No. of Recommendations: 1
It looks like one key difference has been missed: With the CD, you spend the money and it gets used up and then you have no more. The SPIA or SPDA pays you for life. ...

Are you certain? Really certain?
...A 15-year certain term does not pay for life. It only guarantees 15 years of payments, if you live that long. After the 15th year, you're out of luck.



"How Long Will Payments Last?

The next major consideration is whether you want to risk losing a significant portion of your investment to the annuity company if you die before receiving enough payments to justify the annuity purchase...

Life Annuity with Period Certain (Fixed Period/Guaranteed Term)
Minimum period of payments – even after death of buyer – with remaining payments to beneficiary.


...Life Annuity with Period Certain (Fixed Period/Guaranteed Term)

Period certain annuities are the same as a straight-life annuity, but it includes a minimum period the payments will last – say 10 or 20 years – even if the annuitant dies. If the annuity holder dies before the end of the period, the payments for the rest of that time will go a beneficiary or the annuitant’s estate. Adding the period certain will cost you, lowering the amount of your monthly payments."

From: https://www.annuity.org/annuities/payout/

To me, that sounds like a payment for life, with a minimum period where your beneficiaries get the payment if you die before that minimum time.
Print the post Back To Top
No. of Recommendations: 3
SPIA (Single premium immediate annuity) for the very risk adverse and for those that want a guaranteed income stream like a pension.

SPDA (Single premium deferred annuity - fixed) for anyone that typically buys taxable CDs and wants tax deferral of the interest on those CDs or for when CD rates are less than fixed annuity rates.

Might be some other situations but those are the two that I encounter most often.
Print the post Back To Top
No. of Recommendations: 3
SPIA (Single premium immediate annuity) for the very risk adverse and for those that want a guaranteed income stream like a pension.

</snip>


Just remember that all that "risk aversion" comes at a high cost. You lose 15% to 20% of the purchase price to the insurer's various fees, expenses, and costs.

The high cost of a no-fee, no-commission Single Premium Immediate Annuity (SPIA).
https://retireearlyhomepage.com/annuity_costs.html

</snip>


<<<SPDA (Single premium deferred annuity - fixed) for anyone that typically buys taxable CDs and wants tax deferral of the interest on those CDs or for when CD rates are less than fixed annuity rates.>>>

</snip>


I think a fixed term SPDA is OK as long as you're getting a higher interest rate to make up for the fact that an annuity lacks the FDIC insurance you get with a CD.

intercst
Print the post Back To Top
No. of Recommendations: 11
Just remember that all that "risk aversion" comes at a high cost. You lose 15% to 20% of the purchase price to the insurer's various fees, expenses, and costs.

You keep repeating this statement and I keep illustrating that is wrong and misleading.

So, I guess I will do it again.

SPIA quote I just ran:

15 yr Period Certain
Female age 65
Monthly income, Qualified assets
Payments starting 10/1/2019
No inflation rider
$200,000 initial investment

Monthly payment equals $1313.19.
Total payments $236,374.66
IRR: 2.28%

-------------

Now would I recommend the above to someone? Only as a last resort - but that person isn't losing money to fees - they are simply not getting a high rate of return due to low rates. There are a myriad of better options (and better paying SPIAs) but there are no fees on this. The person invested $200,000 and got back $236,000.

Now, before you respond by incorrectly trying to conflate what is a "spread" or profit for the company as a fee, I will, again, point out that your local bank makes more on their spread on a savings account than what a customer makes in interest (these days a ratio of 3 to 1). That still doesn't make that spread a fee.
Print the post Back To Top
No. of Recommendations: 7
Hawkwin explains,

<<<intercst: Just remember that all that "risk aversion" comes at a high cost. You lose 15% to 20% of the purchase price to the insurer's various fees, expenses, and costs.>>>

Hawkwin: Now, before you respond by incorrectly trying to conflate what is a "spread" or profit for the company as a fee, I will, again, point out that your local bank makes more on their spread on a savings account than what a customer makes in interest (these days a ratio of 3 to 1). That still doesn't make that spread a fee.

</snip>

Call it what you want (spread, fee, cost, expense, asparagus, whatever), but it's money being sucked out of the account. I'm merely comparing the "actuarily fair" value of the life annuity with what the insurance company is charging for it.

Kind of like when I buy an index fund. I know what the annual return is for the S&P500 in 2018. And the SEC requires the mutual fund to publish its return in a prospectus which discloses the expenses charged. One mutual fund my charge a 0.10% expense ratio, another 0.90%.

Since insurers are governed by state law, Federal SEC disclosures don't apply. Just because the fee or cost (or spread) isn't disclosed, doesn't mean it's not getting sucked from the account.

intercst
Print the post Back To Top
No. of Recommendations: 5
Call it what you want (spread, fee, cost, expense, asparagus, whatever)....


Call it what you want, what would matter to me is how much ends up in my bank account every month.

As long a as I know what the net % is, then I can make an informed decision between products.
Print the post Back To Top
No. of Recommendations: 2
hk2 writes,

As long a as I know what the net % is, then I can make an informed decision between products.

</snip>


You're certainly free to use any criteria you like to evaluate a financial product.

Kind of like the guy who bought the index fund with the higher fee on the theory that the added expense allowed the hiring of a more talented fund manager. <LOL>

intercst
Print the post Back To Top
No. of Recommendations: 4
but it's money being sucked out of the account.

No, it was never IN your account.

When a bank makes 3% spread off of your savings account that is paying you 1%, the bank never put that extra 3% in your account. You did not lose 75% of your interest to "fees."
Print the post Back To Top
No. of Recommendations: 0
Monthly payment equals $1313.19.
Total payments $236,374.66
IRR: 2.28%


Without logging in anywhere, just doing a 5 sec Google search I found:

Marcus (Goldman Sachs) 1 yr CD at 2.4% and 5 yr at 2.6%.
I'm not sure what you have to do to open an account to get this.
But it seems like you could do the 5 year rate and then take 5 years to figure out what to do next.

Not a fee, but quite the spread.

Mike
Print the post Back To Top
No. of Recommendations: 7
before you respond by incorrectly trying to conflate what is a "spread" or profit for the company as a fee,

This is a difference without a distinction. Fee, cost, spread, profit, whatever you call it, it's still reduced income due to increased expenses.
Print the post Back To Top
No. of Recommendations: 4
mschmit writes,

<<Monthly payment equals $1313.19.
Total payments $236,374.66
IRR: 2.28%>>

Without logging in anywhere, just doing a 5 sec Google search I found:

Marcus (Goldman Sachs) 1 yr CD at 2.4% and 5 yr at 2.6%.
I'm not sure what you have to do to open an account to get this.
But it seems like you could do the 5 year rate and then take 5 years to figure out what to do next.

Not a fee, but quite the spread.

</snip>


What Hawkwin is hawking is the fact that this annuity guarantees your heirs a 30-year pay out even if you die early. So the money is being tied up for 30-years, not a 1yr or 5yr CD.

So the question is, "What is the cost of the longevity insurance the life annuity provides?

