UnThreaded | Threaded | Whole Thread (19) | Ignore Thread Prev Thread | Next Thread
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 75890  
Subject: You're crazy if you don't buy an annuity? Date: 9/16/2010 2:12 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
http://www.nytimes.com/2010/09/16/business/retirementspecial...

Professor Johnson found respondents were particularly loss averse, and the more loss averse they were, the less likely they were to buy an annuity.

“I could not have designed a product from a behavioral economics perspective that would have been a harder sell than current annuities,” he said.

Professor Johnson said he was studying data from a broader range of ages to confirm his findings and also analyzing whether older people viewed future money differently than other age groups. Eventually, he said, he hoped to determine whether loss aversion was connected to cognitive decline.

</snip>


intercst
Print the post Back To Top
Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67517 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/16/2010 3:14 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Thanks for the posting, intercst. I would hope most participants on this board already know that, but if not its a useful reminder.

For those who want to retire (or otherwise need a steady source of income), are uncomfortable with risk, a fixed annuity can be an appropriate investment. Rather than deal with the ups and downs of the markets, you pay the insurance company to take the risks and keep your checks coming.

These days, more and more put the onus on the retiree to manage their own funds (self directed IRA, 401K, defined contribution pension plan, etc). And in good times, people routinely find they can beat the performance of guaranteed plans. But in these volatile times that can be nerve wracking.

Putting a portion of your assets into an immediate annuity--ideally to cover minimal basic living expenses--can make sense. Most contracts have no provision for inflation. Rising costs for those retired for 30 years or more usually means you still need equity investments to keep your money growing. But annuity for day to day expenses is good peace of mind insurance.

Print the post Back To Top
Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67518 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/16/2010 5:48 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
>> For those who want to retire (or otherwise need a steady source of income), are uncomfortable with risk, a fixed annuity can be an appropriate investment. Rather than deal with the ups and downs of the markets, you pay the insurance company to take the risks and keep your checks coming. <<

I agree with this in the general case in terms of an SPIA -- for a *part* of your income stream (I'm not comfortable putting all of my retirement savings into one) and as long as someone understands how it works.

But today is a terrible time to buy one because interest rates are so low that buying (say) $1000 of monthly lifetime income has never been more expensive.

#29

Print the post Back To Top
Author: kcdbc One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67519 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/16/2010 8:10 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
Why do so many consider an annuity as a "risk-free" investment?

What happens if the insurance company goes bust?

I also wonder what the effect would have been on many annuities if
AIG were allowed to fail---as they did were it not for intervention.

Chuck

Print the post Back To Top
Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67520 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/16/2010 8:27 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
ziggy29,

I agree, now is really not the time to invest in annuities due to where interest rates are at.

I have also found that annuities are not a suitable product for unmarried couples, such as same-sex couples which are not federally recognized as married, due to the federal laws governing annuities. Specifically, the benefits will end no longer than 5 years after the annuity holder passes away, best case.

Annuities in general also tend to suffer from high fees.

I'm getting less worried about outliving my assets by the day.

On June 30, my father was diagnosed with pancreatic cancer at the age of 67. He passed away on September 1. He worked his entire career for the same employer, and retired at 60 with a good pension in France. But still, 7 years is not a long retirement. It was not his time to go yet.

According to social security I can't even take my full retirement until age 67. I really wonder the likelihood that I will still be alive by then, given my many medical conditions, and with my lack of heirs, I think I may have already saved enough and need to spend more than I have while I can still enjoy it.

Print the post Back To Top
Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67521 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/17/2010 1:47 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
For those who want to retire (or otherwise need a steady source of income), are uncomfortable with risk, a fixed annuity can be an appropriate investment. Rather than deal with the ups and downs of the markets, you pay the insurance company to take the risks and keep your checks coming.

Yes, a SPIA will likely provide steady income and will provide the income over the remiander of their life even if they live longer than their life expectancy. Thats the good stuff.

