I have been ignoring Yahoo's financial columnists until now. (Who can take Robert Kiyosaki seriously? "Tired of the same old financial advice?" Then do illeagal and stupid things to fend off enui. )

However, Ben Stein is down there at the bottom of the list of columnists and I looked at his stuff today. As laconic as he normally comes off on the tube, his columns are really gems, IMHO. Take a look:

http://finance.yahoo.com/columnist/a...ourlife/2006/1 and .../2005/1

One column is not listed:
Income That Lasts as Long as You Need It.
http://finance.yahoo.com/columnist/a...rlife/2312?p=1
Worthy of reading, at least.

At the risk of boring everyone, here is an abstract of some of his columns:

A Retirement Portfolio With Staying Power
50% REIT ETF/50% high-income ETF
Monte Carlo: 30 yrs,
4% ed 99.99% (1/10,000); average case 16X starting value
5% ed 99+%; most likely scenario leaves 9X starting value;
1/10,000 of running out in 18 yrs

Income That Lasts as Long as You Need It.
http://finance.yahoo.com/columnist/a...rlife/2312?p=1
variable annuities
his parents, economists, bought a VA. Still paying out 6 years after their deaths.
Good references, warnings.

Living Hand-to-Mouth and Barely Getting By
dire warnings.
Medicare will be bankrupt in 11 years
we are living on borrowed time.

Standards of Life in the Future: Think Grim
[don't fly United. Doggies, Ben, I coulda told you that. ]
Americans need to have saved $400k to even start to think of getting by (living on half their income). Avg $50k, $110k w/ home
at 65, put half in an annuity, fixed or VA.
“But be very scared -- and start doing something about it now. Tomorrow is too late. Do it now.”

Three Big Mistakes in Retirement Planning
1.not matching liabilities to assets. [translation: plan to pay for your retirement.]
2.Failing to see that the bad scenario can and often does happen.
3.Failing to educate himself or hire a finance specialist [CFP] to take care of him.
From 65 to 85, 3.5% inflation will double costs.
Ray Lucia, “Buckets of Money”
Another friend, CFP: go 70-30 stocks-bonds and go for broad indexing worldwide for heavy emphasis on emerging market and micro-cap areas.

The Cruel Truth About Retirement
40 yr-old woman, earning $100k:
70% in stocks:
35% in Vanguard Total US Stock Fund (90% S&P, 10'% small stock)
35% in Vanguard Total International Stock Market (90% EAFE large stocks, 10% emerging market)
[corrected version:]
Must save 14% of pre-tax, post-contribution income to get $1.8MM: to replace 80% of 85% = 68% of her present pre-tax income. W/d @4.25% increased by inflation each year
=90% chance of staying comfortable until 87, not counting SS, and 75% chance of making it through 100
Not counting on SS.
A 65 yr-old retiree is still a long-term investor


Work Adds Shine to Your Golden Years
Suggests it may be better to work part-time from 65-75, health permitting.

other stuff: China, oil prices.
..............................

His choices of asset categories is very similar to mine, so obviously, he is a man of perception. : (It doesn't hurt that they have been giving incredible returns for the past few years.)

He is a proponent of variable annuities. (Calm down, now! Whatever John Greaney thinks of annuities, I think they have a place.)

1) They are better than nothing. A lot of teachers are not living under bridges today because of TIA-CREF annuities.

2) At some point in one's life, it is desirable to have automatic distributions. At some point, I expect that I will not be able to handle my own affairs. Others have the same concerns, I know. (We have a lot of teachers in the family.) This is not a trivial concern for an older person.

3) Ben's parents (both economists!) bought into variable annuities--apparantly very carefully, because Ben allows as how, 6 years after their deaths (Ben, how does that work?), the distributions are many times what they were anticipated to be (? read it yourself; it is foggy tonite here.)

Ben Stein is an engaging writer and has an ability to write economically with punch that I have seldom seen since the script of "To The Manor Born", in particular the final episode.