A 30-year high quality corporate bond currently yields 4.1%.

https://fred.stlouisfed.org/series/HQMCB30YR

So the cost of the life annuity (what Hawkwin calls "the spread") is about 1.8% per year in yield. (i.e. 4.1% - 2.28% = 1.82%)

Compound that over 30 years on a $200,000 or $500,000 premium and it's a big number. Probably enough to choke a crocodile.

http://www.solarnavigator.net/animal_kingdom/animal_images/c...

intercst
Print the post Back To Top
No. of Recommendations: 3
shotzongal --

Do you really care or want to know what people think about annuities or are you looking to solve some specific financial question/need?

I mean you could have asked "Is there any reason to purchase a lottery ticket?"

My gut tells me you have a fear of risk, because you think risk is same as loosing money -- but I don't now that.

Can you restate your issue?
Print the post Back To Top
No. of Recommendations: 0
I need 4% risk free!
Print the post Back To Top
No. of Recommendations: 13
I need 4% risk free!

People in Hell need ice-water.

"Wanting or needing x% return doesn’t cause it to be available." -- David E. Hultstrom, of Financial Architects, LLC.
Print the post Back To Top
No. of Recommendations: 4
I need 4% risk free!

To the best of my knowledge that is not possible - I am using this definition of risk.
https://economictimes.indiatimes.com/definition/Investment-r...

In theory you can have no risk with no return by burying money in the back yard - but you might forget where you buried it or maybe an animal will did some up.

Inflation is a risk - in my view most people really don't care about money - rather they care about what money can purchase. I call it the hamburger approach. As a teenager I worked at a gas station and pumped gasoline as low as 18.9 cents per gallon. Today gas in about 250 cents per gallon. Ground beef has gone from 25 cents to about 300 cents a pound.

Over periods of time greater than a couple of years, inflation is a risk that is not only present, but unavoidable if you purchase anything.

If you find any risk free investment, I promise you will be able to earn billions - lots of people who will pay to to eliminate risk.

Myself, I opt for managing risk.
Print the post Back To Top
No. of Recommendations: 1
No
Print the post Back To Top
No. of Recommendations: 0
I need 4% as close to risk free as possible!
Print the post Back To Top
No. of Recommendations: 3
"I need 4% as close to risk free as possible!"

You're looking at it the wrong way around.

Presumably you have determined that 4% of your investable assets will provide enough income to allow you to cover your living expenses.

You should be asking yourself how to adjust your living expenses so that the rate of return available to you (at your comfort level for risk) will be sufficient.

In truth, neither your living expenses nor future rate of return is likely to be accurate (maybe not even close to accurate).

Whatever your current expenses are will change with inflation, potential health events including accidents, potential life events (divorce etc.), and macro things like trade wars, military wars, new technology etc.
Current rates of return are unlikely to remain the same either (for fixed income or equity markets).

Or possibly you just read somewhere that 4% is a safe withdrawal rate and you want someone to tell you how to get it...
Print the post Back To Top
No. of Recommendations: 1
Shotzongoal wrote I need 4% as close to risk free as possible!

Now stick with me --

Would I be wrong to assume you have heard about 4% inflation adjusted with draws from a portfolio? I am going to assume yes. This plan/idea was first written about by a west coast financial planner named William Bengen. He wrote a book. You can buy it from Amazon.

Bengen's plan says there is a small chance of running out of money in less than 30 years. His book has a chapter on what can go wrong - like retiring in 1969 or 1970 -- by far the worst time to retire in his entire data base which starts sometime before the 1929 crash.

Many people say Bengen should not be followed because after 30 years most people will have way more money than when they retired if they follow his rules - in my view a better outcome then running out of cash say 20 years into retirement.

Do you realize if you get a 4% return, after you pay income taxes you will not have 4% left? So maybe you really want 4% after taxes.

Maybe you want 4% after taxes and inflation. (Even a mere 1.5% inflation means that after 20 years the purchasing power of a dollar will be cut by over 25%). Annuities generally speaking do not have inflation protection.

If you read the Bengen book you will quickly learn his 4% plan has some fine print -- like what you have to invest in, when you withdraw (annually) and exactly what you sell for to get cash for the withdraw. Oddly enough, if you don't follow his plan, there is a greater chance your will run out of money in 30 years.
Print the post Back To Top
No. of Recommendations: 2
"I know annuities are almost universally frowned upon
on these boards, but is there any annuity product you
would consider?"

*****************************************************

Keep in mind, putting the term "annuity" in any search routine on
any computer associated with your name or family member's name will
put you in the cross-hairs of every insurance company's agents
from here to Timbuktu. Search very carefully for information -
and look for immediate annuities. If you have a trusted financial
advisor who would not be one to immediately start drooling over
potential fees, you could ask about what is available - basically
you ask about the rate paid to you and the time frame and how the funds
are transferred on your demise.

Howie52
Products have a reason to exist and serve a market. Products also
have a cost to obtain a benefit. Clearly seeing the benefit tends to
be easier than clearly seeing the cost.
Print the post Back To Top
No. of Recommendations: 1
The one time I would consider an annuity is for a large insurance settlement.

Why? Any costs are borne by the insurance company, it would prevent me from running out and blowing it, and most importantly, it makes a smaller sum of money bigger. If I took my settlement money and invested it, I’d have to pay taxes on my earning. Getting my settlement as an annuity shields me from a lot of taxes, potentially.
Print the post Back To Top
No. of Recommendations: 0
MissEdithKeeler reasons,

The one time I would consider an annuity is for a large insurance settlement.

Why? Any costs are borne by the insurance company, it would prevent me from running out and blowing it, and most importantly, it makes a smaller sum of money bigger.

</snip>


How does this work? Is the insurer charging the annuitant the actuarily-fair value for the annuity? (That's 15% to 20% less than what they charge a private annuity customer.)

Annuities are not wealth building vehicles for the annuitant (they are for the insurance company.)

intercst
Print the post Back To Top
No. of Recommendations: 3

How does this work? Is the insurer charging the annuitant the actuarily-fair value for the annuity? (That's 15% to 20% less than what they charge a private annuity customer.)

Annuities are not wealth building vehicles for the annuitant (they are for the insurance company.)


You settle you claim for, say, $500k. You tell the insurance company how much of that will go into the annuity. Let’s say in this case, all of it. The insurance company (really a structured settlement company that will typically have work with a variety of companies and be able to offer a number of different options from different providers) offers a variety of options and you pick one. The carrier puts 100% of the settlement amount into the annuity and pays any fees on top of that. And, like I said, most of the time the payments you get will be tax free.

If you take your lump sum settlement and buy your own annuity, you lose out on both fees AND taxes.
Print the post Back To Top
No. of Recommendations: 2
MissEdithKeeler explains,

You settle you claim for, say, $500k. You tell the insurance company how much of that will go into the annuity. Let’s say in this case, all of it. The insurance company (really a structured settlement company that will typically have work with a variety of companies and be able to offer a number of different options from different providers) offers a variety of options and you pick one. The carrier puts 100% of the settlement amount into the annuity and pays any fees on top of that. And, like I said, most of the time the payments you get will be tax free.

If you take your lump sum settlement and buy your own annuity, you lose out on both fees AND taxes.

