Annuities-when and why?

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bengal22
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Re: Annuities-when and why?

Post by bengal22 » Wed Oct 04, 2017 11:05 am

I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.

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Re: Annuities-when and why?

Post by Sandtrap » Wed Oct 04, 2017 11:07 am

http://www.immediateannuities.com/
You can enter different parameters on this site and have them send you proposals. An excellent information resource.
Also consider a middle ground approach by laddering the SPIA's.
Perhaps at 70 purchase half of what you had in mind, then at 75 buy another SPIA. The returns will rise when purchased at a higher age. You have to do it as you feel comfortable and only you can find what that is (sleep factor).
An SPIA can have a valuable role in an overall financial portfolio for some folks, not everyone because everyone's situation is different.
Random thoughts.
Good luck.'
j

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Re: Annuities-when and why?

Post by tc101 » Wed Oct 04, 2017 11:25 am

I have a variable annuity at Vanguard. Can I roll that over into an SPIA?
. | The most important thing you should know about me is that I am not an expert.

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Re: Annuities-when and why?

Post by ThrustVectoring » Wed Oct 04, 2017 2:11 pm

Single-premium immediate annuities have been mentioned before, and they're basically the only sort you want to buy. Their primary purpose is to cover a shortfall in retirement saving by exchanging your inheritance assets for mortality credits. Other people buying an annuity die early and give up their payments, which means that you collect those mortality credits through outliving expectations. This means that annuities have higher yields than the safe withdrawal rate, so you need less savings in order to make things work. Like, a 70 year old man gets over 7% off an annuity, while a SWR is about 4%. It means you can retire off having something like 15 times annual expenses saved, rather than 25 times.

Their secondary purpose is profiting off of outliving actuarial tables. If you've got a lot of family that lives a long time, if you take care of your health really well and are physically active, etc, you will probably outlive expectations.

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Re: Annuities-when and why?

Post by learning_head » Thu Oct 05, 2017 8:28 am

HomerJ wrote:
Mon Jul 20, 2015 12:15 am
Whiggish Boffin wrote:I intend to buy a CPI-adjusted SPIA between age 75 and 80, and then receive two inflation-adjusted monthly checks (Social Security and SPIA) for as long as I live. They will cover living expenses, but no luxuries. My stock/bond portfolio will pay for toys, treats, and trips, and if the market tanks, I'll just do without.
Yes, I probably will do the same, although I'll probably buy a SPIA around 65-70.
There were some changes since 2015 when above comments were made...

CPI-adjusted SPIAs (which is what people buying SPIAs REALLY want in most cases IMO) are disappearing and may not be around when you want to buy them or might be too expensive considering there is not much competition (supply) for these. There used to be 2 providers of these. AIG did not see enough interest from the public and stopped selling them in the last year. Now there is only one provider (Principal), and it removed the cheaper channel of sales (institutional via Vanguard), is now only available via more expensive channels.

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Re: Annuities-when and why?

Post by Dottie57 » Thu Oct 05, 2017 8:38 am

bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
SPIA is good if you think you may not have enough money to last or to make it simple for a surviving spouse. It is insurance sold by an insurance compny. SPIA should not be looked at as an investment.

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Re: Annuities-when and why?

Post by CyclingDuo » Thu Oct 05, 2017 9:03 am

tc101 wrote:
Wed Oct 04, 2017 11:25 am
I have a variable annuity at Vanguard. Can I roll that over into an SPIA?
Do you mean "rollover" or do you mean "purchase" or do you mean "convert"? The variable annuity is a non-qualified annuity purchased with after tax dollars. Standard tax rules for non-qualified annuities apply (you'll be taxed as ordinary income on the gains).

You can add the GLWB to your variable annuity at Vanguard up until the age of 90 (this is the option to annuitize your variable annuity). That cost is an additional ER fee of 1.2% per year based on the Total Withdrawal Base (TWB). That changes the variable annuity to a "hybrid" annuity.

My guess is that the answer to your question is, if you wanted to "purchase" a SPIA at Vanguard with money in your current variable annuity, the funds in the variable used to purchase the SPIA would be treated as a taxable withdrawal, and you would owe taxes on the gains via it being taxed as ordinary income. In other words, you would be selling one contract (or a portion of one contract) and purchasing another contract. Check the rules on aggregation as well, but I don't think non-qualified would be a part of that.

Give Vanguard a call to find out your options.

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Re: Annuities-when and why?

Post by dbr » Thu Oct 05, 2017 9:08 am

1035 exchange? As suggested call Vanguard to discuss what might or might not be possible.

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Re: Annuities-when and why?

Post by itstoomuch » Thu Oct 05, 2017 9:47 am

tc101 wrote:
Wed Oct 04, 2017 11:25 am
I have a variable annuity at Vanguard. Can I roll that over into an SPIA?
Read your contract 😀
You have a SPIA within . if you want to annuitize your Deferred annuity you should compare what is the guaranteed SPIA in your contract vs what an SPIA can be purchased in today's market place.
YAMV
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Re: Annuities-when and why?

Post by technovelist » Thu Oct 05, 2017 9:50 am

dbr wrote:
Thu Oct 05, 2017 9:08 am
1035 exchange? As suggested call Vanguard to discuss what might or might not be possible.
Right, most annuities can be exchanged for other annuities without causing a taxable event.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Annuities-when and why?

Post by The Wizard » Thu Oct 05, 2017 11:27 am

bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
Possibly, but just be aware that a 7% withdrawal ratio may not succeed in all instances...
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Re: Annuities-when and why?

