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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74801  
Subject: Re: Annuity Calculators Date: 7/13/2000 7:21 PM
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Pablum,

That said, Intrcst, I know I would benefit from as specific a reply (or critique) as you might care to muster up....

There's a good write-up on annuities at the Fool. See the following link:

http://www.fool.com/retirement/annuities/annuities01.htm?ref=G02C04

If your employer's retirement plan only offers an annuity instead of a lump sum option, you really have no choice. I certainly wouldn't suggest you send back the monthly checks.

In addition to the reasons offered in the Fool Annuity article, I can think of three others for avoiding a Single Premium Immediate Annuity (SPIA):

(1) Investment and mortality expenses don't get any lower than about 0.40% of assets, even in the best of circumstances. You can get an S&P500 index fund for a 0.18% management fee, or manage your own LTB&H portfolio for as little as 0.01%.

(2) If you buy an inflation-adjusted annuity that protects you "100%" against rising inflation, the initial pay out isn't much larger than what you can get with a "100% safe" withdrawal rate from a stock/CD portfolio invested at the efficient frontier.

TTRoberts is correct that a SPIA will protect you against running out of money, but for a retiree that can limit his withdrawals to the 100% safe inflation-adjusted withdrawal rate, the risk of running out of money is very low (near a 1% risk.) The far greater concern will be what will you do with a multi-million dollar portfolio at the end of your pay out period. With SPIA this multi-million dollar terminal value of the portfolio reverts to the insurance company. (There's a reason insurance companies typically occupy the grandest structures in many downtowns. <grin>)

(3) Your guaranteed lifetime annuity benefit is based on the solvency of the insurance company. If we did have another "Crash of 1929" or worse, it's certainly possible that some insurance companies would fail. Nothing is "100% guaranteed".

Only the US Treasury can print money if the "Sh** hits the Fan".

intercst

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