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Location: Was Midvalley Oregon; Now Eastside Seattle area
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Quote:
Originally Posted by DaveinMtAiry
I'm not sure why we are comparing an annuity with any form of CD investing. An annuity does exactly what it was designed to do, specifically provide a monthly payout. By definition a CD does just the opposite, withholds every penny until the specified time expires. It's not apples and oranges it's apples and elephants.
IIRC, deferred annuities (except deferred SPIA) one can do partial withdrawals within surrender period or exit after surrender period, without paying taxes if the annuity is within a IRA/Roth/other and transferred to another tax qualified plan.
A CD may or may not be an Investment. Normally a CD is thought of as a short-medium term park savings plan. A CD does not lose in $$ but may lose in inflation.
We have deferred annuities and rolling some $$ out of them into a CD is a possibility but not likely because of the type and age of annuity. Recently purchased annuities have less attractive features and a CD may offer an alternative. You will need to examine this, I haven't.
Location: Was Midvalley Oregon; Now Eastside Seattle area
12,985 posts, read 7,371,740 times
Reputation: 9722
Quote:
Originally Posted by Robyn55
I was very specific - 1.4% for 10 years. That's a no-brainer when the 10 year note is about 1.9%. 2-4% open ended for the rest of your life? No way. Insurance companies aren't dumb (at least for the most part). And neither am I. I actually had the opportunity to do something along the lines of what you're suggesting quite a while back. My father wanted to give us an early "inheritance" on the condition that we give him (IIRC) a 5% lifetime annuity. He's 97 now - and that inheritance would be long gone by now. Robyn
Such is the state of the environment for savings and investment. Quibbling over a difference of 0.6 (2 minus 1.4%) and an overall rate of 2%. I'm passing on 3.35% divs on VPU because IMO, of Risk. and I can afford that Risk.
And yes, Insurance companies are sometimes stupid just as banks and investment firms were in the Credit Bubble. One of the annuity companies that I have some of our assets, had to suspend VA sales and then limit VA sales because of previously offer VA had overly generous features which meant higher reserves.
those under priced deals are the best when you find them . both hartford and prudential offered guaranty's that were so good on a gwlb that moshe milevsky said he does not know how they can offer that deal .
he was right , they suspended new money and offered to buy you out of your contracts .
You picked one of the few places that blows a hole in my argument that you can live pretty much anywhere cheaply if you make tradeoffs. The tradeoff you would have to make there is to have a full-time job in the county; it's so expensive that they have a special housing program for people making middle class wages (or below). Some of the ski areas have dorms (or they used to; it has been a while since I was there). Crazy...
I think there are large parts of the US where you can't live cheaply or close to it (Aspen isn't even near medium IMO - it's nosebleed). Either because of property values - property taxes (state income taxes too) or a combination of both. Like the nicer parts of many large desirable metro areas. I honestly wouldn't mind moving to a more sophisticated urban environment when I'm 75+ or so (not so many years from now) - and can't do things like play golf anymore (a place where I could spend afternoons in restaurants having long lazy lunches/visiting museums/etc. during foul weather). But the prices are quite daunting (and we would have to downsize considerably - we'd have to pay more for 700 sf in Manhattan than what we pay for close to 3000 sf where we live now). And - at 75+ - I wouldn't consider moving anywhere that has fewer services/amenities and/or requires the same or more driving than where I live now. I honestly like selected parts of the Los Angeles metro area (I know most people don't) - but am scared of earthquakes.
A fair amount of Florida real estate falls into the category I've described too. Especially when it comes to waterfront/water view (in various flavors). You used to be able to find property where I live (in NE Florida) that was relatively inexpensive (compared to most of south Florida) - but those days are gone. Robyn
I'm not sure why we are comparing an annuity with any form of CD investing. An annuity does exactly what it was designed to do, specifically provide a monthly payout. By definition a CD does just the opposite, withholds every penny until the specified time expires. It's not apples and oranges it's apples and elephants.
The reason I'm comparing a CD/money market fund with an annuity is specific to the kind of annuity PhxBarb is talking about. A relatively short term (10 year) annuity - where you give the insurance company X - and - at the end of 10 years - that's the end of it and your initial investment is gone. With this kind of annuity - you might as well set up 2 accounts in your own name (one to earn and one to spend) and pretend you're the insurance company.
A SPIA with a "life" or "joint life" guarantee is a totally different animal IMO. I don't think they'd be great for me/my husband - because I think we both have shorter than normal life expectancies. OTOH - the mileage of others may vary. Still - if we're around when I'm 75+ and he's pushing 80 - and we're slowing down - it might make sense for us to take some of our money and buy a charitable SPIA from the charity that is the major beneficiary in our will. Robyn
I am not Robyn, but just running this in my head I get 120 x 900 = 108,000 (just 12x9 with the zeroes tacked on). That's an 8% gain in 10 years, so there is no way that is over 1%. Or am I simplifying too much?
