Article regarding bonds/no bonds in investment account (credit, cash, fees)

[leastprime]

Originally Posted by mathjak107

the job of an income stream is to reduce demand on what that pile of money you have needs to bring to the party via its portfolio allocation.
this is how we used GLWB Fixed Indexed Annuity (IRA)(2012 vintage) to delay taking GLWB Variable Annuity (2008 vintage) until RMD age. That delay let the underlying funds in the variable accounts to grow 2018 -2021 thus fixing the GLWB's Income Income Acct Value at higher levels. It is a sophisticated strategy and entails a creditable knowledge on how the annuities work, market timing, and the need for income.

it is not part of the portfolio allocation at all.
Can be. The distinction becomes fuzzy depending on strategy

I am not going to guess on how other people think.
YMMV

[leastprime]

From my searches for a 1035 GLWB to MYGA, I found ...
GLWB fix-indexed are hard to find today, making the topic of this thread non-relevant for new purchases. My experience with their Indexing (2012) is not favorable and the buyer may see the Income Account Value guarantees as more important but comes with high fees.

Our GLWB Fixed Indexed Annuity 2012-2017, had an Account Value gain of <1% and no crediting from SP500 options even though the SP500 Index was on a Huge run. Even in 2022-23 fiscal year, where the 12 month CD, is 3-5%, our FiA only managed 1% on the short-term account and 0% on the Indexing accounts. Thus I question Pfau's analysis.

Registered Linked Index Annuities (RLIA) seem to be the rage of annuity salespeople. Caveat Emptor.

YMMV

[leastprime]

Wade Pfau's research paper, "Protected Income as an Asset Class" June 2023. Retirement Income Institute.

YRMV

[mathjak107]

Originally Posted by leastprime

I am not going to guess on how other people think.
YMMV

i recommend people stay away from these complex , expensive , glwb contracts and any kind of variable annuity .

grow your money then when the time comes go an spia, it is is the only way and product i recommend

[mathjak107]

Originally Posted by leastprime

From my searches for a 1035 GLWB to MYGA, I found ...
GLWB fix-indexed are hard to find today, making the topic of this thread non-relevant for new purchases. My experience with their Indexing (2012) is not favorable and the buyer may see the Income Account Value guarantees as more important but comes with high fees.

Our GLWB Fixed Indexed Annuity 2012-2017, had an Account Value gain of <1% and no crediting from SP500 options even though the SP500 Index was on a Huge run. Even in 2022-23 fiscal year, where the 12 month CD, is 3-5%, our FiA only managed 1% on the short-term account and 0% on the Indexing accounts. Thus I question Pfau's analysis.

Registered Linked Index Annuities (RLIA) seem to be the rage of annuity salespeople. Caveat Emptor.

YMMV

i always question his examples.

we all know one can always cite examples that prove a certain point regardless of what it is or how it plays out for most .

i have created my own index linked annuities, with no expenses , just like buying one but better , and they still performed poorly .they are more a marketing gimmick then any kind of equity investment.

right off the bat you get nooooo dividends so you are constantly having a gain reset when they are subtracted out but you didn’t get the dividend so in a way you are always debited for it but never receive the payout you are being debited for

my advice is stay away from them and if anything build your own . i can post instructions for index linked cds which is how they are done by the insurers

[mathjak107]

kitces view is don’t try to make income streams part of the portfolio.it will only mess up your allocation and potentially make the portfolio much to volatile over time

https://www.kitces.com/blog/valuing-...balance-sheet/

[ddeemo]

Originally Posted by Lizap

Typically, SPIAs and DIAs cannot be liquidated.

That is not the type of annuities being discussed neither are they GLWB's. Not saying I agree, just looking at what it looks like they are saying.

[mathjak107]

i agree with the author of that article

there are to many assumptions about inflation and cap rates in pfaus article which in practice are far more variable with a much wider range of outcomes .

again , one can prove anything they want by making certain assumptions.. having done index linked cds my self i have a good understanding of what they actually can do in practice and it isn’t much compared to plain old fixed income .

in short i still say stay a way from these index linked products as my opinion and i stay with nice simple spias , equities and bonds

[mathjak107]

for those who want to know how it’s done by either them or you , here you go :

these are older numbers so don’t go by the prices at the time this was worked up . i have no interest in updating the prices and redoing it

so here is how the sausage is made , but unlike sausage which taste great , the taste here is MEH at best .