</snip>


That doesn't answer the question. A settlement is taxable or not depending on it's circumstances, right? (e.g., a $500k payment for losing a leg in an auto accident isn't taxable income whether it comes to you in a structured settlement or a lump sum. A $500k settlement from a bankruptcy proceeding might be taxable.)

You'd still have to look at the cost of the annuity (after any "fees" were paid by the insurer) and the tax rate that would apply to the lump sum to determine if it's a good deal. It's by no means automatic just because someone is selling a "tax savings" by saddling you with the added costs of an annuity.

intercst
Print the post Back To Top
No. of Recommendations: 0
Also, being able to offer structured settlements /annuities like this can help the insurance company turn a smaller amount of money into “more.” For example, I’ve used them with plaintiffs who’ve been paid for their actual damages but I’m settling for their punitive damages. Plaintiff didn’t really need the money right now, but just had twins and he was worried about sending them to college if he couldn’t work in the future. We set up a plan where the money was set aside and allowed to grow until he was going to need for tuition in 18 years. That can look like a lot more $$ than just $100k lump sum right now. And it’s safe, and you’re not paying taxes on the earnings.

I’ve done similar things when people were concerned about retirement. We did one for a lady who was going to have to go into a nursing home. She’d had a stroke after the accident. We called around, figured out the monthly price of the premium assisted living/ nursing home in her area and set it up so she’d have the payments made until she died and she’d never have to worry about it.

I probably wouldn’t buy an annuity, but if I ever got a big insurance settlement, I would do a structure with an annuity.
Print the post Back To Top
No. of Recommendations: 0
MissEdithKeeler reasons,

I probably wouldn’t buy an annuity, but if I ever got a big insurance settlement, I would do a structure with an annuity.

</snip>


What's the difference? Unless you can identify how an annuity in a structured settlement is being offered to you at a much lower cost that the one you can buy as a private customer.

intercst
Print the post Back To Top
No. of Recommendations: 1

That doesn't answer the question. A settlement is taxable or not depending on it's circumstances, right? (e.g., a $500k payment for losing a leg in an auto accident isn't taxable income whether it comes to you in a structured settlement or a lump sum. A $500k settlement from a bankruptcy proceeding might be taxable.)


Beats me re the bankruptcy. I’m specifically talking about insurance settlements.

Yes, if you lose a leg, the settlement for your medical and lost wages are not taxable. You will pay no taxes on that $100k, or whatever. However, if you take that $100k and invest it in, say, Apple stock, your earnings are taxable. If those earnings are paid out in an annuity in a structured settlement, they are not taxable. Yes, you might not make as much as you would on the Apple stock.... but you don’t have to worry about losing your money, either.

Settlements for pUnitive damages are generally taxable, by the way.

I don’t know what “added costs of an annuity” you’re seeing in this scenario.
Print the post Back To Top
No. of Recommendations: 0

What's the difference? Unless you can identify how an annuity in a structured settlement is being offered to you at a much lower cost that the one you can buy as a private customer.


I thought I answered this.
1) fees. The settling insurance carrier pays all fees
2) earnings are not taxed.

If I, as the settling adjuster, settle your claim for $100k and essentially buy you annuity thru my structured settlement company, I pay the purchase fees for that annuity. And the annuity that I buy has no tax implications for you.

https://www.nssta.com/structured-settlements/faq
Print the post Back To Top
No. of Recommendations: 0
MissEdithKeeler writes,

Yes, if you lose a leg, the settlement for your medical and lost wages are not taxable. You will pay no taxes on that $100k, or whatever. However, if you take that $100k and invest it in, say, Apple stock, your earnings are taxable. If those earnings are paid out in an annuity in a structured settlement, they are not taxable. Yes, you might not make as much as you would on the Apple stock.... but you don’t have to worry about losing your money, either.

I don’t know what “added costs of an annuity” you’re seeing in this scenario.

</snip>


I not talking about buying Apple stock. If I take the $100k and buy something safe like Berkshire Hathaway (which doesn't pay a dividend), I'm not paying any taxes until I sell. And when I do sell any increase in value is taxed at capital gains rates. For a married couple, a 0% tax rate up to an income of a bit over $100k per year. (e.g., for 2019, $24,000 standard deduction, $78,750 top of the 0% capital gains tax bracket)

Earlier in the thread, Hawkwin gives you an example of a life annuity with a 30-yr guaranteed pay out and a 2.29% internal rate of return. I can afford to pay an awful lot of taxes with the difference between 5% to 6% conservatively in some kind of stock investment and the 2.29% in an annuity.

That's what I mean by the "added costs of an annuity". You're being sold some kind of tax savings on the condition of accepting an abysmally low rate of return -- which is a "tax" in itself.

intercst
Print the post Back To Top
No. of Recommendations: 0
You're being sold some kind of tax savings on the condition of accepting an abysmally low rate of return -- which is a "tax" in itself.

Ok, I get your point if you’re looking at pure investment earnings. And I agree, 2.29 percent sucks. The last structure I did was around 4 or so, as I recall.

Still, there are other reasons to do a structured settlement in an insurance claim. I would still do it at this point in my life if I had a big settlement and would probably defer any payments until much later—I’d use it more like a long term care policy.

And you’re absolutely free not to do the same.
Print the post Back To Top
No. of Recommendations: 3
MissEdithKeeler writes,

What's the difference? Unless you can identify how an annuity in a structured settlement is being offered to you at a much lower cost that the one you can buy as a private customer.

I thought I answered this.
1) fees. The settling insurance carrier pays all fees
2) earnings are not taxed.


</snip>


1) Great. Now we're getting somewhere. What is the rate of return on the annuity after the "the settling insurance carrier pays all fees?"

2) As I've shown in the post above, you can arrange your financial affairs to reduce taxes without a structured settlement. Even if I was getting a $500,000/yr payout from a structured settlement, if I had to accept a 2.29% return on the annuity, I'd be better off getting 5% or 6% in the stock market, and losing half of that to taxes. (though the actual tax rate would likely be a lot less than 50% of the $500,000/yr.)

You don't want to let "no taxes" drive your investment choices. You always need to compare it to the "after-tax return" on any alternative.

intercst
Print the post Back To Top
No. of Recommendations: 0
MissEdithKeeler writes,

Ok, I get your point if you’re looking at pure investment earnings. And I agree, 2.29 percent sucks. The last structure I did was around 4 or so, as I recall.

</snip>


At today's interest rates, a life annuity with a 4% internal rate of return would be in the ballpark of an "actuarially fair" life annuity (i.e., an annuity without the insurer's costs.)

intercst
Print the post Back To Top
No. of Recommendations: 25
At today's interest rates, a life annuity with a 4% internal rate of return would be in the ballpark of an "actuarially fair" life annuity (i.e., an annuity without the insurer's costs.)

And the "fair" price of a Honda Accord LX, without the profit going to the dealership or the manufacturer, might be $16,000 instead of $21,000 or whatever. So what? Such a product doesn't exist!

As others have pointed out, rather than focus on what you THINK the bank/financial institution/whatever should be offering, focus on what is actually being offered and whether it makes sense for your needs.