Post by bengal22 » Fri Oct 13, 2017 9:31 pm

Dottie57 wrote:
Thu Oct 05, 2017 8:38 am
bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
SPIA is good if you think you may not have enough money to last or to make it simple for a surviving spouse. It is insurance sold by an insurance compny. SPIA should not be looked at as an investment.
My point is that I do not need an annuity because I do not see a shortfall between my known retirement income and my expenses, and I think I can earn more money by investing my assets rather than spending them to buy an annuity. I am not a big fan of any insurance product.

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Re: Annuities-when and why?

Post by bengal22 » Fri Oct 13, 2017 9:32 pm

The Wizard wrote:
Thu Oct 05, 2017 11:27 am
bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
Possibly, but just be aware that a 7% withdrawal ratio may not succeed in all instances...
Please explain where the 7% withdrawal ratio came from.

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Re: Annuities-when and why?

Post by Mel Lindauer » Fri Oct 13, 2017 9:57 pm

bengal22 wrote:
Fri Oct 13, 2017 9:32 pm
The Wizard wrote:
Thu Oct 05, 2017 11:27 am
bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
Possibly, but just be aware that a 7% withdrawal ratio may not succeed in all instances...
Please explain where the 7% withdrawal ratio came from.
The 7% used in this SPIA example would last as long as the annuitant lives since it is GUARANTEED. It could possibly last even longer than the annuitant's life if he/she had chosen a period certain, since the designated heir(s) would get any remaining payments should the annuitant die prior to the end of the period certain.
Best Regards - Mel | | Semper Fi

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Re: Annuities-when and why?

Post by smectym » Fri Oct 13, 2017 11:34 pm

I too have a VA at Vanguard. You can “roll over” all or a portion of variable annuity assets into an SPIA through what is known as a “1035 exchange.” This exchange avoids exposure of the assets to current taxation. We have done several such exchanges in recent years to create income. Works great and Vanguard generally executes the process smoothly.

Once you begin receiving income after a 1035 exchange, taxation of the distribution is pro rata, i.e. each monthly payment is treated partly as taxable earnings and partly as a nontaxable return of principal. Thus, this method of receiving distributions has tax advantages over simply calling Vanguard and asking them to send you a check as such distributions will be treated as entirely taxable earnings until all earnings in the account are exhausted.

As to the broader question of whether it “ever makes sense to invest in variable annuities,” no doubt the products have both pluses and minuses. Assuming you’re in a low-cost product like Vanguard’s, the biggest downside is losing tax-favored treatment on realized long term capital gains. Tilting your asset allocation within the VA heavily towards bonds, and using non-deferred space for equity allocation, is probably the best solution to that problem.

On the other hand, VA’s defer taxation all the way to age 85, unlike 401k and IRA, which require RMD at 70.5. That’s a potentially significant plus factor in my view.

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Re: Annuities-when and why?

Post by The Wizard » Sat Oct 14, 2017 5:09 am

bengal22 wrote:
Fri Oct 13, 2017 9:32 pm
The Wizard wrote:
Thu Oct 05, 2017 11:27 am
bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
Possibly, but just be aware that a 7% withdrawal ratio may not succeed in all instances...
Please explain where the 7% withdrawal ratio came from.
My latest annuitization with TIAA last May has a Payout Rate slightly over 7%. This was an immediate annuity paying lifetime income with a ten year guarantee period.

Bengal says he can get a better return through investing. Perhaps, but withdrawing 7% of the original amount each year could be a risky lifetime plan.
Your mileage may vary...
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Re: Annuities-when and why?

Post by smitcat » Sat Oct 14, 2017 7:34 am

Then you really need to take your proposed annuity and 'plug it in' to a tax plan to see what you will keep vs what you may get. The fixed payments give you a known amount but at the same time they may limit your ability to control taxes from there forward.

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Re: Annuities-when and why?

Post by friar1610 » Sat Oct 14, 2017 2:30 pm

smectym wrote:
Fri Oct 13, 2017 11:34 pm
I too have a VA at Vanguard. You can “roll over” all or a portion of variable annuity assets into an SPIA through what is known as a “1035 exchange.” This exchange avoids exposure of the assets to current taxation. We have done several such exchanges in recent years to create income. Works great and Vanguard generally executes the process smoothly.

Once you begin receiving income after a 1035 exchange, taxation of the distribution is pro rata, i.e. each monthly payment is treated partly as taxable earnings and partly as a nontaxable return of principal. Thus, this method of receiving distributions has tax advantages over simply calling Vanguard and asking them to send you a check as such distributions will be treated as entirely taxable earnings until all earnings in the account are exhausted.

As to the broader question of whether it “ever makes sense to invest in variable annuities,” no doubt the products have both pluses and minuses. Assuming you’re in a low-cost product like Vanguard’s, the biggest downside is losing tax-favored treatment on realized long term capital gains. Tilting your asset allocation within the VA heavily towards bonds, and using non-deferred space for equity allocation, is probably the best solution to that problem.

On the other hand, VA’s defer taxation all the way to age 85, unlike 401k and IRA, which require RMD at 70.5. That’s a potentially significant plus factor in my view.
So you have transferred, via 1035, a portion of your VVA? I had previously looked into transferring a portion of mine to another company's fixed deferred annuity and was told it couldn't be done because it was too hard to compute what the basis would be on the new annuity. I didn't think it would be rocket science but that's what I was told.
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Re: Annuities-when and why?

