# Annuities Advice?



## Joe Rogers (Aug 9, 2019)

Has anyone bought an annuity with part of their retirement savings?  How did you know if it was a good deal or not?  Thanks!  Joe


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## Don M. (Aug 9, 2019)

I looked into annuities a few years ago, and quickly formed the opinion that annuities are a Great program....For the Insurance companies.  A far better approach, for excess savings, IMO, is to invest in a portfolio of high dividend paying stocks, or a good balanced mutual fund.


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## Joe Rogers (Aug 9, 2019)

Thanks for the quick reply Don.  That's my gut feeling, but I figure someone must have a good reason for buying an annuity at or just prior to retirement age.


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## Don M. (Aug 9, 2019)

Annuities are a good buy for someone who fears the stock/bond markets.  They will usually pay between 3 to 4% on the investment....which is FAR better than money sitting in the bank.  However, if a person is willing to take a bit of risk with the markets, a 6%, 7%, and even better, return is quite possible.  The insurance companies make billions on the annuities, by investing that money, so an individual might as well do some research, and make their own investments.  The markets are always going up and down, but if a person looks for "long term", the odds are pretty good.


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## mathjak107 (Aug 10, 2019)

i would never buy any annuity other than an immediate annuity ..... anyother can be so complex to figure out  odds are you will not get what you think you are getting .

index linked  and variable annuities can be very difficult to understand


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## mathjak107 (Aug 10, 2019)

Don M. said:


> Annuities are a good buy for someone who fears the stock/bond markets.  They will usually pay between 3 to 4% on the investment....which is FAR better than money sitting in the bank.  However, if a person is willing to take a bit of risk with the markets, a 6%, 7%, and even better, return is quite possible.  The insurance companies make billions on the annuities, by investing that money, so an individual might as well do some research, and make their own investments.  The markets are always going up and down, but if a person looks for "long term", the odds are pretty good.


insurers have something to invest in that greatly beefs up their returns you can never have ... they invest in dead bodies . those who die help pay for those who live when you deal with life annuities and mortality credits . you can never do what they do with any kind of certainty.

imagine 30 of us buying 30 year bonds at 3% ...well all we get is 3% ... but if every year one of us died and the deal is their bond money goes in to the pot for the rest , you can see by the 30th year that 3% bond returned an awful lot of money for that last man standing .

while safely we can draw about 4% initially from the cash and bond portion of our portfolio's immediate annuities pay out almost 50% more then that  because of mortality credits .   you could take 6-1/2% from a portfolio with at least 40-50% equities but that assumes no worse outcomes hitting then average ones .  a safe withdrawal rate is based on the worst outcomes to date .

but remember that cash flow from the annuity includes your  principal ... it can take 17 years to get your own money back that you gave them before you see your first penny of actual return ... so never confuse cash flow rates with returns on investments .

you give them 100k and get 6k a year , you see zero return for almost 17 years . so you can never say what your return is until you are dead .


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## Liberty (Aug 10, 2019)

Well, I've got friends that have cashed them in and others that like having them.  Whether its the stock market, mutual funds or annuities, what they care about is their yearly extra bucks received, period.


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## mathjak107 (Aug 10, 2019)

Liberty said:


> Well, I've got friends that have cashed them in and others that like having them.  Whether its the stock market, mutual funds or annuities, what they care about is their yearly extra bucks received, period.


then they are likely uneducated on the subject ....   bring them to this forum and i will educate them on just what they own . the only ones that offer a fair deal are immediate annuities and they should be utilized as a piece of the bond budget , not a proxy for using equities ... even an index linked annuity is no proxy for a market investment . it is like a money market on steroids in up years .

immediate annuities have a place but you need to understand how to best use them ..


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## Liberty (Aug 10, 2019)

mathjak107 said:


> then they are likely uneducated on the subject ....   bring them to this forum and i will educate them on just what they own . the only ones that offer a fair deal are immediate annuities and they should be utilized as a piece of the bond budget , not a proxy for using equities ... even an index linked annuity is no proxy for a market investment . it is like a money market on steroids in up years .
> 
> immediate annuities have a place but you need to understand how to best use them ..


All they would say is "hey, I'm getting so much interest on my money and have been for many years, so who cares?"


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## mathjak107 (Aug 10, 2019)

i would bet anything most who veer from simple immediate annuities have no idea how they work nor what is actually their money vs the phantom account that is used for annuitizing ....all these annuities that offer guaranteed amounts vs market or bond returns all work the same ...

they can promise you anything since the account with the guarantees is an account you can't access directly


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## mathjak107 (Aug 10, 2019)

Liberty said:


> All they would say is "hey, I'm getting so much interest on my money and have been for many years, so who cares?"


exactly , only they are not getting interest .... interest is on top of your principal .... in the typical annuity you hand them an amount of money and the first 16-17 years they hand you back your own money ... you get no "interest " or return until you first get back what you handed them . that starts 16-17 years later ... it is less then a fraction of a point  by then .


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## mathjak107 (Aug 10, 2019)

here is a perfect example of a typical annuity with guarantees of whatever the index returns or a minimum of 5.50% ..keep in mind this  rate was when interest on cd's was 1% or less .

it sounds great right ?   what could be better then getting the higher of  what the index does  or 5.50% growth right ?

so it works like this ..

the money linked to the index gets no dividends ... dividends are never part of the deal and they alone count for 20-33% of all of the markets return ..
then there are 2-3%  in fees and commissions on that money . once you annuitize every dollar you take out gets subtracted too decreasing what is working for you .

odds of the index doing better then the guaranteed growth is slim ... especially because the guaranteed growth  includes all expenses in that guarantee ...... so now lets look under the hood and see what you think you are getting vs really are getting .

you think you are getting 5.50% a year ... you are ...only that money goes in a phantom account ... it is never yours to touch , take or pass to heirs .

so in this prudential index linked annuity we give them 100k  at age 55.

for every year we delay annuitizing we get 5.50%  growth .  at at 56 we have 105,500 and if you annuitized you would get a 4% draw rate off that .

now here is the gotcha ... for every year you delay you get another 5.50% growth , but they control how much of that you actually can ever get at
they give you another 1/10% in draw for every year you delay . so they are giving you 5.50% but allowing you to only take 1/10% of it  more.

so at age 65 you  have 180,209,00 and made it to a 5% draw .

it takes until age 76 to first get back your 100k ..that is 21 years after you gave them the 100k . you get an income of 8,125.00 on their dime finally ...that is a return on your money of .69%   21 years later ..up to that point they are just giving you back your own money you gave them 21 years earlier  .

at age 85 your at 3.97%  that is 31 years later .

you can see you never really see the 5.50% .  very few understand the stuff they buy .. guaranteed you ask them , they think they are getting 5.50% a year in interest ....


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## Liberty (Aug 10, 2019)

mathjak107 said:


> exactly , only they are not getting interest .... interest is on top of your principal .... in the typical annuity you hand them an amount of money and the first 16-17 years they hand you back your own money ... you get no "interest " or return until you first get back what you handed them . that starts 16-17 years later ... it is less then a fraction of a point  by then .


Yep but everyone is entitled to their own lifestyle, and these folks think of the interest like a "pension".  Hey, a pension stops when you die, normally.  Got another friend that says she has a "good guy at Merrill Lynch that gives her 8-1/2% on bonds."  Whoa...sounds like junk bonds to me, but when I ask her about it, she said "oh, he knows I'm living off the interest so he's taking good care of me"...yeah, that and 5 bucks might get you a cup of coffee at Starbucks.


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## mathjak107 (Aug 10, 2019)

at the end of the day it is all about total return ... income can be generated off portfolio's forever too but you  get to keep the principal .

a 4% safe withdrawal rate with a 60/40 portfolio  has  ended after 30 years 90% of all 119 30 year cycles with more than you even started with ... they have ended with 2x what you started with 67% of the time ...   that generates quite a bit more in income then 4% .... actually taking raises along the  has been the bigger problem or you can leave to much unspent and enjoyed ..... but like i say , splitting the bond budget with  an immediate annuity can produce very good results when coupled with the equities in a portfolio .... but i would never suggest an annuity as a stand alone  retirement plan . nor would i ever suggest any of these variable or index  linked annuities as a proxy for your own equity investing .

as long as they remain as part of the bond budget i have no complaints about immediate annuities being used . they are like buying a cd in simplicity ...if you like the cash flow , that is the whole deal .


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## Aunt Bea (Aug 11, 2019)

I agree with what has been said about annuities and decided that they were not the best choice for me.