Also, taxes...I think you're misunderstanding MEK's comments. Just for fun, I'm going to use a lottery example. I live in Texas, and right now the state Lotto has a jackpot of either a lump sum of $11.6 million immediately, or 30 payments of $508,000 annually (first one made immediately).

So, which should I choose? Well, if I do a quick calculation in Excel, the IRR I would need on the 11.6 million lump sum would be only 2% to support that stream of $508,000 payments. Now, some people might be fine with that, as that is literally 2% risk free. I, however, am pretty darn sure that over a 30 year time frame, I can do better than that. I suspect many people reading this board would feel the same way, and are willing to accept at least some level of risk (volatility) in order to achieve a higher IRR.

However, this does not factor in taxes. I chose this particular example rather than Powerball or whatever for a specific reason. Here, the lump sum is 11.6 million, and it would all be taxed this year. Almost all of that will be subject to income tax at the top marginal rate of 37% (I'm in Texas so there's no state income tax). If we simply assume married filing jointly, standard deduction, no other income during the year (I know, I know, but just keeping it simple), the effective income tax rate on that jackpot would be 36.4%. I would receive about $7,380,000 after tax.

By contrast, the $508,000 doesn't even reach the top marginal bracket. Same assumptions as above, in year one the effective income tax rate would only be about 23.5%. The after tax amount received in year one would be about 388,400.

Does this change the analysis? Well, if we use after-tax numbers and assume the $388,400 would be the after-tax amount every year, the effective IRR just changed from 2% to 3.5%. At this point, some people might think differently about their options. Or not. Me, I'm still taking the lump sum, but others...

There are, obviously, other factors that come into play. Under current tax laws and assuming at least some inflation, the income tax hit on each annual payment will decline as standard deductions and bracket values creep up over time. That said, I'm almost certain that tax rates will change over the next 30 years, and they may be considerably higher than they are today. It might make sense to take the money now and pay 37% rather than wait and have even the smaller payments subject to the same or higher effective rates. Who knows?

Also, my wife and I are both over 50. Maybe we'd rather have a lump sum now to do with as we wish than get payments into our 80's and maybe die, with our kid getting the rest. Numbers are simple, people are complex.

However, the point is that it DOESN'T MATTER that in some theoretical world that the rate on that annuity stream "should" be X% because the platonic ideal of "actuarially fair" would be higher. What matters is

A) what is the effective IRR on the annuity stream vs. lump sum?
B) would these streams be taxed differently enough to have to take that into account when calculating the effective IRR?
C) what are your alternatives regarding likely return and likely volatility, and how do you feel about those compared to the near-certainty of the annuity?
D) are there are non-financial factors that you want to take into account in making this decision (you don't trust yourself or your spouse with a large lump sum, or as noted you would like to have potential access to everything now rather than paying it over 30 years, or whatever)

You look at those options and make your choices. "But the actuarially fair value SHOULD be X" is irrelevant, much like how I personally believe that iPads SHOULD cost half of what they do but Apple makes Too Much Profit. Well, great, but Apple doesn't give a darn what I think, so the price of an iPad is what it is and I can buy one or not (so far I haven't. That's me. Lots of people obviously think otherwise).

Again, I'm very risk-tolerant. I doubt I would ever purchase an annuity. But I also know that there are billions of people who are Not Me. You takes your money and you makes your choice. As a poster said earlier, as long as it's an informed one...

-synchronicity, works for a financial services company that sells predominantly risk products. I don't buy them personally, for reasons noted above.
Print the post Back To Top
No. of Recommendations: 4
synchronicityII writes,

At today's interest rates, a life annuity with a 4% internal rate of return would be in the ballpark of an "actuarially fair" life annuity (i.e., an annuity without the insurer's costs.)

And the "fair" price of a Honda Accord LX, without the profit going to the dealership or the manufacturer, might be $16,000 instead of $21,000 or whatever. So what? Such a product doesn't exist!

</snip>


Actually Miss Edith seems to be saying that when insurers are buying an annuity for their own account, they have the counterparty absorb all the fees and costs that make an annuity a poor deal for the private buyer. (That's the difference between a 4% return and 2.29%.)

Very useful information for anyone considering an annuity purchase.

<<synchro: You look at those options and make your choices. "But the actuarially fair value SHOULD be X" is irrelevant, >>>

Not at all. Knowing the "actuarially fair value" of an annuity is just as important as knowing the return on the S&P 500 when you purchase an index fund. Admittedly the SEC makes evaluating mutual funds easier since expenses must be disclosed in a prospectus. Not so with an annuity where state law governs and doesn't require the fee, cost & expense disclosure. Fair enough, but if I understand a little bit of arithmetic and can use Excel, it's easy enough to get a mortality table from the Social Security Administration and calculate the discounted present value of a life annuity using the interest rate for a high-quality, 30-year corporate bond.

Anyone who's gone through that exercise will quickly learn that the cheapest annuity you can "buy" is delaying Social security to age 70. Like cheaper by an insane amount.

I can understand why an annuity salesman (and the insurer) wouldn't want the customer to have any knowledge of his "spread". But that's not my problem if I can calculate it on my own.


intercst
Print the post Back To Top
No. of Recommendations: 13
Anyone who's gone through that exercise will quickly learn that the cheapest annuity you can "buy" is delaying Social security to age 70. Like cheaper by an insane amount.

No. Let's please not rehash this argument again. That said, long story short, it's an open question whether it is better to take SS early or wait until age 70. It's certainly not "the cheapest annuity you can buy".

Knowing the "actuarially fair value" of an annuity is just as important as knowing the return on the S&P 500 when you purchase an index fund.

No, all you need to know is the expense ratio (assuming the fund is not structured in some way that makes it otherwise materially different from the index it is following).

Also, why the heck would you expect the expenses on an annuity to be the same as that on an index fund? That's like expecting the markup on an iPad to be the same as the markup on tomatoes at the supermarket. They are completely different products.

Again, I can't see myself buying an annuity (barring a very peculiar set of circumstances), because, FOR ME, it doesn't make sense. The effective IRR on the products is far lower than I will accept for the "risk" that is being removed. I would expect that for most readers on this board, that's the case. But even if an annuity were priced at the mythical "actuarially fair" value, that would still likely be the case for me. Plus, risk products, by definition, remove risk from the purchaser and place it with the seller. They're not going to do that for free. You ever try this line at a restaurant? "You are charging me $X for this meal, but the ingredients only cost $Y. This is outrageous!" Fine, don't go out to eat. But if you want someone to prepare food and sell it to you, you're going to have to pay for that.

-synchronicity
Print the post Back To Top
No. of Recommendations: 3
synchronicityII asks,

Also, why the heck would you expect the expenses on an annuity to be the same as that on an index fund? That's like expecting the markup on an iPad to be the same as the markup on tomatoes at the supermarket. They are completely different products.

</snip>


I'm not. But I want to have some idea of what hidden expenses of an annuity are. And when you determine those hidden costs and identify the rather wide spread, it seems to make some people very upset.

You ever try this line at a restaurant? "You are charging me $X for this meal, but the ingredients only cost $Y. This is outrageous!" Fine, don't go out to eat. But if you want someone to prepare food and sell it to you, you're going to have to pay for that.