Post by itstoomuch » Sat Oct 14, 2017 3:46 pm

friar1610 wrote:
Sat Oct 14, 2017 2:30 pm
smectym wrote:
Fri Oct 13, 2017 11:34 pm
I too have a VA at Vanguard. You can “roll over” all or a portion of variable annuity assets into an SPIA through what is known as a “1035 exchange.” This exchange avoids exposure of the assets to current taxation. We have done several such exchanges in recent years to create income. Works great and Vanguard generally executes the process smoothly.

Once you begin receiving income after a 1035 exchange, taxation of the distribution is pro rata, i.e. each monthly payment is treated partly as taxable earnings and partly as a nontaxable return of principal. Thus, this method of receiving distributions has tax advantages over simply calling Vanguard and asking them to send you a check as such distributions will be treated as entirely taxable earnings until all earnings in the account are exhausted.

As to the broader question of whether it “ever makes sense to invest in variable annuities,” no doubt the products have both pluses and minuses. Assuming you’re in a low-cost product like Vanguard’s, the biggest downside is losing tax-favored treatment on realized long term capital gains. Tilting your asset allocation within the VA heavily towards bonds, and using non-deferred space for equity allocation, is probably the best solution to that problem.

On the other hand, VA’s defer taxation all the way to age 85, unlike 401k and IRA, which require RMD at 70.5. That’s a potentially significant plus factor in my view.
So you have transferred, via 1035, a portion of your VVA? I had previously looked into transferring a portion of mine to another company's fixed deferred annuity and was told it couldn't be done because it was too hard to compute what the basis would be on the new annuity. I didn't think it would be rocket science but that's what I was told.
Re: the italics; Annuities are Insurance products. Variables do have an investment aspect but fees are high for the priviledge. We have 90% of VA within an IRA wrapper so we wouldn't get LTCG or dividend tax advantages anyway. If you take the GLWB option (see vanguard's product) you would be well advised to be more aggressive than being conservative. If we should outlive the liquidation value of the annuity, we would be taxed on the insurance company's annuity income payment vs a self-directed IRA in Indexes/MF/trading accts that can be run down close to $0 just from RMD's and pay no tax on no income. We converted IRA MF (W branded) to a pseudo pension in deferred annuity.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Annuities-when and why?

Post by bengal22 » Sun Oct 15, 2017 9:27 pm

The Wizard wrote:
Sat Oct 14, 2017 5:09 am
bengal22 wrote:
Fri Oct 13, 2017 9:32 pm
The Wizard wrote:
Thu Oct 05, 2017 11:27 am
bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
Possibly, but just be aware that a 7% withdrawal ratio may not succeed in all instances...
Please explain where the 7% withdrawal ratio came from.
My latest annuitization with TIAA last May has a Payout Rate slightly over 7%. This was an immediate annuity paying lifetime income with a ten year guarantee period.

Bengal says he can get a better return through investing. Perhaps, but withdrawing 7% of the original amount each year could be a risky lifetime plan.
Your mileage may vary...
Maybe I am totally missing this. But a payout rate of 7% does not equal a 7% investment return. Your purchase price of the annuity is a sunk cost. Much of the money being returned was yours. Right? The good thing about an annuity is the predictable income stream. But that comes at a price. Right?
If my portfolio's return can easily keep up with the short fall of this known income stream, why would I want an annuity? I still don't understand any risk that I have of needing a 7% withdrawal rate. I really anticipate my portfolio growing during my transition period from work to death.

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Re: Annuities-when and why?

Post by Dottie57 » Sun Oct 15, 2017 9:55 pm

bengal22 wrote:
Sun Oct 15, 2017 9:27 pm
The Wizard wrote:
Sat Oct 14, 2017 5:09 am
bengal22 wrote:
Fri Oct 13, 2017 9:32 pm
The Wizard wrote:
Thu Oct 05, 2017 11:27 am
bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
Possibly, but just be aware that a 7% withdrawal ratio may not succeed in all instances...
Please explain where the 7% withdrawal ratio came from.
My latest annuitization with TIAA last May has a Payout Rate slightly over 7%. This was an immediate annuity paying lifetime income with a ten year guarantee period.

Bengal says he can get a better return through investing. Perhaps, but withdrawing 7% of the original amount each year could be a risky lifetime plan.
Your mileage may vary...
Maybe I am totally missing this. But a payout rate of 7% does not equal a 7% investment return. Your purchase price of the annuity is a sunk cost. Much of the money being returned was yours. Right? The good thing about an annuity is the predictable income stream. But that comes at a price. Right?
If my portfolio's return can easily keep up with the short fall of this known income stream, why would I want an annuity? I still don't understand any risk that I have of needing a 7% withdrawal rate. I really anticipate my portfolio growing during my transition period from work to death.

Example for my 86 year old Mom. All money is in cash or bonds. She is very afraid of stock market and is afraid of running out of money. Using part of her cash (100k) for an SPIA which would give a payout of $1202 per month or over $14k per year. This would continue until death. My mom's people are long lived. Break even is around 7 years. I think this would be a good use of her funds to ease her mind and to make life easier.

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Re: Annuities-when and why?

Post by dbr » Mon Oct 16, 2017 8:05 am

bengal22 wrote:
Sun Oct 15, 2017 9:27 pm

If my portfolio's return can easily keep up with the short fall of this known income stream, why would I want an annuity? I still don't understand any risk that I have of needing a 7% withdrawal rate. I really anticipate my portfolio growing during my transition period from work to death.
You should go through some data and see how possible that has generally been in the past. How long do you expect your retirement to be? Firecalc shows that about half of all 30 year retirements at 100% stocks with 7% withdrawal rates fail by running out of money before 30years. The historical return of the US stock market is greater than 7% and yet it doesn't work. Have you read the Trinity Study? Even a 20 year retirement fails almost a third of the time.

