Annuity with lifetime withdrawal and Guaranteed Benefit?

There's not enough detail and any reply will either A) make an assumption regarding the product or B) give general response about annuities. Given my anti-annuity history (yet pro-immediate annuity position) I'd ask you to provide the exact name of the product. Even then, Met's web site offers a nice glossy that offers little detail (I pulled down a brochure for "MAX income Immediate Fixed Annuity) regarding actual numbers. And how old are you? That makes a look at

a place to compare. JOE

Hi,

I'm 64.5 and recently received a few hundred thousand in life insurance which I need to keep safe, but also need to use earnings to help with living expenses. Thus the possible annuity.

The exact name of the plan is Preference Plus Select Variable Annuity. The brochure heading reads Lifetime Withdrawl, Guarantee Benefit.

If you have any more thoughts with this info, I'd greatly appreciate your passing it on.

Thanks.

Louise

Using immediateannuities.com, it appears that a fixed immediate annuity would return about 7.5% of the initial face amount annually throughout your lifetime. For example, a $250K annuity would return $1,565/month.

Vanguard has a fixed immediate annuity that would return about 5.3% of the initial face amount and then adjust the amount upwards each year to account for inflation. For example, a $250K annuity would return $1,105/month the first year.

If inflation averages 3%, it would take about 12 years before the inflation-adjusted annuity reached the amount paid by the unadjusted annuity. On a present value basis, the inflation-adjusted annuity doesn't reach the total payout of the unadjusted annuity for 27 years. That might make the constant annuity a good choice.

Dave

I'm not necessarily advocating this annuity (I haven't had any time to look at it with Thanksgiving coming up), but it is not exactly apples to apples to compare this annuity with an immediate annuity.

An immediate annuity is annuitized instantly (hence the name). There is usually a 10 year period certain that guarantees you (or your heirs) to receive 10 years of payments, but no more. As with everything in life, the period certain comes with a cost (usually in the form of a lower interest rate). If the contract owner dies during the period certain, or even in the years shortly after, they will receive less than they invested. If the annuitant lives a long time, they may find they received much more than originally invested.

The lifetime withdrawal guarantee (LWG) annuity is NOT annuitized. LWGs are withdrawals from the contract value (just like a brokerage account). Unlike an IA, the contract owner can take a lump sum of the entire remaining contract value at any time. Furthermore, when the contract owner dies, any remaining account value is paid out as a death benefit to the heirs whether the contract owner has been receiving income for 1 year or 100 years. Also unlike an immediate annuity, the contract is guaranteed to pay out at least as much as was paid in.

An LWG annuity also allows for gains in contract value. If an annuitant invests $100k, the guaranteed annual withdrawal amount is $5000 (5%). But if the account grows to $200k, the contract owner can "lock-in" the new value and begin taking $10000 annually. Even if the account then falls back to $100k (or zero) the annuitant can continue taking $10000 annually. Of course, like many deferred annuities, the expenses are in the 2% - 2.5% range, I think. That can obviously erode growth.

All in all, annuities (ALL annuities) only fit a very limited range of people. If we assume that everyone will always live an average life expectancy and that the market will always average 8-10%, then annuities are almost totally unnecessary (except maybe in NIMCRUTs). However, if an investor is unwillingly or unable to risk being "unaverage" an annuity MAY benefit them.

P.S. - I think Metlife offers 8%, 4%, and 0% surrender periods. Make sure you know which one you are getting into should you decide to go this route.

So they have the market going up by almost 7x in three years? Can you let me know when this is going to happen?

If someone handed me a hypothetical like that, I would assume they were stupid or thought I was. It would take a real effort to be polite while I threw them out.

Ironically, the downside hypotheticals are more realistic. $100K invested in August of 1929 would be worth around $12K in May of 1932, just less than three years.

-- Doug

While not apples to apples, the Vanguard annuity I mentioned pays out more than the 5% quoted for MetLife and is not subject to market volatility. It could provide a baseline for comparison with the MetLife plan.

Dave

Thanks for the excellent analysis. I have about $350k salted away in anticipation of retirement, mostly in 'safe' stuff - T-bills and CDs. That, plus the Social Security payments to the wife and me will bring in some $40k per year, resulting in a very small income tax bill and a relatively comfortable life style. The house is paid for also, so we have little in expenses beyond the day-to-day. The pension rollover can grow on its own, not being needed right now, but again, I would prefer investment choices that are safer than (say) a volatile stock market ride.

Is this what you are looking for?

HH

You are close to retirement age, I'll take that to be about 60. In the

25-30 years you should enjoy, inflation will likely halve the value of your spending power. Small tangent - the rule of 72, that the interest rate divided into 72 is the number of years it takes an investment to double, so 7% = ~10.3 years, 5% = ~ 14 yrs, works for inflation as well. 3% inflation will reduce the dollars value in half over 24 years. I'd offer you that you are a long term investor, much of your spending will occur more than 10 years from now. I hear your concern about volatility, and I'd suggest you find the right mix of stocks/cash (cash is bonds, CDs, money market) so the stocks will be an amount that you will not need to think about for 10 years. For the stock portion consider a mix of low expense ETFs which lean towards good yielding stocks, DVY for example, or the Wisdom Tree Funds.