The bad stuff is:

- The yield on the gradual drawdown over the life of the annuity usually runs about that of a 5 year CD

- If the annuitant dies prior to their life expectancy, they lose any unused portion of the annuity

- Once started, the annuity has no flexibility or liquidity

- There is no growth, hence no inflation protection. Yes, basic bills can be paid with it. But at an average annual rate of inflation of 3%, in about 23 years it will pay only 50% of these bills. And if they are medical bills, at an average medical inflation rate of 7%, it will take about 10 years for the annuity to lose half of its purchasing power.

- If the insurer defaults, depending on the state's guaranty fund coverage, the annuitant's annuity payment may be delayed or reduced.

If the retiree knows, understands and accepts these costs, risks and limitations, the SPIA can be a good income alternative.

BruceM

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67522 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/17/2010 8:30 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 4
Or, consider building your own annuity [cite courtesy of Jack over at the RYR board]:

http://moneywatch.bnet.com/investing/blog/irrational-investo...

Hockeypop

Print the post Back To Top
Author: akck Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67523 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/17/2010 2:31 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Or, consider building your own annuity [cite courtesy of Jack over at the RYR board]:

http://moneywatch.bnet.com/investing/blog/irrational-investo......

Hockeypop


Thanks for pointing the article out Hockeypop. When I was reading the thread, I was thinking why don't you just build your own. Now I have a good idea on how to go about doing it. I'd rec you again for the post if I could and probably should go over and rec Jack.

Print the post Back To Top
Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67524 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/17/2010 10:08 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
"What happens if the insurance company goes bust?"

Insurance companies that offer annuity contracts are regulated at the state level. All states have funds set aside to cover the situation of an insurance company failure and so far they claim no one has ever failed to receive a payment. The industry has always managed to make the contract good.

But sure a wide scale industry failure might challenge the system.

When buying an annuity make sure the company is one of the better ones as rated by AM Best.

There have been a few situations where people have worried about the future of their annuities. Collapse of the junk bond market. Money markets breaking the buck after the Lehman's failure. etc. But so far annuities have been OK and much, much, much less volatile than the stock market.

Print the post Back To Top
Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67525 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/17/2010 10:12 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
"Annuities in general also tend to suffer from high fees."

That is true of variable annuities and numerous other insurance products that contain complex features that make them difficult to compare.

Immediate fixed annuities are the exception. They are identical from all sources (unless you buy extra features). Just as with bond ladders, you can get quotes from multiple sources and compare them side by side. That includes from mutual fund companies like Vanguard, Fidelity, and T Rowe Price. That makes them highly competitive and allows you to select the best deal by shopping around.

Print the post Back To Top
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: 67526 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/17/2010 10:30 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
pauleckler writes,

"Annuities in general also tend to suffer from high fees."

That is true of variable annuities and numerous other insurance products that contain complex features that make them difficult to compare.

Immediate fixed annuities are the exception. They are identical from all sources (unless you buy extra features). Just as with bond ladders, you can get quotes from multiple sources and compare them side by side. That includes from mutual fund companies like Vanguard, Fidelity, and T Rowe Price. That makes them highly competitive and allows you to select the best deal by shopping around.


Actually immediate annuities have hidden costs that can consume up to 30% of the purchase price.

http://www.retireearlyhomepage.com/annuity_costs.html

intercst

Print the post Back To Top
Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67527 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/17/2010 11:21 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
All states have funds set aside to cover the situation of an insurance company failure and so far they claim no one has ever failed to receive a payment.

There is always a first time.

Many states are having problems making budget and funding their own pensions. Who is to say they'll not just settle for pennies on the dollar. IIRC, this happened to some pilot's pension years ago.

Personally, instead of an annuity, I'd just ladder CDs. FDIC insured. If the government goes bust, we have more serious problems afoot.

JLC

Print the post Back To Top
Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67528 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/18/2010 12:16 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Thanks for the education, intercst.

Comparison shopping should help you find the lowest cost annuity out there, but I'm sure the insurance company pays for its fancy office buildings somehow. Shop carefully.

Print the post Back To Top
Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67529 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/18/2010 2:20 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
"Personally, instead of an annuity, I'd just ladder CDs. FDIC insured. If the government goes bust, we have more serious problems afoot."

JLC, I'll grant you that FDIC insurance is hard to beat when it comes to security in investments.

