I answered your questions in the post I made below that. In terms of any incident where somone's stopped receiving payment from an SPIA, I don't have data on that, but I do see a list of 100+ insolvent insurance companies on my state insurance guaranator's website (various lines). And the experience of AIG and Genworth, over the past few years should be fair warning about the risks of these companies. A lot can happen in 30 years (or 30 months).lawman3966 wrote:I'm curious as to why either of the above would be true.yobria wrote: If you do choose an SPIA, they're a poor value (and are riskier) until you reach about age 80.
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?
Forget stocks - buy and hold annuities instead
Re: Forget stocks - buy and hold annuities instead
Re: Forget stocks - buy and hold annuities instead
With respect to AIG (and probably other similar annuity providers), their annuity business was firewalled from their other businesses and there was never any question about the safety of their annuities. In any event, I think it might be prudent to diversify your annuity purchases across insurers and to look into the status of state guarantee associations. Looking for 100% safety is a fool's errand, but comparatively it seems to me you're going to be safer with due diligence annuities than trying to fight it out with a traditional stock/bond portfolio. Many people will do both - set up a floor income using Social Security, SPIAs, perhaps a TIPs ladder and also manage an investment portfolio. People on the board are much more comfortable with an investment portfolio than most, but the vast majority of people I know have no desire to do that, and they either opt for a life annuity or turn it all over to a financial advisor and close their eyes. Between the two choices, I'd advice them to do the former.
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- Cut-Throat
- Posts: 2011
- Joined: Sun Oct 17, 2010 9:46 am
Re: Forget stocks - buy and hold annuities instead
I think annuities have a place in your retirement plan, However the title of this thread was " Forget stocks - buy and hold annuities instead" is pure hogwash!Lbill wrote:With respect to AIG (and probably other similar annuity providers), their annuity business was firewalled from their other businesses and there was never any question about the safety of their annuities. In any event, I think it might be prudent to diversify your annuity purchases across insurers and to look into the status of state guarantee associations. Looking for 100% safety is a fool's errand, but comparatively it seems to me you're going to be safer with due diligence annuities than trying to fight it out with a traditional stock/bond portfolio. Many people will do both - set up a floor income using Social Security, SPIAs, perhaps a TIPs ladder and also manage an investment portfolio. People on the board are much more comfortable with an investment portfolio than most, but the vast majority of people I know have no desire to do that, and they either opt for a life annuity or turn it all over to a financial advisor and close their eyes. Between the two choices, I'd advice them to do the former.
That is what most of the naysayers on this thread are addressing.
- Taylor Larimore
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Answer to questions
555: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?
We bought our two SPIA annuities in 2006 and 2007 when we were about 80. At the time, we would have paid about 25% more (or received 25% less income) for the inflation protection.
I decided against the inflation-protection because of the high surcharge, and at age 80 inflation has less time to compound.
Lifetime annuities (only) have long made sense to me:How did you choose if/when to buy them?
* They provide the highest return of any guaranteed investment and they insure against running out of money before running out of life.
* By purchasing the annuities to insure our lifetime income, we felt comfortable to start giving our beneficiaries their inheritance now when they need it most.
* By waiting until age 80, most of the company return is from early deaths and return of principal--not from company earnings (currently very low).
* By waiting until age 80, we receive a considerably larger income and we avoided paying unnecessary premiums had we died earlier.
* By waiting until age 80, there is less chance of company failure.
A good place to learn about SPIAs and compare premiums (but don't forget Vanguard) is:
http://www.immediateannuities.com/
Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Forget stocks - buy and hold annuities instead
Thankyou Taylor. I plan on doing a similar thing, for similar reasons, though you listed a couple of reasons I hadn't even thought of yet. And for inflation protection you can always holds TIPS outside the annuity.
Re: Forget stocks - buy and hold annuities instead
I read an article saying that buying an annuity inside a ROTH can sometimes be a way to improve the return due to the savings on taxes.
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Re: Forget stocks - buy and hold annuities instead
Or Trad and use it for RMDs, though there are two different ways of doing this.Bongleur wrote:`I read an article saying that buying an annuity inside a ROTH can sometimes be a way to improve the return due to the savings on taxes.'
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Re: Forget stocks - buy and hold annuities instead
Executive Life insurance is the only example that I'm familiar with. In that case, only residents of some states didn't receive payments. Within those states, only people with policies whose value exceeded the state guarantee association limits lost money. Of the people who lost money, the worst case was receiving around 60-70%.lawman3966 wrote: 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?
