February 18, 2012
"Consumption smoothing" — the right way to die penniless.
It's done by putting all your money into annuities. If you think it's wrong not to leave something to your children, just make gifts from the annuity income.
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31 comments:
Actually,
the right way to die penniless is to keep Obama in office.
According to CBO projections, by 2050 interest payments on the debt will exceed federal revenues.
But we'll have "free" healthcare and birth control pills!
We ARE leaving them something even if the estate has nothing but dust and cobwebs in it --
We are leaving each of them with tens of thousands of dollars in debt -- a debt which cannot simply be passed on to those suckers in successive generations, but must be paid in the present in taxes to pay ever increasing interest on the debt, as well as being paid by the subsequent drag on the economy (lower employment) due to so much of the economy's lifeblood being sucked out of it to give to monster government.
What a gift to leave.
Let's talk about the topic raised in the post and the linked article. This isn't about the budget and the national debt. This is about retirement and personal finance.
If you want to talk about Obama, etc., go to last night's open thread.
I have all my retirement in annuities, The Blonde has a mix. Given the cost of living, etc., we'll probably go through it all.
Since neither of us leaves heirs, except for nieces and nephews, I suppose it all works out.
Good to see annuities finally getting some respect in the press. Too bad these bastards waited until AFTER equities collapsed in 2008-2009 to do it.
And of course, interest rates - and crediting rates on annuities - are at ridiculously low rates.
That said, most retirees have no business accepting longevity risk. It's devastating, and it takes the savings of your kids right along with it, because it's the adult children of these people who wind up picking up the slack when the equity portfolio has shot its wad.
Annuities were pooh-poohed by the financial press... including that f***ing IDIOT Suze Orman, just when people needed them most.
You want to leave some money behind? Buy a dividend-paying whole life policy in your 20s and 30s, and feed it like crazy, Up to the MEC limit. You can arrange to have them guaranteed fully-paid up at retirement, or whenever you want. You can roll part of it over to an annuity tax-free later, if you want, say, if you need the income more than your kids need the inheritance. Or take loans against the death benefit. Or sell it. Whatever.
The insurance companies had it right all along, but the financial press dorks (Outside of Forbes, that is) couldn't even spell "annuities" during the Internet boom and the Real Estate boom, and how many booms and busts before that?
Obama has gone on record recommending that Americans buy more annuities. He knows his base. Who would trust any of them with a lump sum?
The trouble with annuities, except for Social Security, is that they're only as good as the company that sold it to you, and the company may not be around for as long as your are.
Their existence depends on their earning a good return on the money you gave them, which may not happen.
In fact the better the deal you work for yourself, the less likely the company is to be around in 30 years.
Also, mostly, annuities are not inflation adjusted, which means your income can be worthless if the government screws up, which it well might do.
An inflation adjusted annuity may be riskier than others, as well, because inflation isn't an insurable event. All the company's policies go bad at once, and they fold up.
Social Security doesn't have this problem - its only problem is that the retirement age is set too low, which presumably will be fixed when it can't be put off any longer.
You may be too young to remember the inflation in the late 70's and early eighties, but then I think it likely you may live to learn the lesson again in the late 10's.
Almost of a certainty.
The best thing about many annuity products is the commission that the saleslady makes.
A person who grew up in the Depression (like my parents), when being penniless was all too common, might quail at the thought of dying penniless, even if you're only penniless in the eyes of those who might inherit. Having said that, I think my Dad has an annuity (among other things). Mom just had stock, half a million in XOM. That worked for her.
I'm just saving money, and hoping for the best. I can decided whether or not to annuitize later.
It's a lot better to spend your money when you're alive because you have little control once you are dead. It's also preferable to help your future heirs when they actually need it. Leaving a bunch of money to 50 or 60 year old offspring doesn't do as much good as helping them when they are younger. All you're doing is financing their retirement, which they really should have provided for themselves. Conversely, don't depend on inheritances to finance your retirement... because wills change or it doesn't turn out to be so much money after all. People lie.
Lastly, I'll throw in some advice not to lie about your will. It makes people hate each other when you die and they find out. I had a horrible experience with that.
Wait until you're seventy and then buy a fixed twenty year annuity. If you die before the age of ninety, your heirs can continue to collect the annuity payments. As an added bonus, those heirs will pitch in and help pay for your adventure vacations to Colombia and Mesopotamia. "Mom, it's never too late to take up hang gliding."....No investment is without risk. As rhhardin points out, when you purchase an annuity, you're betting against inflation. I think this can to some extent be managed by buying a longevity annuity. For a reasonable amount, about $15,000 I think, you can buy at age 70 an annuity that will pay $1000 per month for life. Perhaps one should go long and short the way currency traders do.
