Annuities Advice?

Liberty

Well-known member
Location
Texas
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?
 

mathjak107

Well-known member
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 ..
 

Liberty

Well-known member
Location
Texas
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 ..
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.
 

mathjak107

Well-known member
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 .....
 

mathjak107

Well-known member
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

New member
Location
Eastern seaboard
Original Poster
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.
 

Liberty

Well-known member
Location
Texas
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.
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.
 

Aunt Bea

Well-known member
Location
Near Mount Pilot
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.
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!
 

mathjak107

Well-known member
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

Well-known member
Location
Texas
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:
 

mathjak107

Well-known member
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.
 

Liberty

Well-known member
Location
Texas
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.
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.
 

mathjak107

Well-known member
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
 

Liberty

Well-known member
Location
Texas
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!
 

GreenSky

Active member
Location
Las Vegas
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
 

mathjak107

Well-known member
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

Well-known member
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 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

Active member
Location
Las Vegas
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
 

Aunt Bea

Well-known member
Location
Near Mount Pilot
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
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.
 

mathjak107

Well-known member
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
 

mathjak107

Well-known member
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
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.
 

GreenSky

Active member
Location
Las Vegas
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
 

mathjak107

Well-known member
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.
 

mathjak107

Well-known member
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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