But note that CD ladders have another problem. Recall that in the Carter years interest rates hit 20% and you could buy CDs paying over 10%. These days 3 yr CDs pay less than 3%. Those who based their retirement on investments in CDs have seen their incomes not only not keep up with inflation, but fall by 70% or more.

Similarly, the $30K in income that I hear is close to median retirement income requires at cool million dollars at current rates. I suspect that most could do better than $30K in income from that much in assets.

For risk averse retirees, CDs may be the best you can do, but one would hope that the typical retiree has a more aggressive portfolio.

Print the post Back To Top
Author: SirTas Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67532 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/18/2010 8:53 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Professor Johnson said he was studying data from a broader range of ages to confirm his findings and also analyzing whether older people viewed future money differently than other age groups. Eventually, he said, he hoped to determine whether loss aversion was connected to cognitive decline.

I think older people do view future money differently than other age groups, and rightly so. We don't need psychological investigation or scientific data as a source of learning this.

Older people view future money in terms of concerns about outliving what has been accumulated, or not having anything to pass on to heirs, etc. Younger people don't view future money in this way. Like many matters that are supposed to be subject to psychological investigation, the results are pretty obvious even before we gather "data."

--SirTas

Print the post Back To Top
Author: alstroemeria Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67533 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/19/2010 12:15 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
the $30K in income that I hear is close to median retirement income requires at cool million dollars at current rates.

Minor quibble. How many retirees have no SS or pension income at all? To get $30k in income, I bet most seniors get at least $12k in SS income (that's the median amount, IIRC) and so only need to generate $18k from their portfolio, pension, and/or part-time work.

My mother currently has $468k in her IRA, maybe $10k in taxable savings, and collects $20k in interest & dividends plus $16k in Social Security for an income of $36k--which is greater than the median. And she lives quite well--owns a 2300 sq ft home in a very nice neighborhood, goes to the movies pretty often, has lots of DirecTV channels and 2, 42" flat screen TVs--and an Apple computer, eats out whenever she likes wherever she likes, gives $100 per birthday and Christmas to each grandchild, donates to favorite charities, buys some new clothes every season, keeps up with home maintenance, and gets regular medical, dental and vision care. I don't think she'd live any better on twice the income.

Print the post Back To Top
Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67534 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/19/2010 1:21 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
"Minor quibble."

I don't mean to start a major discussion of "typical" retirement income, but recall that median household income in the US in still upper $40s--no yet $50K. Retirees indeed probably are somewhat less.

These days where both husband and wife work, combined Social Security for typical middle class is probably over $20K, and most get some pension--though many are small.

I have heard others say that $30K is typical retiree's income these days, but I am sure there those with far more and many with less.

But yes, I certainly agree that a nice 401K plan balance for those who manage to achieve it helps a lot.

And yes, I too know people who have retired very well on much less than $30K. They own their home, eat well, and seem to have money for nice trips and extras. I would suspect they live conservatively and do with somewhat less of those extras than some.

Print the post Back To Top
Author: alstroemeria Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67535 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/19/2010 2:15 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
My minor quibble was with requiring a $1MM portfolio to support $30,000/year in retirement income when the majority of retirees have/will have SSI that provides 1/3 - 1/2 of that income, and in many cases of couples, more.

Print the post Back To Top
Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 67536 of 75890
Subject: Re: You're crazy if you don't buy an annuity? Date: 9/19/2010 5:53 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Similarly, the $30K in income that I hear is close to median retirement income requires at cool million dollars at current rates. I suspect that most could do better than $30K in income from that much in assets.

Last time I checked, $1,000,000 divided by $30,000 is 33.3 -- If you get 10,000 new crisp $100 bills and bury them in the backyard - you will no run out of money for over 33 years.

Now for most rational people, the idea of taking 4% our with an inflation adjustment has appeal. You have not guarantee, but there is something like a 95% probability you will never run out of money even if you live for another 50 years.

This happens to be the approach I am taking - well not totally, I am taking more like 3.5% plus an inflation factor. Early 2009 had more worries, but now I am a firm believer in the system described by William Bengen in his book "Conserving Client Portfolios During Retirement"

Gordon
Atlanta

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (19) | Ignore Thread Prev Thread | Next Thread
Advertisement