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To My Fav. Fools: Crosenfield, Kahunacfa, Lokicious, and other Fools; Before I am scolded and put in the corner w/ the appropriate dunce cap, allow me this: The Board entitled "Annuities" has not seen a post since 2003. So, I risk the ire of the community posting here a bit out of bounds, in hopes of a better response. Also,regarding the Fools mentioned above: They will always have my gratitude and be bearers of an "IOU" I can never repay. They, in unison, educated me enough so that I could decide against investing in Mortgage Backed Securities in 2007. Priceless knowledge was dispensed and absorbed. Thanks again. My current quandry: Age 59, I have a mid-six figure estate in total, about 50% cash. The investments I have are scattered among 3 low yielding CDs. The 3% APY $100K CD comes due in 15 months. Why not acquire a fixed/hybrid annuity from an A+ rated insurance company, and get $500 or so a month until I'm not around to sign the checks? At 59, I would hopefully live to >79, then I would be living off the insurance company, not simply getting my own money spoon fed back to me. Given my rather unusual life choices, am I among the few an annuity does make sense for? (Any money remaining from my entire estate will be split among 2 charities, so I don't have the great need most people feel to leave as much as possible to heirs, in case that fact figures in the decision making process.) All Input Greatly Appreciated, AD
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Why not use the 100K to buy PSA preferred shares, they yield around 6%+, the company is AAA rated as far as I know. It will yield the same amount you are getting from the Annuity, without losing the capital.

Dangers:
- PSA can't make payments.
- share prices drop & you sell them.
- Shares get called (buy a low coupon rate preferred, selling at a discount and the shares may never get called)
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The Board entitled "Annuities" has not seen a post since 2003.

Either that is a typo or you are looking at the wrong board:

http://boards.fool.com/annuities-113191.aspx?mid=30833816

Last post was 2013.

The 3% APY $100K CD comes due in 15 months.

If the question is between a 3% CD and an annuity that pays 6% (per your math), I think that is an easy choice - but the devil is in the details.

One would hope that CDs eventually get back up to reasonable rates - but how long do you want to wait for such?

Is that 6% an Income Benefit or a Withdrawal Benefit? In my experience, an Income Benefit does not erode your death benefit while a Withdrawal Benefit will.

Do you actually need $6000 in income or can you get buy on $3000 from the CD?

Post the name of the annuity you are considering and we can likely give you more detailed feedback.
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Is that 6% an Income Benefit or a Withdrawal Benefit?

This is far far less than 6%. It is a pitifully low interest rate for such a long term investment. It will take years before he even gets back his principal. Insurance company products, in almost all cases, are poor investment vehicles as there are fat commissions and profits in these for the insurance company and salesperson. I think an annuity is the worst thing you could do right now, as you are locking in a lifetime investment during a very low interest rate environment. You can do better buying your own bonds (or the PSA preferreds mentioned earlier) if you are simply looking for an income stream. Also, in my opinion, there are no AAA rated life insurance companies. They are all highly leveraged operations. In a financial disaster scenario, I would trust PSA to survive it over an insurance company.
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This is far far less than 6%.

$100k investment paying $500 a month equals $6000 a year ~ 6%.

It will take years before he even gets back his principal.

Such an investment is not designed to pay back principle, just like a CD is not designed to pay back principle. The principle is intended to be left in the account for growth.

. Also, in my opinion, there are no AAA rated life insurance companies.

There are a few. I don't know why you trust them less than PSA considering the fact that most insurance policies have state guarantees up to $300,000 against default. PSA has no such protection.

Even AIG, which basically went bankrupt, did not default on a single policy.

Doesn't make one better than the other, just different.
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$100k investment paying $500 a month equals $6000 a year ~ 6%.
Such an investment is not designed to pay back principle, just like a CD is not designed to pay back principle.


Certainly a CD gives you your principal back. I don't understand why you say it is not designed to give you your principal back. With an annuity, if he dies in one year, his estate will lose $94,000 in value. That is hardly like a CD. At $6,000 per year, it will take over 16 years before he starts earning anything. Earning nothing for 16 years and then earning 6% after that is not the same as earning 6%.

