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Old 11-01-2016, 12:23 PM
 
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that is a personal comfort level choice then , not a performance choice . but i would not do that unless delaying social security was already part of my plan .

delaying social security should ALWAYS be done or part of the plan before any annuity product is considered .
you cannot buy any annuity product for what you would lay out by not getting ss from 62 to 70 that would give you so much ,pass to a spouse and be cola adjusted .

first rule is never buy any annuity unless you already included delaying ss in that plan first .
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Old 11-01-2016, 08:38 PM
Q44
 
Location: Hudson Valley, NY
895 posts, read 766,093 times
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I guess I haven't tortured myself enough with all of the retirement planning books I've read in the past few years as well as reading all the posts on sites like this.

I have signed up for two classes- Maximizing Social Security and Generating Retirement Income at the local community college.

Annuities are a major topic in the one class. And yes I agree I wouldn't even consider an annuity unless I was planning to maximize SS. In my case the annuity is already in place if I want to include it because my company followed suit with so many others and will offer the lump sum or the annuity from a major insurance company. From the research I've done they actually have the best 'return'.

I always use the 100% survivor benefit option in doing the comparison. My wife is 2 years younger and would be 60 when we start collecting - if we go that route. Basically we're getting 5% of our own money each year so we wouldn't see a real return until she's 80. But with longevity increasing it is comforting to know that the annuity, max social security, and her teacher's union pension (I stayed away from that thread) would all be coming in.

This is actually a long intro to ask a question. Everything I've read talks about adding an annuity - if you need additional guaranteed income in order to cover your living expenses and can't be exposed to riskier investments. So if your living expenses are X, and you have sufficient guaranteed income X+, do you still think adding an annuity is worth it? Is there a point where an annuity is just an expensive unnecessary insurance policy?
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Old 11-01-2016, 08:42 PM
 
3,460 posts, read 2,200,471 times
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Quote:
Originally Posted by mathjak107 View Post

you spend the money up front to buy it and 17 years later you got all your money back and now first go on their dime .
Let's look at this from the point of view from the company who is offering the annuity. We gather a few people together and form a company. We then start talking about how we are going to make money by receiving money from all these retirees. We come up with a great sales pitch, how we are going to offer people 5% payback every year they are alive no matter how long they live. You could be 120 years of age, and we are going to still keep making the same monthly payments to people. But we do the math, and look at how we are going to invest the money and our own return on it, and we aren't going to do much better than the 5% ourselves every day. In fact, we might lose money overall by making payments to people who live to be 120 years of age.

Then someone says, "Woah, woah, woah...let's hire one of those actuarial guys. They have all kinds of statistics about how long will live". Whew, everyone likes this. They find out the vast majority of the population doesn't live until age 120. They find out that some people died younger and on average they die within 20 years or less after the age they would purchase an annuity from us.

The company executives are happy, they know overall they won't have to keep making those payments to those people starting at age 65 for the next 55 years, and it is more like the next 20 years or so.

The company executives get even happier after someone says, "Let's hire some attorneys to put together a very complex contract that favors us!".

So now things are even more in the companies favor. Take the $200K at age 65 and they start paying out 5% which is $10K. The person dies 15 years into this the age of 80. $10K times 15 years is only $150K. They keep the rest of the money for themselves, plus whatever they have been getting as a return investing the money. So this is a good deal for the company selling the annuity which is why they are selling it and the commissions are so high for the sales person. In this scenario, the retiree gave them $200K and in return got back $150K over 15 years. This retiree might have slept better knowing he or she didn't have to invest and be concerned about the markets, but they also didn't have access to this money to do something else with it, like put a new roof on their home.

You are betting you will live to 120 years of age, and feel like you were savvy with the annuity and you didn't want to leave anything in your estate because none of those relatives came to visit you anyway. Who knows, perhaps you'd live longer not having to be concerned about the stock market's bumps along the way. The company that sold the annuity is betting you aren't going to live that long. This is like Casino gambling which favors the house and the company is "The House". They must be, because they need to stay in business.

None of us knows how long we are going to live or where the markets will head. We also don't know what inflation and expenses will be like in the future. To deal with that, you can have a broker do retirement planning for you where they use simulations and come up with a probability of how the events can turn out. When it comes back with 95% probability that you will have a total of X amount per year of money to spend, then you know what to do to plan for. If that's enough money then fine, if it isn't, then you have time to do something about it before you retire and/or adjust your retirement plans.

The company bets you die young and they make a lot more money than they possibly could by the investments.

