On Fri, 10 Apr 2009 06:59:06 -0500, "Mark Freeland"
<nNeEwTs[at]nyc.rr.com> wrote:

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In a general and broad sense I would agree with the above, but only
with an acknowledgement that, in the end, the path to better returns
is through accepting greater risk. So before getting specific with
someone, I would insist on a thorough discussion of the risk and
liquidity inherent in the comparison.

Once that's done, I confess that I find some utility in fixed deferred
annuities and fixed immediate annuities. As for variable deferred
annuities, you can keep those.

-HW "Skip" Weldon
Columbia, SC

"Douglas Johnson" <post[at]classtech.com> wrote in message
news:1ksst4dbdjeptjtmbqrnpmb20ec6b6l91f[at]4ax.com...
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Likewise, don't confuse deferred annuities with variable annuities.

Deferred = payout later (currently in accumulation phase)
Immediate = payout now

There are fixed immediate, fixed deferred, variable immediate, and variable
deferred annuities. Two different dimensions to the product.

A brief primer, specifically addressing these dimensions is at:
http://www.aarp.org/money/personal/a...r.html?print=1

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If by "variable" you mean "deferred", I respectfully disagree. A fixed
deferred annuity generally offers greater returns than other guaranteed
investments (though the guarantee, being from a private insurer rather than
the FDIC or similar agency, is less valuable), and provides deferral of
taxes on the periodic income. We can certainly debate the suitability of
fixed income investments in the accumulation phase, but if a fixed income
investment is what someone wants, then fixed deferred annuities can offer
better after-tax returns than a fixed income investment in a taxable
account.

Mark Freeland
nNeEwTs[at]nyc.rr.com

On Apr 8, 4:08*pm, Igor Chudov <ichu...[at]algebra.com> wrote:

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A good reason not to put all of one's assets into an immediate
annuity.

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Each State insures annuities up to a certain limit, ranging from
$100,000 to $500,000.

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Immediate annuities are amortized over a certain number of months
depending on the annuitant's age. That results in increased cash flow
for a few years.

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It pays to wait before buying an immediate annuity, and if you're not
healthy, don't buy one. I would suggest to wait until age 70. And,
don't purchase any more than what you need for cash flow (or living
expenses).

I don't know if immediate annuities are appropriate for an IRA or Roth
IRA since one doesn't get the tax benefits of the initial
amortization.

--
Ron

"Alvin" <acorn[at]muncher.com> wrote:

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Don't confuse immediate annuities, the subject of this discussion, with variable
annuities, which provide tax sheltered returns for people still in the
accumulation phase. You seem to be talking about the latter.

Because of high costs, variable annuities are almost always a worse investment
than taxable accounts.

-- Doug

On 2009-04-09 14:42:50 -0700, "Alvin" <acorn[at]muncher.com> said:

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I suspect you are right; annuities are a bad choice under most
circumstances. I am suggesting that they may be bad for still another
reason that no one has mentioned, as far as I am aware. Because current
interest rates are so low, today would be the worst possible time to
buy an immediate annuity, because your "return" would stay relatively
low for the rest of your life. If interest rates in general go up in
the next several years, then eventually annuity "returns" will go up
too, but anyone buying one today will be stuck with today's yield for
life. I do suspect dividend stocks would be a better bet at the present
time.

"Don" <dwzimm[at]telus.net> wrote

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Then you only have to worry that the insurer remains solvent. Annuities are
a last resot in my opinion.
After you max out your retirement plans, 401k 403b whatever, if you still
have cash then a no-load no surrender charge annuity might be ok for some
people.

On 2009-04-09 09:33:59 -0700, Beliavsky <beliavsky[at]aol.com> said:

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I am thinking of variation in the "return" that a fixed amount of money
will provide, depending on the historical date at which you buy the
annuity. For example, suppose in the period around 1980=1984 or so,
when interest rates were very high, you could get $1500 per month for a
fixed outlay of cash. Then, interest rates began to decline in the
years 1985-86, so that in 1988, say, you could get only $1200 monthly
for the same amount of cash.

And now, today, when interest rates are way, way, down, perhaps you can
get only around $600 per month for the same amount of money, and so on.
If it still works like that, then whether or not an annuity meets a
given person's needs depends a lot on the time period when it is
purchased. So, if I am close to retirement age or a little past
retirement age, and I have reason to believe that interest rates will
go up higher in the next few years, it might be in my best interests to
wait a few years before buying an immediate annuity.