There are a few (AAA rated insurance companies). I don't know why you trust them less than PSA considering the fact that most insurance policies have state guarantees up to $300,000 against default. PSA has no such protection. Even AIG, which basically went bankrupt, did not default on a single policy.

When I was growing up in Michigan, one small local corrupt insurance company wiped out the state insurance fund. They are wholly inadequate for a systemic meltdown, let alone 1 large insurance company going under. AIG was too big to fail, and was bailed out by the U.S. government. No state could have bailed them out. A huge annuity writer, Hartford, was literally bankrupt in 2009, but was not taken over. They were ignored and only through the good luck of a soaring stock market were they bailed out. PSA has no debt and is in a business that is steady in good times and bad. Just my opinion.
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To Hawkin, Tjberko and All Responders, Thank you. I will show my ignorance by asking the meaning of PSA, certainly not the ticker symbol for Public Storage? I tried looking it up online, and came back with that storage outfit as the only acronymn w/ a financial meaning.
I think Hawkin asked if I could get by with 3% on my CD $$. Absolutely. I lead a very spartan life style. As was mentioned, when, if ever, will we see 3% APY for a 5 year CD? Anything w/ equities exposure makes me VERY nervous. In particular, now. We have a government accruing debt at a pace that scares even an FDR admirer such as myself, real unemployment (I think, when you factor those in who have given up looking for work)is probably closer to 14%, job growth is anemic at best, we continue to disregard our infrastructure except to build more cell phone towers, and we have Putin thinking it is 1938 all over again. But yet, the DJIA soars! Does the word "bubble" bring back any bad memories? My financial knowledge certainly pales in comparison to many, but I fear we may be sitting on top of the biggest bubble yet. No politics here, just my reasons for fearing anything that is not FDIC insured. Of course, if it truly is as bad or worse than I fear, even those four letters may come to mean nothing if the bubble does not just pop, but goes supernova. I will look into PSA, once I know where to look. Thanks Again All, RJM
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I will show my ignorance by asking the meaning of PSA, certainly not the ticker symbol for Public Storage?

The poster (and I) were referring to the preferred stocks of PSA (yes, the preferred stocks issued by Public Storage). The symbol may vary depending on which site you are using, but you can check them out on quantumonline.com. Try the symbol PSA-V for example. On other sites the symbol might be psa prv, or psa-pv, or psa.prv. PSA-V currently sells at 21.67 with a quarterly dividend of 33.6 cents per share for a yield of about 6.23% annually. Preferred stocks have no maturity date like your annuity, but the company may choose to buy back your stock after September 2017. If they do, they must pay you $25 per share, so you will make a nice long term capital gain if that should happen, increasing your yield. In my opinion, this is much preferable to an annuity. It will take you 16 years to break even on the annuity and start earning anything, but with this investment, you will already have received $100,000 in dividends after 12 years, and still have your shares of PSA-A which you can sell anytime or continue to hold. You will earn much more money over your lifetime with PSA-V than with the annuity.
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Certainly a CD gives you your principal back. I don't understand why you say it is not designed to give you your principal back.

It may at maturity but it does not provide the principle as a form of income (or return of investment) during the term of the CD. Annuity can do either if someone desires.

With an annuity, if he dies in one year, his estate will lose $94,000 in value.

No. I don't think you understand how a deferred annuity works. Your comment reflects an immediate annuity with no period certain feature - which is not something the OP mentioned. Annuities can have a death benefit that protects the principle. Such is quite standard for a deferred annuity. If someone wishes to pay an additional fee, than can purchase one that also includes an increasing death benefit.

AIG was too big to fail, and was bailed out by the U.S. government.

Not their annuity business. It was sold/spun off to Western National. Oddly enough, AIG announced plans to buy them back just a few weeks ago.

PSA has no debt and is in a business that is steady in good times and bad. Just my opinion.

PSA may be the next best thing since sliced bread. Great for PSA and anyone that wants to buy it. None of that makes an annuity any better or worse, just different. My initial reply had nothing to do with PSA.

