Forget stocks - buy and hold annuities instead

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Lbill
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Forget stocks - buy and hold annuities instead

Post by Lbill »

Some gems from the Retirement Income Industry Association 2010 Conference provided in this summary by Kerry Pechter:
At the Retirement Income Industry Association's spring conference, you could almost see Jeremy Siegel standing on his head. Almost...

Siegel, author of "Stocks for the Long Run" made a powerful case for buying and holding stocks. He noted that the U.S. stock market had never posted a loss over a 20-year period.

But his proposition took a beating at the conference. So did conventional wisdom that retirees should hold stocks as a way to ensure adequate inflation-beating growth, especially those who want to make sure their portfolios last for 25 or 30 years.
On Stocks for the Long Run:
I've never been able to reconcile "stocks for the long run" with the warning that "past performance does not guarantee future returns."
if stocks were a cinch to grow over the long run, then the cost of hedging against the risk of equities under performing the risk-free rate would decline over time. But it doesn't.
On Buckets:
The question was whether it was smart to assign risky assets like small-cap stocks to the most distant periods in the belief that, like good wine, they would "mature" in value by time they were needed for income. The panel agreed that bucketing methods can be useful, but they didn't believe that equities were guaranteed ever to mature, let alone mature by a certain date.
On Time Diversification:
What about the oft-cited evidence that the volatility of stock returns diminishes over time? According to Zwecher, it's true that a portfolio's average returns become less volatile over time. But the portfolio's cumulative returns become more volatile,
On Equities and Portfolio Survival:
advisors shouldn't encourage people who are mortality risk-averse--that is, scared of living to age 95 and running out of money along the way--to invest in stocks. "Risk is risk," and people who are risk-averse to mortality will be equally risk-averse to equities.

Such clients should use immediate annuities or, alternately, deferred income annuities (aka "longevity insurance") to lengthen the lives of their portfolios. They should buy equities only with money they can afford to lose.
On Safe investing:
The conference's overall message is that retirees should buy a "floor" of risk-free income-producing assets before considering equities. After Wall Street's recent madness, that makes sense.
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Re: Forget stocks - buy and hold annuities instead

Post by yobria »

Thanks for the link. Yup, stocks are risky - that's why God invented bonds and CDs.
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Cut-Throat
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Re: Forget stocks - buy and hold annuities instead

Post by Cut-Throat »

Jeez, Surprise, Surprise, A conference that supports Annuities slam stocks in Favor of purchasing Annuities.

This is like a Porn Star attending a Porn Convention and getting an Award for "Best Actress".
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Re: Forget stocks - buy and hold annuities instead

Post by patrick »

yobria wrote:Thanks for the link. Yup, stocks are risky - that's why God invented bonds and CDs.
Neither of those protects against longevity risk however, and usually not inflation either.
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

Cut-Throat wrote:Jeez, Surprise, Surprise, A conference that supports Annuities slam stocks in Favor of purchasing Annuities.

This is like a Porn Star attending a Porn Convention and getting an Award for "Best Actress".
You would rather attend a Stock Porn conference? Better hors d'oeuvres probably. :)
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Re: Forget stocks - buy and hold annuities instead

Post by LH »

Any comment on the blow up rate of privately issued guarantees over 30-40 years??

Or comparison to the social security annuity by the biggest financial entity in the world that is failing?


Or they just really say nothing, but imply that annuities by private companies are risk free ?

Magic pixie dust?

How about... Where does the M O N E Y come from over 40 years? Other annuities in a magic circle? Or.... Stocks and bonds?? Coupled with if course, with the dead people's money.

But it's still those stocks and bonds, where the investment of annuity money will have to be made, after of course, fees and such taken out.......


So the annuities, written by companies like aig, won't fail over 40 years, zero chance of that, but ss will fail its promises expectantly, Taxing ability and military power not withstanding, and they are risk less relative to stocks nd bonds, YET have their money invest in stocks and bonds......

Just lovely.
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Re: Forget stocks - buy and hold annuities instead

Post by Jerilynn »

I've never been able to reconcile "stocks for the long run" with the warning that "past performance does not guarantee future returns."
That's an interesting point. However, there comes a point where the 'long run' is a long enough period of time where it is possible that indeed past performance does guarantee future returns, or at least predict them.

Otherwise, why would anyone have ANY assets in securities. Suppose someone has a 10/90 AA. The only reason they are 'crazy enough' to have 10% in more risky stocks, is because that 10% stocks has a higher *expected return* vs 100% bonds. By the same token a 50/50 or age in bonds allocation, would be MUCH more risky than that 10/90AA, yet it would have a much higher expected return.
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

LH wrote:Any comment on the blow up rate of privately issued guarantees over 30-40 years??