Re: Forget stocks - buy and hold annuities instead
I checked my IPS just to make sure, and annuities are not mentioned at all. I plan to stay the course with my unimaginative 60/40 indexed portfolio. Not as exciting as annuities, but I'm hanging in there with that mix anyway.
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Re: Forget stocks - buy and hold annuities instead
I'm in awe of these people I don't have a clue to who they are. Really though Lbill, annuities?Lbill wrote: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.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?
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
Even educators need education. And some can be hard headed to the point of needing time out.
- Ozonewanderer
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Re: Forget stocks - buy and hold annuities instead
Lbill, thanks for the article. I don't pretend to understand the actuarial math but it raises the clear and simple point that the return of annuities at older ages are much higher so I will wait until age 70 to reconsider this strategy.yobria wrote: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:Lbill wrote:Actually, for a number of reasons it might be better to annuitize over time:http://www.ifid.ca/pdf_newsletters/PFA_ ... zation.pdfThis 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.
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.
As for the point that an investment in an annuity locks in that asset to a conservative fixed income allocation I think I would rather remove that investment from my AA plan altogether. I would reduce my required income for planning purposes by the amount of income derived from the annuity.
With respect to the strength of the "guarantee" of an annuity, does anyone have a better guarantee to offer? I would love it if the US gov't sold inflation indexed annuities. I would like the option of buying more social security. Lacking that option, I think an annuity with state insurance provides a more assured income stream than anything else I can do.
- Cut-Throat
- Posts: 2011
- Joined: Sun Oct 17, 2010 9:46 am
Re: Forget stocks - buy and hold annuities instead
In essence you do have the option of buying more Social Security. Delaying to age 70, is your best move. It is Inflation Adjusted also, and can pass to your spouse if you die.Ozonewanderer wrote: With respect to the strength of the "guarantee" of an annuity, does anyone have a better guarantee to offer? I would love it if the US gov't sold inflation indexed annuities. I would like the option of buying more social security. Lacking that option, I think an annuity with state insurance provides a more assured income stream than anything else I can do.
- Ozonewanderer
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- Joined: Mon Apr 12, 2010 12:27 am
- Location: Southwest FL
Re: Forget stocks - buy and hold annuities instead
That is my plan. I'd like to buy more!Cut-Throat wrote:In essence you do have the option of buying more Social Security. Delaying to age 70, is your best move. It is Inflation Adjusted also, and can pass to your spouse if you die.Ozonewanderer wrote: With respect to the strength of the "guarantee" of an annuity, does anyone have a better guarantee to offer? I would love it if the US gov't sold inflation indexed annuities. I would like the option of buying more social security. Lacking that option, I think an annuity with state insurance provides a more assured income stream than anything else I can do.
- White Coat Investor
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Re: Forget stocks - buy and hold annuities instead
I love that you think basic needs can be paid for by a small portion of the portfolio for most people. While I'd love to think that was true, I doubt it is. Most portfolios (much less a small portion of the same) don't even pay for basic needs. If we think of basic needs as say $40K a year, that's a million dollar portfolio, far more than most people have or need to have to have a comfortable retirement. If a million bucks is just a small portion of the portfolio.....dhodson wrote: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).
All that said, I agree with your main point, that a SPIA is a great idea for some portion of the portfolio. Personally, I think the maximum portion is the amount that can be covered with state guarantees! In my state, that's $200K. I'm still not clear if that's $200K from each company, or for each spouse, or total, or what though. But you better believe I'd be sure before buying a SPIA.
So if I could buy $400K worth of SPIAs at say 6%, that's $24K a year. Added to SS, that would be a pretty good floor on my retirement income.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy |
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
- White Coat Investor
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Re: Forget stocks - buy and hold annuities instead
I don't think this is true. The return on annuities is much higher at older ages, but if you live to your life expectancy, I believe the return is LOWER as you get older. The return is highly dependent on how long you live. If you buy a SPIA at 90 with a life expectacy of 4 years, then live 8 more years, that's a fantastic return at 20% a year! That said, I bet those who own SPIAs live longer.Ozonewanderer wrote:[Lbill, thanks for the article. I don't pretend to understand the actuarial math but it raises the clear and simple point that the return of annuities at older ages are much higher so I will wait until age 70 to reconsider this strategy.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy |
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
- ObliviousInvestor
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Re: Forget stocks - buy and hold annuities instead
A post last year from dpbsmith confirmed what I found when researching my book on retirement planning. Also, he found a neat picture.EmergDoc wrote:I don't think this is true. The return on annuities is much higher at older ages, but if you live to your life expectancy, I believe the return is LOWER as you get older. The return is highly dependent on how long you live. If you buy a SPIA at 90 with a life expectacy of 4 years, then live 8 more years, that's a fantastic return at 20% a year! That said, I bet those who own SPIAs live longer.Ozonewanderer wrote:[Lbill, thanks for the article. I don't pretend to understand the actuarial math but it raises the clear and simple point that the return of annuities at older ages are much higher so I will wait until age 70 to reconsider this strategy.