The whole point of an annuity is to guarantee retirement income while giving up the wildly uncertain outcome (mostly upside) of retiring on stocks. However, a major consideration is the effect of inflation. The Firecalc results impose inflation increases on the withdrawals. A fixed annuity would be risky due to inflation. An inflation indexed annuity would be different but also does not pay out at the same initial rate.

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Re: Annuities-when and why?

Post by SQRT » Mon Oct 16, 2017 8:13 am

Annuities are an excellent retirement product for the obvious reasons already stated. Too bad they are often poorly priced, have high fees, and sold through dubious chanals. I will be buying a fairly large annuity in the next few months to replace my alimony payments to Xspouse. Selling stock to fund it.

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Re: Annuities-when and why?

Post by mptfan » Mon Oct 16, 2017 8:34 am

bengal22 wrote:
Sun Oct 15, 2017 9:27 pm
Maybe I am totally missing this. But a payout rate of 7% does not equal a 7% investment return. Your purchase price of the annuity is a sunk cost. Much of the money being returned was yours. Right? The good thing about an annuity is the predictable income stream. But that comes at a price. Right?
If my portfolio's return can easily keep up with the short fall of this known income stream, why would I want an annuity? I still don't understand any risk that I have of needing a 7% withdrawal rate. I really anticipate my portfolio growing during my transition period from work to death.
I tend to agree with this, although I can see a few situations where an SPIA would be beneficial...to protect a surviving spouse who has no interest in investing or handling money, or, if someone is getting old and they are concerned about loss of faculties and they want to purchase a guaranteed stream of income for the rest of their life for peace of mind. Also, it lessens the risk of fraud or identity theft of your savings.
I eat risk for breakfast. :)

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Re: Annuities-when and why?

Post by dbr » Mon Oct 16, 2017 8:38 am

bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
Yes, it is enough annuitization in many cases, but getting better return through investing is easy because annuities (SPIA) don't have return. All the other kinds of annuities are not in the picture because they are a really bad idea for most people most of the time. You are correct that annuitizing is the ultimate trade-off of certainty of income at the cost of surrendering assets. In fact the asset value is also absolutely certain -- it is zero.

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Re: Annuities-when and why?

Post by garlandwhizzer » Mon Oct 16, 2017 11:44 am

Just an opinion of mine, not gospel for others. If you interested in annuities (most IMO do not benefit from them), use only SPIAs and defer purchase as long as possible unless you're losing your marbles. Annuities provide longevity insurance and also insurance against making bad financial judgements as your cognitive function declines. The numbers work best when you're in very good health and expected to have increased longevity relative to the mean at your age. They work worst for those who have poor health and limited life expectancy relative to the mean. The numbers also work better the later you defer the purchase, which increases payout and decreases inflation risk. Inflation risk is a serious flaw in these products, very few of which offer inflation adjusted payouts. They also typically have a high fee structure and very generous sales commissions. They are designed primarily to produce an income stream for those who create and market them. Buying a deferred annuity has better potential payouts but substantially increases inflation risk. If you're very wealthy, you don't need them. If you're not wealthy at all you can't afford their expected low returns. There is a slice of risk averse people in good health in between these extremes for whom SPIA purchase late in life will work well both for security and for payout.

Garland Whizzer

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Re: Annuities-when and why?

Post by itstoomuch » Mon Oct 16, 2017 11:45 am

bengal22 wrote:
Sun Oct 15, 2017 9:27 pm
Maybe I am totally missing this. But a payout rate of 7% does not equal a 7% investment return. Your purchase price of the annuity is a sunk cost. Much of the money being returned was yours. Right? yes. But this same logic also applies to IRAs & 401k The good thing about an annuity is the predictable income stream. But that comes at a price. Right?yes. But everything has a risk price.
If my portfolio's return can easily keep up with the short fall of this known income stream, why would I want an annuity? If you think so. You are making the assumption that you will have enough portfolio income in the future. Suppose, is a pretty big word. I still don't understand any risk that I have of needing a 7% withdrawal rate. I really anticipate my portfolio growing during my transition period from work to death.good luck. You can PM me with your secret sauce
Be aware that annuities also have their disadvantages. Some are pretty big disadvantages.
Too much of anything is not good.
ymmv
Last edited by itstoomuch on Mon Oct 16, 2017 12:02 pm, edited 1 time in total.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Annuities-when and why?

Post by ResearchMed » Mon Oct 16, 2017 11:52 am

garlandwhizzer wrote:
Mon Oct 16, 2017 11:44 am
Just an opinion of mine, not gospel for others. If you interested in annuities (most IMO do not benefit from them), use only SPIAs and defer purchase as long as possible unless you're losing your marbles. Annuities provide longevity insurance and also insurance against making bad financial judgements as your cognitive function declines. The numbers work best when you're in very good health and expected to have increased longevity relative to the mean at your age. They work worst for those who have poor health and limited life expectancy relative to the mean. The numbers also work better the later you defer the purchase, which increases payout and decreases inflation risk. Inflation risk is a serious flaw in these products, very few of which offer inflation adjusted payouts. They also typically have a high fee structure and very generous sales commissions. They are designed primarily to produce an income stream for those who create and market them. Buying a deferred annuity has better potential payouts but substantially increases inflation risk. If you're very wealthy, you don't need them. If you're not wealthy at all you can't afford their expected low returns. There is a slice of risk averse people in good health in between these extremes for whom SPIA purchase late in life will work well both for security and for payout.