Or comparison to the social security annuity by the biggest financial entity in the world that is failing?


Or they just really say nothing, but imply that annuities by private companies are risk free ?

Magic pixie dust?

How about... Where does the M O N E Y come from over 40 years? Other annuities in a magic circle? Or.... Stocks and bonds?? Coupled with if course, with the dead people's money.

But it's still those stocks and bonds, where the investment of annuity money will have to be made, after of course, fees and such taken out.......

So the annuities, written by companies like aig, won't fail over 40 years, zero chance of that, but ss will fail its promises expectantly, Taxing ability and military power not withstanding, and they are risk less relative to stocks nd bonds, YET have their money invest in stocks and bonds......

Just lovely.
Not to get sidetracked into the inner workings of annuities, but their risks are quite different from the risks of stocks and bonds. They are an insurance product - you are insuring against longevity risk; i.e., outliving your money. Most people receiving annuity payments just receive the return of their own money, used to purchase the annuity. Those who outlive their own money begin receiving payments from the ones who didn't. The insurance company serves as the intermediary and takes a cut of the action for their trouble. This doesn't directly depend on the ability of the insurance company to successfully invest annuity premiums. It depends primarily on their ability to operate successfully as actuaries.The risk you have as an annuity holder is the risk the annuity provider can't or won't deliver on it's promises. That's not the same thing as investment risk.
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Re: Forget stocks - buy and hold annuities instead

Post by Harold »

Jerilynn wrote:
IHowever, there comes a point where the 'long run' is a long enough period of time where it is possible that indeed past performance does guarantee future returns, or at least predict them.

Otherwise, why would anyone have ANY assets in securities.
There's an easy way to see why the word "guarantee" has no place in that sentence. For any X (no matter how long), the X-year returns of stocks sell at exactly the same price as the X-year returns of bonds (or any other asset class). Although one may expect higher returns from stocks, if any part at all of that higher return were guaranteed, there would be an arbitrage opportunity.

The far more plausible reason why anyone has ANY assets in securities is due to the equity risk premium, which can be large, and which can persist over entire investing lifetimes. An investor not participating misses out on any potential equity risk premium benefit. But that's not the same thing as saying the investor can count on such returns.
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Re: Forget stocks - buy and hold annuities instead

Post by Bongleur »

It would be interesting to be able to invest in a true tontine. The lump sums of all participants would be in TIPS. Wonder how much the alpha from early deaths would be?
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Re: Forget stocks - buy and hold annuities instead

Post by lawman3966 »

The tone of the top post and of several responders is such as to suggest that recommending the purchase of immediate annuities is for some reason worthy of ridicule. I'm not sure I see why.

Don't get me wrong. As much as anyone else, I love heaping scorn on bad, self-serving financial advice from salesmen with interests adverse to their customers. However, SPIAs have been recommended by many quite reputable finance writers, including Jim Otar and Zvi Bodie. Selecting annuities over stocks for provide a secure minimum income makes a lot of sense to me. No doubt, one should thoroughly investigate the coverage limits in the state the annuity is covered in, and the health of the guaranty fund that backs up those coverage limits. Moreover, I would hope that there are ways to spread out the risk of annuities among different companies, and perhaps among separate jurisdictions.

If I'm missing something, an SPIAs are only for fools who'd unthinkingly buy bad financial products from sneaky salesmen, could someone please fill me in as to why this is true, and how Messrs. Otar and Bodie missed out on this knowledge?
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Re: Forget stocks - buy and hold annuities instead

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lawman3966 wrote:The tone of the top post and of several responders is such as to suggest that recommending the purchase of immediate annuities is for some reason worthy of ridicule. I'm not sure I see why.

Don't get me wrong. As much as anyone else, I love heaping scorn on bad, self-serving financial advice from salesmen with interests adverse to their customers. However, SPIAs have been recommended by many quite reputable finance writers, including Jim Otar and Zvi Bodie. Selecting annuities over stocks for provide a secure minimum income makes a lot of sense to me. No doubt, one should thoroughly investigate the coverage limits in the state the annuity is covered in, and the health of the guaranty fund that backs up those coverage limits. Moreover, I would hope that there are ways to spread out the risk of annuities among different companies, and perhaps among separate jurisdictions.

If I'm missing something, an SPIAs are only for fools who'd unthinkingly buy bad financial products from sneaky salesmen, could someone please fill me in as to why this is true, and how Messrs. Otar and Bodie missed out on this knowledge?
Just the usual thoughtless snarkiness, IMO. In fact, the RIAA is not just a bunch of salesman. Here is a partial list of the academic presenters and advisors to the association, which includes Zvi Bodie, Larry Kotlikoff, Moshe Milevsky, and Wade Pfau who are familiar to participants on this forum.