dpbsmith wrote:I once spent hours doing actual calculations with actual annuity quotations, and what I found is that in theory it is always slightly better to annuitize early. It is all about the mortality credits--see the Fidelity chart--and even at age 65-70 they are not zero. If you annuitize at age 70 instead of age 65 you miss out on the thin little green wedge.
[snip]
That said, at younger ages the difference was so small that a person could choose to regard it as negligible. Or lost in the noise. Or possible to overcome by making very slightly riskier investments than the insurer makes.
[snip]
Mike Piper |
Roth is a name, not an acronym. If you type ROTH, you're just yelling about retirement accounts.
Re: Forget stocks - buy and hold annuities instead
I would say 40k is more than basic. Certainly it is for most Americans. Many don't make that currently.EmergDoc wrote:I love that you think basic needs can be paid for by a small portion of the portfolio for most people. While I'd love to think that was true, I doubt it is. Most portfolios (much less a small portion of the same) don't even pay for basic needs. If we think of basic needs as say $40K a year, that's a million dollar portfolio, far more than most people have or need to have to have a comfortable retirement. If a million bucks is just a small portion of the portfolio.....dhodson wrote: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).
All that said, I agree with your main point, that a SPIA is a great idea for some portion of the portfolio. Personally, I think the maximum portion is the amount that can be covered with state guarantees! In my state, that's $200K. I'm still not clear if that's $200K from each company, or for each spouse, or total, or what though. But you better believe I'd be sure before buying a SPIA.
So if I could buy $400K worth of SPIAs at say 6%, that's $24K a year. Added to SS, that would be a pretty good floor on my retirement income.
Re: Forget stocks - buy and hold annuities instead
The "anatomy of annuity" chart is interesting being dated 2009. One can presume that most of the "interest" is from LT Treasuries; so when their rate drops, the total income from annuitizing early drops a lot. If LT Treasuries are at above average rates, then lock it in...
Seeking Iso-Elasticity. |
Tax Loss Harvesting is an Asset Class. |
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Re: Forget stocks - buy and hold annuities instead
The problem is how to invest funds earmarked for annuitization whilst waiting for higher rates. Short term deposits earn less than inflation, long bonds suffer capital losses when rates rise (exactly the scenario you desire to get a higher income immediate annuity), stocks are risky.Bongleur wrote:The "anatomy of annuity" chart is interesting being dated 2009. One can presume that most of the "interest" is from LT Treasuries; so when their rate drops, the total income from annuitizing early drops a lot. If LT Treasuries are at above average rates, then lock it in...
Re: Forget stocks - buy and hold annuities instead
Just invest it in whatever the annuity would invest in. Then you're somewhat indifferent to interest rates. Just annuitize when it's time to.Verde wrote:`The problem is how to invest funds earmarked for annuitization whilst waiting for higher rates. Short term deposits earn less than inflation, long bonds suffer capital losses when rates rise (exactly the scenario you desire to get a higher income immediate annuity), stocks are risky.'
Re: Forget stocks - buy and hold annuities instead
I'd just like to remind people that getting longevity insurance via an SPIA and the asset allocation after annuitising can be decoupled, so current low bond yields are not necessarily a reason to avoid an SPIA. My favourite UK annuity product would enable me to select from a range of funds inside the annuity, including UK and international equities, inflation-protected, nominal and corporate bond funds, and a property fund. I could run a 50:50 portfolio inside the annuity if I wanted to. Income would obviously be variable with asset fluctuation, and there would be an additional constraint on asset allocation, you need to avoid a 50% drop at all costs, because the insurance company interprets the regulatory requirement to provide a life-time income as meaning they must force you into a conventional annuity if you suffer a 50% drop. In other words, they would force you to sell low, in that scenario. However a 50:50 portfolio without rebalancing, or one with a lower equity allocation, should be safe from this hazard.
In a previous annuity thread I think Barry Barnitz posted that similar products (ones that enable you to continue to manage your asset allocation inside an annuity) are available in the US.