The very idea that annuities are made so complex with so many choices is all the more reason to be extremely caution with them, and look at an overall investment strategy for retirement. The company selling them is playing on the fear everyone has that they will live longer than they have money.
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Old 11-01-2016, 08:49 PM
 
3,460 posts, read 2,200,471 times
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Originally Posted by mathjak107 View Post
can you generate that from your own cash and bond side ?

no you can't . you would be at zero all to quickly .
I have a neighbor who is 80 years of age. He retired at age 62. He has been investing in almost all equities for many years in his IRA. These are all good quality companies and most pay dividends. I've spoken to financial advisors and accountants who have told me overall people don't really change how they invest in their retirement years than when they were younger still working. My point is, why limit things to cash/bonds simply because it is for retirement? Cash and bonds aren't going to give the kind of return you would need.
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Old 11-01-2016, 08:52 PM
 
3,460 posts, read 2,200,471 times
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Quote:
Originally Posted by hurricane harry View Post
lets say you already have a maxed out IRA full of equities............
The returns can be greater, of course, but I was comparing doing almost nothing with the money vs. simply putting it in an account and taking out 5% a year for 20 years to compare it to the annuity and how it would be super safe.
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Old 11-01-2016, 08:59 PM
 
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Originally Posted by mathjak107 View Post
i went with a brokerage account . we are pretty much split between retirement accounts and our brokerage account .

i have no need for deferred annuity's . but we will eventually have a need to replace some bonds and cash with some laddered spia's .
At some point in our lives, we simply might not want to deal with brokers, reading the news about the markets each day and figure out as long as we are getting X amount a year guarantee we are settled. My 80 year old neighbor who continues to invests isn't there yet, but at some point we have other interests and concerns perhaps.

I read a financial article recently about annuities that said even though they are paying record lows, they have record sales now because people are afraid.
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Old 11-01-2016, 09:02 PM
 
3,460 posts, read 2,200,471 times
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Quote:
Originally Posted by mathjak107 View Post
that is a personal comfort level choice then , not a performance choice . but i would not do that unless delaying social security was already part of my plan .

delaying social security should ALWAYS be done or part of the plan before any annuity product is considered .
you cannot buy any annuity product for what you would lay out by not getting ss from 62 to 70 that would give you so much ,pass to a spouse and be cola adjusted .

first rule is never buy any annuity unless you already included delaying ss in that plan first .
Yes. We plan not to take SS until age 70. My neighbor who is 80 years old, he started taking SS at age 62. I asked him why he took it so young, he said he didn't know how much longer he was going to live, he was concerned he might not make it to 65. No real logically reason he was in good health. He doesn't say it, but I'm sure at age 80 he is regretting not waiting until age 70 to start taking SS.
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Old 11-02-2016, 02:22 AM
 
Location: Massachusetts
207 posts, read 132,018 times
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Quote:
Originally Posted by eastcoastguyz View Post
Let's look at this from the point of view from the company who is offering the annuity. We gather a few people together and form a company. We then start talking about how we are going to make money by receiving money from all these retirees. We come up with a great sales pitch, how we are going to offer people 5% payback every year they are alive no matter how long they live. You could be 120 years of age, and we are going to still keep making the same monthly payments to people. But we do the math, and look at how we are going to invest the money and our own return on it, and we aren't going to do much better than the 5% ourselves every day. In fact, we might lose money overall by making payments to people who live to be 120 years of age.

Then someone says, "Woah, woah, woah...let's hire one of those actuarial guys. They have all kinds of statistics about how long will live". Whew, everyone likes this. They find out the vast majority of the population doesn't live until age 120. They find out that some people died younger and on average they die within 20 years or less after the age they would purchase an annuity from us.

The company executives are happy, they know overall they won't have to keep making those payments to those people starting at age 65 for the next 55 years, and it is more like the next 20 years or so.

The company executives get even happier after someone says, "Let's hire some attorneys to put together a very complex contract that favors us!".

So now things are even more in the companies favor. Take the $200K at age 65 and they start paying out 5% which is $10K. The person dies 15 years into this the age of 80. $10K times 15 years is only $150K. They keep the rest of the money for themselves, plus whatever they have been getting as a return investing the money. So this is a good deal for the company selling the annuity which is why they are selling it and the commissions are so high for the sales person. In this scenario, the retiree gave them $200K and in return got back $150K over 15 years. This retiree might have slept better knowing he or she didn't have to invest and be concerned about the markets, but they also didn't have access to this money to do something else with it, like put a new roof on their home.

You are betting you will live to 120 years of age, and feel like you were savvy with the annuity and you didn't want to leave anything in your estate because none of those relatives came to visit you anyway. Who knows, perhaps you'd live longer not having to be concerned about the stock market's bumps along the way. The company that sold the annuity is betting you aren't going to live that long. This is like Casino gambling which favors the house and the company is "The House". They must be, because they need to stay in business.

None of us knows how long we are going to live or where the markets will head. We also don't know what inflation and expenses will be like in the future. To deal with that, you can have a broker do retirement planning for you where they use simulations and come up with a probability of how the events can turn out. When it comes back with 95% probability that you will have a total of X amount per year of money to spend, then you know what to do to plan for. If that's enough money then fine, if it isn't, then you have time to do something about it before you retire and/or adjust your retirement plans.