Can we get back to answering the questions of the OP now? If an annuity is indeed a horrible choice for them, wouldn't you rather they be educated on the details as to why instead of the typical knee-jerk reaction, "that's bad, mkay."

https://www.youtube.com/watch?v=ydbfdx0bgO4
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Why not acquire a fixed/hybrid annuity from an A+ rated insurance company, and get $500 or so a month until I'm not around to sign the checks? At 59, I would hopefully live to >79 ...

Is the $500 inflation adjusted? Because if it isn't, it's quite possible (probable) that in 20 years from now, that $500 will be worth A LOT less purchasing power.
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As was mentioned, when, if ever, will we see 3% APY for a 5 year CD?

Last I checked, PenFed offered such.

https://www.penfed.org/

Anything w/ equities exposure makes me VERY nervous.

Then an annuity, at least a deferred variable annuity, is not for you. A fixed annuity is not likely to pay much above the 3% 5 yr CD so you might want to consider other options. Annuities are certainly not covered under FDIC.
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PSA-V currently sells at 21.67 with a quarterly dividend of 33.6 cents per share for a yield of about 6.23% annually. Preferred stocks have no maturity date like your annuity, but the company may choose to buy back your stock after September 2017. If they do, they must pay you $25 per share, so you will make a nice long term capital gain if that should happen, increasing your yield. In my opinion, this is much preferable to an annuity. It will take you 16 years to break even on the annuity and start earning anything, but with this investment, you will already have received $100,000 in dividends after 12 years, and still have your shares of PSA-A which you can sell anytime or continue to hold. You will earn much more money over your lifetime with PSA-V than with the annuity.

PSA looks like a great option, but lets dive into the details of your post a bit.

1. PSA is trading at 21.67. That means that someone that bought it at the issue price of $25 is currently sitting on a 13%+ loss. If such a person needed their principle back, they would lose over 13% of it. There goes two years worth of interest. How long must a person wait before they can be assured of getting their principle back? Can you guarantee a date with PSA-V as to when that will occur? For a person like the OP that is concerned with volatility and losses, do you think PSA-V is protected against such? Is there a death put option with PSA-V? If one were to die, does PSA-V make up the difference to the benes?

2. It will take you 16 years to break even on the annuity and start earning anything

That is not factual. I won't go into all the details here as to why but that is simply not how a deferred annuity with an income rider works.

Lastly,

3. You will earn much more money over your lifetime with PSA-V than with the annuity.

There is no guarantee of such. You cannot even effectively predict such. The underlying investments of a variable annuity determine performance so an annuity invested in something like American Funds or Fidelity Funds has very likely outperform PSA over the last decade, especially when one considers PSA is currently trading at a loss while something like the American Funds Income Fund of America (AMECX) has a conservative ROR of over 7% during the same time (such does not reflect the additional fees the VA would charge which would like reduce the ROR down to about 5% net of fees).

All that being stated, I am a big fan of preferreds. I own some. But, I also sold my index of preferreds last year though because of what a rising interest rate environment does to the principle - as indicated by the share price of PSA-V.

For a conservative investor that is concerned about volatility and losses, I would not recommend a preferred in this interest rate environment. The Duration (how much an investment will lose for every 1% increase in interest rates) is probably pretty high. My guess is that it is about 10 yrs (10%) for PSA-V.
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Is the $500 inflation adjusted? Because if it isn't, it's quite possible (probable) that in 20 years from now, that $500 will be worth A LOT less purchasing power.

Very unlikely it would have such built into the rider; but then neither does a CD or a preferred stock.

Some immediate annuities will have an inflation rider but of course you pay for that benefit by accepting a lower starting income.
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This is the way Preferred Shares work:

1. Company makes profits.

2. It pays the dividend on Preferred Shares.

3. It pays dividend on common shares.

PSA has virtually 0 Debt.
PSA preferreds are cumulative (if they can't pay the dividend on the preferred, they can't pay dividend to common and they have to make up the dividend on the preferred before they can make payout to common shares

PSA pays dividend on common so before the preferreds you buy stop the dividends, the commons will have to lose their dividend.

Currently the profits are $ 847 million a year or approx. $4.89/share.
Revenues are $ 1700 million a year.

You can calculate the profitability.