In a previous annuity thread I think Barry Barnitz posted that similar products (ones that enable you to continue to manage your asset allocation inside an annuity) are available in the US.
Re: Forget stocks - buy and hold annuities instead
I would very much appreciate if you could provide the costs for the annuity product you refer to. Sounds like a great product, if the costs are ok. All the US variable annuities I have looked at are too expensive, I won't even mention the crap we have to settle for in South Africa.cjking wrote:I'd just like to remind people that getting longevity insurance via an SPIA and the asset allocation after annuitising can be decoupled, so current low bond yields are not necessarily a reason to avoid an SPIA. My favourite UK annuity product would enable me to select from a range of funds inside the annuity, including UK and international equities, inflation-protected, nominal and corporate bond funds, and a property fund. I could run a 50:50 portfolio inside the annuity if I wanted to. Income would obviously be variable with asset fluctuation, and there would be an additional constraint on asset allocation, you need to avoid a 50% drop at all costs, because the insurance company interprets the regulatory requirement to provide a life-time income as meaning they must force you into a conventional annuity if you suffer a 50% drop. In other words, they would force you to sell low, in that scenario. However a 50:50 portfolio without rebalancing, or one with a lower equity allocation, should be safe from this hazard.
In a previous annuity thread I think Barry Barnitz posted that similar products (ones that enable you to continue to manage your asset allocation inside an annuity) are available in the US.
Re: Forget stocks - buy and hold annuities instead
Just one thing puzzles me a little. Some posters say to avoid annuities because of uncertainty about the financial future of insurance companies offering them, but some of these same posters seem to think owning stocks (which includes the stock of insurance companies) is safer. I don't get it. If economic times get bad enough to drive insurance companies into bankruptcy, why would the stock market be a safer place to be?
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard |
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"You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
Re: Forget stocks - buy and hold annuities instead
From memory, if you go about it the right way (get all advisor comission rebated) then I think the cost was 1% off the front, plus 0.55% a year charge for the cheapest funds (equity, bond, property) which happened to be the ones I would actually use, even if they weren't cheaper.Verde wrote:I would very much appreciate if you could provide the costs for the annuity product you refer to. Sounds like a great product, if the costs are ok. All the US variable annuities I have looked at are too expensive, I won't even mention the crap we have to settle for in South Africa.
I had to dig the charges information out of their advisor web site, it's not easy to find.
I'm slightly worried that I can't find information about the product on their web site now, I hope they haven't discontinued it. I'm sure it was still there just a month or two ago.
I think the product is still there, but the information is now hidden on their advisor web site. It is called "Flexible Lifetime Annuity", see the following page. http://www.pruadvisor.co.uk/content/26670/
Re: Forget stocks - buy and hold annuities instead
You can think of the counterparty risk of an annuity the same as the risk of buying a corporate bond in the company. The fact that there are other risks in other asset classes doesn't negate this one. And with stocks I can diversify.Lbill wrote:Just one thing puzzles me a little. Some posters say to avoid annuities because of uncertainty about the financial future of insurance companies offering them, but some of these same posters seem to think owning stocks (which includes the stock of insurance companies) is safer. I don't get it. If economic times get bad enough to drive insurance companies into bankruptcy, why would the stock market be a safer place to be?
You can also think of it the other way around - the insurance co is going to give you a big chunk of change today, and, in a couple of decades, if you're able, you'll pay them some premiums. Would the insurance company be worried about counterparty risk?
- Cut-Throat
- Posts: 2011
- Joined: Sun Oct 17, 2010 9:46 am
Re: Forget stocks - buy and hold annuities instead
Diversity......I would not own the stock of one insurance company either! Or even an insurance sector mutual fund. Or any Sector for that matter.Lbill wrote:Just one thing puzzles me a little. Some posters say to avoid annuities because of uncertainty about the financial future of insurance companies offering them, but some of these same posters seem to think owning stocks (which includes the stock of insurance companies) is safer. I don't get it. If economic times get bad enough to drive insurance companies into bankruptcy, why would the stock market be a safer place to be?