I do think that they can be a sensible choice for a person that has lived paycheck to paycheck and is now faced with the choice of taking a retirement lump sum or an annuity.  The annuity will keep a roof over your head and groceries on the table through good times and bad.  It will also protect you from yourself, bad investor behavior, temptation, etc...

When it comes to retirement we won't get a do-over so we need to be honest with ourselves and decide what is best for our own particular situation.


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## mathjak107 (Aug 11, 2019)

that assumption  about annuities may  be the same bad assumption made about reverse mortgages ... the annuities don't  match the unexpected and emergency spending in ones life that go over budget  as well as your personal cost of living increases .

someone on limited means may leave themselves all to short  with a no to low growth annuity ..  annuities can be part of a financial plan but by themselves leave much to be desired and  carry a high risk in not matching ones increases in expenses.

that money can go much farther   by just using a balanced portfolio . there is way to much given up in potential income by trying to use insurance instead of investments ... in this case it is not like someone using them in conjunction with growth vehicles   .

my opinion is if someone is that gun shy then there are enough  low cost ways to have a 3rd party handle things for you putting a wedge between you , your money and poor behavior ....the less you have the more important it becomes to utilize that money efficiently .

that would mean not tossing it in to an insurance product with no means for growth to keep up . like i said , the annuity should only replace a piece of what you would typically allocate to cash and  bonds , it should not be the plan without some growth vehicles  unless you are that wealthy you don't need any growth vehicles because you have so much accumulated  .


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## Liberty (Aug 11, 2019)

mathjak107 said:


> that assumption  about annuities may  be the same bad assumption made about reverse mortgages ... the annuities don't  match the unexpected and emergency spending in ones life that go over budget  as well as your personal cost of living increases .
> 
> someone on limited means may leave themselves all to short  with a no to low growth annuity ..  annuities can be part of a financial plan but by themselves leave much to be desired and  carry a high risk in not matching ones increases in expenses.
> 
> ...


Have got another friend that invested her money with a money manager...in fact several money managers over the years and has lost money big time.  Just because you use a money manager and take his or her advice doesn't guarantee you from losing assets.  She finally pulled her money out in frustration.  Told me she'd lost 200 grand.  Now that's a lot of groceries to make up.


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## mathjak107 (Aug 11, 2019)

Liberty said:


> Have got another friend that invested her money with a money manager...in fact several money managers over the years and has lost money big time.  Just because you use a money manager and take his or her advice doesn't guarantee you from losing assets.  She finally pulled her money out in frustration.  Told me she'd lost 200 grand.  Now that's a lot of groceries to make up.




there is more to that story i assure you .. markets are up 300% since 2008  just about any stock fund is up big time . . a simple 50/50 mix had to do just fine ... i will bet she forced the money manager to liquidate their positions in a down draft

if the story does not make sense it is usually because a chunk of it is missing .. in fact to date no one ever lost a penny in a 50/50 mix assuming broad based stock funds in any 10 or 20 year period , ever.

only way you could have lost money is using long term investments to meet short term money needs , bad investor behavior , or speculating in individual stocks ... none of which a money manager would likely have done so there is more to that story


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## fmdog44 (Aug 11, 2019)

Annuities apply if you want super security and a greater interest rate than banks CDs and savings pay. I own one that is a very small portion of my total portfolio. I rolled my poor yielding Merrill Lynch IRA in to a Voya annuity many years ago. I leave the money there and take the RMD annually only because I have to according to the contract. Be cautious before you move because you cannot change your mind once you commit without a very steep penalty. Most important above all do what YOU and you alone are comfortable with. Investing should never be a reason to lay wake nights worrying about your money.


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## Liberty (Aug 11, 2019)

mathjak107 said:


> there is more to that story i assure you .. markets are up 300% since 2008  just about any stock fund is up big time . . a simple 50/50 mix had to do just fine ... i will bet she forced the money manager to liquidate their positions in a down draft
> 
> if the story does not make sense it is usually because a chunk of it is missing .. in fact to date no one ever lost a penny in a 50/50 mix assuming broad based stock funds in any 10 or 20 year period , ever.
> 
> only way you could have lost money is using long term investments to meet short term money needs , bad investor behavior , or speculating in individual stocks ... none of which a money manager would likely have done so there is more to that story


Sorry to differ with you, but there's been more than one "sticky fingers" money manager.  Our business partner's kid lost a chunk of change when a financial manager got greedy.  They're still looking for him the last I heard.  Remember Bernie Madoff.  Just because the markets are up doesn't always mean your money is way up either.  It is what it is sometimes.  I happen to know my other friend didn't "tell her advisor" to do this or that...quite the opposite, she didn't know enough about it to do it and it wasn't just one money manager, there were like 3 over the years.
She'd almost doubled a house sale of just 4 years and had put that money into the pile, too.   One fund would be great and do well, another would tank, etc.  When the market went down, like last year, it was a wash out.  Got  a friend in Canada that should be suing her money guy - he absolutely was illegal with her retirement investment - .

It is what it is...pay your money and take your chances.  There's risk with both money and money managers.


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## mathjak107 (Aug 11, 2019)

Liberty said:


> Sorry to differ with you, but there's been more than one "sticky fingers" money manager.  Our business partner's kid lost a chunk of change when a financial manager got greedy.  They're still looking for him the last I heard.  Remember Bernie Madoff.  Just because the markets are up doesn't always mean your money is way up either.  It is what it is sometimes.  I happen to know my other friend didn't "tell her advisor" to do this or that...quite the opposite, she didn't know enough about it to do it and it wasn't just one money manager, there were like 3 over the years.
> She'd almost doubled a house sale of just 4 years and had put that money into the pile, too.   One fund would be great and do well, another would tank, etc.  When the market went down, like last year, it was a wash out.  Got  a friend in Canada that should be suing her money guy - he absolutely was illegal with her retirement investment - .
> 
> It is what it is...pay your money and take your chances.  There's risk with both money and money managers.


fraud is a whole different issue ..... there are no diversified finds i bet you can find that are down  since 2000  or 2008 ... i bet none ..... they are all up ... unless they had a poor manager speculating in individual stocks  it can't be.  in fact all they needed was an index fund and they would have done well .... mark my words there is more to this story


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## Liberty (Aug 11, 2019)

mathjak107 said:


> fraud is a whole different issue ..... there are no diversified finds i bet you can find that are down  since 2000  or 2008 ... i bet none ..... they are all up ... unless they had a poor manager speculating in individual stocks  it can't be.  in fact all they needed was an index fund and they would have done well .... mark my words there is more to this story


Then there has to be more to "many stories"...lol.  Where there are people there will always be honesty,  greed and mismanagement.
One of the most boring things is to go out to dinner with folks and have them talk about their "investments"...one big yawn.  Or pump you about yours. According to most, they are doing fantastic and have found that magic method or stock mix or whatever that "everyone that's smart should be doing". That's great, now could we talk about something more interesting...lol.  After being in business for so many years, its time to relax and enjoy. Heard it all before, in different variations.

You can't take it with you. Would hope that folks would do well and not get scammed, but would rather talk about "interests", rather than "interest"...lol.


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## mathjak107 (Aug 11, 2019)

all you need is a simple index fund and yawn , call it a day ..investing should be boring if you are doing it right .


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## Liberty (Aug 11, 2019)

mathjak107 said:


> all you need is a simple index fund and yawn , call it a day ..investing should be boring if you are doing it right .


Yep, or whatever you want to do.  Just think a lot of folks don't have many "interests".  Guess we've got too many.  One of our favorite couples never talks about it.  He's like 89 and works full time as a general consul for a large H Town law firm and has for 65 years!  He never talks about the latest hot IPO.  Like now its "Beyond Meat" or whatever it is...lol. Do understand that people enjoy their stocks, though!


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## mathjak107 (Aug 11, 2019)

i enjoy fun trading and do well but my serious money  is in simple portfolio's that are boring as heck and just do well over time .


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## Liberty (Aug 11, 2019)

mathjak107 said:


> i enjoy fun trading and do well but my serious money  is in simple portfolio's that are boring as heck and just do well over time .


Do you use a money manager or do you manage your own portfolio?


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## mathjak107 (Aug 11, 2019)

I do all my own trading ....I like trading things that are volatile like oil , gold , Long treasury bond funds ...

But as far as investing goes I can put portfolios together in my sleep ..but for more than 30 years  I have been using the fidelity insight newsletter ..

I like them  and it keeps me from myself.... I would always be thinking my next move and second guessing the last ... so  all I or my wife do is check a weekly e-mail as to any Changes . Changes are rare...following the models is so easy my wife can handle doing it if need be ..so the newsletter keeps me from even thinking about portfolio moves.