Julie Agnew, William and Mary School of Business
David Babbel, Wharton School
Somnath Basu, California Lutheran
Shlomo Benartzi, UCLA
Zvi Bodie, Boston University
Jeff Brown, University of Illinois
Gary V. Engelhardt, Syracuse University
Michael Finke, Texas Tech University
Larry Kotlikoff, Boston University
David Laibson, Harvard University
Annamaria Lusardi, Dartmouth College
Moshe Arye Milevsky, Ph.D.,York University
Olivia Mitchell, Wharton School, University of Pennsylvania
Wade Pfau, GRIPS
Doug Short, (retired) North Carolina State University
Meir Statman, Santa Clara University
Pirooz Vakili, Boston University
Jack VanDerhei, Temple University and EBRI Fellow
Stephen Zeldes, Columbia University
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Re: Forget stocks - buy and hold annuities instead

Post by dhodson »

A SPIA (or several purchased in a ladder fashion) is a great idea for longevity concerns for a small portion (like the amount necessary for basic needs) of one's portfolio at an older age (which for me will likely be around age 80).

Most other annuities arent worth the costs. Buying annuities at a younger age in order to accumulate wealth is a bad idea for the majority of people. One just needs to look at what insurance companies invest in and their costs to realize it isnt going to work out for the client in most situations. You can talk about all the pooling of risk you want but it wont be enough. Unfortunately so many products are created to deceive people into thinking they are great investments.
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Re: Forget stocks - buy and hold annuities instead

Post by Grt2bOutdoors »

Lbill wrote:
lawman3966 wrote:The tone of the top post and of several responders is such as to suggest that recommending the purchase of immediate annuities is for some reason worthy of ridicule. I'm not sure I see why.

Don't get me wrong. As much as anyone else, I love heaping scorn on bad, self-serving financial advice from salesmen with interests adverse to their customers. However, SPIAs have been recommended by many quite reputable finance writers, including Jim Otar and Zvi Bodie. Selecting annuities over stocks for provide a secure minimum income makes a lot of sense to me. No doubt, one should thoroughly investigate the coverage limits in the state the annuity is covered in, and the health of the guaranty fund that backs up those coverage limits. Moreover, I would hope that there are ways to spread out the risk of annuities among different companies, and perhaps among separate jurisdictions.

If I'm missing something, an SPIAs are only for fools who'd unthinkingly buy bad financial products from sneaky salesmen, could someone please fill me in as to why this is true, and how Messrs. Otar and Bodie missed out on this knowledge?
Just the usual thoughtless snarkiness, IMO. In fact, the RIAA is not just a bunch of salesman. Here is a partial list of the academic presenters and advisors to the association, which includes Zvi Bodie, Larry Kotlikoff, Moshe Milevsky, and Wade Pfau who are familiar to participants on this forum.

Julie Agnew, William and Mary School of Business
David Babbel, Wharton School
Somnath Basu, California Lutheran
Shlomo Benartzi, UCLA
Zvi Bodie, Boston University
Jeff Brown, University of Illinois
Gary V. Engelhardt, Syracuse University
Michael Finke, Texas Tech University
Larry Kotlikoff, Boston University
David Laibson, Harvard University
Annamaria Lusardi, Dartmouth College
Moshe Arye Milevsky, Ph.D.,York University
Olivia Mitchell, Wharton School, University of Pennsylvania
Wade Pfau, GRIPS
Doug Short, (retired) North Carolina State University
Meir Statman, Santa Clara University
Pirooz Vakili, Boston University
Jack VanDerhei, Temple University and EBRI Fellow
Stephen Zeldes, Columbia University

Impressive. My question is whether they eat what they cook up? Do they disclose what their asset allocation and retirement plans look like because if they aren't - they are merely presenting theoretical outcomes.
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Re: Forget stocks - buy and hold annuities instead

Post by dbr »

I notice the name Zwecher was mentioned.

Bogleheads might be interested in perusing his book:

http://www.amazon.com/Retirement-Portfo ... 550&sr=1-1

I cannot recommend most readers here actually pony up $50.40, but the approach outlined there seems to me to have a lot of validity. The whole thing lines up pretty well with a fairly respectable cohort of financial analysts that are certainly not just insurance salesmen.