Dangers of buying preferreds.
- They act like bonds, when interest rates go up, the price goes down and vice versa.
- Company can stop the dividend
- In default, they fall below bonds in return of capital.
- NOT qualified dividends (so you pay tax rate at your marginal rate)
- When you wish to sell, you may sell for less than what you bought
- Can be called by the company (the dividend stream stops, you get the face value of the preferred, so if you buy an issue at Discount, you get a nice forced capital gain too)

NEVER buy preferred shares at Market prices, always place limit orders as there is low liquidity in some preferred shares.

More information on preferreds:
http://quantumonline.com/ParentCoSearch.cfm?tickersymbol=PSA...

If I was in your situation and wanted a higher income, I'd prefer to go with PSA Preferred Share than with an annuity.
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I would highly recommend you take the next 3 months to bone up on Preferred Shares.

Books are highly under-rated.
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Very unlikely it would have such built into the rider; but then neither does a CD or a preferred stock.

Arguably, the CD *does* have some level of inflation protection because after inflation occurs, when you renew it, it will be at a higher rate.

The preferred stock will generally have a fixed dividend, except when it is omitted, so it isn't adjusted in any way for inflation.

Some immediate annuities will have an inflation rider but of course you pay for that benefit by accepting a lower starting income.

Yes, that is generally the tradeoff, either a lower starting income or a lower ending income (in real terms).
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With an annuity, if he dies in one year, his estate will lose $94,000 in value.

No. I don't think you understand how a deferred annuity works.<i/>

There is no way he can get 6 percent on a deferred annuity now. This is an immediate annuity. An immediate annuity is a form of life insurance where instead of getting a lump sum when you die, you get a stream of income until you die. His $100,000 is gone as soon as he makes that purchase.

PSA is trading at 21.67. That means that someone that bought it at the issue price of $25 is currently sitting on a 13%+ loss.<i/>

I wouldn't have recommended it when it IPO'd, but regardless, a 13% loss is better than the 100% loss he experiences with the annuity - and on top of that, it actually pays a higher interest rate which starts immediately and not after 16 years of waiting for your principal to be returned.
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Ooops. Got the italics messed up.

I stated that "With an annuity, if he dies in one year, his estate will lose $94,000 in value."

No. I don't think you understand how a deferred annuity works.

There is no way he can get 6 percent on a deferred annuity now. This is an immediate annuity. An immediate annuity is a form of life insurance where instead of getting a lump sum when you die, you get a stream of income until you die. His $100,000 is gone as soon as he makes that purchase.

PSA is trading at 21.67. That means that someone that bought it at the issue price of $25 is currently sitting on a 13%+ loss.

I wouldn't have recommended it when it IPO'd, but regardless, a 13% loss is better than the 100% loss he experiences with the annuity - and on top of that, it actually pays a higher interest rate which starts immediately and not after 16 years of waiting for your principal to be returned.
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There is no way he can get 6 percent on a deferred annuity now.

I continue to find it interesting that you post is such absolutes.

Are you so aware of the universe of products that you are positive that nothing out there pays 6% these days?

I know of at least one - and if there is one, there are very likely more.

His $100,000 is gone as soon as he makes that purchase.

Again, you are assuming a life only annuity. Take a look at Period Certain. Heck, there are even some immediate annuities that provide liquidity - a person can request a return of their premium on some policies.

it actually pays a higher interest rate which starts immediately and not after 16 years of waiting for your principal to be returned.

This bit of false comparison has been repeated enough that I will simply ignore it.
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Again, you are assuming a life only (immediate) annuity. Take a look at Period Certain. Heck, there are even some immediate annuities that provide liquidity - a person can request a return of their premium on some policies.

Hawkin, I am not assuming anything. I read the original post. You should go back and look at it. Here is a quote:

". . . get $500 or so a month until I'm not around to sign the checks. At 59, I would hopefully live to >79, then I would be living off the insurance company, not simply getting my own money spoon fed back to me."

He is absolutely describing an immediate annuity, not a deferred annuity. He will only be getting his principal back for many years before he starts to earn any interest. You mention a "Period Certain" annuity, but he is talking about a life time annuity. And the immediate annuities that guarantee your principal back pay a lower interest rate and they still don't guarantee you any interest.

