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Subject:  Re: Income Planning Assumption Date:  6/7/2007  1:33 PM
Author:  BruceCM Number:  57807 of 88026

"Is the "4% " option designed to preserve capital forever?"

Yes, if one invests purely for income. No, if one gradually consumes their principal.


Life annuities 'guarantee' a fixed or variable life income, with multiple payout options, to include a guaranteed 'period certain', where the insurer will continue monthly payments even after one dies, presumably to a named beneficiary. Other options include a joint-survivor, that allows a % to continue being paid to a surviving spouse (like a pension plan offers), a 'death benefit' that guarantees payments that will at death return to the estate any balance left on the initial investment, annual inflation adjustments,usually at a fixed rate of say 3%, and so on.

All of these options will have the effect of a net reduction to the simple life annuity. IOW, if one were to take the present value of any option or combination of options over one's life expectancy, this value would be less than the PV of a simple life annuity.

And yes, life annuities do prevent superannuation, or the risk that the retiree will outlive his/her life income. But this is counterbalanced by the exact opposite, the risk that the annuitant will die before his/her life expectancy, and thus lose any remaining balance on the initial investment amount.

One other risk that never seems to be discussed: default tisk. "Guaranteed payments for life" are guaranteed only to the extent the insurer can pay them...much like interest on a corporate bond, which is also 'guaranteed', until the company files for Chapter 11. Now to be sure, this is a low risk with the large insurers like Hancock, Met Life or others....but its still a risk, and insurer defaults do occur. And depending on the annuitant's state of residence, a default on a life annuity may or may not be covered by the State's Guaranty fund. Most states cover up to a maximum present value amount, usually about $100,000 for a fixed annuity, and often offer no coverage for a variable life annuity.


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