So, the question is, if one wants to eschew insurance, then what approach is there to insuring against risk by employment of inherently risky investment structures? Are we back to Siegel?
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Re: Forget stocks - buy and hold annuities instead

Post by fishndoc »

GRT2BOUTDOORS wrote: Impressive. My question is whether they eat what they cook up? Do they disclose what their asset allocation and retirement plans look like because if they aren't - they are merely presenting theoretical outcomes.
I expect most/all of those listed are tenured professors with what amounts to a (very generous) lifetime annuity in their retirement plan. So, they probably truly do not need to buy an annuity.
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

Impressive. My question is whether they eat what they cook up? Do they disclose what their asset allocation and retirement plans look like because if they aren't - they are merely presenting theoretical outcomes.
I see your point, sorta. But I don't know why you would have to own the same portfolio you would recommend to others based on your expertise, since your needs and circumstances might be very different. We're talking about investing for retirement here, and most of these folks are not retired and many are quite financially secure. There's no secret about how some of these people are invested. For example, Milevsky has made it clear several times that he is 150% invested in equities (he uses leverage) because he has a secure, tenured academic post, receives book and consulting royalties, and is pretty well set financially. But he's not a Pollyanna - he knows he could lose his entire stake and he's willing to incur that loss if it happens. On the other hand, Zvi Bodie, who is equally set with a secure, tenured academic position, book royalties, etc. has made it clear that he's nearly 100% in TIPS (he's eating his own cooking). He could afford to lose it all like Milevsky but he has said that he has a very low risk tolerance and a very low marginal utility of additional wealth. It's a lot more important to read, think, and evaluate the research and opinions of these writers and judge the appropriateness for yourself than to insist that they eat their own cooking, IMO.
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Re: Forget stocks - buy and hold annuities instead

Post by dailybagel »

Bongleur wrote:It would be interesting to be able to invest in a true tontine. The lump sums of all participants would be in TIPS. Wonder how much the alpha from early deaths would be?
Alpha for whom?

If you average over all participants, the alpha is zero, relative to the underlying TIPS asset. That is, if you don't know in advance whether you will live for a long time or expire early, and choose a participant at random many times, the average over all such trials would be zero.
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Re: Forget stocks - buy and hold annuities instead

Post by Bongleur »

Actuarially, you DO know how many will be alive every year. So when the deal is to distribute x% of the assets each year to the living members, you CAN determine the amount above their investment which every living member will receive. TIPS are just a way to preserve the real value of the capital with minimal risk, although there might be a slight gain in value too; but early deaths create the alpha.

So, at what ages do you need to 1) make the investment and 2) start distribution, so that actuarially half the participants will be dead at the start of distributions? That is a 100% gain, but over how many years? If its 10 years, then that is a 7.2%/year rate of growth, guaranteed. Might be a good bet for a 75 year old who needs money at age 85.
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

Not sure what TIPS have to do with typical annuities. Some annuities use a "step-up" feature in which early payments start lower than a standard annuity and are stepped up periodically. But most annuities are not inflation-protected. The ones that are have higher premium, which I suppose is set based on the issuing company's estimate of inflation. They might hedge those annuities with inflation-linked investments such as TIPS in case their estimates turn out to be wrong, but I don't really know.
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Re: Forget stocks - buy and hold annuities instead

Post by Ozonewanderer »

Lbill wrote:
On Safe investing: The conference's overall message is that retirees should buy a "floor" of risk-free income-producing assets before considering equities. After Wall Street's recent madness, that makes sense.
I've been reading more and more highly reputed sources that advocate this position. It makes sense to me to protect some minimum from any downside risk and then take more risk with the remainder. I am giving serious thought to how to do this. I am retired at 62, married with a 60 YO wife and both in good health. In theory we have more than enough in our retirement savings (but with no pension) to provide for us well for many years. I am currently invested 40% stocks/35% bonds/25% cash although my target is 40/50/10. What if I buy an SPIA each year for the next 10 years or so to provide the guaranteed downside protection?

Bongleur wrote: It would be interesting to be able to invest in a true tontine. The lump sums of all participants would be in TIPS. Wonder how much the alpha from early deaths would be?
I wonder if there would be significant financial advantage in a non-profit annuity over a commercial SPIA. It seems to me that the simplicity of SPIA's as a financial product and the strength of competitive forces would make the margins on commercial immediate annuities very small.
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Re: Forget stocks - buy and hold annuities instead

Post by Cut-Throat »

Ozonewanderer wrote:What if I buy an SPIA each year for the next 10 years or so to provide the guaranteed downside protection?
Are you comfortable with putting your money with a single or a few insurance companies instead of investing across thousands of companies in the U.S in stocks and bonds and the U.S. government?

And what makes you think it's "guaranteed"?
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Re: Forget stocks - buy and hold annuities instead

Post by hq38sq43 »

Cut-Throat wrote:
Ozonewanderer wrote:What if I buy an SPIA each year for the next 10 years or so to provide the guaranteed downside protection?
Are you comfortable with putting your money with a single or a few insurance companies instead of investing across thousands of companies in the U.S in stocks and bonds and the U.S. government?