Ed The Tree-Hugging Gypsy,
tired after cleaning up the shoreline of a reservoir in Calgary today. :P

__________________
I have outlived most of the people I don't like and I am working on the rest.

Stein has disclosed that is an official spokesperson for some annuity organization. I didn't read your links to see if he discloses that in those articles or not, nor do I know which came first - articles or affiliation.

LOL!,

Actually, Ben very clearly points out the organizations he belongs to and who pays him. He couldn't be paid for the ETFs he identifies.

My opinion: I think he believes in the value of annuities--where appropriate. I do too, for certain circumstances. As Leonardo Da Vinci became a Christian on his deathbed, I may well purchase an annuity (variable, low-fee, minimal insurance component) at some point in my declining years. (All other analogies do not apply.) With my family hisory, I should make out like a bandit.

Take a peek at Ben's stuff. It is well written and succinct. I was impressed enough to put together a summary of the stuff I thought interesting, and I am a rabid do-it-yourself-er.

__________________
I have outlived most of the people I don't like and I am working on the rest.

I have looked at both fixed and variable annuities.* The bottom line is that their IRR's are pathetic because of high fees and low intrinsic interest rates.*

You can create your own fixed annuity with laddered CDs and government bonds and get a much higher interest rate.* What you do get with annuities is a "negative" life insurance.* They will pay as long as you or your spouse live.* If you live about 10 years past your life expectancy you are going to break even.* Unfortunately, they are not inflation indexed unless you give up more current return.

Variable annuities are much more complex and the ways they rip you off are much more subtle.* Typically, the "variable" part is limited on the upside to an annualized 8 or 10% monthly.* That sounds great except the typical market upside during a year occurs in short, swift moves.* The market may move up 5% in a month but the VA gives you credit for 0.4 or 0.5%.* Of course, when it corrects, you lose that.* Just for fun, the fees are much higher on variable annuities.* They pay your sales professional a much higher commission.

My plan is to create a laddered CD/bond annuity using 10 year maturities to supplement SS and non-inflation adjusted pensions.* I will then continue renewing them until I reach my and DW's "expected" life expectancy.* As they come due after that, I figure to live on the principle.*

Initially, most of our assets will be in the stock market but I expect to have to increase our fixed income as time marches on.*

Another key point to remember with annuities.* They are not backed by anything except the "full faith and credit" of Joe's Annuity Company.* Even the large financial organizations have their annuity contracts in separate subsidiary corporations.* If American Expess has financial trouble paying their annuities, the whole corporation won't go bankrupt.* Only the part that owes you your annuity payments will go belly up.* It's happened before and will again.

Ben Stein has some interesting articles. Some of his points have been incorporated into my plans. Bottom line though, he is a paid spokeman for the annuity industry. I have not seen anything offerred by the annuity industry that makes any sense for most of us.

Now, you can be sure Ken Lay has a pile of annuities. They are considered "retirement assets" protected from creditors. When he bought them, legal protection of his assets was probably much more important than his rate of return.

__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius

Just checked the interest rate on http://www.immediateannuities.com/. A 60 yo man can set up a lifelong annual income stream of of about 7.4% of the initial investment.

While the jury is still out on whether it is wise to include IAs as part of one's retirement plan, this sure beats a 4% SWR. It would take 15+ years before inflation eroded that return back to the 4% range in real dollars. By then your nest egg is likely much bigger and your expenses lower. You can either coast or purchase more annuities to inflation-correct, and your dollars buy more income (you are older).

I look at IAs as being longevity and volatility insurance. They have their ups and downs, but my research thus far suggests that they may have a place for some.

