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GAO report says that's the "advice of experts".

http://www.marketwatch.com/story/retirees-need-less-stocks-m...

Unfortunately, they don't mention that 25% to 30% of the purchase price of a single premium life annuity (SPIA) is lost to the insurance company's various fees and costs for the average retiree.

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

I wonder who's paying their "experts"?

The cheapest annuity you can buy is to delay your Social Security benefits until age 70.

http://www.retireearlyhomepage.com/cheap_annuity_no_more3.ht...

intercst
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I suspect the reason the gov is recommending these things is for simplicity, retiree piece of mind and to prevent the modest savings of unsophisticated investors from doing the stock market 2-step and losing a good portion of their savings to "bad investments" and risk becomming wards of the state.

But clearly, anyone with even a casual interest in managing their own savings will lose a big chunk of it if they turn those savings over to an insurance company. And when you think about it, it must be that way. Consider, an insurance company...

1. ...invests in the same stock and bond markets we alll do. Yes, at a different scale, but still the same market

2. ...knows no more of what the markets will be doing in the future than anyone else does. They don't have crystal balls and they are not time travelers. This means, they must asset allocate just like everybody else does

3. ....does NOT print money

Add to this the exorbitant expenses and costs as outlined in The Retiree Early article above, and the only 'guarantee' you get with an insurance product is to lose money when compared with an ultra simple target date fund.

BruceM
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BruceCM,


But clearly, anyone with even a casual interest in managing their own savings will lose a big chunk of it if they turn those savings over to an insurance company. And when you think about it, it must be that way. Consider, an insurance company...

1. ...invests in the same stock and bond markets we alll do. Yes, at a different scale, but still the same market


Well, insurance companies do pool the risk of longevity.
Some people will buy an annuity, die shortly after, and therefore lose big on their upfront premium. This can be profit to the insurance company, or part of it can also be redistributed to other policyholders who end up live longer.

So, it's conceivable the returns will be higher than just investing your premium amount in the stock market - as there may be more money for your benefit in the same stock market, from the dead policyholders. This assumes of course that the insurance company's profit doesn't take this completely away from you.
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This is an important subject for me, because I intend to retire at age 60 at the end of 2012 and was considering putting a portion of retirement savings (approximately 25%) into an immediate, noninflation adjusted annuity to cover basic expenses. Rationales are:

1. I do have the genes to make living another 30 or more years a probability. And if I don’t live that long, being dead I don’t really care that I lost the bet. (My beneficiaries will do okay out of the portion of retirement savings not dedicated to the immediate annuity).
2. The stability is attractive, and would permit me to invest the remainder more aggressively than I likely would otherwise. The additional investments also deal with the issue of inflation in using non-inflation adjusted annuities.
3. I would spread the annuities among 4 or 5 AAA insurance companies to reduce the default risk.

Because I’m shifting risk to a profit-making institution, it doesn’t trouble me that the institution will likely make a profit in accepting that risk (unless I live to be 110 or so). But I don’t want to be a sap either in terms of how much of a risk-shifting premium I’m paying.

The Retire Early article was troubling, but two aspects made me wonder whether it really is a useful guide: (1) the snarky, anti-corporate comments hurt its credibility with me; and (2) the use of only an inflation-adjusted comparison and not including a non-inflation adjusted comparison seemed designed to push the pre-ordained conclusion (clearly, the risk premium is much higher for taking on the inflation question over a 30 or more year period).

So what is the best way to evaluate an immediate annuity? And what alternative is there for ensuring stable income over a 30-year period? (I tried as a test creating a 30-year bond ladder through Fidelity, but it didn’t seem to work. Also, what I’ve seen and read about target funds make them less than attractive to me—high fees without a large reduction in market uncertainty).

Thanks,
Case
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2. The stability is attractive...

You assume that the insurance company you buy from will be stable over the next 30+ years. A big assumption.

What was the old saying, what's good for GM is good for the country? How stable has GM been lately? 25 years ago it looked like a sure thing, very long history, constant dividend payer, etc., etc., etc.