On Apr 8, 4:02*pm, Don <dwz...[at]telus.net> wrote:

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For a fixed immediate annuity, you would send the insurance company
$100K, and they would send you $X a month for the rest of your life,
where X depends on age and other factors.

Maybe you are thinking of CD-type deferred annuities. There are also
variable deferred annuities.

<JoeTaxpa...[at]comcast.net> wrote:
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<big laugh!
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snip; agreed with all. Yours is the point to be made. What the return
on these products is has to be qualified to be meaningful AFAIC.

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!! Thank you for this financial planning comic relief.

honda.lioness[at]gmail.com wrote:
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I had to laugh when I saw the last two replies. The other day I was
approached by someone who say an 8% return for their age. I found myself
doing that finger gesture putting quotes in the air as I said the word
'return'. Of course, that was part of a longer dialog, where I was able
to calculate and show the actual returns assuming various dates of
death. I can't quantify the insurance company default risk, but I can
easily reduce the exercise to a break-even point beyond which the
annuity outperforms current risk-free rates.

I think the quotes are appropriate just like the Asterisk stamped on the
homerun record baseball. It indicates the word is used with a certain
meaning.

At least for a bond, we have current yield vs yield to maturity (YTM).
For Elle's purpose, the annuity could show yield to expected MYM (meet
your maker), as well as the current promised yield. I find that to be a
reasonable way to show such a product.

Joe

Rich Carreiro <rlc-n...[at]rlcarr.com> wrote:
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A life expectancy is assumed, of course. With that assumption, the
quotation marks stay. (And Richard, no need to get testy. Take things
post by post and the dialogue here will be much cleaner insofar as
getting the facts out.)

honda.lioness[at]gmail.com writes:

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Yes, it does. And you can ditch your scare quotes around "return".

You're trading a lump sum of money for a series of cash flows. That's
no different than any other investment and you can compute the annual (or
monthly) return exactly the same way -- find the discount rate that sets
the NPV of the series (including the initial investment and any payout
at the end) equal to zero.

--
Rich Carreiro rlc-news[at]rlcarr.com

Igor Chudov wrote:

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Dying is the third risk. Some immediate annuity provide no guaranteed
number of payments, so if you die the year after your purchase, your
heirs are out that money.
Joe

Igor Chudov <ichudov[at]algebra.com> wrote:


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You can buy inflation adjusted immediate annuities. Of course, the yearly
income stream (is that better than "return"?).

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It is my understanding that insurance companies are backed by state insurance
funds, similar to FDIC. Can someone confirm that?

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Or in absolute terms. Or some of the companies will go bankrupt, wiping out
both the dividend and capital. I my mind, we are not talking about comparable
levels of risk. Perhaps a better comparison would be a bond/CD ladder.

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"Might", even "probably", certainly not "will", rise modestly in the future.

There is no way I think an immediate annuity is the only answer to retiree
finances. Stocks have to be part of it. But annuities have some advantages,
especially for older folks. That same site you mentioned shows a 75 y/o male
can get $1,000 a month for life with an investment of $120,337. That's a 10%
"return".

Getting that kind of income out of stocks and bonds pretty much requires you to
invade principle. That raises the question of how long you are going to live.
Remember "life expectancy" means half the people are going to live longer and
half are going to die sooner. Unless you are in very ill health, you need to
hedge against you being in the long-lived half.

Interestingly, the insurance company doesn't need to make this hedge. Because
they write lots of annuities, they can pretty well count on enough people dying
on time to make up for those that are so rude as to live longer.

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The one I remember is a call from someone who claimed to be from AT&T Financial
Services asking about her finances. Best as I can tell, there is no such thing
in AT&T. One that has been on the news around here is someone calling claiming
to be a grandchild in trouble (jail, stranded, etc) and asking for money.

-- Doug

Igor Chudov <ichu...[at]algebra.com> wrote:
However, the potential rewards of owning
- quote -

A diversified portfolio of dividend paying stocks can easilly see
annual increases higher than inflation. Just saying: I do not call
exceeding inflation "modest."

On 2009-04-08, Douglas Johnson <post[at]classtech.com> wrote:
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Sure, if you like to call them insurance, that's fine.