Caveats:
- Spread the risk among several highly rated carriers
- DCA in (i. e. over a couple years, perhaps), since yields chase long term rates
- Don't overdo it; invest no more than about 25% of the nest egg.
- Be aware and willing to take this off the table for your beneficiaries

A 7.4% return on 25% of your initial nest egg allows you to apply a SWR of just 2.15% on your remaining assets to get to 4% total SWR. Your investment will thus grow faster than at 4% of assets (yes, I realize that you also have 25% lower nest egg to grow - it is a matter of trading more income early for a bit less later on, perhaps). This effect obviously diminishes over time as inflation erodes the real value of your IA payments.

It's a confusing issue and I don't pretend it is good for all, but I am considering such a purchase upon ER as a strategy to allow a bit more spending in early, active retirement; I can accept its diminishing real returns over the first 15 yrs and rely mostly on my SWR after that.

Am I overlooking any showstoppers here?

__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.

With your example the money is gone upon death. Yes, I agree it won't matter then but in the interim you lose flexibility and access to the capital forever.

A 60 yo man has a life expectancy of less than 20 years. Assuming 20 years of payments, I get a 4.06% rate of return. There is no money left for funeral expenses or heirs. The payment also isn't indexed to inflation as you pointed out. If the 60 yo man lived to 85 he would equal the 5.3% available on CDs now.

You bring up the valid point of "reverse life insurance." They will pay as long as you live. Beat the odds and make it to 110 and you win. You might. Actuarily, the insurance company, like the Las Vegas casinos, will win overall.

If interest rates go to 20%, the annuity stays the same. The CDs can be cashed in with the loss of 90 days interest and reinvested.

__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius

That's why I suggest confining this strategy to about 25% of assets at retirement. I agree, if you put all your pennies in an annuity it would be a bad idea. BTW, my life expectancy, per various web tables is age 85.

Yup, and if interest rates drop to 2% or stock values decrease 20%, the annuity stays the same. Volatility insurance.

Agree, this has to be money your are willing to part with forever. And did you calculate in the fact that for some 15+ years you can tap less from your nest egg than the legendary 4%? That matters, especially early in retirement and, in part, compensates for taking that 25% off the table to begin with. Heck, in any event you have to set some money aside for your expense bucket.

Sounds like it is not an approach you are comfortable with, so it's not for you. I look at it as a possibly attractive piece of the expense/cash management aspect of ER (like CDs, STBond funds, MMF, etc.).

Not sure if I will do this yet, but I guess I remain a bit more open-minded about it.

It's funny, but every time I raise this issue I get pretty negative gut reactions (maybe because it's an insurance product) yet when you dissect the various arguments it seems like something worth considering. That's why I am concerned I am missing something important (wouldn't be the first time!)

Cheers.

__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.

I always jump on anyone that brings up annuities because I put the people that sell them in one of the lower levels of Dante's hell.

I think I understand your objective. Putting the "negative life insurance" issue aside, you can get a better "fixed" annuity for 15 years with laddered CDs and bonds. I got a quote for a 15 year fixed annuity. It would pay at a 4.73% rate (TX) but end after 15 years.

This is a better way to compare since the lifetime payout has all the mortality rates figured in. I was surprised it was this high but then the credit rating of the issuer wasn't disclosed. You can get better than 5.30% with a group of laddered CDs and bonds. Everything there is AAA or FDIC insured.

The cash value of any fixed payment will drop over time due to inflation. That's the curse of us poor slobs that don't have COLA'd pensions. I tend to think any payment you think is meaningful now will be irrelevant in 15 years. I am personally planning on my pensions to be "blow" money. I hope to spend it in a totally irresponsible manner. It will be for luxuries and travel until both I and my pension are no longer up to the task.

My 4% SWR and SS are to keep me in a comfortable lifestyle. I hope to be free from want but I also don't expect too many luxuries with what I have.

__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius

I agree with you on the negitive reaction to annuities from this board, it seems to be very prevalent. *I submit this observation: one of the biggest concerns you read on this board in reply to someone new asking if they have enough assets to retire is the concern about running out of income and having to go back to work. *With an inflation adjusted immediate annuity as one of your assets the risk of this can be greatly reduced or even eliminated. *However, if you suggest this as a possible option you will hear how bad annuities are.

