annuities is in the distribution stage. I don't need an annuity because I have a pension plan and a small SS benefit.

IMO they should be outlawed in the accumulation stage because investors will never get stock market returns. There have been hundreds of articles, and books showing how most annuity plans (except TIAA) does not keep pace with inflation, so investors are slowly losing money.
Just curious, is your pension COLAd?
Sort of. I get a fixed 2% based on my first year of benefits, so I get a fixed $72 per month increase every October.
Well, we need to get Immediate Annuities to offer this sort of increase as well then.
Inflation can certainly be higher than 2% per year, but trying to get insurance companies to bear the risk of future inflation with true COLAd annuities is just plain silly and will not be cost-effective.

TIAA does offer something like that, of course, though I've not chosen it...
A fixed increase should be a good selling point for the company, a lot better than no increase.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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arcticpineapplecorp.
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Re: Annunity vs investment

Post by arcticpineapplecorp. » Thu Aug 02, 2018 4:51 pm

corn18 wrote:
Thu Aug 02, 2018 9:49 am
FBN2014 wrote:
Thu Aug 02, 2018 7:08 am
arcticpineapplecorp. wrote:
Thu Aug 02, 2018 6:58 am
FBN2014 wrote:
Thu Aug 02, 2018 2:09 am
The SPIA you want to buy is one with an installment refund which means that the named beneficiary gets what is left in the account if you die prematurely. The idea is to use the smallest amount of funds to buy a SPIA to cover your expenses and put the rest of your assets in a growth portfolio that over time will grow to replace the funds depleted by the SPIA income. You could also use a portion of the SPIA income to purchase a life insurance policy for legacy.
yes but that will cost more than a SPIA without a death benefit (either in less monthly income or higher initial premium). Every rider will cost something. There's no free lunch. Telling someone to get a death benefit may be helpful if they haven't thought of it or aren't aware such SPIA's exist but then they should also be aware of the additional cost for the additional benefit, so as to not think it's an apples to apples comparison.
Surprisingly when I have compared SPIAs with and without the death benefit there wasn't a significant difference in payout. At least not enough to warrant not buying the death benefit. Same result when buying a joint payout, not a significant difference. Thanks
Agree. $1,000,000 SPIA, age 60

$4,143 / month with no death benefit (4.97% payout)
$4,084 / month with 100% survivor benefit (4.9% payout)

The cost is $708 / year (1.4% of payout) for the death benefit.
Thank you for having looked that up. I was going to ask what the amount was. When FBN2014 said it wasn't significant, I was going to ask what the definition of significance was.

So let's look at what that would cost. Looking at the IRS actuarial tables (https://www.ssa.gov/OACT/STATS/table4c6.html) for a 60 year old today (your example) a man has a life expectancy of 21.51 years and a woman has a life expectancy of 24.48. Yes we know that only means that half of men age 60 today will live as long as 81.5 and the other half will not live as long and half of all women age 60 today will make it to 84.5 and the other will not. But still, let's look at what it would cost for a man who lives to 81.5 and a woman who ives to 84.5:

man: 21.51 X $708 would cost $15,229.08 for the protection of the death benefit
woman: 24.48 X $708 would cost $17,331.84 for the protection of the death benefit

If you consider this to not be significant, ok. I wonder what others think. Definitely not a free lunch, which was my point. I wasn't arguing whether it was worth it or not. I was making sure others were aware that a death benefit would cost them something. Everyone should know what they're paying. That's the only point I'm making.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Annuity vs investment

Post by garlandwhizzer » Thu Aug 02, 2018 5:56 pm

So an annuity is 6% return when you are 65, right?
Return? It's not really a return on investment but rather a return of your investment. It's giving you 6% of your own premium payment back annually for the first 16 and 2/3 years. Even if the issuing company makes nothing at all on your million dollar premium payment they're still only giving you your own money back dollar for dollar until you're 81 years old. Except it's worse than that. When you paid in it was with real inflation adjusted dollars on the day of purchase. They return 6% not in real inflation adjusted dollars but in nominal dollars so your real annual return is diminished every year by the cumulative value of compound inflation since purchase date. So when they finally start using their own money to pay you 16+ years later, your real return will very likely be 3% or less in real dollars, could be zero if inflation takes off. With a portfolio that produces a 3% withdrawal rate, unlike the annuity, your entire portfolio principal value is not forfeited when you die and it's full value is available if and when you need it for emergencies, etc., at any time. Annuities do not take into account the fact that your income needs may vary substantially from year to year in the future as unexpected things happen which they always seem to do. Annuities are designed to be sold, not bought.