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With an immediate annuity, giving me a yearly payment of X, there are
two risks:

1) Inflation
2) That the insurance company would go bankrupt and one way or another
I will not get paid what is promised.

If I invest a comparable amount of money in stocks, and get X in
dividends, then my only risk is that dividends will be reduced in the
future, in real terms. However, the potential rewards of owning
stocks, even without ever selling them, is that dividends will
modestly rise in the future. Such a reward is absent in an annuity.


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I agree.

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It is true that for older people, annuity payments would be higher
than in my example of a 38 year old investor.

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Very well put.

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Just curious, what sorts of calls was she getting. I have parents too
and would like to know more.

i

Douglas Johnson <p...[at]classtech.com> wrote:
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Does monthly or annual "return" mean anything when you sign away the
principal in the first place?

On 2009-04-08 12:21:18 -0700, Douglas Johnson <post[at]classtech.com> said:

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Unless I am mistaken, the amount of income that you receive monthly for
the rest of your life can vary widely, depending on the current
interest rates on bank deposits, etc. at the time you purchase the
annuity. Also, there is some lag in time before the annuity rates catch
up with changes in the bank rates. In other words, if you buy an
immediate annuity when interest rates are low, like today, you will be
stuck with a low monthly check for the rest of your life, no matter how
much higher rates may go in the future. My information here may be
outdated, but that is how it used to be. I certainly would want to
explore these matters more thoroughy before purchasing an immediate
annuity.

At any rate, when making these comparisons, do not assume that what
annuities cost today will be same at all times in the future. You are
certainly paying the insurance company to assume a risk, but I guess an
important question is HOW MUCH are you paying for that service when
compared to other possible ways of getting a return on your money, not
only today but throughout the rest of your life.

Igor Chudov <ichudov[at]algebra.com> wrote:

- quote -

[snip]
- quote -

Thanks for posting this because it helped me clarify some thoughts on the
subject, posted here for discussion.

An immediate annuity is only loosely comparable to a stock portfolio, they are
really two different things. One reason that immediate annuities are sold by
insurance companies is that they are insurance, just like fire insurance.

With fire insurance, you are paying the insurance company to assume the risk
that your house will catch fire. And you pay an insurance premium for that. For
an immediate annuity, you pay the insurance company to assume market risk and
the risk that you will out live your money. You can even pay them to assume
inflation risk. And you pay an insurance premium for that. It is not
explicit, but is in the difference in returns that you noticed.

I can't think of an reason that immediate annuity would be useful for someone
in the accumulation phase of life, although I'm sure the smart people here will
tell me if there is one.

On the other hand, an immediate annuity can be really useful for older folks.
Surveys show most retired folks are at least somewhat worried about out living
their money. An immediate annuity can help with that. Current market
volatility is gut wrenching, especially if it starts to impact groceries and
rent. An immediate annuity can help.

An immediate annuity can simplify finances. You don't have to manage
investments, you just cash the check every month. As mental state fades, this
can be really important.

You also get a much better monthly return than many alternatives when you are
older. True, part of it is a return of capital based on your life expectancy,
but you are getting it and will as long as you live.

One advantage is some degree of fraud protection. Late in life, my mom was
starting to get all sorts of suspicious calls. She had the mental state to know
they were suspicious, but not everyone does. With an immediate annuity, there
is no lump sum that can be conned out of an older person. At worst, the con
artist can only get part of the income stream and then only until someone
catches on.

Oh, I know that there are other ways to limit you exposure to market volatility,
I'm using them. Just noting that immediate annuities do that, too.

-- Doug

Here's an interesting article from today's WSJ about bailing out life
insurance companies who made overly generous promises (that is,
managers underreserved and overbonused themselves).

I am only posting a small portion of this article to avoid copyright
concerns.

http://online.wsj.com/article/SB1239...ml#mod=testMod

The Treasury Department has decided to extend bailout funds to a
number of struggling life-insurance companies, helping an industry
that is a linchpin of the U.S. financial system, people familiar with
the matter said.

The department is expected to announce the expansion of the Troubled
Asset Relief Program to aid the ailing industry within the next
several days, these people said.
[insurers' shares]

The news will come as a relief to a number of iconic American
companies that have suffered big losses made worse by generous
promises to buyers of some investment products. Shares of life
insurers have fallen more than 40% this year. Their troubles led to a
string of rating-agency downgrades that, in a vicious cycle, made it
more difficult for some insurers to raise funds. ...