Is An Annuity Right for Us? (2015, payment, insurance, return)

[TuborgP]

Originally Posted by mathjak107

the danger is an annuity will be eaten by inflation all by itself . i would never recommend an annuity without your own investing too . you need the growth for inflation protection and emergency expenses that grow over time

Wouldn't the same be true of a pension. Even a pension with a COLA cap limit can burn you over time and if you should have an emergency fun that is either six months or a years worth of income when working, why not in retirement.

[mathjak107]

it would be true of any non cola source of income

[Robyn55]

Originally Posted by mathjak107

exactly my point , annuity's should not be used alone without some investment providing inflation protection and growth . i would not recommend tips though as they may not provide enough growth to keep up with your personal rate of inflation which is very different from a cpi index .

I wouldn't recommend TIPS because they're extraordinarily complicated investments. I bought a few individual issues quite a few years ago - and - both times - my broker at the time - UBS - got the (secondary market) buy prices wrong.

Note that I am much more weighted today in favor of disinflation/deflation than inflation. Robyn

[mathjak107]

you will never see a spread sheet like this from your annuity provider . THIS IS THE REAL DEAL .

they would never let you see the bottom line growth rate you get on their guaranteed minimums and bonus bucks they give you .

here is an example of how these guaranteed minimums work and why what you think you are getting is not what you get .

this is actually not a bad products and as a proxy for cash it is actually pretty good.

it is called prudentials variable fixed income deferred annuity . it gives you a guaranteed 5-1/2% increases a year minimum or whatever your bond index that is linked got as a high water mark , which ever is higher .

in reality there is no way a bond index today with more then 2-1/2 % in fees being charged is going to beat 5-1/2% so your guarantee is going to be your deal .

same on the equity based variable annuity's . the returns include no dividends and all those fees , the odds of doing better then the guarantees is slim .


you will never see spread sheets like this from the annuity issuer . this is your real deal once the curtain is pulled back .




so here is a deferred annuity for a single , you start at age 55 putting money in and delay until age 65 when you annuitize your money .

the fees are 2.55% and you are linked to the ast bond index , similiar to AGG .

the guaranteed min of 5.50% includes the fees , the bond index does not , so right off the bat you know the link to the index is there because it sounds good but it will not beat the min with those fees .

so below you see the yearly compounding of the promised 5.50% . that is taking part in a sub account which you can never take out or pass to heirs . the balance is only used to compute your draw when you annuitize . your actual account value is the one linked to the bond index with all the fees .

that is what you get if you want your money or pass to heirs .

so you see if you give them 100k and take the annuity after year 1 ,you get 4% of 105k or 4200.00 bucks.

for every year you delay your balance grows by 5.50% and your draw if you annuitize goes up 1/10% so finally 10 years later you get 5% of 180k or 9k .

that is a nice jump in income so it isn't a bad product but if you thought that 180k was yours to take you were wrong . your actual balance is what is linked to the bond index net of all those fees .

you can see it takes until age 75 before you get all your money back and see dollar 1 on their dime .

NOTE , YOUR ACTUAL GROWTH RATE BY AGE 90 IS NOT THE 5.50% YOU THOUGHT , BUT ONLY 4.55%

not bad by todays standards but not what you expected .

[mathjak107]

here is what it looks like for a couple ,when the first spouse dies , the 2nd gets the payments .

age 55 would give you a 3.50% draw right away and 10 years of deferring gets you to 4.50%

by age 95 you are getting 4.50% of 251k and if one of you lives to 95 you actually got a 4.31% return , not 5.50% as you thought .

remember though these variable annuity's are not like the high pay outs of spia's because if you die there are certain guarantees to heirs as far as getting money back .

[mathjak107]

so you can see above how these promised growth rates actually work . you also see if you look in the return column unless you live to 90 your actual returns are not just lower but way way lower .

that is important to remember with these guaranteed minimum growth rates . the math and the way they work with the main accounts and sub accounts gives you very different results then you think you are getting and they all work the same way , they have to .

hope this break out helps explain the mechanics of things .

again , i am not saying it is a bad product , it still gives a better draw on that 100k as a single then you can safely get on your own up front but it is not the great growth deal you thought with 5.50% guaranteed as a min and how you thought you are blowing actual investing on your own away ..

[loves2read]

Great specifics for a complicated product
Since that data is from 2011 I would guess in current low rate/return period the promised return now is lower that with that?

[mathjak107]

i saw a presentation on it last year and it was still at 5.50% so not sure if it changed much .

it really does not matter because every time they give it to you , you only get an additional 1/10% of 5.50% so for them it is really tiny .

the balance in the sub account goes up by another 5.50% a year but what you get of that is only another 1/10% a year added to your amount you can draw off it .

in reality they can offer you any guarantee amount they want and just adjust the amount you get to add to your draw percentage wise behind the scenes and you will never know the difference . how about a 10% min but then they add 1/20 % a year to your draw instead of 1/10 .

99% of folks would still think they are actually getting a guaranteed 10% growth rate a year .

[mic111]

Originally Posted by loves2read

Great specifics for a complicated product
Since that data is from 2011 I would guess in current low rate/return period the promised return now is lower that with that?

One way they have changed since then (in general) is that the guaranteed interest used to be compounding from the growth amount but is now simple interest off the initial payment amount. This is how most are still offering the same or only a single percentage point difference in the guaranteed growth rate in this market. They have also shortened the roll-up period from 20 yrs to 10, 12 or 15 in most cases. Keep in mind this is off the virtual account for annuitization and not the actual amount you can withdraw.

Edit: I just looked at Prudential's web site and they are still saying compounding for the Highest Daily product. Current percentage appears to be 5% roll-up rate. That is what I have so it hasn't changed.

[mathjak107]

i didn't think it would change much since the portion of it you actually can tap is pretty small .