Another interesting vibe I get from this board is that someone who has retired with a government (inflation adjusted) pension is in better shape then someone without one, even though the person with the pension has a smaller portfolio. *But buying an inflation adjusted immediate annuity (even with just part of your portfolio) is the worst thing a person can do, even though a pension is just an annuity that is backed by a different entity. *I've also read that a person with a pension has the positive benefit of being able to take greater risks with their portfolio. *Some count the pension as their portfolio's bond allocation leaving the rest for stocks and more volatile investments and they can still sleep at night because of the security of having that income stream. *Annuities could be looked at in the same manner.

It is interesting that when looking to retire the main thought here seems to be picking a W/D rate that is sustainable (i.e. don't go too high, 4% [or lower] is all you can take) and given a good portfolio allocation you will make it but when an annuity is suggested as a means of getting that W/D amount then the discussion turns to rates of return and how bad an annuity is. *Isn't the whole point of the FIRECalc calculation that it doesn't matter what the rate of return on your portfolio is as long as you don't expire your portfolio and run out of your income stream?

I don't mean to offend anyone with this post and I hope I haven't. *I retired over 2 years ago and the only reason I make a post such as this is to try and help as many people as possible to retire also. *If an annuity can provide some peace of mind for someone looking to make the plunge then why scare them into staying at work by taking annuities off the table?

Instead of pointing fingers at the board or the posters, I can think of a few other issues that might adversely impact an annuity's reputation:
- High-pressure annuity sales tactics for inappropriate forms of the same
- High up-front fees with poor disclosure of who's profiting from what
- High surrender charges or inappropriate investment mixes
- Inappropriate benchmarks.* I don't think most annuities can compare to govt penaions.* Most govt pensions have a higher likelihood of survival than most annuity insurance programs, and survivor's benefit options as well.
- Nothing for the heirs (which appears to be important to some).

Most people hide their wallets when they realize what they'll have to pay for an annuity.* Yet if you tell those same people about military or civil-service jobs they'll exclaim "Cool, affordable healthcare and COLA pensions!!* Where do I sign up?!?"* In other words the job benefits aren't perceived to have an extremely high cost compared to the job itself.* Can't say the same for annuities.

When confronted with purchasing an annuity, the lack of disclosure and the negative marketing makes the choice even more confusing than finding a decent mutual fund.* I wonder if M* could find enough people for the "Annuity Diehards" discussion board.

With all of the above issues, and the prospect of writing out a fairly big check, it's inevitable that "buyers" (rarely investors) would think to themselves "Gee, shouldn't I see if I can do better in a low-cost index fund?"*

I think that all the good annuities have already been located by this board and deemed inadequate when compared to an index equity fund. F'gosh sakes, no offense, Rich, but how badly does an investment have to suck before even a medical doctor hesitates to buy it?

__________________
*

Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on E-R.org: "The Military Guide to Financial Independence and Retirement."
I don't spend much time here— please send a PM.

You've got a couple of good points. *Most of the people that frequent this board are anal-retentive types. *We generally slice and dice the numbers numerous ways. *Unfortunately, there are no guarantees so there is a significant amount of risk that "past performance does not guarantee future results."

My experiences with annuities are not good. *My father and FIL are the proud purchasers of totally inappropriate annuity products. *I'm about to start a thread on my late father's variable annuity which is about to come due to his children. *It has been a financial blunder and I am afraid it is going to turn into a tax nightmare. *Many people buy annuities because they were sold something they didn't need so the salesman could get a commission.