Many men dump complex portfolios on their spouse who has no clue and that is not a good thing ..


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## Liberty (Aug 11, 2019)

mathjak107 said:


> I do all my own trading ....I like trading things that are volatile like oil , gold , Long treasury bond funds ...
> 
> But as far as investing goes I can put portfolios together in my sleep ..but for more than 30 years  I have been using the fidelity insight newsletter ..
> 
> ...


Yes, Math...see what you mean.  That is sad when the living spouse has no clue.  God bless them all.  Talk about trauma x 2.


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## mathjak107 (Aug 11, 2019)

Liberty said:


> Yes, Math...see what you mean.  That is sad when the living spouse has no clue.  God bless them all.  Talk about trauma x 2.


My wife was a widow when I met her ...her husband dropped a pile of investments in her lap she knew nothing about ....she decides to go to her bank and they hook her up not with a planner but a broker ...he put her in dot com and tech stuff and she lost half her savings ....so today she takes an interest and understands everything we do ..... in fact I don’t even do a trade without her in the loop....so following a newsletter is very easy for her to do with or without me .....


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## Floridatennisplayer (Aug 11, 2019)

Agree.  I dumped Fidelity's Private Client managed account BS with all the fees. I now have a simple 2 index fund portfolio. Broad market index and bond index.  Asset allocation: 20% SP annuity, 25%bonds, 20% cash, 35% equities.


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## mathjak107 (Aug 11, 2019)

Floridatennisplayer said:


> Agree.  I dumped Fidelity's Private Client managed account BS with all the fees. I now have a simple 2 index fund portfolio. Broad market index and bond index.  Asset allocation: 20% SP annuity, 25%bonds, 20% cash, 35% equities.


Nice diversification... personally I would have rounded it out with some gold and long term treasuries....it would be like a quasi golden butterfly but with an spia

It would be an all weather portfolio

15% gold

15% long term treasuries

15% cash

35% equities

20% spia’s


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## Joe Rogers (Aug 12, 2019)

Thank you all for sharing your thoughts and staying positive on a love 'em or hate 'em topic.  

My favorite was: “you give them 100k and get 6k a year , you see zero return for almost 17 years . so you can never say what your return is until you are dead.”  Thanks for that one.  

My bottomline.  If I buy an immediate annuity at 65, I won’t see a return on my money until I’m 82.  And if I don’t live that long, my wife gets nothing back.  

Instead, I can leave the same money in an interest earning savings account and start $500 a month withdrawals.  The interest I earn will add a few more years of guaranteed monthly payments to myself.  I do this all by myself without broker commissions - and my wife gets to keep the money if I die sooner.  

Do you all agree?  Am I missing anything?  Trying to keep it simple.


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## Liberty (Aug 12, 2019)

Joe Rogers said:


> Thank you all for sharing your thoughts and staying positive on a love 'em or hate 'em topic.
> 
> My favorite was: “you give them 100k and get 6k a year , you see zero return for almost 17 years . so you can never say what your return is until you are dead.”  Thanks for that one.
> 
> ...


Well, everyone is different, so its just a matter of opinions, huh.  I'd see about getting the best interest I could by doing  a couple years rate CD laddering or whatever your chosen bank has going right now.  Should be able to get 2-1/2% interest I'd think, so that would help.  Sounds like a plan, Joe.


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## Aunt Bea (Aug 12, 2019)

Joe Rogers said:


> Thank you all for sharing your thoughts and staying positive on a love 'em or hate 'em topic.
> 
> My favorite was: “you give them 100k and get 6k a year , you see zero return for almost 17 years . so you can never say what your return is until you are dead.”  Thanks for that one.
> 
> ...


The only caution from me would be that the money in a savings account could disappear, along with the income, if you are sued, encounter huge medical bills, are tempted to use the money for other purposes like home repairs, etc...  If you can get along without the extra $6,000.00/year I would take the risk and stay flexible if not I would still consider an annuity.

Good luck!


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## mathjak107 (Aug 13, 2019)

Aunt Bea said:


> The only caution from me would be that the money in a savings account could disappear, along with the income, if you are sued, encounter huge medical bills, are tempted to use the money for other purposes like home repairs, etc...  If you can get along without the extra $6,000.00/year I would take the risk and stay flexible if not I would still consider an annuity.
> 
> Good luck!


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## Liberty (Aug 13, 2019)

If a spouse has to go into long term nursing home facilities and needs to qualify under Medicaid, 
the money can then be used to buy an immediate annuity which would protect the other spouse's assets:
https://www.nolo.com/legal-encyclopedia/using-annuities-medicaid-term-care-planning.html


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## mathjak107 (Aug 13, 2019)

they are used in medicaid planning but there are some caveats .


Some states either do not allow spousal annuities or put additional restrictions on them.


Other planning options may be preferable, such as spending down assets in a way that preserves them, transferring assets to exempt beneficiaries or into a trust for their benefit, seeking an increased resource allowance, purchasing non-countable assets, using spousal refusal, or bringing the nursing home spouse home and qualifying for community Medicaid.


The acquisition of an annuity might require the liquidation of IRAs owned by the nursing home spouse, causing a massive tax liability.


The non-nursing home spouse may be ill, meaning that he or she may soon need nursing home care. If the spouse goes into the nursing home, too, the annuity payments would go to the nursing home.


The savings may be small due to a high income or the short life expectancy of the nursing home spouse, and the process of liquidating assets and applying for Medicaid might not be worth the considerable trouble.


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## Liberty (Aug 13, 2019)

mathjak107 said:


> they are used in medicaid planning but there are some caveats .
> 
> 
> Some states either do not allow spousal annuities or put additional restrictions on them.
> ...


Its always best to check out your state's requirements.  A good elder care lawyer can't be beat, if you can find one.  Some folks care about leaving assets to their heirs, others don't of course.  That in and of itself makes a huge difference on how you might want to stucture things. Exempt beneficiaries could really vary I'd guess.  Usually transferring assets into community spousal incomes are good for medicaid shelter purposes.


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## mathjak107 (Aug 13, 2019)

Liberty said:


> Its always best to check out your state's requirements.  A good elder care lawyer can't be beat, if you can find one.  Some folks care about leaving assets to their heirs, others don't of course.  That in and of itself makes a huge difference on how you might want to stucture things. Exempt beneficiaries could really vary I'd guess.  Usually transferring assets into community spousal incomes are good for medicaid shelter purposes.



i would never plan any of this on my own ...  it is complex .

we have a new york state partnership plan for LTC  so we have no look back , spending down , restricted incomes etc .... medicaid just pays the bills once the 3 years insurance is up .

according to our attorney new york , florida and connecticut  are big on upholding right of refusal and ordering a negotiated price that does not upset the lifestyle of the community spouse


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## Liberty (Aug 13, 2019)

mathjak107 said:


> i would never plan any of this on my own ...  it is complex .
> 
> we have a new york state partnership plan for LTC  so we have no look back , spending down , restricted incomes etc .... medicaid just pays the bills once the 3 years insurance is up .
> 
> according to our attorney new york , florida and connecticut  are big on upholding right of refusal and ordering a negotiated price that does not upset the lifestyle of the community spouse


Yes, we are aware of a lot since we went through it with the MIL...years ago.  So glad we had sold out most all of her out of state assets, and she had made son Power of Attorney for more than the 5 years required by state law before she went into the nursing home for 9 years. Set up a Miller Trust for her to connect the income dots as she was receiving too much income.  Never would have believed anyone could live 9 years flat on their back, mostly... if you call that living I mean...she died in her 95th year!


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## GreenSky (Aug 14, 2019)

Let's make this easy.  Deferred (non-variable) annuities basically come in two flavors:

1)  Fixed interest much like a CD.  Generally a bit higher than you get from the bank.  Boring as hell.  Right now a 2 year is about 3% with a 4 year around 4%.  I like the 2 year as an alternative to a low yield bank CD.  Stock market just dropped dramatically and this might be a good place to "park" money for a short time until things settle.

2)  Index Annuities.  You get a part of the upside of the market with zero of the downside.  So it the market goes up (for example) 10% you might get 6%.  Did you get ripped off?  Well, if the market drops 10% you lose nothing.  Gains are always locked in.

It's interesting that if the market went up 50% in a year and then dropped 50% most people think they have the same amount they started with.  Actually they would be down 25%.  (Do the math).  Same if reversed.  Down 50% and up 50% yield a 25% loss.