A VA takes 3-4% of your money to 'guarantee' some level of return, maybe a death benefit, etc. DVY yields 3.2% right now, you give up a bit under 2% compared to the CDs, but gain the market return, and over time that yield will exceed 5% of the original investment. See

play with the dates. You can see that 2000-2 was horrific, but go back so you look at 10 years 1996-2005, the return was 9.0% for that period. In the end, you need a mix you will be comfortable with, and only you can decide that.JOE

When in doubt limit your infvestment to no more than 50%. For something that looks "pretty good" but you dont fully trust.

Hector, I would suggest you look at some of the Vanguard LifeStrategy Funds. They are a mix of bonds and stocks, and a place you can put your money and not worry about fiddling with it. This is an alternate suggestion to your thinking of an annuity. In this series, Vanguard has a more aggressive fund - LifeStrategy Growth - which may be too aggressive for you, if I'm listening correctly - but there are also Moderate Growth, Conservative Growth, and an Income Fund. For money you may be wanting to tap 10 years from now, the Income Fund, while mostly cash-type investments, is probably too conservative for you to get the growth you'll need to protect yourself from inflation.

My husband and I are in the early stages of retirement, with a similar outlook, both as to expenses (no mortgage) and income. We have some money invested for income - in the Income Fund and very conservatively - while money we expect to need in the outlying years invested in stock mutual funds.

Good luck,

Elizabeth Richardson

Well, the way I read his information is that he isn't dipping into the principal, rather using the income only from these investments. And, he as in addition a lump sum pension that he doesn't need right now. While I might agree with you that he should consider a portion of this pension money be invested in a stock mutual fund, we should all have been as prudent as this fellow. He's doing all right it would appear.

Elizabeth Richardson

"joetaxpayer" wrote

I like dividend paying stocks a lot for retirement, precisely because of that which Joe suggests here. One perhaps germane observation on DVY, from data at ishares's web site: In the last two years, DVY's dividends have increased 8% a year. This is well above the usual rate of inflation quoted. If the 8% rate of increase continues, then using the Rule of 72, in about nine years, the dividends will double, yielding . In 15 years, the dividends will have tripled.

Factor in too that dividends, as a whole and in general do not take a hit when the economy goes bad or investors lose confidence in a stock and so its price goes down. What matters it that the company can keep selling its product.

I own a number of the stocks DVY holds. Their dividend growth is indeed the biggest attraction. I bank on people continuing to consume; corporate earnings necessarily keeping up with inflation; increased demand due inter alia to a growing population; and the unlikelihood of the economy tanking completely. It seems to me a nuclear holocaust of the world would be necessary to destroy the unimaginably strong cogs of our industrial machine. The only thing that is necessary is to take a deep breath when we have a correction like that which we are having now, and remember that, while the value of one's prinicipal may see-saw, one's dividends keep flowing and furthermore increasing (if history prevails).

The point I and others were making was taking just the income out is as good as reducing the principal due to inflation. If you are earning

5% interest, you can only take out 1.5% to leave 3.5% available to cover inflation. Spending the entire 5% is the equivalent of a 3.5% principal reduction.

Well, the point I was making is that the interest amount in question is not his entire portfolio. He has other resources for which he currently has no need. There is no way he is reducing his principal. If you'll read my entire message, I did say that I agree he needs to invest this at least a portion of this additional money in stock mutual funds to address inflation.

Elizabeth Richardson

Use some of that money to postpone Social Security payments. That will increase your Social Security payments when you do start taking them.

-- Ron

I'm a bit unclear why you're just picking on this paragraph when it was part of a much bigger message. At the end, I listed a variety of options -- one of which is don't spend the money.

What about my example of 15% risky + 85% CDs ended up being safer than

100% CDs during the past 35 years? While nothing is guaranteed for the future, there's a lot of data & studies showing a tiny bit of risky but uncorrelated classes can produce a more stable portfolio than holding 100% safe investments. Here's another example from the Great Depression era but without commodities since I can't find data going that far back.

Real Return: 100% T-Bills

1929 3.16% 1930 11.57% 1931 12.37% 1932 10.86% 1933 -1.37% 1934 -2.73% 1935 -1.24% 1936 -2.02% 1937 -0.59% 1938 1.52% Annualized Return 3.00% Standard Deviation 6.08% Number of Negative Return Years: 5 Worse Year: -2.73%

Real Return: 90% T-Bills, 5% Stock, 5% T-Bonds

1929 2.64% 1930 10.08% 1931 9.82% 1932 10.76% 1933 1.13% 1934 -2.42% 1935 1.30% 1936 -0.19% 1937 -2.30% 1938 3.18% Annualized Return 3.29% Standard Deviation 5.05% Number of Negative Return Years: 3 Worse Year: -2.42%

Adding 10% risk produced more return, less volatility, fewer down years and smaller losses during down years. Sure there's always the possibility that every class you can think of suffers major losses simultaneously but that also probably means a period even worse than the Great Depression. I would not guarantee the safety of CDs or T- Bills in that scenario either. Guns, ammo, fuel, alcohol, cigarettes would be my asset classes.

The poster hasn't been 100% CDs for the past 35 years. Why do you think he has?

Elizabeth Richardson