Garland Whizzer

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corn18
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Re: Annuity vs investment

Post by corn18 » Thu Aug 02, 2018 6:06 pm

garlandwhizzer wrote:
Thu Aug 02, 2018 5:56 pm
So an annuity is 6% return when you are 65, right?
Return? It's not really a return on investment but rather a return of your investment. It's giving you 6% of your own premium payment back annually for the first 16 and 2/3 years. Even if the issuing company makes nothing at all on your million dollar premium payment they're still only giving you your own money back dollar for dollar until you're 81 years old. Except it's worse than that. When you paid in it was with real inflation adjusted dollars on the day of purchase. They return 6% not in real inflation adjusted dollars but in nominal dollars so your real annual return is diminished every year by the cumulative value of compound inflation since purchase date. So when they finally start using their own money to pay you 16+ years later, your real return will very likely be 3% or less in real dollars, could be zero if inflation takes off. With a portfolio that produces a 3% withdrawal rate, unlike the annuity, your entire portfolio principal value is not forfeited when you die and it's full value is available if and when you need it for emergencies, etc., at any time. Annuities do not take into account the fact that your income needs may vary substantially from year to year in the future as unexpected things happen which they always seem to do. Annuities are designed to be sold, not bought.

Garland Whizzer
Garland is right. I just ran some numbers on a 15 year period certain SPIA that I have been thinking about to get me from 55 to 70. The annual amount would be equivalent to my SS @ age 70.

ANNUITY
Period Certain 15
Cost 657895
Monthly Payout 4500
ROI 1.54%

That ROI or APR is pretty pathetic considering 2 things:

1. I can expect 2% dividends on a 60/40 portfolio
2. Even current inflation will eat that 1.54% for lunch

So I am going to pass. I could just dump $657,895 into VBTLX and get 3%+ SEC yield.

Figuring out a life annuity ROI is more complex as it requires you to guess when you will die.

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Re: Annuity vs investment

Post by willthrill81 » Thu Aug 02, 2018 6:13 pm

corn18 wrote:
Thu Aug 02, 2018 6:06 pm
garlandwhizzer wrote:
Thu Aug 02, 2018 5:56 pm
So an annuity is 6% return when you are 65, right?
Return? It's not really a return on investment but rather a return of your investment. It's giving you 6% of your own premium payment back annually for the first 16 and 2/3 years. Even if the issuing company makes nothing at all on your million dollar premium payment they're still only giving you your own money back dollar for dollar until you're 81 years old. Except it's worse than that. When you paid in it was with real inflation adjusted dollars on the day of purchase. They return 6% not in real inflation adjusted dollars but in nominal dollars so your real annual return is diminished every year by the cumulative value of compound inflation since purchase date. So when they finally start using their own money to pay you 16+ years later, your real return will very likely be 3% or less in real dollars, could be zero if inflation takes off. With a portfolio that produces a 3% withdrawal rate, unlike the annuity, your entire portfolio principal value is not forfeited when you die and it's full value is available if and when you need it for emergencies, etc., at any time. Annuities do not take into account the fact that your income needs may vary substantially from year to year in the future as unexpected things happen which they always seem to do. Annuities are designed to be sold, not bought.

Garland Whizzer
Garland is right. I just ran some numbers on a 15 year period certain SPIA that I have been thinking about to get me from 55 to 70. The annual amount would be equivalent to my SS @ age 70.

ANNUITY
Period Certain 15
Cost 657895
Monthly Payout 4500
ROI 1.54%

That ROI or APR is pretty pathetic considering 2 things:

1. I can expect 2% dividends on a 60/40 portfolio
2. Even current inflation will eat that 1.54% for lunch

So I am going to pass. I could just dump $657,895 into VBTLX and get 3%+ SEC yield.

Figuring out a life annuity ROI is more complex as it requires you to guess when you will die.
As you've pointed out, fixed annuities like SPIAs typically 'lock in' very low rates of return (from a historical perspective). Their relatively high payout compared to a SWR is due to the mortality credits they offer.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

rgs92
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Re: Annuity vs investment

Post by rgs92 » Thu Aug 02, 2018 6:22 pm

Thank you Dottie.

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Re: Annuity vs investment

Post by Stormbringer » Fri Aug 03, 2018 3:22 am

Jeff Albertson wrote:
Thu Aug 02, 2018 2:25 pm
It's worth listening to Robert Merton on "The New Retirement" podcast.
https://www.newretirement.com/retiremen ... etirement/
Thanks for that, I found it to be very interesting and confirms some of the thoughts I've had about focusing on retirement wealth rather than income.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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