JLC
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Mad

I didn't include mortality risk in my reasoning, because in nominal dollars its a wash. The annuitant risks giving up 'unused' dollars at premature death in exchange for mitigating superannuation (outliving your savings withdrawals). But in time weighted dollars, the mortality risk is also a loss to the annuitant, as dollars lost due to premature death are worth more than dollars collected if one lives beyond life expectancy.

For an ultra simplistic example...lets say there are twins A and B, who both buy a life annuity at age 65 for $100,000 (each), and both are expected to survive to age 88. Brother A dies prematurely at age 84 while twin B lives to age 92. At the death of twin A, the insurer sets aside enough of the 'unused' portion of twin A's premium to cover the risk of twin B outliving his. The unused part of twin A's premium is $25,000...but the amount of this the insurer keeps invested is only $15,000, as this will grow over the ensuing 8 years to fund twin B's longer life. The difference (25,000 - 15,000 = 10,000) is revenue to the insurer.

Of course, the actual calculations are much much more complicated, taking into account large risk pools, probability targets, mortality 'drifting', etc, etc. But the concept is the same.

Now, this doesn't mean one should not annuitize....it only means that it is an expensive way to create a future income stream.

BruceM
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Case58 writes,

The Retire Early article was troubling, but two aspects made me wonder whether it really is a useful guide: (1) the snarky, anti-corporate comments hurt its credibility with me; and (2) the use of only an inflation-adjusted comparison and not including a non-inflation adjusted comparison seemed designed to push the pre-ordained conclusion (clearly, the risk premium is much higher for taking on the inflation question over a 30 or more year period).

</snip>


1) Well, the Retire Early Home Page is known for its irreverence.

2) There's an Excel spreadsheet linked in the article that you can download to analyze both inflation-adjusted and nominal annuities. As BruceCM indicates, you'll find that the insurer's costs (i.e., quoted premium minus fair value) for both types of annuities are much the same.

http://www.retireearlyhomepage.com/fair_annuity_06_26_2009.x...

intercst
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Of course, the actual calculations are much much more complicated, taking into account large risk pools, probability targets, mortality 'drifting', etc, etc. But the concept is the same.

Now, this doesn't mean one should not annuitize....it only means that it is an expensive way to create a future income stream.



but OP asks a good question (IMO):


what's a better was to create *stable* 30yrs income stream?
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Case58 asks,

So what is the best way to evaluate an immediate annuity?

Because of the adverse selection and high insurance company costs, I wouldn't consider an annuity unless I thought I was in the top 15% of the mortality curve. For a 60-year-old, that means you think there's a good chance you'll live to be at least 90.

If you "buy" your annuity by delaying your Social Security until age 70 instead of turning a big wad of cash over to an insurance company, the odds are a bit better. The break-even point is around 80 years of age.

intercst
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...what's a better was to create *stable* 30yrs income stream?

That is a good question, and here is how I'm answering it.

The majority of my money is in dividend paying stocks, most with long history of increasing dividends. By the time I near retirement, these stocks should be throwing off enough dividends to pay for all my needs and hopefully for all my wants too. Plus, I'll have 5 years of living expenses in laddered CDs. Each year a CD matures, use that money to live and the dividends to replenish a new CD.

But didn't I just rail against GM? Yes. The difference, I'll have my risk spread out over about 20 stocks. If one tanks, I'll have 5 years to recover. Plus, I shouldn't be living so close to the edge that one stock collapsing will kill me. Putting all my eggs in one basket (an annuity), if it goes under, I definitely will go under.

JLC
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JLC
I've been using this strategy for about 11 years now in retirement. Its worked out pretty well, despite some learning bumps along the way.

Following this last credit collapse, I've learned the hard way that diversification is very important to mitigating the effect of a dividend cut or dividend elimination. IMHO, 20 stocks is not enough...I currently hold 52 income securities, 4 of which are ETFs...which I think is a good diversification alternative to individual stocks, although they will cost you a % of the income they produce.

Interesting idea on CD ladder. I can see the value of this with a total return rebalancing income strategy, but why would you need to do this with an income portfolio?