Garland Whizzer
I don't think the "high fee structure and very generous sales commissions" are characteristic of SPIAs, although they are among the serious problems with the "other types" of annuities, such as variable or indexed annuities (increasingly sold under other "names").

Otherwise, I think you've given a good overview of SPIAs.

And then there are the TIAA "annuity" mutual funds that have NOT been annuitized. Those seem to be more like other mutual funds, and bear little resemblance to other "variable annuities" until/unless they are annuitized - which is *not* required.
(I'm not sure how Vanguard's variable annuities fit in the picture in terms of being useful or not.)

But SPIAs are very different from the "bad" annuities. They aren't for everyone, but they shouldn't be criticized for characteristics that are not relevant.

RM
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Re: Annuities-when and why?

Post by itstoomuch » Mon Oct 16, 2017 12:18 pm

bengal22 wrote:
Wed Oct 04, 2017 11:05 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
For many, Me and Spouse, we have a very small pension, and we took early SS. We bought annuities as a supplement to SS and the small pension. We also have better "options" in the deferred annuities over SS and pension. JMO.
Would I buy annuities (all flavors) today at our today's assets and risk profile? Debatable and leaning towards, not as much.
YMMV.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

garlandwhizzer
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Re: Annuities-when and why?

Post by garlandwhizzer » Mon Oct 16, 2017 12:24 pm

ResearchMed wrote:
I don't think the "high fee structure and very generous sales commissions" are characteristic of SPIAs,
As for sales commissions for SPIA, the following is a quote from
https://blog.annuity123.com/how-do-annu ... the-agent/
The sales commissions as well as commissions from surrender charges are often hidden from the investor. Minimum commission is 1% and for some types, not SPIA, they go up to 10%. SPIA is the best product, as I said, but they are there. All annuities pay a commission, and that commission is actually “built in” to the product. For example, if you put $100,000 into an annuity, you will see $100,000 on your first statement. Yes, the agent got paid a commission, but it is a net transaction to you. This is how some agents justify saying “no fee”, even though that’s really not true.

It’s also important to understand that annuity commissions can range from 1% to over 10%, depending on the product. The commission correlation is easy to remember. The longer the surrender charge period, the higher the commission. The more complex the annuity is, the higher the commission. The simpler the annuity structure is, the lower the commission is to the agent. The shorter the surrender charge period, the lower the commission.

For example, long term surrender charge deferred annuities like variable annuities or fixed indexed (called “hybrid” by some internet promoters) annuities pay the highest commission to the agent. It’s somewhat predictable that the majority of annuities (over 80%) sold are these 2 long term surrender charge annuity types.

The lowest commission annuities are Single Premium Immediate Annuities because of their simplistic (yet efficient) transfer of risk design. For the record, Single Premium Immediate Annuities are the original annuity design….and still is my favorite annuity strategy of them all.

Some annuities allow the agent to choose a “trail” commission that allows him to get paid a small % annually for the life of the product in exchange for a much lower up front/initial commission. Less than half of annuities offered by carriers allow the agent to make this choice, which is a negative reflection on the annuity industry in my opinion.

So your gut feel on this was correct Joe. Annuity agents do to get paid a commission, and there is a reason that most only show you long term surrender charge annuity products. That doesn’t mean that a long term product isn’t suitable, it just means that you need to do your homework and keep asking questions until you feel fully comfortable with your decision.
SPIA is the best product among annuities but that is far from a free ride.

Garland Whizzer

james22
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Re: Annuities-when and why?

Post by james22 » Mon Oct 16, 2017 12:30 pm

mungofitch wrote:
Mon Oct 16, 2017 11:52 am
alan321 wrote:
Mon Oct 16, 2017 11:44 am
The Times had a recent article on "How to make you money last as long as you do" which has been a topic here as well.

They quote a financial planner who has done some Monte Carlo simulations of the possibilities of running out of funds and found that delaying social security until age 70 helped considerably but that adding a single premium immediate annuity reduced the risk of running out of funds to essentially zero. The kicker? For $298k this annuity would generate $12k/year (~4% yield).

Our much-discussed WFC/L is currently above 6% yield, so perhaps you could avoid the financial planner and do considerably better?
The difference is far more than it appears in that comparison. In one case it's a yield, and in the other case it's mostly return of capital.

Let's say you go for one or the other deal today for $298k, inflation is 2%/year, and you croak 20 years from today. WFC/PL is trading at $1199.60 today. Let's call it $1200, so the $75 coupon is exactly 6.25%.

Between you and your estate, how much do you get from the annuity?

For annuities I believe that only a very small and changing portion of the amount is taxable for Americans. Let's say 5% just so we don't ignore it? So, you receive $12k payments for 20 years or $240k, which after inflation equates to $190710 in today's money. After tax, that's around $181794 in today's money, which is 60.8% of your original money.

The other 39.4% of your money (in purchasing power) is lost and gone forever.

Even with zero tax and living to 103, you have had a negative real return on your money after 38 years. Only in year 39 do you start to come out ahead on the deal, at age 104, and your rate of return at that point is less than 0.1%/year.

