The Connie Mack show focused on guaranteed income in retirement this week with a writer from Kiplinger's, a portfolio manager and an annuity salesman.Annuities are a touchy subject. I am inclined to agree with any negative sentiment about them you can come up with but I know quite a few people here on the mountain who have them and they all seem to say the same positive things about being able to sleep at night.
The writer (her name was Mary Beth Franklin) talked looking at using guaranteed income for the fixed expenses. She used the example of people needing $6000 per month with $3000 of that being fixed expenses. In her example if social security (which she included as guaranteed income) paid $2000 per month she suggested a suitable annuity to cover the other $1000 of fixed expenses and then the portfolio (assuming there is one) would cover the other $3000 for the month.
If some annuities are as square of a deal as Ben Stein implies then this might be viable.
When the show came around to the annuity salesman I got lost in what he was saying or more correctly I think he was saying things without saying anything and I wondered how the hell the typical person could ever understand all of the nuances of the product. I for one get the feeling that I know what I don't know as far as annuities are concerned if you follow me. To be clear I am not licensed to sell annuities and it is not long into a conversation before it loses me.
Which circles back to people I know socially who love them; makes me wonder what they do not know.
The portfolio manager (his name was Louis Stanasolovich) seemed to be saying do it yourself. He talked a little bit about building your own (or having him build it for you, but not in an inappropriate salesy way) endowment-like portfolio using the sorts of products I have written about before.
Stanasolovich also made interesting comments about portfolios that "come in" which I took to mean portfolios of people who hire him. He said that these portfolios never are "never managed well." There is obviously a skew to the portfolios he sees because if the portfolio was doing well by the client's measure they would not have hired him in the first place.
Still this might be a call to review what you have, look under the hood, maybe shell out a little bit for a website or two that can analyze what you own and make sure your portfolio is "managed well."
Based on all the interaction I get to have through the blog, theStreet.com, Seeking Alpha, meeting people in the course of running our business and interacting with other investment managers at these conferences I attend I can tell there is a wide range of knowledge and skill level but anyone who seeks out blog content must want to learn more than they currently know so they can be more knowledgeable and have a better chance of having enough money when the need it.
I'll repeat that all of us are in the same boat; we are trying to learn more than we now know so we have enough when we need it.
Yesterday we had a helicopter land at the fire station for a training exercise. I have been directly involved with one air evacuation of a patient and while nothing went wrong the number of things that can go wrong is astounding and yesterday's training was a good reminder of that. Can you even see the tail rotor in the picture? If you ever need to be anywhere near a helicopter always, always, always stay to the front.
9 comments:
Perhaps a conversaton about "fixed expenses" are in order. My mother had an annuity that paid $300 per month and she was set up for life. Of course, hamburgers & haircuts were 25 cents at the time. (She did live long enough to see the $4.00 burger and the high dollar haircuts however) The other downside of annuities is the salesman's fee which can be spectacular. IMHO, there is no place for annuities in anyone's portfolio.
On the diehards board Single Premium Immediate Annuities (SPIA) are the "good" ones. You give the insurance company money and they give you an income stream. You get mortality credits for being old. The older you are when you buy it the more you get. The income can be fixed or inflation adjusted. Generally late 60s is about the earliest you want to get them. States have some protection on these at around $100K. Taking one at 80 can get the buyer 10%.
The "bad" annuities is pretty much anything else such as variable annuities, equity indexed annuities etc. Insurance is not an investment!
We're not talking long term care insurance. That's a different subject with its own complications.
Paul
"Paul" continued.
An exception for annuities as an investment might be someone who is:
-100% taxable
-Wants to invest in REITs or other tax inefficient asset.
Then a low cost variable annuity at some place like Vanguard might be an option, but it adds an extra 25 or 30 basis points to the ER.
Paul
Vanguard recently introduced 3 managed distribution products with monthly distributions: a growth orientated fund designed to pay an anualized 3% (VPGFX), whose Net Asset Value (NAV) is designed to increase at a rate greater than inflation; a growth and distribution oriented fund designed to pay an anualized 5% (VPGDX), whose NAV is designed to increase at the rate of inflation; and a distribution oriented fund designed to pay an anualized 7% (VPDFX), whose NAV is designed to not keep pace with inflation. The expense ratios are around 0.58%. I intend to watch these funds for a few months and may invest in one or more of them if they live up to their objectives; I view these as annuity-like products that can be cashed in if one so desires. Thoughts? Thanks, JCarr
I'm also someone who has long been turned off by annuities; I'm still 10 years away from retirement but if I were 62 and retired today I believe I would take social security (i'm planning on ss alone covering my fixed expenses, with my residence paid off); and then when i turn 66 1/2 very likely make use of a “Withdrawal of Application.” on my ss. By filing an SSA Form 521, Social Security will treat you as though you had never applied for benefits. It will let you immediately reapply for benefits at your current age. To do this I'd have to repay all the money I've received in past benefits. But because Social Security charges no interest, reapplying turns out to be a good deal. It's my way of buying an inflation-adjusted annuity for a price that beats anything offered by the financial services industry.
the social security do over was also discussed on the show at length and pretty much drew the same conclusion as you.
If you make $2000 per months in those 4 years then it works out to $96,000.
to be fully informed it seems to me you need to understand the return implied by doing the do over versus keeping that $96,000 in your portfolio.
could the $96,000 return 7% annualized and you spend 4% or better yet 3%? if so, is that better? maybe not.
I am not poo-poohing it but I will say I don't know what I think.
I'll betcha the portfolio manager meant "incurring losses" when he said "coming in".
The option Anon 2:00 PM mentions is improved even more because of the income tax deduction for Social Security income taxes paid in prior years; that amount goes straight to ‘miscellaneous adjustments’ on the Itemized Deduction sheet.
But depending upon what return you expect to receive during those four years and beyond the Withdrawal of Application route may not be optimum. I've run a number of trials testing the crossover point where starting early and investing SS payments at x% is passed by waiting and starting SS 4 years later. Stated more formally the question is: How many months does it take for the future value of income stream 1 to equal the future value of income stream 2?
For example in the case of a 5% discount (interest/return on earlier SS funding) the crossover occurs about 16 years out (factoring COLA is will tighten that somewhat). It turns out that a virtually infinite crossover point, where starting later never catches up with starting earlier, isn't much further off: about 8% will do it; of course a return at that level with the requisite risk characteristics might not be easy to find but if searching for the grail appeals ....
PS: As an aside I think the Vanguard Group products are the pick of the crop. In the case of their annuities the insurance wrapper is remarkably cheap and the variable annuity I bought for my wife 17 years ago has performed quite well (I'm not a big fan of annuities either, variables included, and wouldn't touch any of the "Life" products with a fork, but there were tax reasons for the move and the management of the Vanguard sub-accounts I was interested in had good track records). I've been investigating Vanguard's managed distribution products and been fairly impressed so far but haven't researched these in depth yet and would probably wait for a bit more track record to develop in any case.
Disclosure: other than maintaining a couple accounts at Vanguard I have no interest in or connection to the firm.
Roger,
I have a Fidelity "Personal Retirement Annuity," with a .25% annual fee, no sales charge, no annual maintenance fee, and no surrender charge. I bought a tax-deferred annuity because I came into a lump of money too large for an IRA, etc. It has done well over the years but I dislike the 18 trading days maximum imposed by Fidelity. After that, I can move it all into cash, but nothing else. I would like to slowly transfer it to a brokerage accounts, but am reluctant to face the tax consequences. John
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