BruceM
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JLC: If you'll note in my original posting, I'm talking about using roughly 25% of retirement assets towards immediate annuities. Also, (point 3 in my OP), that I would spread the annuities among four or five companies to reduce the risk of defaulat by one company. Further, life insurance companies are regulated by state insurance agencies and required to maintain reserves towards their obligations--this doesn't eliminate the possibility of a life insurance company going under, of course, but it certainly reduces it. So I don't see the use of immediate annuities the way I've outlined as the equivalent of investing everything in GM, putting all my eggs in one basket, or putting my entire retirement at risk.

I do like your idea of a revolving CD or bond ladder.

BrucCM and Intercst: To me the real question is the one you posed, as to what is the "real" premium on an immediate annuity, especially for someone like me who has a reasonable expectation of living to 90 or beyond. Due to my ineptness in such things, I couldn't use the Retire Early spreadsheet. From some general reading and other things, it appears that immediate annuity rates run roughly between CD rates and Treasury rates. Does that sound about right?

Thanks to everyone for their comments.

Case
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Case58 asks,

From some general reading and other things, it appears that immediate annuity rates run roughly between CD rates and Treasury rates. Does that sound about right?


One way to look at at is the return based on the Treasury yield curve. Berkshire Hathaway has an online calculator that shows a 3.60% return for a 60-year-old buying a life annuity. If you bought a straight 30-year term annuity (i.e. 360 fixed monthly payments) you should get a return somewhere around the 30-year Treasury yield (4.25%).

http://www.brkdirect.com/spia/EZQUOTE.ASP

intercst
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That's really helpful.

Thanks again,

Case
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...what's a better was to create *stable* 30yrs income stream?
-----------
That is a good question, and here is how I'm answering it.

The majority of my money is in dividend paying stocks, most with long history of increasing dividends. By the time I near retirement, these stocks should be throwing off enough dividends to pay for all my needs and hopefully for all my wants too. Plus, I'll have 5 years of living expenses in laddered CDs. Each year a CD matures, use that money to live and the dividends to replenish a new CD.


kind of why i emphasized 'stable' ..not knowing what OP meant.

dividends CAN go down /stocks can go down
CD/bond rates go up and down ..

not exactly 'stable'



But didn't I just rail against GM? Yes. The difference, I'll have my risk spread out over about 20 stocks. If one tanks, I'll have 5 years to recover. Plus, I shouldn't be living so close to the edge that one stock collapsing will kill me. Putting all my eggs in one basket (an annuity), if it goes under, I definitely will go under.


sounds good ..you just have to keep some watch ,i would think, on the 20 stocks and replace any that look weak (30yrs is rather long time frame)

..and why OP was talking about 25% of port in 4 or 5 annuities to produce a **stable** stream

personally, i'm not so much interested in stable for itself, but 'enough' (2011 is starting to look like a very expensive year)
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Interesting idea on CD ladder. I can see the value of this with a total return rebalancing income strategy, but why would you need to do this with an income portfolio?

BruceM


My thinking on the CD ladder is simple. At the end of 5 years, I'll know exactly how much money I will have. And will have plenty of time to adjust spending accordingly.

If I was just living off dividends, there is a little less certainty. Form example, I'm expecting to get $100 this quarter but Company X decreased their dividends and now I'm getting only $80. Oops, might have to cancel that trip to the beach.

JLC
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Further, life insurance companies are regulated by state insurance agencies and required to maintain reserves towards their obligations--this doesn't eliminate the possibility of a life insurance company going under, of course, but it certainly reduces it.

Counting of the government for protection, being the cynic that I am, doesn't count for much. Google Fannie Mae and Freddy Mac.

I did miss the part about spreading it over 4 or 5 companies. That is smart. I am just not a fan of annuities.

JLC
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kind of why i emphasized 'stable' ..not knowing what OP meant.

dividends CAN go down /stocks can go down

CD/bond rates go up and down ..

not exactly 'stable'

The only way you could get "stable" would be to sit there and by 30 year bonds each year.