If you buy WFC/PL instead, you get 248.33 shares, paying a coupon of $75, total $18625/year pretax. Let's assume you're US based and a top tax bracket kind of guy and pay 23.8%, so that's net $14192 per year after tax in today's dollars. So, your real after-tax return after 20 years to your assumed death gets you $225550 in coupons overall in today's money, which is 18% more than the annuity gave you.

But...and here is the kicker...your estate still owns the preferred stock.

Assuming the price is still $1200 in then-current dollars, it's worth $741.77 per share in today's dollars or $184206. There is no capital gains due if it's sold, as the nominal price hasn't changed. Losing 2%/year in value to inflation is a lot better than losing it all.

So, after 20 years you (including your estate) end up putting in $298000 and end up with either

* $181794 total back in today's money from the annuity, after taxes and inflation
* $409756 total back in today's money from the WFC/PL, after taxes and inflation

The thing to remember about an annuity is that you are not *investing* that money. It is an insurance premium expense, and once given over to the insurer, the principal never comes back to you. Thus the payments are not a yield at all, but little steps back up out of that really big initial hole.

They are priced so badly that you have to live a *really* long time for it to be better than simply running down the pile of cash it would have cost you. (that $298000, again without inflation protection or any return at all, will obviously last 24.8 years at a $12k/year rundown rate as there is no tax)

A disadvantage of the WFC/PL in these really long scenarios is that it's not perpetual. There is the likelihood that each WFC/PL that cost you $1200 will get forcibly exchanged for $1300 worth of WFC common stock...eventually. Maybe 16-25 years out?

Your earnings yield is probably going to be a bit lower on the common than than the yield on the preferred, and "payments" will get irregular (selling bits of stock when the market value of the block rises in real terms above its initial level). But it does mean that you start getting inflation protection from that point onwards. Hardly a wipe-out.

Previously I have suggested to people to use a mix of mainly WFC/PL for yield and a little WFC common to "insure" against the forced conversion. The only scenario that you get the forced conversion is the scenario wherein WFC has gone up by 3.5 from today's price, so when you eventually lose yield from the WFC/PL you have done wonderfully on the WFC common.

On certain assumptions a portfolio of 1/3 WFC and 2/3 WFC/PL would keep your yield from dropping below its initial nominal level when the conversion happens, which is 4.90% pretax at current prices and yields. You also get a material amount of inflation protection on your coupons, though not complete.
http://boards.fool.com/a-value-opportun ... sort=whole
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Annuities-when and why?

Post by technovelist » Mon Oct 16, 2017 3:26 pm

james22 wrote:
Mon Oct 16, 2017 12:30 pm

Previously I have suggested to people to use a mix of mainly WFC/PL for yield and a little WFC common to "insure" against the forced conversion. The only scenario that you get the forced conversion is the scenario wherein WFC has gone up by 3.5 from today's price, so when you eventually lose yield from the WFC/PL you have done wonderfully on the WFC common.

On certain assumptions a portfolio of 1/3 WFC and 2/3 WFC/PL would keep your yield from dropping below its initial nominal level when the conversion happens, which is 4.90% pretax at current prices and yields. You also get a material amount of inflation protection on your coupons, though not complete.
http://boards.fool.com/a-value-opportun ... sort=whole
What is the guaranteed payout on this WFC/PL (whatever it is)?

I'm guessing the answer is "0".

If you don't mind possibly being wiped out, you can of course do better by taking chances. What if you want a guaranteed income?
In theory, theory and practice are identical. In practice, they often differ.

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Re: Annuities-when and why?

Post by The Wizard » Mon Oct 16, 2017 5:25 pm

bengal22 wrote:
Sun Oct 15, 2017 9:27 pm

Maybe I am totally missing this. But a payout rate of 7% does not equal a 7% investment return. Your purchase price of the annuity is a sunk cost. Much of the money being returned was yours. Right? The good thing about an annuity is the predictable income stream. But that comes at a price. Right?
If my portfolio's return can easily keep up with the short fall of this known income stream, why would I want an annuity? I still don't understand any risk that I have of needing a 7% withdrawal rate. I really anticipate my portfolio growing during my transition period from work to death.
An immediate annuity is basically a do it yourself pension that pools your money with others to yield an enhanced lifetime payout. Not everyone likes pensions and annuities, I understand that.

The $100k I annuitized in May was not a sunk cost until the end of April. It was a purchase of a contractual payout that I was content with. Had I not annuitized that $100k, I could have withdrawn it bit by bit over the next 20-30 years at my marginal 28+5% tax rate.

But yes, my remaining portfolio seems likely to continue growing over my retirement with any luck...
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The Wizard
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Re: Annuities-when and why?

Post by The Wizard » Mon Oct 16, 2017 5:29 pm

dbr wrote:
Mon Oct 16, 2017 8:38 am
bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
Yes, it is enough annuitization in many cases, but getting better return through investing is easy because annuities (SPIA) don't have return. All the other kinds of annuities are not in the picture because they are a really bad idea for most people most of the time. You are correct that annuitizing is the ultimate trade-off of certainty of income at the cost of surrendering assets. In fact the asset value is also absolutely certain -- it is zero.
Not always.
The immediate annuity I bought from TIAA in May, 2017 has a ten year guarantee period. So if croak tomorrow, there's a significant value remaining on that asset...
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The Wizard
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Re: Annuities-when and why?

Post by The Wizard » Mon Oct 16, 2017 5:53 pm

Here's another way of looking at guaranteed retirement income (pensions+annuities+SS).
How much guaranteed income is reasonably sufficient such that you are no longer dependent on your portfolio to fund your lifestyle?