Annuities can fill a certain place in a retirement portfolio but I am of the belief you can get a better deal by creating your own. *I have never seen a variable annuity that wasn't a clever way to take money from people that don't understand the small print. *Fixed annuities are a fixed cash flow with zero residual value. *The rate of return of the ones I have evaluated have run anywhere from 0.5% to 3% below the going rate for treasuries. *Again, the fine print frequently reveals that the actual fixed rate isn't quite what the big print says it is. *I have not personally evaluated an inflation adjusted fixed annuity. *I think they are relatively new because I hadn't heard about them until about a year ago. *I would be concerned with how well they would compare to a portfolio of TIPS or I Bonds. *I would also want to look at the fine print to see what limitations or restrictions apply to the inflation adjustments. *The annuity is also for a very long time (we all hope) so the market risk falls on how well your annuity company performs. *If the stock market really tanks, why would they be able to pay out your annuity amount any better than withdrawing money from your own well balanced portfolio? *Unfortunately, my personal history with any annuity product is very, very poor.

As for peace of mind, studies (according to Ben Stein) show that people with significant fixed payments such as pensions or annuities are much more comfortable with their retirement than those that don't have these forms of income. *I'm assuming the people that aren't as "comfortable" also have enough extra assets to be equal to the NPV of the annuities/pensions. *It makes sense. *I would like to know that I will get xxx dollars every month for the rest of my life even though I know it will depreciate over time to a pittance if I'm lucky enough to live that long. *By the time I get that old I probably won't be spending as much anyway. *My objection to fixed annuities is based entirely on the belief that an individual with substantial assets can get a better rate of return on their own.

__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius

First off I want to make clear that I like this board alot.* My comments weren't an attack just a plea to be a little more open minded.* I would not want to be responsible for a potental ERer not ERing when they possibly could if they got the whole picture.

That said, let's take these one at a time;
1) Are you saying that when you go to Vanguard to purchase an annuity you get High-pressure sales tactics?
2) What upfront fees do you pay for an immediate annuity. *You pay them a lump sum and get an income stream in return. *If it doesn't provide a high enough amount (i.e. SWR) don't buy it
3) You don't surrender an immediate annuity therefore no charges. *If it is an inflation adhusted annuity like I wrote about before thereis no investment mix, it is an income stream.
4) Of course a govenment pension has a "higher likelihood of survival than most annuity insurance programs" so it is a little more risky and you need to do more due dilagence with an insurance company than with the government.
5) If your portfolio tanks there is also nothing for heirs. *If you want something for heirs don't put your entire portflio into the annuity. *That doesn't mean that the annuity isn't a valuable part ofyour retirement plan.

Lets continue - when it comes to government pension the gov worker has paid for it in contributions and often times lower wages.* It just isn't a single large payment.

Maybe you could do better in an index fund maybe not, it depends on what is going to happen in the future, but I must point out that you have done exactally what I pointed out normally happens.* That is the discussion switched from an income stream discussion to a rate of return discussion.

I also noticed that at the beginning of your post you chastised me for pointing fingers and then at the end of you post you slap Rich up side the head.* Seems like bad form.

2B Thanks for your response.* When it comes to "I know it will depreciate over time to a pittance if I'm lucky enough to live that long", that won't happen to an inflation adjusted annuity.*

BTW* I am hesitant to keep backing annuities because I don't want to come off as a salesman (which I am not) but I think they could be useful for some people who might otherwise not retire.

JDW, there have been numerous threads and hundreds of posts on this forum regarding the value of managing your own investments vs. using the services of a financial planner. The bottom line is a majority on this forum feel strongly that an individual can do much better without the fees and the “expertise” of a financial professional.

Putting aside the feeling many of us may have that the ranks of annuity salesmen are comprised largely of failed Nigerian government officials , why would you expect forum members to have positive feelings about annuities? Aren’t they just insurance products designed, in the aggregate, to favor the financial well-being of the insurance company, their agents and stockholders? Even the best of companies (Vanguard, etc.) sell the products to make a profit.

Bottom line, you simply cannot expect a bunch of financial DIY types to embrace annuities.

__________________
Numbers is hard

Uh..OK . Once again proving the point that merely mentioning immediate annuities seems to elicit sarcasm and an oddly heated reaction in some quarters around here.