</snip>


Funny thing. I regularly compare the cost of restaurant meals with the purchase of high quality ingredients at the store and the time spent to prepare a meal at home. I rarely find the time required to drive to a restaurant and wait to be served worthwhile.

Perhaps paying attention to both financial product cost and restaurant markups is one of the reasons I retired before 40? <LOL>

intercst
Print the post Back To Top
No. of Recommendations: 0
All very interesting but....How do I get 4% as close to risk free as possible!
Print the post Back To Top
No. of Recommendations: 24
Funny thing. I regularly compare the cost of restaurant meals with the purchase of high quality ingredients at the store and the time spent to prepare a meal at home. I rarely find the time required to drive to a restaurant and wait to be served worthwhile.


And yet many people find great value in going out to dinner vs. cooking at home. Different values will lead to different choices. That does not make the other choice wrong. It makes it different.

Perhaps paying attention to both financial product cost and restaurant markups is one of the reasons I retired before 40?

But you made other choices as well that got you to your early retirement including foregoing a spouse and children, something that others prefer to have. In our case, we spent thousands of dollars just trying to have the children, even with a lot of it covered by medical insurance, and we find that choice to be one of the better ones that we have made. Similarly, we found the expenses associated with those children, including paying for their college, to be completely worthwhile. Others do not share our opinions and so have made different choices.

So your choices were right for you, but those same choices were not right for me, and vice versa. That does not make either of our choices wrong. It makes them different.

Different values, different life experiences, and different filters will lead to different results for a similar set of circumstances. There's nothing wrong with that.
Print the post Back To Top
No. of Recommendations: 2
syke: "No. Let's please not rehash this argument again. That said, long story short, it's an open question whether it is better to take SS early or wait until age 70. It's certainly not "the cheapest annuity you can buy".'

Insofar as SS is calculated based on my life expectancy, but provides survivor's benefits for my spouse for free, delayed SS is the cheapest annuity I can find - by a wide margin.
Print the post Back To Top
No. of Recommendations: 0

All very interesting but....How do I get 4% as close to risk free as possible


Index fund?
As intercst points out, invest in Berkshire Hathaway?

Here’s annuities that purport to pay over 4, but I’d read the fine print...
https://www.blueprintincome.com/fixed-annuities?utm_source=a...

I think if you’re that risk averse, you’d be better off with a savings account.
https://ratepro.co/index-ver2?header=Compare+the+Best+Saving...
Print the post Back To Top
No. of Recommendations: 2
The one time I would consider an annuity is for a large insurance settlement.....
it would prevent me from running out and blowing it...MissEdithKeeler


While maybe not applicable to those who read and post here, I agree this is the best course of action for most people. Financial literacy and delayed gratification are not common in the general population, and nothing spends like found money, be it from a personal injury settlement, lottery winnings, inheritance or other financial windfalls. I would wager that 99% of the population doesn't have the math skills of intercst or the spread sheet skills of Rayvt.

An anecdote, primarily for iampops based on his career. Several years ago a I met a young attorney with an interesting story---graduated law school and set up shop in her small town in flyover country. Within the first few months of practice, two families who had been involved in a horrific interstate truck accident showed up at her office since she was the only attorney in town. Multiple injuries, a death etc. Her one-third of the settlement was in the eight figures, but she was very conflicted by this as she apparently didn't feel worthy and was making large donations to her school and charities, and spending lavishly. All that money at once had socially isolated her in her small town. She had no idea how to handle all that money, and perhaps an annuity would have kept her from "blowing it".

tsimi
Print the post Back To Top
No. of Recommendations: 3
"..Within the first few months of practice, two families who had been involved in a horrific interstate truck accident showed up at her office since she was the only attorney in town. Multiple injuries, a death etc. Her one-third of the settlement was in the eight figures, but....All that money at once had socially isolated her in her small town..."


So...I had the good fortune to work really hard for 38 years and never land a case like that?
Print the post Back To Top
No. of Recommendations: 0
We probably need to know more about your 4% goal.

Do you want your assets to provide you 4% annually in terms of spendable cash?
Do you want a 4% return but you need less than that taken out each year?
Are you looking for 4% after adjusting for inflation?

Me personally, I'd suggest an S&P 500 index fund with a low expense ratio and a good quality bond fund.

I'd need someone else to back test this but if you wanted lower volatility, you might go with a fund based on dividend aristocrats or something similar. Not a specific recommendation, but an example: https://www.proshares.com/media/fact_sheet/ProSharesFactShee...
Print the post Back To Top
No. of Recommendations: 4
Let's please not rehash this argument again. That said, long story short, it's an open question whether it is better to take SS early or wait until age 70. It's certainly not "the cheapest annuity you can buy".

Arguably it is the cheapest annuity WITH THOSE PARAMETERS that you can buy. Those parameters are set by the SSA and are different for every person.

Not even sure that it's the cheapest. Not too long ago I posted an annuity quote that I got with the same parameters (amount, deferral period, etc.) as a SS deferral and this quoted price was *cheaper* that the equivalent SS "annuity".
Posted it twice, in fact, a couple of weeks apart.

Both ignored by you-know-who. Also ignored was my note(s) about SSA giving you a take-it-or-leave-it offer from SSA, if you should happen to like a different number that what SS offers.



Knowing the "actuarially fair value" of an annuity is just as important as knowing ...

No, not really. All you need to know is if the deal is acceptable for you or not. When I buy something---a financial product, a car, groceries, or whatever---all I care about is if the benefit to me is worthwhile. The sellers profit (or lack thereof) is his problem not mine.
Search around for the best deal (for me). Don't bother arguing with the waitress about how much profit they are making on that $1.99 glass of soda.
Print the post Back To Top
No. of Recommendations: 9
Perhaps paying attention to both financial product cost and restaurant markups is one of the reasons I retired before 40? <LOL>

No, it's because you hit the jackpot in a tech stock in the tech boom.



I regularly compare the cost of restaurant meals with the purchase of high quality ingredients at the store and the time spent to prepare a meal at home. I rarely find the time required to drive to a restaurant and wait to be served worthwhile.

Would you do any differently if you knew the restaurant's cost of the meal was more than what they charged you?

What you have described is just what I have said we should pay attention to: The benefit to yourself, not how much the other party is making on the deal.
Print the post Back To Top
No. of Recommendations: 4
All very interesting but....How do I get 4% as close to risk free as possible!

Buy a low cost index fund and wait 15 years.
Print the post Back To Top
No. of Recommendations: 26

What you have described is just what I have said we should pay attention to: The benefit to yourself, not how much the other party is making on the deal.


This is a very good point. I was thinking about this whole discussion this morning and the can of worms I guess I opened with my comments re insurance settlements.

I think that among some people (and I’m not meaning this to be snarky about intercst) but just some people want to maximize the bottom line. And that’s the goal, everything else is secondary. They can tolerate volatility, they enjoy researching and checking on their balances, etc.

Other people just want to know they’ll have x amount coming in every month for the rest of their lives. They don’t care if they could get more, they don’t care if someone else is “winning” in the deal, they just want to make sure they’re covered, probably with a minimum of hassle. My grandparents were like this.