Re: Forget stocks - buy and hold annuities instead
I don't understand the motive for a variable annuity, even supposing costs are low. Why not just have a plain vanilla fixed immediate annuity (possibly inflation adjusted), and then have all your other investments outside in your regular portfolio.cjking wrote:``I'd just like to remind people that getting longevity insurance via an SPIA and the asset allocation after annuitising can be decoupled, so current low bond yields are not necessarily a reason to avoid an SPIA. My favourite UK annuity product would enable me to select from a range of funds inside the annuity, including UK and international equities, inflation-protected, nominal and corporate bond funds, and a property fund. I could run a 50:50 portfolio inside the annuity if I wanted to. Income would obviously be variable with asset fluctuation, and there would be an additional constraint on asset allocation, you need to avoid a 50% drop at all costs, because the insurance company interprets the regulatory requirement to provide a life-time income as meaning they must force you into a conventional annuity if you suffer a 50% drop. In other words, they would force you to sell low, in that scenario. However a 50:50 portfolio without rebalancing, or one with a lower equity allocation, should be safe from this hazard.
In a previous annuity thread I think Barry Barnitz posted that similar products (ones that enable you to continue to manage your asset allocation inside an annuity) are available in the US.''
Re: Forget stocks - buy and hold annuities instead
Because then you won't earn mortality credits on the other investments.555 wrote: I don't understand the motive for a variable annuity, even supposing costs are low. Why not just have a plain vanilla fixed immediate annuity (possibly inflation adjusted), and then have all your other investments outside in your regular portfolio.
An annuity (SPIA) is life insurance in reverse: by putting your portfolio inside an annuity wrapper, you are in effect contracting to make a lump sum payment equal to your portfolio value when you die, in return for that you get paid "life insurance premiums" that increase your income while you're alive. These premiums are tiny at age 65, probably outweighed by exta insurance company costs, but they become significant in your seventies and large in your eighties. If you make it to your nineties, a fair premium would be well over 20% of the value of you portfolio, per year.
(I should add that not being a US investor, I don't know about US variable annuities, so I don't know if they are an attractive product, in terms of structure, charges and counter-party risk. It's really the theory of what a perfect annuity should look like that I argue for. In particular, there's no theoretical necessity for charges much higher than you would normally pay for holding financial assets outside an annuity, and no theoretical necessity for their to be any counter-party risk. If financial regulation weren't a probably expensive obstacle, I'd advocate that US Bogleheads get together to create a non-profit company to administer this perfect variable annuity.)
Re: Forget stocks - buy and hold annuities instead
What would happen if the Ins. company that had the annuity went into receivership/bankruptacy? Is the money only protected up to $300k, like life insurance?
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
Re: Forget stocks - buy and hold annuities instead
What's so great about mortality credits? You get them from people you survive, but you give them to people who survive you, when you forfeit the value of your annuity. It's zero sum.cjking wrote:Because then you won't earn mortality credits on the other investments.555 wrote: I don't understand the motive for a variable annuity, even supposing costs are low. Why not just have a plain vanilla fixed immediate annuity (possibly inflation adjusted), and then have all your other investments outside in your regular portfolio.
An annuity (SPIA) is life insurance in reverse: by putting your portfolio inside an annuity wrapper, you are in effect contracting to make a lump sum payment equal to your portfolio value when you die, in return for that you get paid "life insurance premiums" that increase your income while you're alive. These premiums are tiny at age 65, probably outweighed by exta insurance company costs, but they become significant in your seventies and large in your eighties. If you make it to your nineties, a fair premium would be well over 20% of the value of you portfolio, per year.
(I should add that not being a US investor, I don't know about US variable annuities, so I don't know if they are an attractive product, in terms of structure, charges and counter-party risk. It's really the theory of what a perfect annuity should look like that I argue for. In particular, there's no theoretical necessity for charges much higher than you would normally pay for holding financial assets outside an annuity, and no theoretical necessity for their to be any counter-party risk. If financial regulation weren't a probably expensive obstacle, I'd advocate that US Bogleheads get together to create a non-profit company to administer this perfect variable annuity.)
Also it seems the insurance wrapper must be more expensive for volatile assets, though I'm not sure how these things are structured. Why pay those costs?
Re: Forget stocks - buy and hold annuities instead
If having a far higher income while alive is of absolutely no interest to you, if you really would just leave the extra money in the bank until you die, then an annuity is not for you. I don't think many people are that wealthy.555 wrote: What's so great about mortality credits? You get them from people you survive, but you give them to people who survive you, when you forfeit the value of your annuity. It's zero sum.
For a UK product I've mentioned a few times in annuity threads, the extra cost amounts to (very roughly and depending on asset allocation) 0.25% a year. The extra income depends on age, but could be a number of whole percentage points per year. So the consequence of annuitisation could be that the amount you can spend while alive increases hugely.Also it seems the insurance wrapper must be more expensive for volatile assets, though I'm not sure how these things are structured. Why pay those costs?