My impression is that the unsavory sales tactics your refer to in your rant reply concern variable annuities. In any event they don't speak to the merits (or lack thereof) of the product. I think you will agree that immediate annuities are a different product designed to pool risk of longevity, among other things, and generally are not pitched so aggressively.

But I'm educable. Re: my original post, can you help me understand where the logic fails in such a universal way? Remember, as opposed to the IA yields for a 40-something, a sixty-something gets 7.25-7.5% interest annually - fixed, and not necessarily inflation protected (that's an add-on and I personally would not purchase it).

Read it from the perspective of someone hoping to retire around age 60, using the measured parameters I refer to: say, 25% of assets at FIRE, covering perhaps 40% of initial annual expenses, admittedly eroding slowly in real value, but with SS not too far down the road; volatility reduced, longevity risk reduced, trading off initial net assets for ability to reduce the SWR needed to fill in the 4% per year cash flow, etc.

__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.

2B,

Your points are well taken. Interestingly, you do much better on a lifetime annuity (yield-wise) than you do on a fixed term annuity (say, 15 years) because -- I believe, the fixed annuities alway pay out in full, whereas the life annuities allow the company to spread the risk, ending payouts when you die; I double-checked and indeed a 60 year male old life-only annuity pays well over 7%.

If it paid in the 4s or 5s, I'd pass. At 7.4% it gets my attention.

Cheers.

__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.

REW, I am aware of the numerous threads and recognize the majority of posters don't want to pay for a financial professional and*I don't expect the forum members to have positive feelings about annuities. *But I do think (based on the some of the replies I've gotten and I've read) that their prejudice against annuities as an investment vehicle is blinding them when I talk about using an annuity as a cash flow device. *Yes annuities are products that yield there companies a profit but so are mutual funds and that doesn't prevent their use.

If you look back at my first post in this thread you will find this paragraph:
"It is interesting that when looking to retire the main thought here seems to be picking a W/D rate that is sustainable (i.e. don't go too high, 4% [or lower] is all you can take) and given a good portfolio allocation you will make it but when an annuity is suggested as a means of getting that W/D amount then the discussion turns to rates of return and how bad an annuity is. *Isn't the whole point of the FIRECalc calculation that it doesn't matter what the rate of return on your portfolio is as long as you don't expire your portfolio and run out of your income stream?"
Why is it so hard to look at the annuity as an income stream providing a >4% W/D rate relative to the price paid for it?

Rather than cut & paste the last six quotes, let me summarize my feelings thusly:
1. The annuity salesmen have poisoned the waters. There may be good annuities out there but no one trusts the companies that are offering them to have the customer's best interests at heart. I include Vanguard in this characterization. I will continue to criticize any company that has collected Vanguard's record of customer-service complaints, especially their inflexibility in implementing & careless shredding of beneficiary designations.

2. Step back from the mathematics for a minute and consider these issues:
a. Does an annuity help you sleep better at night? Then go buy one. It's not a financial issue, it's an emotional issue.
b. Do you think that you could self-annuitize at a lower expense with better performance, while still sleeping soundly at night? Then don't buy one. It's a financial issue, not an emotional one.

__________________
*

Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on E-R.org: "The Military Guide to Financial Independence and Retirement."
I don't spend much time here— please send a PM.

REW I also don't expect a bunch of financial DIY types to embrace annuities, but these are not the only people to read the posts on this forum.* There are some that saved a large some over most of their working life, or got an inheiritance, or won the lottery and are looking for a way to retire.* They may not have all the financial expertise as the main posters of this board and maybe all they need is an inflation adjusted income stream that doesn't require that expertise to maintain.* I wouldn't want to tell them "sorry you can't retire, keep working", would you?

Or maybe someone wants to have a very sure minimal cash flow amount to cover their bare bones retirement needs and an annuity would work very well but without that security they are too afraid to retire. *I wouldn't want to tell them "sorry you can't retire, keep working", would you?