I’m somewhere in between, I think. I’m a boring, plodder investor. I’m happy with my combo of stock index fund, bond fund, and a little in an overseas fund, and a couple of pet stocks here and there. I have some real estate. I feel like I’m diversified. I have a defined contribution pension that I just may use to—get ready—buy an annuity with when I retire.

I don’t like messing with my money too much. I like the idea of getting a regular check every month that’s a sure thing, on top of whatever distributions I’ll take from my other stuff.

I don’t like sitting down and doing all those calculations about things—-maximizing returns, minimizing taxes, etc. That’s just not my thing. I’m glad it’s intercst’s thing, because I read his posts—and many others’ here—with great interest. I learn stuff. But I’m not always going to do the same thing. But at least I’m informed.
Print the post Back To Top
No. of Recommendations: 2
...just some people want to maximize the bottom line. And that’s the goal, everything else is secondary...

...I don’t like sitting down and doing all those calculations about things—-maximizing returns, minimizing taxes, etc. That’s just not my thing....



http://www.dieselsweeties.com/ics/862/
Print the post Back To Top
No. of Recommendations: 3
{{I don’t like messing with my money too much. I like the idea of getting a regular check every month that’s a sure thing, on top of whatever distributions I’ll take from my other stuff.}}



I agree. One other issue is that some people, as they age, begin to lose the mental acuity they had when they are younger. But, the worst part of that is they do not recognize it is happening.
Our financial risks during retirement are not just external, but include internal risks as well:
1. Market variability
2. Inflation
3. Mental issues
4. Outliving assets


My personal goal for retirement is to protect against all of those risks in some. I think this board spends a fair amount of time discussing risks 1, 2 and 4. But risk 3, loss of mental acuity, is scary. I have seen too many people blow through money in general. But, some of the older people I know have made increasingly worse financial decisions. It is why older people are targeted by scammer so often.

SS is one protection for this risk as those payments are "guaranteed" monthly. Pensions would also provide this protection. On a personal note, it is a good thing that my dad's retirement is a pension and SS. Otherwise I bet he would have emptied his 401k long before retirement.

I am only 40, but I can already tell I am not as sharp as I used to be. (insert a gap so those who want to can make a personal dig at me). So when I do retire, I will strongly consider putting part of my savings into an annuity to protect myself from myself.


c
Print the post Back To Top
No. of Recommendations: 1
This is a difference without a distinction. Fee, cost, spread, profit, whatever you call it, it's still reduced income due to increased expenses.

No.

Your local bank does not charge you a 3% fee to hold your savings. 3% is their spread.

When you buy a gallon of milk, the grocery store does not charge you a $1.00 fee to buy it.

APPL does not charge you a 40% fee on your dividend. You are simply paid a dividend.
Print the post Back To Top
No. of Recommendations: 0

What Hawkwin is hawking is the fact that this annuity guarantees your heirs a 30-year pay out even if you die early. So the money is being tied up for 30-years, not a 1yr or 5yr CD.


You need to reread. It was 15 yr PC.
Print the post Back To Top
No. of Recommendations: 2
So when I do retire, I will strongly consider putting part of my savings into an annuity to protect myself from myself.


c


---------------

And then you can fall prey to those opportunistic companies who will convert your income stream into a big check right now! Paraphrasing the commercial, "It's my money and I want it now".
Print the post Back To Top
No. of Recommendations: 1
This is a difference without a distinction. Fee, cost, spread, profit, whatever you call it, it's still reduced income due to increased expenses.


No.

Your local bank does not charge you a 3% fee to hold your savings. 3% is their spread.

When you buy a gallon of milk, the grocery store does not charge you a $1.00 fee to buy it.

APPL does not charge you a 40% fee on your dividend. You are simply paid a dividend.


Yes, Thank you for making my point.

I don't know the bank's or grocery store overhead or profit margin, nor do I care. They provide me a product at a certain price, if the price and product are worth the value and competitive I buy it. Otherwise I do without or buy elsewhere. Same with annuities, buying & selling stock, the return is what I watch, generally don't care how the costs are arbitrarily allocated. Call it spread or fee, if it diminishes my return they are less competitive.
Print the post Back To Top
No. of Recommendations: 2
You appear to be contradicting yourself.

I don't know the bank's or grocery store overhead or profit margin, nor do I care. ...

Call it spread or fee, if it diminishes my return they are less competitive.



You don't know what the spread is on the product. All you should care about is your return - just like all you care about is the gallon of milk.

Just like your savings account, you don't know the fee, you just know what interest you are paid.

All else being equal, If BOA has a spread of 4% but pays you 2% and Citibank has a spread of 2% but pays you 1.9%, then the choice between those two products should be easy.
Print the post Back To Top
No. of Recommendations: 3
You don't know what the spread is on the product. All you should care about is your return - just like all you care about is the gallon of milk.

So I guess we agree, if the risk and value adjusted return on an annuity is better than other financial products, then buy them. If not, then don't. Again, don't care what the arbitrary named given to the component reducing the return is called, fee, or something else.
Print the post Back To Top
No. of Recommendations: 3
JonathanRoth writes,

You don't know what the spread is on the product. All you should care about is your return - just like all you care about is the gallon of milk.

So I guess we agree, if the risk and value adjusted return on an annuity is better than other financial products, then buy them. If not, then don't. Again, don't care what the arbitrary named given to the component reducing the return is called, fee, or something else.

</snip>


The real problem is that some people get upset when you identify the size of the component reducing the return and compare it to other investment alternatives. The financial services industry spends a lot of money on lobbying to keep those costs, (fees, spreads, whatever) hidden.

intercst
Print the post Back To Top
No. of Recommendations: 0
rayvt: "Not even sure that it's the cheapest. Not too long ago I posted an annuity quote that I got with the same parameters (amount, deferral period, etc.) as a SS deferral and this quoted price was *cheaper* that the equivalent SS "annuity".


I could be confused, but my recollection was that your annuity was a 'life only annuity' which pays more than a joint survivor annuity because there are no joint survivor benefits:

https://boards.fool.com/btw-where-did-you-find-the-link-to-r...

If I am wrong, I will reconsider my decision to have Ispouse claim early while I delay for the reasons stated in earlier posts.
Print the post Back To Top
No. of Recommendations: 2
I regularly compare the cost of restaurant meals with the purchase of high quality ingredients at the store and the time spent to prepare a meal at home. I rarely find the time required to drive to a restaurant and wait to be served worthwhile.



When you figure out how to make enchilada sauce as good as the experts, let us know!
Print the post Back To Top
No. of Recommendations: 0
Monthly payment equals $1313.19.
Total payments $236,374.66
IRR: 2.28%


Without logging in anywhere, just doing a 5 sec Google search I found:

Marcus (Goldman Sachs) 1 yr CD at 2.4% and 5 yr at 2.6%.
I'm not sure what you have to do to open an account to get this.
But it seems like you could do the 5 year rate and then take 5 years to figure out what to do next.


It looks like one key difference has been missed: With the CD, you spend the money and it gets used up and then you have no more. The SPIA or SPDA pays you for life. So, the $236,374.66 was the minimum amount the purchaser gets because in the example it was 15 year period certain. If the purchaser lives 30 years or even longer, he/she won't outlive that monthly income. (So the percent return is better, but it never really gets all *that* good.)