This product he describes is definitely not a tax deferred annuity. A tax deferred annuity does not provide checks sent to you each month but the interest builds up tax deferred. After some fixed period of time, you can then start getting checks sent to you. Deferred annuities issued by solid companies generally pay around 2% now. I would be curious to see a link to the 6% deferred annuity you talk about.

I continue to find it interesting that you post is such absolutes.

But I absolutely believe that this is a terrible product, and I want to warn him away from it.
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He is absolutely describing an immediate annuity, not a deferred annuity. He will only be getting his principal back for many years before he starts to earn any interest. You mention a "Period Certain" annuity, but he is talking about a life time annuity.

I stand corrected. You are indeed correct.

A tax deferred annuity does not provide checks sent to you each month but the interest builds up tax deferred.

They can do both, but that is neither here nor there. The fact that the OP is does indeed appear to be illustrating an immediate annuity makes that a moot point.
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coolprash,

I would like to address two points in your post where you wrote, Dangers of buying preferreds.
...
- In default, they fall below bonds in return of capital.
- NOT qualified dividends (so you pay tax rate at your marginal rate)
---


These are true statements of PSA preferreds; but not all preferreds have these attributes.

Addressing the second point first, investment trusts (PSA is a REIT - a real estate investment trust) are pass-thru entities. Pass-thru entities usually cannot issue qualified dividends. Only regular corporations can. So if you hold a preferred of a regular corporation - say DFS-B, which is a corporate preferred issued by Discover Financial Services - you will receive qualified dividends.

As to the second point, a number of banks and a few companies create investment trusts that issue preferreds. These trusts are created to sell debt on the stock exchange, instead of through the rather less liquid bond markets. They can be structured so that senior debt is issued to the trust and the trust sells preferred shares. In this type of structure a preferred shareholder, by way of the trust, can be in the same position as other senior bond holders. However, I would also note that as an investment trust, these preferred cannot issue qualified dividends.

BTW, the pass-thru rule on qualified dividends is a significant reason to never to buy something like PFF (iShares S&P US Preferred Stock Index Fund) in a taxable account. This ETF pools qualified and non-qualified income and passes it all through as non-qualified dividends. A fine strategy in a tax-advantaged account, but a poor one in a taxable account.

- Joel
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Hi Joel,

Excellent points.
Thanks for adding meat to this conversation.
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Hey Joel -

BTW, the pass-thru rule on qualified dividends is a significant reason to never to buy something like PFF (iShares S&P US Preferred Stock Index Fund) in a taxable account. This ETF pools qualified and non-qualified income and passes it all through as non-qualified dividends. A fine strategy in a tax-advantaged account, but a poor one in a taxable account.

I believe this is inaccurate. iShares provides a breakdown of qualified/nonqualified divs for use on your tax return:

http://www.ishares.com/us/literature/tax-information/2013-qd...

For instance, here, PFF pays out almost 67% qualified dividend income, which you can claim on your tax return.

The more likely issue is that some *brokers* might not incorporate that information into their 1099s. But that's a broker issue, not an issue with the ETF structure itself.

best,
dan
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TMFGalagan,

I wrote, BTW, the pass-thru rule on qualified dividends is a significant reason to never to buy something like PFF (iShares S&P US Preferred Stock Index Fund) in a taxable account. This ETF pools qualified and non-qualified income and passes it all through as non-qualified dividends. A fine strategy in a tax-advantaged account, but a poor one in a taxable account.

To which you replied, I believe this is inaccurate. iShares provides a breakdown of qualified/nonqualified divs for use on your tax return:

http://www.ishares.com/us/literature/tax-information/2013-qd......

For instance, here, PFF pays out almost 67% qualified dividend income, which you can claim on your tax return.

The more likely issue is that some *brokers* might not incorporate that information into their 1099s. But that's a broker issue, not an issue with the ETF structure itself.


I stand corrected.

Even so, a qualified dividend strategy is usually preferable (pun intended) in a taxable account. So while I might be wrong about the specifics, I'd still tend to avoid PFF and REITs in my taxable accounts because of the unqualified dividends and interest payments. With that said, I do have plenty of this stuff in my IRAs.

- Joel
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