And what makes you think it's "guaranteed"?
Of course, any guarantee is only as trustworthy as the guarantor. Buying an annuity without thorough investigation of the issuing company is buying a "pig in a poke."
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Re: Forget stocks - buy and hold annuities instead

Post by Cut-Throat »

hq38sq43 wrote: Of course, any guarantee is only as trustworthy as the guarantor. Buying an annuity without thorough investigation of the issuing company is buying a "pig in a poke."
I don't know about yourself, but I would have a hard time doing a 'thorough investigation' of any company. Would you have been able to tell that Lehman Brothers would be 'belly up' 6 months before they were?
How about Enron?, AIG?, Countrywide Mortgage?, Bear Stearns?
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Re: Forget stocks - buy and hold annuities instead

Post by 555 »

Ozonewanderer wrote:``
Lbill wrote:
On Safe investing: The conference's overall message is that retirees should buy a "floor" of risk-free income-producing assets before considering equities. After Wall Street's recent madness, that makes sense.
I've been reading more and more highly reputed sources that advocate this position. It makes sense to me to protect some minimum from any downside risk and then take more risk with the remainder. I am giving serious thought to how to do this. I am retired at 62, married with a 60 YO wife and both in good health. In theory we have more than enough in our retirement savings (but with no pension) to provide for us well for many years. I am currently invested 40% stocks/35% bonds/25% cash although my target is 40/50/10. What if I buy an SPIA each year for the next 10 years or so to provide the guaranteed downside protection?''
If you have plenty of asset, e.g. if you only need to withdraw 2% or 3% per year, then you don't need annuities. Reassess each year.
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

Most states have Guarantee Associations that guarantee annuities up to $100,000 from loss due to bankruptcy of the issuer. See the list here:

http://freeannuityrates.com/annuities/a ... aranty.php

The limit in your state applies to each annuity contract separately, so if the total amount you wish to qualify is larger, you can purchase multiple annuities that are each no larger than $100K. Now, if they would just guarantee you from your stock market losses...
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Re: Forget stocks - buy and hold annuities instead

Post by market timer »

Bongleur wrote:Actuarially, you DO know how many will be alive every year. So when the deal is to distribute x% of the assets each year to the living members, you CAN determine the amount above their investment which every living member will receive. TIPS are just a way to preserve the real value of the capital with minimal risk, although there might be a slight gain in value too; but early deaths create the alpha.

So, at what ages do you need to 1) make the investment and 2) start distribution, so that actuarially half the participants will be dead at the start of distributions? That is a 100% gain, but over how many years? If its 10 years, then that is a 7.2%/year rate of growth, guaranteed. Might be a good bet for a 75 year old who needs money at age 85.
Roughly half of 75-year-old men survive another 10 years, but it is only alpha if you survive.

http://www.ssa.gov/oact/STATS/table4c6.html
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Re: Forget stocks - buy and hold annuities instead

Post by Bongleur »

If you're dead you don't care. That's the risk.
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

Death has been woefully underrated as insurance against portfolio failure. :)
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Re: Forget stocks - buy and hold annuities instead

Post by dhodson »

Lbill wrote:Most states have Guarantee Associations that guarantee annuities up to $100,000 from loss due to bankruptcy of the issuer. See the list here:

http://freeannuityrates.com/annuities/a ... aranty.php

The limit in your state applies to each annuity contract separately, so if the total amount you wish to qualify is larger, you can purchase multiple annuities that are each no larger than $100K. Now, if they would just guarantee you from your stock market losses...

There is no real money behind that association. Its an agreement where other companies in the state will work with the state to take over the business of failed companies and maintain the guarantees of the contract. In a larger industry failure, this wouldnt be worth anything. In this low interest environment, insurance companies are in real trouble trying to maintain guarantees and obtain any return for the client. Just look at the dividends over the last few decades.

There is no magic in how insurance companies invest. If you want their kind of return without the insurance feature then just directly invest in us treasuires/bonds and avoid the middle man cutting into your return. Your fear mongering about the stock market is pointless. More people lose money on insurance products in particular permanent insurance then the stock market. Less than 20% of permanent policies stay in force until death. Those that do get a return that is in essence the return of the insurance companies investments of us treasuries/bonds minus 2%. Death can be easily protected against with term. In retirement, if one dies, the spouse has the money that was saved for two.
Sam I Am
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Re: Forget stocks - buy and hold annuities instead

Post by Sam I Am »

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yobria
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Re: Forget stocks - buy and hold annuities instead

Post by yobria »