Much of our retirement has been moved into index annuities.  7 year with 10% penalty free withdrawals annually.  In 7 years we walk away with whatever the index earns us.  I've very happy earning zero in a down year.  I'm happy getting a piece of the action in an up year.

We have money in gold and silver and still some in the stock market.  But I'm more concerned with being "loss proof" than earning the maximum possible.  We gain in a good year and don't lose in a bad year.  Seems simple enough!

Many of my clients like this approach.  Some prefer to do things in other way.  There is more than one way to win in life.  I just don't want to lose.

Rick


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## mathjak107 (Aug 15, 2019)

index annuities are not ever proxies for market investments ... they are really fixed income with a bump ....  no one on my opinion should buy an index linked annuity to replace growth investments ...

they do not include dividends which account for  20-30% of all market returns .so right off the bat you  so are starting out much lower with one hand  tied  behind your back  , then the internal fees are high plus your participation rate is capped . in the end these  are no where near an equity investment and should not be ever counted on as one nor ever ever sold as a proxy for one , that would be very disingenuous  . they are mostly  a fixed income investment with a bit of a stock option bought  to add a kicker ..

so no , you do not earn what the index earns , that is just false  ,, you have a capped participation rate and nooooooooooo dividends which are a very important part of  a return plus fees .

in fact you can create your own cd's on steriods by making your own  index linked cd's which are just like the index linked annuities . .


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## mathjak107 (Aug 15, 2019)

for those who want to see how these linked products are done here are my older instructions . this was written when rates were higher but the mechanics are the same ...you can also see why " getting what the index gets " is just false ...



An EIA is an insurance contract that theoretically offers the buyer the opportunity to participate (to some extent) in equity market performance while guaranteeing a minimum payout at the end of the policy guarantee period. The extent to which the buyer participates in equity market performance typically varies year to year as does the minimum guaranteed crediting rate (AKA interest rate paid on the policy). This has proven to be  the sucker pitch for many conservative investors. 

The problems with these policies are that you have little control over how much you participate in the equity market; the policies typically have high early surrender fees and very lengthy surrender periods (10+ years is not uncommon); the internal expenses of these policies are quite high; you are exposed to insolvency of the issuer; the participation is typically limited to price changes in an equity *index*, with no compensation for dividends on the *index*; the participation in the *index* is capped at a predetermined level so that really big gains are truncated within the annuity structure; and the tax treatment of eventual distributions may be less than optimal.


By far, the simplest way to set up an EIA is to do it in an uncapped version. The simplest uncapped replication portfolio consists of a 1 year fixed income investment (such as a CD) and a call option on whatever equity *index* ETF you want exposure to. So let us assume you can buy a 1 year CD that yields (APY) 4%, you want exposure to the S&P 500, you have $100,000 to invest, and you want a minimum yield of 1%. To replicate an EIA, you would buy the following:

CD: You want $101k in a year, so you invest $101,000/1.04 = $97,115 in a 1 year 4% yield CD. In a year, the CD matures and you get $101,000, which is your desired minimum payout.

Options: Your CD purchase leaves you with $100,000 - $97,115 = $2,885. You take this amount and buy at the money 1 year call options on the S&P 500 *index*ETF (ETF symbol SPY). At the money means that the option exercise price is about equal to whatever the ETF sells for today. So with SPY trading at $137.93 as I write this in April 2008, we wish to buy April 2009 calls with a strike of $138. Such a thing doesn’t exist, so we will settle for the closest month we can get, which is March 2009. March 2009 calls (Symbol SFBCH) sell for $12 each and must be bought in contracts on 100 shares each, so you want to buy $2885/$1200 = 2.4 contracts, but must buy 2 contracts for $2400.

So you end up with a CD that will pay $101,000 in a year, $485 in cash, and options on 200 shares of SPY struck at 138. The options cover a notional amount of $138 X 200 = $27,600, so your “participation rate” in the *index* is 27,600/100,000 = 27.6%, meaning that you catch 27.6% of the appreciation of the S&P 500 through next March while bearing none of the downside. When the options are about to mature, you can sell them for cash, assuming the market has gone up and they are worth anything. Otherwise, you collect your $101,000 from the CD, have your $485 plus whatever interest it generated, and decide if you want to play this game again for another year.

or

Instead of having a small, uncapped participation in the *index*, you could have a larger participation but cap it at a given level. This is essentially what is done inside the EIA contract sold by most insurers. To replicate the EIA, you would buy the same CD as in the above example. However, the options portion would include:

1) Buy the at the money options on the *index* as in the above example
2) Sell out of the money options for the same expiration date and underlying ETF.

An example will be helpful:

Lets assume that you would be willing to cap your upside in return for a higher participation rate. That means you want to buy call options at the money ($138 strike) and sell call options at a strike that is about 10% higher ($152 strike). The $152 strike options currently trade for about $5.50 a share. So we buy:

4 contracts of the at the money options (SFBCH) for 400X12 = $4800

And we sell:

4 contracts of the 10% higher strike $152 (symbol SYHCV) and receive cash of $400X5.50 = $2,200.

Total out of pocket for the options is $4,800 - $2,200 = $2,600.

So you end up with a portfolio that consists of a CD that will pay you $101,000 in a year, $285 in leftover cash, and a package of options that gives you up to 10% of the upside on 400 X $138 = $55,200 worth of the S&P 500 *index*. Note that by capping your potential upside you have increased your participation rate to $55.2% of your $100,000, or double the uncapped version.


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## GreenSky (Aug 15, 2019)

One can certainly do exactly what what was written above.   While the return may be better than allowing an insurance company to do something similar (albeit with a cap), it is a bit more complicated and takes skill that many of us don't have.  But I will agree it's a very good way for those with the ability to maximize return.

And nobody should say you "get what the index pays."  You get a part of the growth of the market without any risk of loss.

Unless the money accumulation is for personal use I still prefer a single premium life policy tied to the S&P index.

Rick


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## Aunt Bea (Aug 15, 2019)

GreenSky said:


> One can certainly do exactly what what was written above.   While the return may be better than allowing an insurance company to do something similar (albeit with a cap), it is a bit more complicated and takes skill that many of us don't have.  But I will agree it's a very good way for those with the ability to maximize return.
> 
> And nobody should say you "get what the index pays."  You get a part of the growth of the market without any risk of loss.
> 
> ...



I have trouble with the idea of giving up control until I'm firmly planted in the earth.  

With most of the old SPLI policies, you have to pay a surrender fee if the going gets tough and you need to access your own money.  I would think that for most people it would be better to invest the money in CDs, short term bond funds, etc... and use the income to purchase a term life insurance policy to benefit their heirs.


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## mathjak107 (Aug 15, 2019)

Aunt Bea said:


> I have trouble with the idea of giving up control until I'm firmly planted in the earth.
> 
> With most of the old SPLI policies, you have to pay a surrender fee if the going gets tough and you need to access your own money.  I would think that for most people it would be better to invest the money in CDs, short term bond funds, etc... and use the income to purchase a term life insurance policy to benefit their heirs.


in over 10,000 different scenario' run by dr wade pfau  67% of the time a a couple who buys an immediate annuity for the oldest spouse , a 40-60% balanced portfolio and single premium life  for the younger spouse worked out the best . the tax free life insurance was worth a light to a spouse who has rmd's as a single


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## mathjak107 (Aug 15, 2019)

GreenSky said:


> One can certainly do exactly what what was written above.   While the return may be better than allowing an insurance company to do something similar (albeit with a cap), it is a bit more complicated and takes skill that many of us don't have.  But I will agree it's a very good way for those with the ability to maximize return.
> 
> And nobody should say you "get what the index pays."  You get a part of the growth of the market without any risk of loss.
> 
> ...



i am in never in favor of mixing insurance with investments ..it rarely works out well... you can develop a comprehensive package like i mentioned above using your own investing , life insurance an an spia but each should be handling a dedicated function ... it is like these hybrid life insurance policies that combine life and ltc can be one of the most expensive ways to get ltc  coverage , while on the outside looks pretty cheap.


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## GreenSky (Aug 15, 2019)

Aunt Bea said:


> I have trouble with the idea of giving up control until I'm firmly planted in the earth.
> 
> With most of the old SPLI policies, you have to pay a surrender fee if the going gets tough and you need to access your own money.  I would think that for most people it would be better to invest the money in CDs, short term bond funds, etc... and use the income to purchase a term life insurance policy to benefit their heirs.


That is 100% true of older and in fact many current SPLI policies.  That is why I only use companies that despite withdrawal penalties will guarantee to return at least when you deposited.  So if you put in $100,000 (for example) and the next day you want it back, you get it.