The company bets you die young and they make a lot more money than they possibly could by the investments.

The very idea that annuities are made so complex with so many choices is all the more reason to be extremely caution with them, and look at an overall investment strategy for retirement. The company selling them is playing on the fear everyone has that they will live longer than they have money.
What a well written and coherent post. I can't wait to see how the common sense and logic of it gets distorted.
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Old 11-02-2016, 02:55 AM
 
71,595 posts, read 71,751,865 times
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it would not make any sense in most cases to buy anything but a cheap simple spia . it is no different than buying a cd .

they have been very very effective planning tools that increase your odds of not getting hammered out of the retirement gate which can be very dangerous to a retirement .

what if i die is about the worst criteria anyone can use for structuring a plan based on living .

the real issue will always be what if i or my spouse live . dead is dead .

it will all depend on personal situations and how subject to markets and rates they want to be .

the past is the past and the new normal has never happened before so what was may no longer hold true .

i know right out of my retirement gate i am already experiencing crappy returns and burned principal to early in the game .

a year or two is not bad , but high stock valuations and rates this low never happened before in our history so we have no idea how long this may continue .

so it may not be a bad idea to diversify farther and go into something that is pretty constant year to year - dead body's .

the dead can add quite a bit of stability to a portfolio as well as provide a floor so you are not always refilling cash and bonds from zero as they get spent down .

the more you learn about how the combo's of spia's and your own investing work together the more you realize that they offer quite an advantage over more outcomes then going at it just with your own market and interest rate dependent investments .

sure stocks and bonds work fine when the outcomes are favorable . the problem is will it be your retirement that has outcomes that are anything but good .

i know with 80% of my income dependent on markets and rates right now i am anything but comfortable with the way things have been and look going forward so we are working on becoming less dependent . delaying ss will certainly help and the next step in the plan around age 70 is to ladder some spia's with some of the bond and cash money . equity's will always be part of the strategy .

at some point we may add a single premium life policy . we can take forever taxable money in my ira and spend a piece of it buying a life policy instead . even at 70 you can buy a policy that cost far less than it pays out .

rather than leave my spouse 100% forever taxable money , i can leave her the same value as the ira's in 100% tax free money .

that is a big deal for a spouse that now lost a partner ,lost a ss check and now has to file single with heavy rmd's . not a good situation for a spouse to be in .

so by manipulating the single premium life insurance we can take taxable money and turn it in to a greater amount of non taxable money .

that integrated combo of an spia bringing in an income base , our own investments and the life insurance for 100% tax free money will all make a comprehensive package most wives would be very happy with . while there is still market and interest rate risk in the plan it is greatly reduced and replaced with guaranteed sources of income , both if we live and when one of us dies .

it is up to if you are a couple to find a plan that is comforting for both of you assuming one is not around

Last edited by mathjak107; 11-02-2016 at 03:08 AM..
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Old 11-02-2016, 03:13 AM
 
71,595 posts, read 71,751,865 times
Reputation: 49209
Quote:
Originally Posted by eastcoastguyz View Post
I have a neighbor who is 80 years of age. He retired at age 62. He has been investing in almost all equities for many years in his IRA. These are all good quality companies and most pay dividends. I've spoken to financial advisors and accountants who have told me overall people don't really change how they invest in their retirement years than when they were younger still working. My point is, why limit things to cash/bonds simply because it is for retirement? Cash and bonds aren't going to give the kind of return you would need.
i never said limit things to cash and bonds . that is a poor idea

what i said is spending down in retirement will DEPLETE the cash and bond buckets eventually to zero .

you then have to sell some equity's to refill .

you can either refill from equity's before you empty the cash and bonds selling equity's more frequently or wait until they are down near zero and replenish .

we wait until we are down 1/2 way in cash , replenish from bonds and then refill bonds from equity's for the next cycle but in any case eventually equity's have to be sold .

a combo of spia's and equity's has been shown to both provide a higher draw rate and a bigger balance over a wider range of outcomes then equity's bonds and cash have . the income floor that is always there ends up requiring LESS EQUITY'S TO BE SOLD allowing them longer growing times .

that is where the advantages come in of using an spia with your own investing . while the spia floor stays constant for life the cash flow from my stocks and bonds reduces every year since interest is not enough to provide the draw when cash is 0-1% and bonds under 3% so each year as you spend down you are also generating less interest on cash and bonds requiring more principal to be spent .

no matter how you choose to refill you will have to sell equity's sooner without the spia . it is the delaying of selling equity's longer that has the spia /equity combo more often being a better perfomer than bonds ,cash equity's and no spia .

Last edited by mathjak107; 11-02-2016 at 03:53 AM..
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