Ozonewanderer wrote:
Lbill wrote:
On Safe investing: The conference's overall message is that retirees should buy a "floor" of risk-free income-producing assets before considering equities. After Wall Street's recent madness, that makes sense.
I've been reading more and more highly reputed sources that advocate this position. It makes sense to me to protect some minimum from any downside risk and then take more risk with the remainder. I am giving serious thought to how to do this. I am retired at 62, married with a 60 YO wife and both in good health. In theory we have more than enough in our retirement savings (but with no pension) to provide for us well for many years. I am currently invested 40% stocks/35% bonds/25% cash although my target is 40/50/10. What if I buy an SPIA each year for the next 10 years or so to provide the guaranteed downside protection?
You probably have quite a bit of downside protection - social security, bonds, cash, and even stocks (which can't go to zero) all provide some degree. If you do choose an SPIA, they're a poor value (and are riskier) until you reach about age 80.
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Lbill
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

You probably have quite a bit of downside protection - social security, bonds, cash, and even stocks (which can't go to zero) all provide some degree. If you do choose SPIA stocks and bonds, they're a poor value (and are riskier) until you reach about age 80.
I agree, with some edits. :)
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Ozonewanderer
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Re: Forget stocks - buy and hold annuities instead

Post by Ozonewanderer »

yobria wrote: If you do choose an SPIA, they're a poor value (and are riskier) until you reach about age 80.
Taylor says this too. Can you explain this to me? Intuitively the opposite would seem to be true. If I buy an immediate annuity when I'm younger and live to say age 90, a good chunk of the payments that I receive will have been subsidized by the earlier mortality of the group of annuitants who did not live as long. OTOH if I start an annuity at age 80, the odds of my living to age 90 are calculable with greater accuracy so I am probably just getting more of my money back. No?
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Cut-Throat
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Re: Forget stocks - buy and hold annuities instead

Post by Cut-Throat »

Ozonewanderer wrote:
yobria wrote: If you do choose an SPIA, they're a poor value (and are riskier) until you reach about age 80.
Taylor says this too. Can you explain this to me? Intuitively the opposite would seem to be true. If I buy an immediate annuity when I'm younger and live to say age 90, a good chunk of the payments that I receive will have been subsidized by the earlier mortality of the group of annuitants who did not live as long. OTOH if I start an annuity at age 80, the odds of my living to age 90 are calculable with greater accuracy so I am probably just getting more of my money back. No?
The price of the annuity is much cheaper at age 80 than at a younger age....The older you get, the cheaper the annuity.
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Re: Forget stocks - buy and hold annuities instead

Post by yobria »

Cut-Throat wrote:
Ozonewanderer wrote:
yobria wrote: If you do choose an SPIA, they're a poor value (and are riskier) until you reach about age 80.
Taylor says this too. Can you explain this to me? Intuitively the opposite would seem to be true. If I buy an immediate annuity when I'm younger and live to say age 90, a good chunk of the payments that I receive will have been subsidized by the earlier mortality of the group of annuitants who did not live as long. OTOH if I start an annuity at age 80, the odds of my living to age 90 are calculable with greater accuracy so I am probably just getting more of my money back. No?
The price of the annuity is much cheaper at age 80 than at a younger age....The older you get, the cheaper the annuity.
Right, if you look at payout rates at 60, you'll see they aren't much better than CD rates. And consider the interest rate risk - rates could double tomorrow, and you'd be stuck with a lifetime of low payouts. Counterparty risk, the risk that the insurance company will go under, also declines as you age. Finally you'll just have a better estimation of how long you're going to live at 80 (if you make it) than at 60. There have been academic papers linked here backing this up, if you want to search.

My mother is 62. We may put 10-15% of her nest egg in an SPIA when she reaches 80 if we feel she needs it. Or not.
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

Ozonewanderer wrote:
yobria wrote: If you do choose an SPIA, they're a poor value (and are riskier) until you reach about age 80.
Taylor says this too. Can you explain this to me? Intuitively the opposite would seem to be true. If I buy an immediate annuity when I'm younger and live to say age 90, a good chunk of the payments that I receive will have been subsidized by the earlier mortality of the group of annuitants who did not live as long. OTOH if I start an annuity at age 80, the odds of my living to age 90 are calculable with greater accuracy so I am probably just getting more of my money back. No?
Actually, just the reverse. The way they work is that the older you get, the more your annuity payments are the payoff of "mortality credits;" e.g., your cohorts kicking off. So, your payments will reflect that. The younger you are, the more your payments are based on the return of your money.
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

Actually, for a number of reasons it might be better to annuitize over time:
This is why there is an emerging body of literature that is suggesting that lifecycle
investors should annuitize slowly, akin to a dollar-cost averaging strategy. Depending
on contract and policy features this process would start at age 70 and continue until age
80 or 85 for example, until the entire amount of desired annuity income is actually
annuitized.
http://www.ifid.ca/pdf_newsletters/PFA_ ... zation.pdf
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
yobria
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Re: Forget stocks - buy and hold annuities instead