It may be a poor return compared to investments like stocks or bonds or even longer term CDs, but most insurance is. Most of us will waste our life insurance or disability insurance premiums, but the alternative is too bad to risk. The annuities are (sometimes expensive) ways of assuring lifetime income.

If you look back about a year, you can find a post I made comparing:
1. Taking social security at age 62 and buying an annuity for $X to make a certain annual income
vs
2. Taking social security at age 67 and living off the $X, and the numbers were chosen such that the amount needed annually was the age 67 SS payment. It turned out that #2 was the better. But sometimes that may not be an option, and some person with a long life expectancy ahead will want the sure monthly payment vs taking on market risk and sequence of returns risk for an "expected" higher return.
Print the post Back To Top
No. of Recommendations: 4
That said, long story short, it's an open question whether it is better to take SS early or wait until age 70. It's certainly not "the cheapest annuity you can buy".

I certainly was not able to run every possible scenario, but running a couple scenarios using my situation (SS estimates from SocialSecurity.gov at ages 62, 67 and 70, actual annuity rates I got online), it was *always* superior to delay SS vs buying an annuity in the amount that would make up the difference in the payments.

The possible "wild card" is that I assume a fairly low rate of return to be conservative in my "when can I retire" question, and also to have some guardband against getting a nice "average" rate of return with the bad years at the front. But, raising the portfolio returns would make it even better to keep more of your own money, i.e., no annuity. To be fair, most of my models treat "running out of money at age 95" as a much worse alternative vs. "not maximizing how much I get from SS" or "what's the earliest possible moment I can retire if nothing goes wrong?"

Also, 67 was very superior to 62, but 70 was only marginally superior to 67. So, I intend to wait until 67 and then decide about waiting to 70.

There are some other nuances, like if your spouse takes SS early it can lower the amount of spousal benefits. So, it pays to run your own numbers.
Print the post Back To Top
No. of Recommendations: 2
Marcus (Goldman Sachs) 1 yr CD at 2.4% and 5 yr at 2.6%.
I'm not sure what you have to do to open an account to get this.
But it seems like you could do the 5 year rate and then take 5 years to figure out what to do next.

It looks like one key difference has been missed:


Actually, there are four differences (five if one wants to quibble over FIDC vs. state-based insurance).

2. This was never a discussion about CDs vs annuities. There will always be times when one might find a better fixed rate product. There are times when CDs have better rates and other times when annuities will have better rates. With the 10 year treasury hitting an all-time low, and with annuity rates being very closely tied to such, now is a really lousy time to buy an annuity.

3. CDs, except in rare cases, have no liquidity other than the interest earned. That means a person can't spend them down or otherwise take a monthly income that includes principal and interest.

The CD in the above quote that is paying 2.4% is going to only pay $400 a month in interest income where as the annuity is going to pay 3x as much with principal and interest. A person wishing to use the CD must keep some excess cash, every year (or do a monthly laddering of CDs) if they want to achieve the same amount of monthly spend - and that reduces their effective yield on the full $200,000 to something less than 2.4% or 2.6%

4. Lastly, you have reinvestment risk. Sure, now might be a real lousy time to buy an annuity and there are certainly CD rates that are higher but there is no guarantee that we don't one day face zero or even negative interest rates and one might find themselves trying to reinvest that CD with rates significantly less than current rates.
Print the post Back To Top
No. of Recommendations: 1
TheBreeze,

You wrote, Monthly payment equals $1313.19.
Total payments $236,374.66
IRR: 2.28%


Without logging in anywhere, just doing a 5 sec Google search I found:

Marcus (Goldman Sachs) 1 yr CD at 2.4% and 5 yr at 2.6%.
I'm not sure what you have to do to open an account to get this.
But it seems like you could do the 5 year rate and then take 5 years to figure out what to do next.


It looks like one key difference has been missed: With the CD, you spend the money and it gets used up and then you have no more. The SPIA or SPDA pays you for life. ...


Are you certain? Really certain?

Because you conveniently omitted the policy terms in Hawkwin's post. Here it is in its entirety:

SPIA quote I just ran:

15 yr Period Certain
<--- Extremely important.
Female age 65
Monthly income, Qualified assets
Payments starting 10/1/2019
No inflation rider
$200,000 initial investment

Monthly payment equals $1313.19.
Total payments $236,374.66
IRR: 2.28%


That very first pre-condition contradicts your assertion. A 15-year certain term does not pay for life. It only guarantees 15 years of payments, if you live that long. After the 15th year, you're out of luck.

- Joel
Print the post Back To Top
No. of Recommendations: 1
It looks like one key difference has been missed: With the CD, you spend the money and it gets used up and then you have no more. The SPIA or SPDA pays you for life. ...

Are you certain? Really certain?
...A 15-year certain term does not pay for life. It only guarantees 15 years of payments, if you live that long. After the 15th year, you're out of luck.



"How Long Will Payments Last?

The next major consideration is whether you want to risk losing a significant portion of your investment to the annuity company if you die before receiving enough payments to justify the annuity purchase...

Life Annuity with Period Certain (Fixed Period/Guaranteed Term)
Minimum period of payments – even after death of buyer – with remaining payments to beneficiary.


...Life Annuity with Period Certain (Fixed Period/Guaranteed Term)

Period certain annuities are the same as a straight-life annuity, but it includes a minimum period the payments will last – say 10 or 20 years – even if the annuitant dies. If the annuity holder dies before the end of the period, the payments for the rest of that time will go a beneficiary or the annuitant’s estate. Adding the period certain will cost you, lowering the amount of your monthly payments."

From: https://www.annuity.org/annuities/payout/

To me, that sounds like a payment for life, with a minimum period where your beneficiaries get the payment if you die before that minimum time.
Print the post Back To Top
No. of Recommendations: 4
...Life Annuity with Period Certain (Fixed Period/Guaranteed Term)
.
.
.
To me, that sounds like a payment for life, with a minimum period where your beneficiaries get the payment if you die before that minimum time.


But this isn't what the provided quote was for. The provided quote said:

15 yr Period Certain
Female age 65
Monthly income, Qualified assets
Payments starting 10/1/2019
No inflation rider
$200,000 initial investment

Monthly payment equals $1313.19.
Total payments $236,374.66
IRR 2.28%


You can see that this is just a Period Certain Annuity (without the Life Annuity in front of it) by looking at the total payments, divided by the monthly payments - that equals 180, which is the number of months in 15 years.

This one is cheap because the insurance company knows that the payout is limited to 15 years and they won't have to pay out for the annuitant's lifetime. It's just a Fixed Period annuity without the Guaranteed Term part.

A Life Annuity with a 15 year Certain Period (Fixed Period/Guaranteed Term) will likely have significantly lower monthly payments.

AJ
Print the post Back To Top
No. of Recommendations: 1
aj485 writes,

15 yr Period Certain
Female age 65
Monthly income, Qualified assets
Payments starting 10/1/2019
No inflation rider
$200,000 initial investment

Monthly payment equals $1313.19.
Total payments $236,374.66
IRR 2.28%

You can see that this is just a Period Certain Annuity (without the Life Annuity in front of it) by looking at the total payments, divided by the monthly payments - that equals 180, which is the number of months in 15 years.