If money is for your heirs I know of no other product that can guarantee a large step up in value than a SPLI.  There is a downside of course.  We need to compare the potential return if you do surrender quickly (usually after 10 years there is no penalty) with what the money could earn in another safe investment.  Bonds don't count because if interest rates go up and you need to cash them in the value might drop.  So you have to compare with a CD and somehow don't include the penalty for that early withdrawal.

Bottom line for a SPLI is a 70 year old woman can deposit $100,000 and have an immediate benefit of $180-200,000 for her heirs. You can indeed buy a term insurance good to age 121 for $80,000 at a cost (preferred rates) of about $2,600. That would be the same as paying 3.25% on $80K for the insurance. 

Everything we do has pluses and minuses.  I suggest everyone look at all options.

Rick


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## mathjak107 (Aug 15, 2019)

whole life or any permanent life insurance  is not an investment . it is insurance and it can be a great way of taking forever taxable money and turning much of it in to never taxable money for a spouse .

if i leave a million dollar ira to my wife she has rmd's and taxes to pay . not only that but now she loses an ss check , has to file single and has huge rmd's that can trigger other income linked penalty's like increasing medicare premiums .

but if i take some of that ira money and buy a life insurance policy she now gets 100% tax free money . perhaps not even getting her social security taxed anymore .

yeah , i will owe tax on the amount i use to buy the policy but you will not pay anywhere close to what the policy pays .

whatever is left in the ira's can go to the kids and they can pay the taxes over their life time but my spouse has totally tax free money .


never buy it for the cash value . the cash value is like a refund on  a cancelled gym membership . the cash value is only an agreement on an amount that you will get back if you do not use the insurance you paid for less restocking fees . it is a terrible deal and in fact there is no account in your name with this money .

every penny you pay is premium for a policy with a 100% pay off rate . unlike term where 98% is never paid on .
one other benefit is you can take extra cash and over fund a whole life policy up to the irs limits before it is considered a modified endowment policy .

that extra money by law can have no fees or expenses taken out and usually policy's have a pretty high minimum rate like 4%  because they take some back in fees .

in this case they can't so at retirement you can borrow it out , not ever pay it back and enjoy all that compounding tax free . it just gets deducted off the death benefit .

whole life is a poor deal if you buy it for any  other purpose other than dying . they are priced so usually by age 100-105 you paid in through premiums ,decades of compounding interest and dividends just what the death benefit is less fees .

basically you are eventually self insuring . many insurers just call the policy endowed and dead or alive send you back your money .

permanent life insurance can be a very powerful planning tool because so much other crap is linked to your taxable retirement income .

in fact in a study by dr wade pfau an integrated  plan including  spia's for income /your own investing /whole life , beat buy term and invest the rest 2/3's of the time in over 10,000 different scenario's run .

the buy term and invest the rest if you did actually do that which few do always had a bigger balance by age 65 . but after that is where the advantage ended .

the integrated plan let you draw more income 100% of the time because there was little sequence risk and less powder had to be kept dry , and it left a bigger balance for heirs 2/3's of the time .

it took dying young and only the better outcomes for buy term and invest the rest to be the better deal  because of the tax advantages of the integrated strategy.

and noooooooooooooooo i never worked in the financial industry ever ... i just take an interest in learning from the smartest people on the subject.


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## mathjak107 (Aug 16, 2019)

one of the problems i found is you have insurance products getting a bad name because there is to much myth and misinformation  floating around out there ...  in fact most of the time people buy products for the wrong reason .

any kind of permanent life insurance is  only efficient if you die . you don't buy insurance with the intent of using it as a product for living via the refund amount if you cancel commonly called the cash value .. yet people do it all the time .

annuities are a product that are efficient if you live . that is what you want to buy for living ...so people tend to buy the wrong product for the wrong purpose ...

most people don't understand that while they say they don't want to give up the money  to buy an spia  , that in retirement spend down they are doing that very thing .

if you take a typical  retiree bucket system we have a bucket with money for short term needs like cd's , checking , savings accounts , money markets , etc ....we likely have a bond bucket for eating in the intermediate term and then an equity bucket for eating in 20-30 years .  these break down in to the typical 40/60 to 60/40 allocations retiree's use .

well you are spending down bucket 1 typically at a 4% draw rate or so . you can see that bucket will eventually  GO TO ZERO  and need to be refilled from bonds ...   read that again , that money is GONE  , you spent it ....

so you refill by selling some bonds and spend more ...eventually you will sell some equities and replenish buckets 1 and 2  again .

all the spia does is provide a  cash flow that never depletes ... it  is   about 50 % bigger then you can get safely because  annuities invest i n something you can't-dead bodies ..those who die add mortality credits to those who live .

so unlike your bonds and cash which can eventually go to zero and need refilling from equities the spia never stops ...that means you need a lot less selling of bonds and equities each time to refill .   that is where the advantage of using spia's with your own investing is ....

it makes life more efficient for your portfolio.

green sky -if you have not read the research from the  likes of michael kitces , dr wade pfau or moshe  milevski , i suggest you do ... it can be a big plus in educating your clients as to why these products can be beneficial when used in a COMPREHENSIVE PLAN   with their own investing and  NOT USING THESE PRODUCTS IN ISOLATION  by themselves.

hey for a fee i can be the pitchman   ha ha ha ,,, only i don't lie , i call it as i see it based on research from some of the smartest people on the planet in the field of retirement planning


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## Liberty (Aug 16, 2019)

mathjak107 said:


> one of the problems i found is you have insurance products getting a bad name because there is to much myth and misinformation  floating around out there ...  in fact most of the time people buy products for the wrong reason .
> 
> any kind of permanent life insurance is  only efficient if you die . you don't buy insurance with the intent of using it as a product for living via the refund amount if you cancel commonly called the cash value .. yet people do it all the time .
> 
> ...


What I want to know is where all these "smart people" when the big recession hit?  Who do you know that forecast it well "before" it happened so those  buckets could be rearranged...lol.


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## mathjak107 (Aug 16, 2019)

Liberty said:


> What I want to know is where all these "smart people" when the big recession hit?  Who do you know that forecast it well "before" it happened so those  buckets could be rearranged...lol.


your are mixing up 2 different things

don't confuse fortune tellers  and predictors with researchers who  deal with planning for these bad events when they happen ..

the smart people are those who  develop the spending methods that are based on the worst outcomes in history and finding ways to continue your income stream without interruption in good and bad times ...

that is what the safe withdrawal methods and bucket systems are about or using insurance products integrating them  in to the plan  ...

these are all about dealing with the events when they happen , which they have done well since 1871 , not predicting them .

in fact if you retired in 2008  and followed a safe withdrawal method you are no different then any other retiree group in history.

a  40/60, 50/50/60/40 mix has a very low failure rate despite the great depression , world wars , crashes , and all the disasters we have had to date only 5% of the 119 30 year retiree groups to date would  have failed with no adjustment follow a safe withdrawal rate method ... that is about the same odds of you spending down 4% inflation adjusted for 30 years and ending with 8x what you started with .

no one can predict the future but there certainly ways of allowing for uncertainty and planning for uncertainty.

as far as rearrainging the buckets ???? once established there is nothing to rearrange .

imagine having7 ears of safe money , 7 years of bonds and intermediate term money and all the rest equities ....   you can go  more than 15 years   years without selling a share of stock ... or you can rebalance and refill along the way whenever markets are up ...there is no predicting  in advance of anything


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## Liberty (Aug 16, 2019)

mathjak107 said:


> your are mixing up 2 different things
> 
> don't confuse fortune tellers  and predictors with researchers who  deal with planning for these bad events when they happen ..
> 
> ...


New some folks that has the old "GM" stocks in their portfolios that watched it go straight down the drain...along with some others that were supposed to be so "golden".
Do not think it is always the case that anything "always" works. Times change big time.  Figures lie and...well, you know the rest...lol.