Post by yobria »

Lbill wrote:Actually, for a number of reasons it might be better to annuitize over time:
This is why there is an emerging body of literature that is suggesting that lifecycle
investors should annuitize slowly, akin to a dollar-cost averaging strategy. Depending
on contract and policy features this process would start at age 70 and continue until age
80 or 85 for example, until the entire amount of desired annuity income is actually
annuitized.
http://www.ifid.ca/pdf_newsletters/PFA_ ... zation.pdf
70 might have been OK in 2006, when payout rates were so much higher, today I'd be far more worried about, to quote the paper you cited:
Another problem with premature annuitization is that when the immediate annuity
is of the fixed nominal (or even real) type – which currently represents 90% of income
annuities sold in the U.S.3 -- the lifecycle investor is selecting an asset allocation
together with a product allocation. The asset class underlying the annuity is essentially
fixed income bonds with a predetermined duration and sensitivity to interest rates. This
is precisely where the irreversible nature of real-world annuities, as opposed to pure
tontines, impacts the optimal age and process by which to annuitize. Given that this
contract is for life, the annuitant must now commit to a fixed income asset allocation that
can never be altered.
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Lbill
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

70 might have been OK in 2006, when payout rates were so much higher, today I'd be far more worried about, to quote the paper you cited:
Another problem with premature annuitization is that when the immediate annuity
is of the fixed nominal (or even real) type – which currently represents 90% of income
annuities sold in the U.S.3 -- the lifecycle investor is selecting an asset allocation
together with a product allocation. The asset class underlying the annuity is essentially
fixed income bonds with a predetermined duration and sensitivity to interest rates. This
is precisely where the irreversible nature of real-world annuities, as opposed to pure
tontines, impacts the optimal age and process by which to annuitize. Given that this
contract is for life, the annuitant must now commit to a fixed income asset allocation that
can never be altered.
You need to consider what role the annuity has in your overall portfolio. An annuity (or a diversified holding of annuities) has bond-like safety and has a higher interest rate. So even today, a SPIA is like a high-yield bond with a longevity insurance kicker. So, I might consider replacing some or all of my bond allocation with SPIAs, for example. Some people who are presently getting zero yield from their bonds and betting on deflation as the only way to squeeze out any capital gains might want to consider that option. One reason for scaling into annuities is that "allocation" is irreversible once made, so it might make sense to move incrementally in that direction. Another is that you can average into annuities over time when interest rates might be better than today. If you wait to do a lump sum annuity, you're not able to "dollar cost average" into them.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
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Lbill
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

Another article on this topic Retirees need fewer stocks, more annuities
Retirees should invest just 5% to 25% of their portfolios in stocks, or at least that’s the case for those whose primary goal is to minimize the risk of running out of money and sustaining their withdrawals, said one report published by Putnam Investments new think tank.

And, Americans can avoid the risk of outliving their assets by saving more, working longer, investing wisely, delaying Social Security and buying a life annuity, according the Government Accountability Office (GAO).

For his part, W. Van Harlow, Ph.D., CFA charterholder and director of research at the Putnam Institute, is suggesting a conservative asset mix largely because of what he views as the greatest risk to a retiree’s portfolio: the unfavorable “sequence of returns” in the securities’ markets.

In an interview, Harlow noted that once a retiree starts taking money from their retirement accounts, the withdrawals become “path dependent.” And if the success of a retirement income plan rests on whether the markets go up or down, one has to figure out how to protect oneself against that volatility, and especially against the risk of unfavorable “sequence of returns.” And the best way to do that is by reducing one’s overall exposure to equity to no more than 25%, he said.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
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Re: Forget stocks - buy and hold annuities instead

Post by pkcrafter »

LBill, I think the quotes you posted are very good. For very risk averse investors, an annuity (SPIA or even a Vanguard or other fee-only annuity) is a reasonable solution, and maybe the only solution to countering the risk of an all non-equity portfolio. Convincing someone to invest in equities who is not at all comfortable with equities will turn out poorly.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Forget stocks - buy and hold annuities instead

Post by yobria »

Lbill wrote:Another article on this topic Retirees need fewer stocks, more annuities
Retirees should invest just 5% to 25% of their portfolios in stocks, or at least that’s the case for those whose primary goal is to minimize the risk of running out of money and sustaining their withdrawals, said one report published by Putnam Investments new think tank.

And, Americans can avoid the risk of outliving their assets by saving more, working longer, investing wisely, delaying Social Security and buying a life annuity, according the Government Accountability Office (GAO).