This one is cheap because the insurance company knows that the payout is limited to 15 years and they won't have to pay out for the annuitant's lifetime. It's just a Fixed Period annuity without the Guaranteed Term part.

A Life Annuity with a 15 year Certain Period (Fixed Period/Guaranteed Term) will likely have significantly lower monthly payments.

</snip>


If there's no life contingency, why are they specifying "Female age 65"?

A fixed term, 15 yr annuity should cost the same no matter the sex or age of the annuitant.

intercst
Print the post Back To Top
No. of Recommendations: 2
If there's no life contingency, why are they specifying "Female age 65"?

A fixed term, 15 yr annuity should cost the same no matter the sex or age of the annuitant.


Period certain annuities can be used as Medicaid bypass trusts to benefit a spouse who doesn't need nursing home care, and have the needed nursing home care paid for by Medicaid without depleting the couple's assets. If that's the case, a requirement may be that the trust must be set up to pay out within the expected lifetime of the annuitant, and not for the lifetime of the annuitant. For example, a 65 year old female born 1/15/54 (currently 65 and 7 months) has a life expectancy of 21.0 years, per the SSA calculator https://www.ssa.gov/cgi-bin/longevity.cgi So, the annuity could be as long as 21 years and still meet the requirements for a Medicaid bypass trust. An annuity that is not a life term, but is only a 15 year period certain annuity would meet this criteria.

If the annuitant were instead, a male born on 1/15/44 (current age 75 years 7 months) then the life expectancy would be 11.3 years, so the longest annuity that could be used for a Medicaid bypass trust would be 11 years, 3 months. If he got the 15 year period certain annuity, it would not qualify for a Medicaid bypass trust, as his expected lifetime is less than 15 years, and he would be required to pay for the nursing home care for his spouse.

Please note: Medicaid bypass trusts are subject to many state specific rules, and your state may have different requirements.

AJ
Print the post Back To Top
No. of Recommendations: 0
If there's no life contingency, why are they specifying "Female age 65"?
A fixed term, 15 yr annuity should cost the same no matter the sex or age of the annuitant.


Period certain annuities can be used as Medicaid bypass trusts to benefit a spouse who doesn't need nursing home care, and have the needed nursing home care paid for by Medicaid without depleting the couple's assets. If that's the case, a requirement may be that the trust must be set up to pay out within the expected lifetime of the annuitant, and not for the lifetime of the annuitant. For example, a 65 year old female born 1/15/54 (currently 65 and 7 months) has a life expectancy of 21.0 years, per the SSA calculator https://www.ssa.gov/cgi-bin/longevity.cgi So, the annuity could be as long as 21 years and still meet the requirements for a Medicaid bypass trust. An annuity that is not a life term, but is only a 15 year period certain annuity would meet this criteria.



HAWKIN--Would you please specify what details your example assumed? Either aj485 doesn't know what "period certain" annuities are, or I (and others + the definition on the sites I checked) missed the boat. If I'm wrong, I won't be offended by being corrected.
Print the post Back To Top
No. of Recommendations: 4
Either aj485 doesn't know what "period certain" annuities are

I do know what "Period Certain" annuities are. I also know what "Life" annuities are. They can be combined, but do not have to be. If the title of the annuity just specifies "Period Certain" and not "Life, Period Certain" then it's only "Period Certain". That's what the quote Hawkin shared said, at least the way it was shared - there was no "Life" in the title. Now, it could be that Hawkin just didn't copy the whole title in. But if the whole title was copied in, then it's just a "Period Certain" annuity, and not a "Life, Period Certain" annuity.

If you want 3rd party confirmation that "Period Certain" means that the annuity will only pay for a specific timeframe, here's some information from Investopedia https://www.investopedia.com/terms/p/periodcertain.asp

Breaking Down Period Certain
By selecting the period-certain annuitization option, the annuitant is usually able to receive a higher monthly payment than with a life option. This extra income comes with a price, though; the risk that the annuity payments will run out before the annuitant's death (longevity risk). For example, say a 65-year-old annuitant decided to start receiving payments from his or her annuity and chose a 15-year period-certain payout option. This would provide him or her with a retirement income until the age of 80. Should the annuitant die at or before age 80, this option would not present a problem, but should he or she live longer than 80 years and not have another source of retirement income, this option could prove risky.


Investopedia then goes on to describe "Period Certain vs. Life" as well as a 'hybrid' product that combines "Period Certain" and "Life"

Period Certain vs. Pure Life Annuity
A pure life or lifetime annuity pays a benefit to the annuitant until death. The deceased's estate or beneficiary will receive no benefits after that point. With such an annuity, there is no risk of outliving the retirement income they provide. By choosing a period certain option in a life, guaranteed or certain annuity the annuitant can specify when the benefit will start and how long it will last to tailor it to their retirement and estate planning needs, as well as their lifespan expectations. With a period certain option the deceased annuitant's estate or beneficiary may still receive annuity payments until the timeframe specified within the period certain expires. Common periods for a period certain annuity are 10, 15, or 20 years.

Period Certain Plus Life Annuity
A hybrid product combines a period certain annuity with a life annuity and is called 'Income for life with a guaranteed period certain benefit' (also referred to as 'life with period certain'). This strategy provides a guaranteed payout for life that has a period certain phase. If the customer (annuitant) dies during the certain period phase, their beneficiary receives the remainder of payments for that period.


AJ
Print the post Back To Top
No. of Recommendations: 2
Fools,

I can attest that aj485 knows what she's talking about here. Not only do I have some background knowledge of annuities since my father used to sell them (I worked in his office some summers in my youth and he repeated tried to get me interested in taking over his business after I got older); but aj485 and I just went through this with my mother, an eldercare attorney and Medicaid just 2 years ago.

aj485's assertions are spot-on. A period-certain annuity pays out for at most the specified term. Notice I said at most? In other words, without an additional rider the annuitant's estate will not receive any unpaid funds from the annuity. This could make the annuity's total return appear to be superior to other fixed income options - but that's only because the analysis often doesn't take into account the risk that the balance of the premium could be forfeit to the insurer. If you take proper account of the mortality risk, these annuities are pretty lousy "investments". But I suppose you might be able to make some kind of argument for them as income insurance ... or just a means of asset protection in case of Medicaid.

- Joel
Print the post Back To Top
No. of Recommendations: 1
Aj is correct. PC 15. No life component.

Female 65 is only relevant as it pertains to what aj stated - and the fact that the quote tool requires that bit of data entry. Changing the quote to male 62, for example, has no impact on the output of the results.
Print the post Back To Top
No. of Recommendations: 0
Aj is correct. PC 15. No life component.

Female 65 is only relevant as it pertains to what aj stated - and the fact that the quote tool requires that bit of data entry. Changing the quote to male 62, for example, has no impact on the output of the results.



Thanks for the clarification. People must sometimes use "Period Certain" as shorthand for "Period Certain Life Annuity."
Print the post Back To Top
No. of Recommendations: 0
Ya, the jargon can be sloppy, especially when it is in an article or when it is being written by someone not actively engaged in the industry.
Print the post Back To Top