As far as stocks, yes dividends can go down. But if you choose from Dividend Champions (Google the term), these are stocks that have a very long history of INCREASING their dividends. Still no guarantee (GM, BAC) but it cuts down the chances.

Plus, I'm not worried about the stock price going down. I'm buying the stock for the dividend. I kind of think about it like a bond/CD, I buy for the yield. I'm getting $x reguardless of price. If I'm not selling the stock, I don't care the price.

JLC
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The only way you could get "stable" would be to sit there and by 30 year bonds each year.


but if rates go up and down, even that won't be Stable



As far as stocks, yes dividends can go down. But if you choose from Dividend Champions (Google the term), these are stocks that have a very long history of INCREASING their dividends. Still no guarantee (GM, BAC) but it cuts down the chances.

Plus, I'm not worried about the stock price going down. I'm buying the stock for the dividend. I kind of think about it like a bond/CD, I buy for the yield. I'm getting $x reguardless of price. If I'm not selling the stock, I don't care the price.


yes .. i completely agree you have a better plan ... very little down-side risk, some upside.

just askin' --OP seemed to value Stability overall ( wasn't $X per month GUARANTEED ) with as little down-side risk as possible -- there's no upside to annuities, but is there less down-side risk than a basket of dividend stocks and CDs/bonds?

(also Much higher fees with the annuities)
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>> The cheapest annuity you can buy is to delay your Social Security benefits until age 70. <<

Agreed. But even that is a fairly small annuity, maybe $5000 a year, give or take for most folks. That "annuity" on top of SS at the standard retirement age is not nearly enough to live on by itself.

And for the increasing number of pensionless (I'm noting how almost all the people I hear retiring voluntarily these days have pensions) who want a guaranteed, secure income steam that meets or exceeds their annual expenses, what are the options? That's even more true these days when the pensionless are feeling more vulnerable than at any time in the post-WW2 economy and are feeling like retirement is an increasingly impossible dream.

The thought of buying the security of a pension is very seductive, if nothing else, and the annuity peddlers know it.

#29
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Of course the annuity salesmen know...and will fully exploit the upcoming baby-boom fear factor.

What I find the most scary about this aren't so much the simple life annuities...which, like term life insurance, are pretty comperable and due to competative pricing, will provide only a modest commission to the sales rep and only modest profitability to the insurer...what I find alarming are the insurance-based products that are pitched as high guaranteed income-guaranteed principal products, such as equity indexed annuities, principal guaranteed fixed annuities, guaranteed structured layout annuities, and so on. These products are carefully designed to avoid market variability so as to avoid SEC registration and full disclosure rules. I suspect the next 10-15 years will be profitable to many insurers.

BruceM
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What I find the most scary about this aren't so much the simple life annuities...which, like term life insurance, are pretty comperable and due to competative pricing, will provide only a modest commission to the sales rep and only modest profitability to the insurer...what I find alarming are the insurance-based products that are pitched as high guaranteed income-guaranteed principal products, such as equity indexed annuities, principal guaranteed fixed annuities, guaranteed structured layout annuities, and so on. These products are carefully designed to avoid market variability so as to avoid SEC registration and full disclosure rules. I suspect the next 10-15 years will be profitable to many insurers.

1. You won't have to wait 10-15 years. The pitch is beginning to made
now.

2. I do think that there will be easier calculators that will allow "do it yourself" annuity-like projects. Using some of the annuity calculators I've found simple insurance options that pay about $7,000 per year per $100,000 for a 70 year old with no guaranteed payout, inflation increase or spouse guarantee (like I said simple).

Right now I can buy treasury STRIPS of denominations that will pay the same $7,000 every year for about 23 years. Add in a little life insurance and you have a very conservative annuity.

If you use zero coupon bonds of very good companies (like Coke) you add about 35% more to the time factor. THAT's under a VERY low interest rate environment.

I think that there can be calculators that allow very similar products without the intermediary of the insurance company. I plan to do more with this because it also takes care of any problems with a bond ladder.

Just speculating.

Hockeypop
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No one should ever blindly listen to ANY "experts".

Read, learn, perhaps listen to advice, judge for yourself, and manage your own money.

Vermonter
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