An EIA (equity indexed annuity ) is an insurance contract that theoretically offers the buyer the opportunity to participate (to some extent) in equity market performance while guaranteeing a minimum payout at the end of the policy guarantee period.

The extent to which the buyer participates in equity market performance typically varies year to year as does the minimum guaranteed crediting rate (AKA interest rate paid on the policy). This has proven to be a tantalizing pitch for many conservative investors. The problems with these policies are that you have little control over how much you participate in the equity market; the policies typically have high early surrender fees and have surrender periods usually .

the internal expenses of these policies are quite high; you are exposed to insolvency of the issuer; the participation is typically limited to price changes in an equity index, with no compensation for dividends on the index; the participation in the index is capped at a predetermined level so that really big gains are truncated within the annuity structure; and the tax treatment of eventual distributions may be less than optimal.

How you can “roll your own” EIA, part 1:

By far, the simplest way to set up an EIA is to do it in an uncapped version. The simplest uncapped replication portfolio consists of a 1 year fixed income investment (such as a CD) and a call option on whatever equity index ETF you want exposure to. So let us assume you can buy a 1 year CD that yields (APY) 4%, you want exposure to the S&P 500, you have $100,000 to invest, and you want a minimum yield of 1%. To replicate an EIA, you would buy the following:

CD: You want $101k in a year, so you invest $101,000/1.04 = $97,115 in a 1 year 4% yield CD. In a year, the CD matures and you get $101,000, which is your desired minimum payout.

Options: Your CD purchase leaves you with $100,000 - $97,115 = $2,885. You take this amount and buy at the money 1 year call options on the S&P 500 index ETF (ETF symbol SPY). At the money means that the option exercise price is about equal to whatever the ETF sells for today. So with SPY trading at $137.93 as I write this in April 2008, we wish to buy April 2009 calls with a strike of $138. Such a thing doesn’t exist, so we will settle for the closest month we can get, which is March 2009. March 2009 calls (Symbol SFBCH) sell for $12 each and must be bought in contracts on 100 shares each, so you want to buy $2885/$1200 = 2.4 contracts, but must buy 2 contracts for $2400.

So you end up with a CD that will pay $101,000 in a year, $485 in cash, and options on 200 shares of SPY struck at 138. The options cover a notional amount of $138 X 200 = $27,600, so your “participation rate” in the index is 27,600/100,000 = 27.6%, meaning that you catch 27.6% of the appreciation of the S&P 500 through next March while bearing none of the downside. When the options are about to mature, you can sell them for cash, assuming the market has gone up and they are worth anything. Otherwise, you collect your $101,000 from the CD, have your $485 plus whatever interest it generated, and decide if you want to play this game again for another year.


Rolling your own, part 2:

Instead of having a small, uncapped participation in the index, you could have a larger participation but cap it at a given level. This is essentially what is done inside the EIA contract sold by most insurers. To replicate the EIA, you would buy the same CD as in the above example. However, the options portion would include:

1) Buy the at the money options on the index as in the above example
2) Sell out of the money options for the same expiration date and underlying ETF.

An example will be helpful:

Lets assume that you would be willing to cap your upside in return for a higher participation rate. That means you want to buy call options at the money ($138 strike) and sell call options at a strike that is about 10% higher ($152 strike). The $152 strike options currently trade for about $5.50 a share. So we buy:

4 contracts of the at the money options (SFBCH) for 400X12 = $4800

And we sell:

4 contracts of the 10% higher strike $152 (symbol SYHCV) and receive cash of $400X5.50 = $2,200.

Total out of pocket for the options is $4,800 - $2,200 = $2,600.

So you end up with a portfolio that consists of a CD that will pay you $101,000 in a year, $285 in leftover cash, and a package of options that gives you up to 10% of the upside on 400 X $138 = $55,200 worth of the S&P 500 index. Note that by capping your potential upside you have increased your participation rate to $55.2% of your $100,000, or double the uncapped version.

[leastprime]

Today, I'd pass on purchase of GLWB Fixed-Index Annuity, if I can find one. But I'm not looking, so it doesn't matter.

But for hypothetical:
Today, Sept 2023, How many near and current retirees would purchase a CD paying out 6.5%, credited annually, indefinite term limit?

YMMV