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Old 03-21-2015, 02:07 PM
 
Location: Columbia SC
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Variable Annuities: Beyond the Hard Sell | FINRA.org
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Old 03-21-2015, 02:39 PM
 
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Variable annuities can be one of the most difficult products to figure out.

They can far to complex for most folks to understand what they are buying.

I had the prudential defined income annuity pitched to me the other night at a dinner an investment house threw.

It sounded so good when pitched but of course once you looked under the hood it was nothing like the sales pitch.


It wasn't bad but it fell short of what it appeared to be.

I can go in to the details of it if anyone wants.
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Old 03-21-2015, 03:06 PM
 
Location: Near a river
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Quote:
Originally Posted by mathjak107 View Post
Variable annuities can be one of the most difficult products to figure out.

They can far to complex for most folks to understand what they are buying.

I had the prudential defined income annuity pitched to me the other night at a dinner an investment house threw.

It sounded so good when pitched but of course once you looked under the hood it was nothing like the sales pitch.


It wasn't bad but it fell short of what it appeared to be.

I can go in to the details of it if anyone wants.
Yes please do. As opposed to fixed.
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Old 03-21-2015, 03:16 PM
 
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For all purposes it really is a fixed annuity. They have an income minimum guarantee based on age.

The sub account is the ast bond index.

You know the drill , you get to draw income from which ever is higher. But with bond index's averaging 5.25% the last 50 years the odds of getting that are not only slim but the 2.80% fees make sure it can never be higher than the guaranteed income rider.

They promise you a 5.25% growth rate on the min income guarantee while you are deferring it but the trick is while deferring it your draw rate increases by only 1/10% a year which kind of makes sure you get very little from that growth rate.


The balance increases from the 5.25% growth rate can not be accessed or taken out. It is only used as a base for the income.

They call it a variable annuity but with one choice ,a bond fund with little chance of beating the income guarantee i am not so sure why

All in all it can't generate the cash flow an immeaditate annuity can .

Last edited by mathjak107; 03-21-2015 at 03:46 PM..
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Old 03-22-2015, 04:07 AM
 
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now that i have some time i can give you those details you wanted.

to really see what a variable annuity can do you really have to run your own excell stress test on it like annuity gaitor did for the prudential one above.


because you are combining an investment with an annuity and it is going to be an either or case as to what your income stream gets based on we can compare hypothetical returns at various ages to see if you can actually beat the guaranteed minimum payment with the investment portion.

in this case bonds would have to beat the implied return of the guarantee to make the variable portion worth it .

no way will that happen since bonds had much higer rates in the past and the almost 3% in fees pretty much dash any hopes of doing better.


while the guaranteed portion gets a 5.25% kicker every year you delay taking an income you see that you can only get 1/10% a year extra out of that growing balance.

thanks for nothing is what i say. we get to look at the balance on paper but can't access it in a meaningful way.


this is a joint annuity for a couple . a single pays out a bit more. at 65 it would be a 5% draw rate. not bad at all when you figure that is 20% more income than the old 4% safewithdrawal rate rule so it isn't a bad product. it just misses the mark from what the advertising promotes in my opinion but i am no specialist at these things so i use my own criteria to judge.

so starting out with 100k at age 55 and deferring here are the actual results and they won't show you a sheet like this ,you can be sure.

note how they grow the guaranteed income base for 10 years at 5.25% but notice how you can only access it at the rate of a 1/10th % increase each year you delay taking money so they never really are giving you the amount as an account cash value.


Last edited by mathjak107; 03-22-2015 at 04:30 AM..
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Old 03-22-2015, 04:19 AM
 
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one thing i did find very valuable with a variable annuity is the taxing of it in some cases.

using fidelitys retirement income planner i was able to see the taxing each year incorporated with my own rmd's at 70-1/2.

since i do have a 7 figure ira the rmds are crazy amounts.

well there is a difference in how deferred annuity's are taxed compared to immediate annuities.

deferred annuities are taxed in a way that the first withdrawals are considered the gains .

that means heavy taxes up front and less taxes each year as it is considered a pay back of principal.

what i noticed is with the deferred annuity the amount of taxable income was growing less and less as the rmds were growing more and more .

that was because we paid the bulk of the taxes on the annuity in the early years before the rmd's kicked in.

by the time the rmd's kicked in heavy that annuity was almost tax free income .

the difference in taxes really was a plus for that deferred annuity.

on the other hand an immediate annuity is taxed different . it is taxed each year as a bit of principal and a bit of interest based on a life expectancy chart the irs uses.

the rmd's when used with the immediate annuity had higher tax consequences forever once rmd's kicked in .

so here is another factor in the mix that no one can project for you unless you run the numbers yourself based on your own amounts and tax situation.
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Old 03-22-2015, 06:39 AM
 
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so how does ss stack up as annuity ? better!

if you look at the difference in roi the deferred annuity above and ss both give you about a about a 4.00% return at age 86 or so for a single .

but ss is inflation adjusted making it a better deal.

once you work up an excel sheet like the annuity one it is far easier to compare what the real deals are .




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Old 03-22-2015, 11:26 AM
 
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now if you look at the annuity chart you can understand why there is an advange to using the annuity instead of cash and bonds.

it you take a 200k portfolio with a 50/50 mix of 50% equities and 40% bonds 10% cash and draw 9k a year off it with bonds at 2.50% and cash at 1% how long before you spent it all down and had to sell off stocks to raise cash ?

in fact each year you will get less and less interest as you spend down as the balance shrinks.

it won't be long at all until you have to add some stock sales.


the annuity never stops its 9k flow . it does not reduce each year either after each payment.

in either case the 100k either bought the annuity or it was spent down and is gone.

the question is which eventually has more equities left over unsold ?

well assuming normal life expectancy or longer the annuity /equity combo beats the bonds cash equity combo especially when rates are this low.

in this case though you would have to start the annuity about 10 years before you are using it with a variable deferred annuity.


but an immediate would do the same thing but better since the rates are higher.
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Old 03-22-2015, 11:29 AM
 
Location: Near a river
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Quote:
Originally Posted by mathjak107 View Post
this is a joint annuity for a couple . a single pays out a bit more. at 65 it would be a 5% draw rate. not bad at all when you figure that is 20% more income than the old 4% safewithdrawal rate rule so it isn't a bad product. it just misses the mark from what the advertising promotes in my opinion but i am no specialist at these things so i use my own criteria to judge.
Can you provide the link so I can enlarge the chart to see the numbers, thanks.
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Old 03-22-2015, 01:13 PM
 
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With the grandkids now so when i get home i will post it. Good video to go with the chart explaining it.
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