For his part, W. Van Harlow, Ph.D., CFA charterholder and director of research at the Putnam Institute, is suggesting a conservative asset mix largely because of what he views as the greatest risk to a retiree’s portfolio: the unfavorable “sequence of returns” in the securities’ markets.

In an interview, Harlow noted that once a retiree starts taking money from their retirement accounts, the withdrawals become “path dependent.” And if the success of a retirement income plan rests on whether the markets go up or down, one has to figure out how to protect oneself against that volatility, and especially against the risk of unfavorable “sequence of returns.” And the best way to do that is by reducing one’s overall exposure to equity to no more than 25%, he said.
Yeah, I take industry financed papers telling me to buy insurance products with a large grain of salt. Even the apparently academic papers on this topic usually come from folks that have "consulting arrangements" with the industry.
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Re: Forget stocks - buy and hold annuities instead

Post by hq38sq43 »

Cut-Throat wrote:
hq38sq43 wrote: Of course, any guarantee is only as trustworthy as the guarantor. Buying an annuity without thorough investigation of the issuing company is buying a "pig in a poke."
I don't know about yourself, but I would have a hard time doing a 'thorough investigation' of any company. Would you have been able to tell that Lehman Brothers would be 'belly up' 6 months before they were?
How about Enron?, AIG?, Countrywide Mortgage?, Bear Stearns?
As thorough as possible under the circumstances. Main thing is not to rely on a guarantee simply because it is labeled a guarantee. Question is who is the guarantor and whether after due diligence reliance on the guarantee seems reasonable. Certainty is not possible. Prudence is.
Harry at Bradenton
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Re: Forget stocks - buy and hold annuities instead

Post by lawman3966 »

yobria wrote: If you do choose an SPIA, they're a poor value (and are riskier) until you reach about age 80.
I'm curious as to why either of the above would be true.

Regarding value, one rationale for getting an SPIA is that one can obtain a higher return in the form of inflation-indexed income from a lump sum invested in an SPIA than from the same lump sum invested in stocks/bonds, using conventional safe withdrawal rate theory (which may be between 3.5% to 4%). This should apply at any age. Can you indicate why this is wrong? I ask because, the above-stated logic is referred to extensively in Jim Otar's book (Unveiling . . . myth).

Regarding risk, other than there being less time in which a "black swan" can occur, why would SPIAs become less risky with increasing age of the purchaser?

With regard to the risk of SPIAs in general, can anyone here name a single incident (including the carnage on Wall st in 2008) in which anyone has stopped receiving income from an SPIA because of financial difficulty of an insurance company?
Tuxx
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Re: Forget stocks - buy and hold annuities instead

Post by Tuxx »

Great idea. However, you would want to do this when yields are near all time HIGHs not all time LOWs.
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Re: Forget stocks - buy and hold annuities instead

Post by Verde »

Due to adverse selection, SPIA's probably only offers value to less than 25% of the population (The healthiest quartile).
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Taylor Larimore
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SPIAs are primarily insurance

Post by Taylor Larimore »

Verde wrote:Due to adverse selection, SPIA's probably only offers value to less than 25% of the population (The healthiest quartile).
Hi Verde:

You make a good point that people in poor health generally don't buy life annuities. However, that doesn't mean they are not good value.

Single Premium Immediate Annuities (SPIA's) are not investments where everyone makes a profit--they are primarily insurance against running out of money--and make sense for a lot of us.

Best wishes.
Taylor
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Re: Forget stocks - buy and hold annuities instead

Post by Lbill »

Perception of the value of annuities may be affected by "framing;" the context in which it is being considered. In one state, Florida I believe, state employees were given a chance to vote on whether they wanted to replace their defined benefit retirement system (traditional pension) with a defined contribution system (401k), in which they manage their own investment portfolio. They overwhelmingly rejected the notion. A defined benefit pension is essentially a lifetime annuity. What would you choose if your employer offered a choice? I'd go for the defined benefit, assuming that I felt confident about the financial stability of the insurance company behind the pension and/or sufficient guarantees were in place. Buying your own annuity is even better, since you get to choose the annuity provider and you can spread your money over multiple providers.
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Re: SPIAs are primarily insurance

Post by 555 »

Taylor Larimore wrote:[quote="Verde"``]Due to adverse selection, SPIA's probably only offers value to less than 25% of the population (The healthiest quartile).
Hi Verde:
You make a good point that people in poor health generally don't buy life annuities. However, that doesn't mean they are not good value.
Single Premium Immediate Annuities (SPIA's) are not investments where everyone makes a profit--they are primarily insurance against running out of money--and make sense for a lot of us.
Best wishes.
Taylor[/quote][/quote][/quote]
Taylor, just curious. When you bought them, what was the difference in price between regular annuities and inflation protected annuities? How did you choose if/when to buy them?
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