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IMO, if you are looking to invest, then get a bunch of good publications and then invest with a broker.
This is a great way to underperform the market.
I can never figure out why an amateur investor thinks he can beat a professional at his game, especially since the pros have access to resources and information we amateurs could never afford.
Stockbrokers? Why? Surely not for their investment advice? They are salespeople after all. The only "investment" training they get is how to push firm products. Yes, a few have been to a course or two, yada yada, but their pay is based on turnover and product sales, not investment results.
just stick to single premium immediate annuity's and save the headaches and fee's. they are as simple and transparent as buying a cd
Deferred annuities are good too. They are also called longevity insurance. They are just like a single premium immediate annuity except for the "immediate" part - you pay now and fly later. The idea is to have the issuer (insurance company) pay for only the end of your life, starting at say age 85, while you are responsible for the first 20 years of retirement (65-85). That way, you get a much higher income at age 85 per dollar invested because most people don't live long enough to collect. The people who die young pay for those who live a long time. See my article at http://www.cfapubs.org/doi/pdf/10.2469/faj.v69.n6.4.
I do like longevity annuity's too . They are a great way to strech the budget.
Instead of planning until 90 or 95 and stretching your money out plan to 80 or 85 instead.
You have a lot more money to spend. Then get a cheap longevity annuity to kick in at that age if you are stll here. They are pretty cheap for what the pay out
The only person who thinks annuities are a great solution is the person selling them to you. Their commissions are very high, so they have a vested interest in selling you annuities vs putting your IRA money in moderately aggressive investments.
Currently most annuities are paying about 5% a year. So say you have $200K in your IRA, and you are scared of any kind of investing. So 5% a year of $200K is $10K. The seller likes to use the phrase "stream of income" and that puts people at ease. They dream of handing over this money and getting $10K a year from it.
But look at the math. $200K divided by $10K a year is 20 years. If you retire at 67 years of age, you could put that money in a very safe old type of passbook savings account earning almost nothing and FDIC insured being as safe as it could possibly be, and still withdraw $10K a year from it. This would be super safe guaranteed until you are 87 years of age. And this is without expecting a return on investment. Most people plan their retirement to have funds until they are age 90. So having that payment until age 87 is pretty good considering there is no risk at all.
OK, let's take it up a notch. Let's look at Jumbo CDs. This is also FDIC CDs, and currently you could get 2.27% for a 5 year Jumbo CD. So now instead of your $200K earning almost nothing, it would earn $4,540.00 a year, each year for 5 years. That's $22,700.00 total in 5 years. So now you have $222,700.00. You could continue to do this type of investment getting a new jumbo CD every 5 years or whatever longest terms offered that give you the highest return and it is all FDIC.
The big part of all, this is all still 100% your money. It isn't locked up in a complex annuity with all these insane rules and restrictions. I know a retired fellow who got talked into getting a $500K annuity by his wife, because his wife's friend was selling it to him. A month later, he had terrible buyer's remorse and simply had to get out of it. Trouble sleeping, the whole deal, so he called up his wife's friend a month later and said he wanted to get out of it. He ended up paying a 10% penalty because of the way the annuity was written. So within 30 days he lost $50K in this so-called "investment".
If you are the type of person who simply can't control your spending and you need it locked up in an annuity otherwise you will just flush it on stupid stuff, or allow a member of your family or a friend to influence you to spend money foolishly, then by all means, get an annuity because you aren't in control of your life. I know a guy who inherited $250K. Within a year he spent it all on substance abusive and gambling. He ended up broke and out of a job worrying about if he was going to get evicted from his apartment. For whatever demons he had, he would have been better off with an annuity where at least he would have been getting money every month instead of zero now.
But for people who don't face problems like that, annuities are a very bad deal. There are complex by design to benefit the company selling them, not to protect you. The other thing to consider is, how can an annuity afford to pay you 5% when the Jumbo CDs are paying 2%? The answer is, they are investing it to getting a higher return so they profit from your money and only pay back 5% to you. OK, if they are able to invest the money and get 5% return on investment, then why can't you do the same thing? Well, with the help of a good broker with long range planning you likely can, and you will still have control of all the money and it would be part of your estate.