If I grant you $150k per year, is that enough to leave your portfolio alone henceforth, for future generations and bequests?

Well, people can certainly expand their lifestyle given an extra $20k or more per year, so this is a bit silly.
But it's worth pondering...
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technovelist
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Re: Annuities-when and why?

Post by technovelist » Mon Oct 16, 2017 6:23 pm

The Wizard wrote:
Mon Oct 16, 2017 5:29 pm
dbr wrote:
Mon Oct 16, 2017 8:38 am
bengal22 wrote:
Wed Oct 04, 2017 11:04 am
I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.
Yes, it is enough annuitization in many cases, but getting better return through investing is easy because annuities (SPIA) don't have return. All the other kinds of annuities are not in the picture because they are a really bad idea for most people most of the time. You are correct that annuitizing is the ultimate trade-off of certainty of income at the cost of surrendering assets. In fact the asset value is also absolutely certain -- it is zero.
Not always.
The immediate annuity I bought from TIAA in May, 2017 has a ten year guarantee period. So if croak tomorrow, there's a significant value remaining on that asset...
Actually, for people who aren't extremely old, especially with a joint annuity, adding a "return of premium" benefit generally costs very little. That's because it is likely that one of them will live long enough to collect all of the premium back.

For example, if a 58 year old female and a 61 year old male were to buy a joint&100% SPIA, according to the rates I looked up earlier this year on immediateannuities.com, the return of premium feature would cost only about 3%.
In theory, theory and practice are identical. In practice, they often differ.

littlebird
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Re: Annuities-when and why?

Post by littlebird » Mon Oct 16, 2017 6:49 pm

littlebird wrote:
Sun Jul 19, 2015 11:10 pm
Because of my age and work history I had very little tax-deferred space. And I wanted more. I started investing in a Vanguard Variable Annuity ( functionally almost indistinguishable from a regular Vanguard mutual fund account) when I was 58 1/2, so that if I were to change my mind and want out, there'd be no tax penalty by the next year. Vanguard itself, unlike many annuity sellers, charges no penalty for premature withdrawal. I keep it mainly in bonds and occasionally, when the opportunity arises , I use it to "over re-balance" into stocks so that I can later sell them w/o a tax penalty.

If spouse or I should need l.t care, or need to move back to a HCOL area, I'll annuitize it. Yes, the ER is higher than regular Vanguard funds, but the compounding effect of not having paid tax on 15 years of bond interest, together with having the flexibility of a reasonable amount of tax-deferred space has made it worthwhile to me. There's also the serendipitous part where the 15 year old interest rate (4.1%) is locked in if and when I do annuitize it. If I were to do so at my present age I would get 8% for the rest of my life. If the interest rates should go up and Vanguard doesn't raise their's, I always have the opportunity to 1035 (1031?) it. All in all, a pretty happy old camper.
As an update on my post: Last year, my spouse did have to go into long-term care, and as planned, I did annuitize one of my 2 VVA accounts. Before I did so, I considered the possibility of doing an exchange to an immediate annuity from a different insurer, but I found I'd get an average of 9+% larger payout from my VVA than from other insurers . I also considered leaving my VVA intact for my potential beneficiaries and simply drawing down our assets modestly. But for reasons of simplifying logistics, and diversification of income sources, as well as the 8+% payout, I decided to annuitize. Only part ( it depends on the ratio of gain to investment and your age and type of payout) of the payout is taxable. I still have my 2nd VVA account unannuitized, and still use it for over-rebalancing and other tax-deferred trades. I've been more than satisfied with this investment.

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Re: Annuities-when and why?

Post by Cyclesafe » Mon Oct 16, 2017 7:10 pm

Littlebird,
Did you ever have the option of partially annuitizing your VVA?

james22
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Re: Annuities-when and why?

Post by james22 » Mon Oct 16, 2017 10:18 pm

technovelist wrote:
Mon Oct 16, 2017 3:26 pm
james22 wrote:
Mon Oct 16, 2017 12:30 pm

Previously I have suggested to people to use a mix of mainly WFC/PL for yield and a little WFC common to "insure" against the forced conversion. The only scenario that you get the forced conversion is the scenario wherein WFC has gone up by 3.5 from today's price, so when you eventually lose yield from the WFC/PL you have done wonderfully on the WFC common.

On certain assumptions a portfolio of 1/3 WFC and 2/3 WFC/PL would keep your yield from dropping below its initial nominal level when the conversion happens, which is 4.90% pretax at current prices and yields. You also get a material amount of inflation protection on your coupons, though not complete.
http://boards.fool.com/a-value-opportun ... sort=whole
What is the guaranteed payout on this WFC/PL (whatever it is)?

I'm guessing the answer is "0".

If you don't mind possibly being wiped out, you can of course do better by taking chances. What if you want a guaranteed income?
You miss the point (annuity payments do not '"yield").

And guess wrong - the guaranteed payout (coupon): $75/share.

TBTF, there's less a chance of Wells Fargo being wiped out any insurance company. If you want a guaranteed income, you can't do much better.

But don't let not knowing 'whatever WFC/PL is' to keep you from guessing.
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Annuities-when and why?

Post by technovelist » Tue Oct 17, 2017 8:38 am

james22 wrote:
Mon Oct 16, 2017 10:18 pm
technovelist wrote:
Mon Oct 16, 2017 3:26 pm
james22 wrote:
Mon Oct 16, 2017 12:30 pm

Previously I have suggested to people to use a mix of mainly WFC/PL for yield and a little WFC common to "insure" against the forced conversion. The only scenario that you get the forced conversion is the scenario wherein WFC has gone up by 3.5 from today's price, so when you eventually lose yield from the WFC/PL you have done wonderfully on the WFC common.