There's a fallacy of composition in all mass market retirement advice.
It pays to ask where it is in each article.
The fallacy is that what works for one person doesn't work if everybody does it. If everybody stands on their toes, everybody can see better.
In the case of retirement, the working population below retirement supply all the goods and services of the retired people above retirement. The burden on the workers has to be one they'll tolerate, and that limits how many retired you can have at once. This adjusts by raising the retirement age so the burden is tolerable.
It doesn't matter how the retirees have saved for retirement - the numbers have to add up. If they don't, it won't work.
Schemes arrange not to work by arranging to violate an assumption. That's what they'll all do.
Suppose everybody buys stocks. When everybody retires, there's nobody to buy the stocks. That depresses the stock price, and that reduces the return on investment. Until what? Until people are forced to keep working and retire later, when they have more savings and less savings are needed because their remaining lifespan is now shorter.
In every case, in every scheme, the retirement age has to go up. There's no way around it.
Ask where that fact is in every retirement scheme.
The article said:
"Put all your savings into annuities. Kotlikoff likes annuities. With these you convert a lump sum into monthly payments for life."
That statement, made so broadly as to include all types of annuities, is a bald-faced lie.
Annuities are the favorite product of dishonest "investment professionals."
Approach any proposal to purchase an annuity with the pre-supposition that the person proposing is trying to rob you blind. Then go from there.
This isn't about the budget and the national debt. This is about retirement and personal finance.
You're wrong about this; the two issues are fundamentally related.
In most of the threads about old-age entitlements, people argue endlessly about the young vs. the old, completely failing to keep in mind that most young people have parents. So a full discussion of entitlement reform should be based on the essential fact that the wealth effects of any reform can be spread across generations through changes in parental gifts and bequests.
The only intergenerational conflict is between orphans and childless older people.
The Cruise line we often use has a cute saying announced everyday that we should be spending our kids inheritance by being pampered by the them.
It is a little late to begin now, but the best investment is buying Swiss Gold Francs with your Dollars.
One of the most important lessons of the last financial kerfuffle is that you cannot ignore the counter-party credit risk involved when you deal with even a giant insurance company like AIG. Annuities depend upon the continuing solvency of the counter-party just like credit default swaps do. So if you annuitize, diversify your risk by having different insurers involved in different parts. Of course, you can play the moral hazard game by assuming that the government will always tax the next generation to bail out any insurers who provide annuities to the poor defenseless old folks.
Approach anything that Rabel writes from now on with the presupposition that she's an idiot. And then go from there.
These annuity guys will all go bust the next time the market tanks. With zero interest rate policy they have to take more risk than usual. So all generations will be broke. But have a nice day anyhow and how bout that Survivor program huh?
I'm not affiliated with the William immediately above. I'm my own William. At any rate I bought an annuity in 2006. It survived the 2008 crash without any problems....I think the most realistic risk for an annuity is not the bankruptcy of the insurer but a sudden gust of inflation. It's possible to envision a scenario that bankrupts Fidelity or Met Life but in such a scenario your brokerage accounts would also probably be worthless......There is no absolutely safe long term investment. Gold bugs take note up until very recently gold was a losing investment.....All our tomorrows are based on the brokered bargain between faith and probability.
I have read that the best offer in annuities is Social Security itself. I don't know if the offer is still available, but the person who takes SS starting at age 62 had the option to pay back ($100,000 on the sale of a house, for example) at age 70, say, into SS the amount received in the intervening 8 years, then enjoying an immediate huge bump in the monthly SS benefits.
I see another problem with annuities. At age 67, I have a primary residence worth $300,000 and a car worth $15,000. In spite of that wealth, I qualify for food stamps ($200/mo)and for Medicaid assistance ($120/mo) to pay my Medicare monthly payments, as long as my annual income, as a single here in Texas, does not exceed $18,000.
Since my annual income is only $13000 from Social Security, in spite of my wealth, I do indeed qualify for food stamp) and the Medicare premium assistance, all of which I would forgo if I turned my wealth into an annuity now.
A better option for me would be to borrow (best from a relative) some $2000/mo secured by my real-estate holdings ($300,000 say). That being a loan, it doesn't count as income.
Then I would have an effective income of $13000 + $24000 + $2400 + $1440 = $40,840 tax free till age 82 and some $16,840 (+ the 15-year growth in value of my principal residence) thereafter.
I have come to appreciate that in Amerika, it's better to spend you time learning to game the system (quite legally) than to work hard and have to pay taxes to finance the breeders and their brood.