If you don't have a broker (aka financial advisor) then I suggest you shop around for one. Go to the larger very well known brand name brokerage houses and ask for a meeting to interview brokers. Bring statements with you and ask them questions. They should also give you a survey of sorts to fill out that helps answer your risk tolerances and expectations for your investment goals. Investment goals are not "I want to have a lot of money", it is investing with a purpose in mind such as retirement, paying for college, getting a second house, etc.. Any competent broker should be able to do this. Ask around from friends, people you respect who they are using and interview them.
your off base because once an annuity is annuitized you have no returm . it is not a comprehensive investment . it is like you owning no equity's and using only cash instruments and bonds .
basically you bought a pension . not an investment .
your logic is skewed because you are not comparing apples to apples .
you are trying to take an income stream alone and compare it to a comprehensive investment that includes all assets but an annuity only represents the cash and bond portion .
in that regard it beats your cash and bond portion over a far wider range of scenario's . like i said your cash and bonds will go to zero eventually and the income stream stops until you sell equity's to refill . the annuity lets you not only run longer before selling but your base income never goes to zero so you need less refilling with the annuity over time then you would on your own .
the other factor is you hit a downturn the first 5 years with your own investing and you can derail that retirement trying to sustain income early on . that extra principal you have to draw out to sustain life is like a trader having a string of losing trades .
an annuitized base income with your equity's over that same scenario will reduce the effects of that downturn .
i retired 2 years ago and wish i had an spia base income running at a 6% draw rate . i burned principal the last 2 years right out of the gate . last year i drew 3.50% while investments returned 1% and this year drew 3.50% while investments are up 5% . so principal has already been spent and gone forever right out of the gate .
the 2 years cash we had is just about depleted now and we will need to sell assets to raise more future spending cash.
we will have to sell enough assets to refill starting at near zero again . had we had a 6% spia coming in , very little assets would need to be sold .
that is where the power of an annuitized income is .
the annuity gives your own money back at a rate greater than your own cash and bonds can provide . your cash and bonds will deplete to zero while an annuity does not . a current cash flow rate for a 65 year old from an spia is a draw rate of 6% .
think about this very carefully . you do NOT still have your own money spending your own cash and bonds because eventually they will hit zero trying to pull even 4% not even the 6% the spia gives in in draw .
you eventually need to sell equity's to get more spending money on your own . so down the road you no longer have your own money since you drew down your cash and bonds to zero in about 17 years at that draw rate and interest rates today .
so basically on your own you start out with your own money in cash and bonds but deplete it down the road to ZERO . .
the annuity is the reverse .
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 .
Last edited by mathjak107; 11-01-2016 at 03:49 AM..
while i do not like variable annuity's and it is very important to separate all the annuity products because they are all different even they can provide a level of cash flow you can't provide during the early critical years of retirement .
as an example lets take the prudential variable bond index annuity and compare it to what you would be able to draw from your own cash and bonds .
i use this product because i know it well and it already has been broken down to a level you will not see from an insurer . expenses on the variable side run 2.50% so that is pretty typical .
so here is this deal : i will use 100k as an example which you take from your cash / bond allocation side.
you give them 100k and the deal is that money gets invested in a bond index .
that bond index has an expense of about 2.50% . you pull 2.50% from a bond return and odds are you will never ever get much return . i think we can all agree , that sucks .
but the beauty is the insurer guarantees you forever a minimum return of 5.50% and that growth is inclusive of any fees .
but there is a hitch:
the variable account is all your money . you can take that actual balance out after the surrender period , you can pass it to heirs . when you draw an income just like with your own investing that money gets subtracted off the balance .
we can basically write this off as any kind of viable investment , so thumbs down for the variable part .
so lets focus on the guaranteed side .
so that 100k is also recorded in a sub account for purposes of the guaranteed 5.50% growth .
for every year you delay drawing an income and defer taking money out you get another 5.50% added to your balance .
so if 10 years before we want to draw an income we give them 100k that sub account will now have 180,209.00 bucks in it with no other fees taken out ..
at the same time that balance is increasing over those 10 years the draw rate increases too.
if i did not want to delay drawing money and just handed them the 100k and drew an income after 1 year you would get 4% of 105,500 forever. that is 4,220.00 a year .