On certain assumptions a portfolio of 1/3 WFC and 2/3 WFC/PL would keep your yield from dropping below its initial nominal level when the conversion happens, which is 4.90% pretax at current prices and yields. You also get a material amount of inflation protection on your coupons, though not complete.
http://boards.fool.com/a-value-opportun ... sort=whole
What is the guaranteed payout on this WFC/PL (whatever it is)?

I'm guessing the answer is "0".

If you don't mind possibly being wiped out, you can of course do better by taking chances. What if you want a guaranteed income?
You miss the point (annuity payments do not '"yield").

And guess wrong - the guaranteed payout (coupon): $75/share.

TBTF, there's less a chance of Wells Fargo being wiped out any insurance company. If you want a guaranteed income, you can't do much better.

But don't let not knowing 'whatever WFC/PL is' to keep you from guessing.
"Too big to fail" doesn't mean that the shareholders will be made whole. It means that the depositors don't have too much to worry about.

People who buy their preferred stock are shareholders, not depositors.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Annuities-when and why?

Post by littlebird » Tue Oct 17, 2017 11:18 am

Cyclesafe wrote:
Mon Oct 16, 2017 7:10 pm
Littlebird,
Did you ever have the option of partially annuitizing your VVA?
No, it was all or nothing. But I must have known that years ago when I set it up, because I did set up 2 separate contracts, and added to them both as the years went by, although I honestly don't remember any more if that was the reason I did it that way.

james22
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Re: Annuities-when and why?

Post by james22 » Tue Oct 17, 2017 12:22 pm

technovelist wrote:
Tue Oct 17, 2017 8:38 am
"Too big to fail" doesn't mean that the shareholders will be made whole. It means that the depositors don't have too much to worry about.

People who buy their preferred stock are shareholders, not depositors.
Source?

Because:

Federal Reserve Chair Ben Bernanke also defined the term in 2010: "A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences."

He continued that: "Governments provide support to too-big-to-fail firms in a crisis not out of favoritism or particular concern for the management, owners, or creditors of the firm, but because they recognize that the consequences for the broader economy of allowing a disorderly failure greatly outweigh the costs of avoiding the failure in some way.

Common means of avoiding failure include facilitating a merger, providing credit, or injecting government capital, all of which protect at least some creditors who otherwise would have suffered losses.


https://en.wikipedia.org/wiki/Too_big_to_fail

Cretors understood to include:

Too-Big-To-Fail: Regardless of what anyone might say, “too big to fail” is still a reality. It serves as a backstop on the creditworthiness of bank preferred shares, especially preferred shares issued by the big four money center banks: JP Morgan, Wells Fargo, Bank of America, and Citigroup. We can think of these banks as heavily-regulated, government-backed utilities–ideal candidates for a preferred investment.

http://www.philosophicaleconomics.com/2 ... ed-stocks/
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

itstoomuch
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Re: Annuities-when and why?

Post by itstoomuch » Tue Oct 17, 2017 2:32 pm

littlebird wrote:
Tue Oct 17, 2017 11:18 am
Cyclesafe wrote:
Mon Oct 16, 2017 7:10 pm
Littlebird,
Did you ever have the option of partially annuitizing your VVA?
No, it was all or nothing. But I must have known that years ago when I set it up, because I did set up 2 separate contracts, and added to them both as the years went by, although I honestly don't remember any more if that was the reason I did it that way.
Which is why If someone is to buy deferred or deferred SPIA to do so in ladder amounts and in time. A form of DCA.
YMMV
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Annuities-when and why?

Post by technovelist » Tue Oct 17, 2017 3:22 pm

james22 wrote:
Tue Oct 17, 2017 12:22 pm
technovelist wrote:
Tue Oct 17, 2017 8:38 am
"Too big to fail" doesn't mean that the shareholders will be made whole. It means that the depositors don't have too much to worry about.

People who buy their preferred stock are shareholders, not depositors.
Source?

Because:

Federal Reserve Chair Ben Bernanke also defined the term in 2010: "A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences."

He continued that: "Governments provide support to too-big-to-fail firms in a crisis not out of favoritism or particular concern for the management, owners, or creditors of the firm, but because they recognize that the consequences for the broader economy of allowing a disorderly failure greatly outweigh the costs of avoiding the failure in some way.

Common means of avoiding failure include facilitating a merger, providing credit, or injecting government capital, all of which protect at least some creditors who otherwise would have suffered losses.


https://en.wikipedia.org/wiki/Too_big_to_fail

Cretors understood to include:

Too-Big-To-Fail: Regardless of what anyone might say, “too big to fail” is still a reality. It serves as a backstop on the creditworthiness of bank preferred shares, especially preferred shares issued by the big four money center banks: JP Morgan, Wells Fargo, Bank of America, and Citigroup. We can think of these banks as heavily-regulated, government-backed utilities–ideal candidates for a preferred investment.

http://www.philosophicaleconomics.com/2 ... ed-stocks/
I don't feel comfortable relying on what government regulators might do in the next crisis.
In theory, theory and practice are identical. In practice, they often differ.

3funder
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Re: Annuities-when and why?

Post by 3funder » Tue Oct 17, 2017 3:32 pm

Never and because.

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