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## mathjak107 (Aug 16, 2019)

Liberty said:


> New some folks that has the old "GM" stocks in their portfolios that watched it go straight down the drain...along with some others that were supposed to be so "golden".
> Do not think it is always the case that anything "always" works. Times change big time.  Figures lie and...well, you know the rest...lol.


first of all buying individual stocks is speculating . you are betting on the whims of a particular company ...diversified funds have no  individual company risk .
so betting on beaver cheese ,   land in florida or individual companies carries entirely different risks than just market volatility .

long term we are only dealing with market volatility . markets are up 300% since 2008 and 1100% since 1987 including the lost decade for stocks ... so any discussion about planning is about diversified equity funds or index's which are broad .

what lost money for investors is their own bad behavior not markets .

that is why retirement planning involves either bucket systems or  rebalancing   to provide their income streams . in down markets bonds get sold  , not stocks .

so far 50/50 has a 95%  success rate for surviving the worst of the worst we have ever seen ..in fact we have not seen anything as bad as those who retired in 1965/1966 since .... retirement planning is based on that group.

so what do the smart people teach us ???????????

by crunching the worst of the worst outcomes to date , their research teaches us that to draw 4% inflation adjusted takes a minimum of a 2% real return average the first 10 years of a 30 year retirement ... the entire outcome is decided in the first 15 years  so if 10 years in you are falling behind you need to take a pay cut ..... that is very important research because we can all monitor in advance where we stand ...after the first 15 years you will excessively have spent down to far and even the greatest bull markets can't bring you back ....

so the smart people do not predict ..they take these worst outcomes and develop planning methods for them ...anything better than worst case  is a bonus and we should take raises .    90% of  all 119 30 year retirements so far have ended at 4% draw rate with more than you started with .. that is how conservative a 40 to 60% equity portfolio actually is and how well it works against the worst of the worst when poor investor behavior does not  ruin things for you  ..


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## mathjak107 (Aug 16, 2019)

this pretty much says it all


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## CallmeIshmael (Aug 30, 2019)

mathjak107 said:


> there is more to that story i assure you .. markets are up 300% since 2008  just about any stock fund is up big time . . a simple 50/50 mix had to do just fine ... i will bet she forced the money manager to liquidate their positions in a down draft
> 
> if the story does not make sense it is usually because a chunk of it is missing .. in fact to date no one ever lost a penny in a 50/50 mix assuming broad based stock funds in any 10 or 20 year period , ever.
> 
> only way you could have lost money is using long term investments to meet short term money needs , bad investor behavior , or speculating in individual stocks ... none of which a money manager would likely have done so there is more to that story



Sorry, this is taking a myopic view of the stock market based on past results in the US.  How did a Japanese person who retired on January 1, 1990 do with a 50/50 mix of Japanese stocks and Japanese bonds?  Not too hot and could have suffered draw downs that were too steep using a 4% withdrawal rate.  

Using Japan is also not an unfair comparison given Japan is still stuck in a non-inflationary environment as is the EU - and if people have significant portfolio allocations to international equities, they could be subject to these issues as well.  

I agree with many of your views about annuities - primarily that going with a type of annuity other than an immediate annuity is fraught with issues related to usury fees and unknown risks in the measurement assets.  But immediate annuities have psychological benefits (behavioral finance is a thing after all, and we're subject to it more than we like to think) as well as simple budgeting benefits.  For example, if you know you have certain monthly fixed costs to solve for and your retirement portfolio is a bit lower than you would like, then monthly annuity payments combined with social security benefits can provide very valuable peace of mind - and be financially sensible to boot.  (I'm not a financial advisor, btw - I just think annuities are unfairly disparaged.)


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## GreenSky (Aug 30, 2019)

mathjak107 said:


> i would never buy any annuity other than an immediate annuity ..... anyother can be so complex to figure out  odds are you will not get what you think you are getting .
> 
> index linked  and variable annuities can be very difficult to understand


Not everyone has several million dollars where they can diversify themselves.  

Rick


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## mathjak107 (Aug 30, 2019)

GreenSky said:


> Not everyone has several million dollars where they can diversify themselves.
> 
> Rick


What you have is irrelevant as far as an amount ...it is still subject to the same math whether it is a million dollar portfolio or 100k ...

In any case a safe draw rate would be initially a 4% draw of whatever you have  with a 40-60 % equity allocation and the rest  assorted bond funds ...if one wants to share some of the bond portfolio with an spia no problem..  that draw rate would likely require raises taken along the way besides inflation adjustments,as 90% of all 119 30 year cycles have ended with more than you started with  if you don’t


Making whatever we all have last 30 years is the same math regardless of amount....
I highly recommend they avoid variable annuities.


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## 911 (Aug 30, 2019)

I have an index annuity. It’s not at all hard to understand. If the S&P index rises by 10%, my account rises by 10%. If the S&P’s have a bad year and falls by 10%, my account doesn’t move up or down. My annuity is not affected by any losses in the S&P index, only by the gains.


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## mathjak107 (Aug 30, 2019)

911 said:


> I have an index annuity. It’s not at all hard to understand. If the S&P index rises by 10%, my account rises by 10%. If the S&P’s have a bad year and falls by 10%, my account doesn’t move up or down. My annuity is not affected by any losses in the S&P index, only by the gains.


Right off the bat I can see you don’t under stand it ...you can NEVER GET WHAT THE INDEX GETS. ...index linked annuities get nooooo dividends and dividends account for 20-30% of the s&p return .....your participation rate is also likely capped because the options they use are capped . It may be capped at a max of 10% but you certainly don’t get unlimited gains unless the point you start seeing anything extra is raised ... index annuities are either uncapped but  need a minimum gain that is higher before you see an extra dime , or they cut in lower but are capped at a max ...

   in short most years it is more like a cd on steroids not a proxy for a real equity investment...

I suggest you learn to understand what you bought because you obviously don’t understand how an index linked product works... I described in my post somewhere , just how you can do these on your own ...so don’t believe for a second that your explanation above is correct ... you get no dividends and your participation rate is likely a capped version ,it can never return what the index does .

So get back to us after confirming you get no dividends and tell us what your actual participation rate is ..it is in the plan offering .

Here is exactly how it’s done so you can hopefully understand why your understanding of what you think it is can’t possibly be .


By far, the simplest way to set up an EIA is to do it in an uncapped version. The simplest uncapped replication portfolio consists of a 1 year fixed income investment (such as a CD) and a call option on whatever equity index ETF you want exposure to. So let us assume you can buy a 1 year CD that yields (APY) 4%, you want exposure to the S&P 500, you have $100,000 to invest, and you want a minimum yield of 1%. To replicate an EIA, you would buy the following:

CD: You want $101k in a year, so you invest $101,000/1.04 = $97,115 in a 1 year 4% yield CD. In a year, the CD matures and you get $101,000, which is your desired minimum payout.

Options: Your CD purchase leaves you with $100,000 - $97,115 = $2,885. You take this amount and buy at the money 1 year call options on the S&P 500 indexETF (ETF symbol SPY). At the money means that the option exercise price is about equal to whatever the ETF sells for today. So with SPY trading at $137.93 as I write this in April 2008, we wish to buy April 2009 calls with a strike of $138. Such a thing doesn’t exist, so we will settle for the closest month we can get, which is March 2009. March 2009 calls (Symbol SFBCH) sell for $12 each and must be bought in contracts on 100 shares each, so you want to buy $2885/$1200 = 2.4 contracts, but must buy 2 contracts for $2400.

So you end up with a CD that will pay $101,000 in a year, $485 in cash, and options on 200 shares of SPY struck at 138. The options cover a notional amount of $138 X 200 = $27,600, so your “participation rate” in the index is 27,600/100,000 = 27.6%, meaning that you catch 27.6% of the appreciation of the S&P 500 through next March while bearing none of the downside. When the options are about to mature, you can sell them for cash, assuming the market has gone up and they are worth anything. Otherwise, you collect your $101,000 from the CD, have your $485 plus whatever interest it generated, and decide if you want to play this game again for another year.

or

Instead of having a small, uncapped participation in the index, you could have a larger participation but cap it at a given level. This is essentially what is done inside the EIA contract sold by most insurers. To replicate the EIA, you would buy the same CD as in the above example. However, the options portion would include:

1) Buy the at the money options on the index as in the above example
2) Sell out of the money options for the same expiration date and underlying ETF.

An example will be helpful:

Lets assume that you would be willing to cap your upside in return for a higher participation rate. That means you want to buy call options at the money ($138 strike) and sell call options at a strike that is about 10% higher ($152 strike). The $152 strike options currently trade for about $5.50 a share. So we buy:

4 contracts of the at the money options (SFBCH) for 400X12 = $4800

And we sell:

4 contracts of the 10% higher strike $152 (symbol SYHCV) and receive cash of $400X5.50 = $2,200.

Total out of pocket for the options is $4,800 - $2,200 = $2,600.

So you end up with a portfolio that consists of a CD that will pay you $101,000 in a year, $285 in leftover cash, and a package of options that gives you up to 10% of the upside on 400 X $138 = $55,200 worth of the S&P 500 index. Note that by capping your potential upside you have increased your participation rate to $55.2% of your $100,000, or double the uncapped version.