not a great deal at all . but if you defer drawing you gain 1/10% more draw rate for every year you delay so in 10 years you would get forever 5% of 189,209.00 . that is over 9k a year .
that is your actual income deal from this product , it is not hypothetical .
can you generate that from your own cash and bond side ?
no you can't . you would be at zero all to quickly .
but that phantom account is only for the purpose of basing an income on . it is not your money to take out lump sum nor will to heirs .
your balance is the dwindling balance of your actual account that has the bond index and fees attached .
so you can see even in this higher fee variable annuity , for a proxy of your own cash and bonds that income stream can be quite large . far more than you can initially take from your self .
this is why i say do not listen to those misinformed folks who do not know how to compare apples to apples .
The only person who thinks annuities are a great solution is the person selling them to you. Their commissions are very high, so they have a vested interest in selling you annuities vs putting your IRA money in moderately aggressive investments.
Currently most annuities are paying about 5% a year. So say you have $200K in your IRA, and you are scared of any kind of investing. So 5% a year of $200K is $10K. The seller likes to use the phrase "stream of income" and that puts people at ease. They dream of handing over this money and getting $10K a year from it.
But look at the math. $200K divided by $10K a year is 20 years. If you retire at 67 years of age, you could put that money in a very safe old type of passbook savings account earning almost nothing and FDIC insured being as safe as it could possibly be, and still withdraw $10K a year from it. This would be super safe guaranteed until you are 87 years of age. And this is without expecting a return on investment. Most people plan their retirement to have funds until they are age 90. So having that payment until age 87 is pretty good considering there is no risk at all.
OK, let's take it up a notch. Let's look at Jumbo CDs. This is also FDIC CDs, and currently you could get 2.27% for a 5 year Jumbo CD. So now instead of your $200K earning almost nothing, it would earn $4,540.00 a year, each year for 5 years. That's $22,700.00 total in 5 years. So now you have $222,700.00. You could continue to do this type of investment getting a new jumbo CD every 5 years or whatever longest terms offered that give you the highest return and it is all FDIC.
The big part of all, this is all still 100% your money. It isn't locked up in a complex annuity with all these insane rules and restrictions. I know a retired fellow who got talked into getting a $500K annuity by his wife, because his wife's friend was selling it to him. A month later, he had terrible buyer's remorse and simply had to get out of it. Trouble sleeping, the whole deal, so he called up his wife's friend a month later and said he wanted to get out of it. He ended up paying a 10% penalty because of the way the annuity was written. So within 30 days he lost $50K in this so-called "investment".
If you are the type of person who simply can't control your spending and you need it locked up in an annuity otherwise you will just flush it on stupid stuff, or allow a member of your family or a friend to influence you to spend money foolishly, then by all means, get an annuity because you aren't in control of your life. I know a guy who inherited $250K. Within a year he spent it all on substance abusive and gambling. He ended up broke and out of a job worrying about if he was going to get evicted from his apartment. For whatever demons he had, he would have been better off with an annuity where at least he would have been getting money every month instead of zero now.
But for people who don't face problems like that, annuities are a very bad deal. There are complex by design to benefit the company selling them, not to protect you. The other thing to consider is, how can an annuity afford to pay you 5% when the Jumbo CDs are paying 2%? The answer is, they are investing it to getting a higher return so they profit from your money and only pay back 5% to you. OK, if they are able to invest the money and get 5% return on investment, then why can't you do the same thing? Well, with the help of a good broker with long range planning you likely can, and you will still have control of all the money and it would be part of your estate.
If you don't have a broker (aka financial advisor) then I suggest you shop around for one. Go to the larger very well known brand name brokerage houses and ask for a meeting to interview brokers. Bring statements with you and ask them questions. They should also give you a survey of sorts to fill out that helps answer your risk tolerances and expectations for your investment goals. Investment goals are not "I want to have a lot of money", it is investing with a purpose in mind such as retirement, paying for college, getting a second house, etc.. Any competent broker should be able to do this. Ask around from friends, people you respect who they are using and interview them.
lets say you already have a maxed out IRA full of equities............
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 .
you are retired, I'm still working and wanted tax advantage and security
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