At immediateannuities.com you can find out how much monthly income you can realize based on how large an annuity you purchase simply by entering your age, sex and the state you live in. Different payouts for different types of annuities of course. Very helpful in determining whether an annuity makes sense for you, IMO.
William,
THere's a whole little sub-industry of annuity planning, in which carriers design annuities to comply with, say, Medicaid law. For example, they design an annuity to pay monthly benefits that are carefully adjusted to be below the level where you would be disqualified from receiving Medicaid benefits.
As for the possible collapse of an insurance company resulting in nonpayment of benefits, it hasn't happened yet. Not to say it can't - it certainly can, and state regulators should be vigilant.
But there are a lot of things that serve to help keep insurers afloat unless they are totally stupid, and returns on investments in the general account (the float) are not the entire picture. You still get a steady flow of premiums in from the life insurance side of the business. If longevity rises, so do your profits from the life insurance lines. If longevity falls, your life insurance side struggles, but your annuity side does well.
If you look at crediting rates on fixed annuities they're pretty conservative. CDs on steroids, with the sweetener of a tax deferral.
The danger comes in with guaranteed minimum income and guaranteed minimum withdrawal benefits, if they turn out to be unsustainable given the actual returns the portfolio generates.
A lot of companies got stung with that, and ran into some liquidity trouble in recent years. Why? Because the GMIB and GMWB provisions were too sweet of a deal. The insurance companies were giving away the frigging store! And you still have knuckleheads like Orman and Rabel, above, squawking about how they were a rip-off.
Both can't be true. But annuity companies have really scaled back the more generous GMIB and GMWB provisions in newer contracts.
I commented above:
I have read that the best offer in annuities is Social Security itself. I don't know if the offer is still available, but the person who takes SS starting at age 62 had the option to pay back ($100,000 on the sale of a house, for example) at age 70, say, into SS the amount received in the intervening 8 years, then enjoying an immediate huge bump in the monthly SS benefits.
But apparently this option has been discontinued:
http://moneyover55.about.com/od/socialsecuritybenefits/a/buybacksocialsecurity.htm
So it looks like our best hope is to keep young people dumb enough to keep paying their 12% SS taxes, which shouldn't be a problem considering the sorry state of public education.
Jason wrote:
"Approach anything that Rabel writes from now on with the presupposition that she's an idiot."
Jason, my friend, I can't deny your assertion, but let's look at a specific example.
My mother was sold an annuity from The Hartford by an "investment professional."
He promised her 8 percent forever and a guarantee of the principal. That was the impression she left his office with. I tried to explain the 8 percent was only for 1 year and that there were no guarantees on a variable annuity, but he was a family friend, so she trusted him.
Twenty-two years or so later the notice came that the annuity was exausted and closed and that she had no further legal claims on the account.
Over that time she withdrew a grand total of 54k on a 60k initial investment for a negative return of 6k over twenty-two years.
I stand by my comment.
From the SEC:
"NASAA has led the way in exposing the abusive sales practices often used to promote equity indexed annuities to older investors for whom they are unsuitable. So too has the Financial Industry Regulatory Authority (FINRA) and the National Association of Securities Dealers (NASD) before it. Two years ago at the national Seniors Summit here at the SEC, NASAA made public its survey results showing the scope of senior investment fraud. As then-NASAA President Patty Struck put it, the survey revealed a landscape "littered with slick schemes and broken dreams" that has been "devastating" to the victims and their families. The survey of state securities regulators showed that 45% of all investor complaints received by state securities regulators are made by seniors. The survey also found that equity-indexed annuities are among a handful of products most often involved in senior investment fraud. For example, cases involving annuities represented 65% of the caseload in Massachusetts, and 60% of the caseload in Hawaii and Mississippi."
Cash is king until the economy takes off again, and then you just make more of it.
Keep it simple - make more money.
I don't see any reason to stop making money when you retire. Retirement for me means not doing things I don't want to do. Find a fun way to make money, and then have lots of fun. When I retire, I plan on being a male exotic dancer. I'll price it low, but make it up on volume.
Hey bagoh20:
Have you thought of taking a Brazil-wax class? They can't refuse you on account of age or sex nowadays.
Companies that sell annuities are like casinos. The house always wins.
Sink most of your net worth in an annuity, begin taking payments at age 70, die at age 72. The house wins. Your heirs lose.
Here's a more realistic point of view than that of the Forbes writer.
Rabel.
I see. So we're going to draw conclusions about an entire industry based on an impression what your mother left someone's office with 20 years ago.
N = 1.
Your mom lost money with a VA and somehow that's the insurance industry's fault, and every annuity salesperson out there is a thief.
What are you? Twelve?
What was in the annuity CONTRACT? They put these things in writing, you know.
Good grief. Go back to watching Suze Orman.
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