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## GreenSky (Aug 30, 2019)

A safe draw rate is closer to 2.8%.  Plus someone with a nest egg of $100K should not, under any circumstances be directly in the stock market.

At one time I had a Series 7 license, stock broker.  What has been suggested is so complicated that 99% of people couldn't handle it.  A reasonable return of 4-6% without any thought at all is fine.  Certainly for me and certainly for many if not most.

If it takes 1,000 words to describe something simple, it's not.

Rick


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## mathjak107 (Aug 30, 2019)

I 


GreenSky said:


> A safe draw rate is closer to 2.8%.  Plus someone with a nest egg of $100K should not, under any circumstances be directly in the stock market.
> 
> Rick


nope ...that would be  for fixed income portfolios .drawing 4% inflation adjusted and having at least 40% equities has resulted in 90% of  the 119 30 year cycles to date ending with more than you started ..in fact 60/40 has ended with more than 2x what you started with 67% of the time and 3x what you started with 50% of the time .

The odds of 4% failing is the same as the odds of ending with 8x what you started with ...

That is because a 4% draw is already based on the worst of times .....

If we eliminated the 5 or 6 worst case scenarios we had a safe draw rate would be 6.50% .


So who ever is telling you this story needs to look at the research from guys like Michael kitces


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## mathjak107 (Aug 30, 2019)

GreenSky said:


> A safe draw rate is closer to 2.8%.  Plus someone with a nest egg of $100K should not, under any circumstances be directly in the stock market.
> 
> At one time I had a Series 7 license, stock broker.  What has been suggested is so complicated that 99% of people couldn't handle it.  A reasonable return of 4-6% without any thought at all is fine.  Certainly for me and certainly for many if not most.
> 
> ...


. ...with out knowing their full situation you should never make that claim ..what if they had big pensions and this is  legacy money .....

Even at 65 we have money we won’t eat with for 20-30 years ..that is still long  term money and there is nothing wrong putting long term money in a diversified fund and  the rest in bonds and cash ...

100k is a small amount in the scheme of  things and to be honest not much of a retirement savings . But the point is. When it comes to a safe draw rate the amount is not the determining factor ...but a retiree should have cash reserves for emergencies and 100k would not be enough to do it all if they did not have big pensions


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## mathjak107 (Aug 31, 2019)

GreenSky said:


> A safe draw rate is closer to 2.8%.  Plus someone with a nest egg of $100K should not, under any circumstances be directly in the stock market.
> 
> At one time I had a Series 7 license, stock broker.  What has been suggested is so complicated that 99% of people couldn't handle it.  A reasonable return of 4-6% without any thought at all is fine.  Certainly for me and certainly for many if not most.
> 
> ...




a typical retirement portfolio is nothing more than  40-60%  total market fund / the rest  a total bond fund .. there is nothing simpler .. surely you are not suggesting a variable or index linked annuity is simple ... i would hope not ..   as evidenced here few understand what they bought other then the words the person selling them wants them to believe .

many retirees use wellsely income

there has been lots of numbers crunching over the years by the likes of kitces , pfau , blanchette , .. the biggest risk has been going fixed income only . it has failed to last at 4% 64% of all 119 30 year cycles we have had ... 100% equities has actually been the safer bet  with a 93% success rate .. while i am not suggesting retirees go 100% equities , 100% equities did about the same as 50/50 .

the reason is the up years are so powerful that they have cushioned the down years almost the same as 50/50 .

but 40-60% equities are the traditional retiree allocation  and they  have  done well .

the 4% safe draw rate is based on what it would have taken to get through the likes of the worst of the worst for a retiree  . if you retired  in 1907,1929,1937, 1965 or 1966 you were a poster child for the worst times ever .

a safe withdrawal rate is not based on some average return  as the un-informed think ..it is based on the worst of the worst time frames . which is why  anything better leaves you with to much money unspent .

this is why 2.80% as a safe withdrawal rate would be a very inefficient use of your savings  unless you were 100% fixed income ..which in my opinion would be a very inefficient use of ones savings regardless  .

never ever assume some average , like 4- 6% is fine .. moishe milevski demonstrated how  the exact same average return   can fail 15 years earlier with nothing more then the sequence of the gains and losses being moved around ...the biggest risk a retiree has is sequence risk .

so 4-6% can actually fail if the sequencing is poor which is why you never use average anything in dealing with safe withdrawal rates ... they are not based on achieving any particular average . they are solely based on what it would have took for a retiree to get through the nastiest of times or in a monte carlo scenario the worst outcomes the computer can come up with .


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## 911 (Aug 31, 2019)

mathjak107 said:


> Right off the bat I can see you don’t under stand it ...you can NEVER GET WHAT THE INDEX GETS. ...index linked annuities get nooooo dividends and dividends account for 20-30% of the s&p return .....your participation rate is also likely capped because the options they use are capped . It may be capped at a max of 10% but you certainly don’t get unlimited gains unless the point you start seeing anything extra is raised ... index annuities are either uncapped but  need a minimum gain that is higher before you see an extra dime , or they cut in lower but are capped at a max ...
> 
> in short most years it is more like a cd on steroids not a proxy for a real equity investment...
> 
> ...



Yeah, I get it. My point is that I have a small amount of money in an index annuity just as "safe" money. The vast majority of my money is still invested in mutual funds that are tied to either the S&P or the NASDAQ. 

I never said that I couldn't have done better, but it is my money, so I do what I want to do, not what you think I should do.


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## mathjak107 (Aug 31, 2019)

911 said:


> Yeah, I get it. My point is that I have a small amount of money in an index annuity just as "safe" money. The vast majority of my money is still invested in mutual funds that are tied to either the S&P or the NASDAQ.
> 
> I never said that I couldn't have done better, but it is my money, so I do what I want to do, not what you think I should do.



it has nothing to do with you doing what you like with your money .



911 said:


> I have an index annuity. It’s not at all hard to understand. If the S&P index rises by 10%, my account rises by 10%. If the S&P’s have a bad year and falls by 10%, my account doesn’t move up or down. My annuity is not affected by any losses in the S&P index, only by the gains.



if you are going to give people information about your index linked annuity , get it right at least .. don't say you are going to get what the s&p 500 gets  but with no potential for loss . that is blatantly  false . not only that but you claimed they are so simple . you could not be more wrong , they are very complex and few understand what they bought or how they work and why they can never be an equal to an equity investment .

with no dividends and almost 2% in expenses plus commissions  that is 4%-5%  less as a minimum right off the bat and that only grows worse as dividends go up . .. then you only get a percentage of that market gain because your participation rate is capped .. in the end these really are fixed income investments , not  equity investments ... the two should never be  compared .... index linked annuities are like cd's on steroids and they can give you a bit of a boost in an up market but they are never an equal to an equity investment -ever.

nether you or a broker should ever try to pass them off as any kind of real equity investment .

like i said it has nothing to do with what you choose to do , it only has  to do with the information you posted being false . you made it sound like you get what an investment in the s&p would get yet you could never loose money ... there is no such thing as a product like that .


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## mathjak107 (Sep 2, 2019)

so as you see even those who claim they understand these products obviously do not ...

by the time you really understand what you are buying when you buy both index linked annuities and variable annuities , YOUR HAIR WILL HURT   trying to figure out the twists and turns .

on the other hand buying an immediate annuity is very simple . it is as simple as buying a cd. if you like the draw rate , that is the whole deal . all fees , commissions , etc , like a cd , are already in the product .

but you need to understand that these pay as much as they do out because of mortality credits . those who die pay for those who live .

that draw rate is not a return , it is the rate they give you back the money you gave them .  it can take 17 years to get your money back and first see a penny of their money so that is when you first start actually seeing a return .

they can give you a draw rate higher then you can safely take it from your self . while early on you may want to hold to 4% , they can give you 6%  since they invest in not only bonds but something we can never invest in , DEAD BODIES  .. whoever dies gives their money to the rest in the pool .

they will be happy to sell you a life insurance rider for your heirs to get something but it is a very expensive way to buy life insurance


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## Liberty (Sep 2, 2019)

Immediate annuities can be used to shelter money / provide spousal income.  like when one spouse has to go in the "boneyard".  Assuming enough lifespan is left on the spouse remaining.