EDIT - I am! Forgot about the declining balance...
EDIT AGAIN - Or did I? Dave (below) is right - apples and elephants - if you are just talking about how much you end up with, then you have to ignore the decline.
Yup - you forgot about the declining balance. IIRC - my loan/annuity calculator put the exact rate of return at 1.47%.
And - like I've said perhaps 3-4 times now - there's a big difference between a 10 year term certain SPIA (where the return is very easy to calculate with mathematical precision) and one that lasts "for life" (because no one knows how long he/she will live). Robyn
these short term annuity products are really just cd's from insurers . there should not be much difference . usually the insurer is a tad higher . likly not even enough of a difference to switch unless the tax structure adds some value . with the annuity cd you do not get hit all at once with interest since each payment is principal and interest
I ran a spreadsheet with the numbers provided by PhxBarb:
Premium: $100K
Monthly payment: $900
Term: 10 years or 120 months.
Start with $100K at beginning of Month 1 and end with $0 after 120th month (10 years)
I got 1.574% interest per year.
So this is not too bad of a deal in comparing with 10 year CD ladder. I did a quick search for best CD rates and found
6 months: 1.05%
1 year : 1.35%
2 year : 1.55%
3 year : 1.7%
5 year : 1.98%
10 years : 2.5%
The longer term CDs pay more but one has to lock-in the principal for the durations.
So if one is diligent in finding the best CDs yield and willing to keep track of withdrawal, maturity dates etc then investing in ladder CDs will definitely yield more than this 10year annuity. However, if one is OK with the 1.574% constant yield and don't want to do any extra work then this is not too bad of a deal.
There are definitely different mindsets and inclinations when it comes to managing money and investing. I like to play with the numbers, research, find the best deals, keeping records etc. My husband absolutely hates to deal with finance and investing. He also does not trust financial advisers either so simple things like annuity is likely to appeal to him (if he has to manage our finance).
Even for myself, I have over 150K parked in money market in the last 6 months earning very little interest. I meant to convert some cash into ladder CDs but have not gotten around to do it. In addition, we are planning to do some major home repairs/upgrades (kitchen, floor) this year in preparation to selling the house. I will have to figure out how much easy access cash to put aside for these projects.
P.S.
I ran the spreadsheet for the SPIA which I plan to take from my pension when I turn 65 for different longevity scenarios. The numbers are quite interesting
Projected pension balance or premium: $171K
Projected annuity payment: $1078/month (hope to be higher if interest rises)
1. Break even point: at 77 years and 11 months (collect 1x of premium)
2. Die at 80: effective interest rate is 1.8% (collect 1.13x of premium)
3. Die at 85: effective interest rate is 4.5% (collect 1.5x of premium)
4. Die at 90: effective interest rate is 5.82% (collect 1.9x of premium)
As I mentioned in the previous post, I am not interested in getting the most money by going with annuity. It simply will give me a peace of mind having an additional fixed income source besides SS.
Took another look - and yes - it's 1.54% (I think I reversed the numbers to 1.45% in my head when switching from one program to another). It is still a terrible rate of return. Even in today's interest rate environment. Where you can get 2.6-2.7% on a federally insured brokered 9-10 year CD. Or 3+% on AAA 20 year munis - Florida GOs (which I bought last week).
I suspect your employer is subsidizing your annuity to some extent - to get your pension off its books. When I plug your numbers into a "man off the street" annuity calculator - I am looking at < $900/month with your numbers. Robyn
IIRC, deferred annuities (except deferred SPIA) one can do partial withdrawals within surrender period or exit after surrender period, without paying taxes if the annuity is within a IRA/Roth/other and transferred to another tax qualified plan.
A CD may or may not be an Investment. Normally a CD is thought of as a short-medium term park savings plan. A CD does not lose in $$ but may lose in inflation.
We have deferred annuities and rolling some $$ out of them into a CD is a possibility but not likely because of the type and age of annuity. Recently purchased annuities have less attractive features and a CD may offer an alternative. You will need to examine this, I haven't.
YMMV.
I have bought 10 year brokered CDs for years and years and years now - especially in my IRA accounts. As a fixed income product. They generally yield between 50-150 bp more than treasuries. Today they are about 90 bp more than treasuries. Robyn
you can't compare risk on going out 20 years on muni's inflation wise to just 10 years on a cd . that is apples to grapefruits . hardly worth betting another 10 years out for 1/2 a point . if you need the income from principal and interest the muni will not help you
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Such is the state of the environment for savings and investment. Quibbling over a difference of 0.6 (2 minus 1.4%) and an overall rate of 2%. I'm passing on 3.35% divs on VPU because IMO, of Risk. 
and I can afford that Risk. 