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## mathjak107 (Sep 2, 2019)

Liberty said:


> Immediate annuities can be used to shelter money / provide spousal income.  like when one spouse has to go in the "boneyard".  Assuming enough lifespan is left on the spouse remaining.



i never recommend them by themselves-ever .... but they do work well when they are used as part of the bond allocation in a diversified portfolio of equities and bonds.

when you are concerned about a surviving spouse ,  facts and figures shows us  that a single annuity , your own investing and permanent life insurance works better than a joint annuity and your own investing . the tax free life insurance has a big edge over the annuity .

so the single annuity pays more then a joint , you have your own investing and then  permanent life insurance for the spouse ... in 10,000 different scenarios run by dr pfau   this  comprehensive  package beat buy term and invest the rest in 67% of the scenarios .

that tax free life insurance to a spouse now filing single can be very powerful .


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## Liberty (Sep 2, 2019)

mathjak107 said:


> i never recommend them by themselves-ever .... but they do work well when they are used as part of the bond allocation in a diversified portfolio of equities and bonds.
> 
> when you are concerned about a surviving spouse ,  facts and figures shows us  that a single annuity , your own investing and permanent life insurance works better than a joint annuity and your own investing . the tax free life insurance has a big edge over the annuity .
> 
> ...


Bond fund seem to be really increasing.  Know a fellow that bought a fund of high-quality long-term bonds in the spring, thinking he'd park the money after witnessing  a bad sell off in the market. He is like a lot of others are thinking of a looming recession.  He was really surprised when the bond fund jumped up. It was up more than 20% this year...lol. Lots of ways to make and shelter your dough.  Having fun in retirement, to me is what its about though.  Not spending so much time figuring and refiguring...unless its your main interest of course.  Then, please go to someplace else for dinner, not my house!


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## mathjak107 (Sep 2, 2019)

Liberty said:


> Bond fund seem to be really increasing.  Know a fellow that bought a fund of high-quality long-term bonds in the spring, thinking he'd park the money after witnessing  a bad sell off in the market. He is like a lot of others are thinking of a looming recession.  He was really surprised when the bond fund jumped up. It was up more than 20% this year...lol. Lots of ways to make and shelter your dough.  Having fun in retirement, to me is what its about though.  Not spending so much time figuring and refiguring...unless its your main interest of course.  Then, please go to someplace else for dinner, not my house!




there are very simple portfolio's that are all weather . they make money up or down ...

they hold long term treasuries as well as short term treasuries , gold , and  equities  . all you do is rebalance once a year or when things get to far from the desired allocation .   the permanent portfolio uses 25% in each .

another model the golden butterfly weights more for prosperity with 40% in equities . 20% in the s&p 500 , 20% in small caps , 20% in long term treasuries , 20% gold , 20% short term treasuries ...

that has beaten 60/40 since 1971 in return , less down years and less swing .


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## Liberty (Sep 2, 2019)

mathjak107 said:


> there are very simple portfolio's that are all weather . they make money up or down ...
> 
> they hold long term treasuries as well as short term treasuries , gold , and  equities  . all you do is rebalance once a year or when things get to far from the desired allocation .   the permanent portfolio uses 25% in each .
> 
> ...


Sounds like a good plan.  Gold has always seemed to be included in these types of plans. Have often wondered why gold is still thought of as so valuable.  Chemically its boring, but is one of the "noble" metals, so that might be it.  Its gorgeous.  When you walk into the Cairo museum, better have your sun glasses on to view that stunning King Tut mask & chariot display in the center. It knocks your socks off with the morning sun coming through the windows. Its beyond beautiful.  Shiny things are valued. Gold may be valuable just because it is so beautifully shiny and we, as humans have always been so in love with and mesmerized by its golden beauty.


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## mathjak107 (Sep 2, 2019)

Liberty said:


> Sounds like a good plan.  Gold has always seemed to be included in these types of plans. Have often wondered why gold is still thought of as so valuable.  Chemically its boring, but is one of the "noble" metals, so that might be it.  Its gorgeous.  When you walk into the Cairo museum, better have your sun glasses on to view that stunning King Tut mask & chariot display in the center. It knocks your socks off with the morning sun coming through the windows. Its beyond beautiful.  Shiny things are valued. Gold may be valuable just because it is so beautifully shiny and we, as humans have always been so in love with and mesmerized by its golden beauty.


gold has a 5000 year history of being coveted ....

but gold can't be left sitting static . gold has to be used with a portfolio and rebalanced ...  when you do that you take advantage of the rise and buy other assets ..

it is like equities have gone no where for more than a year .. but gold and  long term treasuries are up 20-30% ...so they get rebalanced to add more  short term treasuries and equities .


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## Liberty (Sep 2, 2019)

mathjak107 said:


> gold has a 5000 year history of being coveted ....
> 
> but gold can't be left sitting static . gold has to be used with a portfolio and rebalanced ...  when you do that you take advantage of the rise and buy other assets ..
> 
> it is like equities have gone no where for more than a year .. but gold and  long term treasuries are up 20-30% ...so they get rebalanced to add more  short term treasuries and equities .


Yeah, its crazy with the short vs long term treasury bond markets today, too.  Maybe things will keep going nuts here for a while with all the interest rates so low.  Its like "how low can it go".  Something is big time wrong.  Do you know the history of why our money is worth less and less?
Read it somewhere and it scared the bloomers off of me...lol.  We're heading for a train wreck.


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## mathjak107 (Sep 2, 2019)

Liberty said:


> Yeah, its crazy with the short vs long term treasury bond markets today, too.  Maybe things will keep going nuts here for a while with all the interest rates so low.  Its like "how low can it go".  Something is big time wrong.  Do you know the history of why our money is worth less and less?
> Read it somewhere and it scared the bloomers off of me...lol.  We're heading for a train wreck.


actually monetary inflation is quite  low . a lot of the increases we see are shortage and demand based not  an inflating money supply ..

just look at oil as an example.what was once scarce is now abundant . oil is cheaper today then 12 years ago ... when we increase supply or stop the over use prices fall on most things . it has nothing to do with the money supply


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## Liberty (Sep 2, 2019)

mathjak107 said:


> actually monetary inflation is quite  low . a lot of the increases we see are shortage and demand based not  an inflating money supply ..
> 
> just look at oil as an example.what was once scarce is now abundant . oil is cheaper today then 12 years ago ... when we increase supply or stop the over use prices fall on most things . it has nothing to do with the money supply


I live in oil country.  Know lots of things are working together for oil prices.  But when you have short term interest bearing treasury bonds going for more than long term, that to me says inversion.  Period.  And with the overall interest rates so low and still yelling for the feds to keep lowing them...how low can they go already.

If I find that history of the money I'll post the link.  Very interesting and scary to see where we can be headed.  Most would say greed and avarice I guess.   Pretty soon a kid will pop out of his mom's womb a few hundred grand in debt!


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## mathjak107 (Sep 2, 2019)

I gave up predicting..Recession is always part of the business cycle ... in fact markets spend 80% of their time somewhere between the last low and last high ....trying to time this stuff is a losing game .

I have been an investor since 1987 ..I have been through crashes ,wars , the Great Recession and the lost decade for stocks as well as all the downturns ...markets still returned 10% a year cagr ...which is within spitting distance of just about every other retirement time frame or typical accumulation stage ....in short don’t try to rule bad things out , plan for them and allow for them and just forget about this stuff ...in the end odds are we will once again be just fine as we have been for 95% of the 119 30 year cycles we already had


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## Liberty (Sep 2, 2019)

mathjak107 said:


> I gave up predicting..Recession is always part of the business cycle ... in fact markets spend 80% of their time somewhere between the last low and last high ....trying to time this stuff is a losing game .
> 
> I have been an investor since 1987 ..I have been through crashes ,wars , the Great Recession and the lost decade for stocks as well as all the downturns ...markets still returned 10% a year cagr ...which is within spitting distance of just about every other retirement time frame or typical accumulation stage ....in short don’t try to rule bad things out , plan for them and allow for them and just forget about this stuff ...in the end odds are we will once again be just fine as we have been for 95% of the 119 30 year cycles we already had


As long as we live long enough...lol.  Otherwise it won't matter.


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## mathjak107 (Sep 2, 2019)

Liberty said:


> As long as we live long enough...lol.  Otherwise it won't matter.


Well if we don’t and we have a spouse they will ....life expectancy for a couple is much higher than either separately since each can outlive the other .  There is almost a 50% chance at 65 one in a couple will see 90


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## Liberty (Sep 2, 2019)

mathjak107 said:


> Well if we don’t and we have a spouse they will ....life expectancy for a couple is much higher than either separately since each can outlive the other .  There is almost a 50% chance at 65 one in a couple will see 90


Yeah, then they can get a "gigolo" to help her spend it and live happily ever after!


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