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Archive for October, 2015

Guaranteed Lifetime Income

October 14th, 2015 at 10:26 am

PatientSaver suggested a post about SPIA's (single premium immediate annuities) and I agree it's a good topic. If you get to retirement age and you want to have a guaranteed cash flow for life, you can consider an SPIA. Basically it's a lifetime payout like a pension. You give them money (it can be IRA money or not), but you construct it the way you want. You can choose how much to invest, whether you get some inflation hedging, whether it also covers your spouse, etc. Every added factor of course reduces the payout.

There are a few advantages to SPIAs. First, as long as the insurance company stays in business (and insurance company failures are very rare), you will continue to receive your check. No worries about what the stock market is up to, or if your old company is going bankrupt if they will reduce you payout. You get paid for your lifetime, even if you live to be 110. And because part of it is considered return of capital, you'll get a higher interest rate and a bit of tax break than you'd get on a savings account. Also, you don't have to worry about one of your relatives stealing your money as you get older, the money is all with the insurance company, unavailable to anyone.

The downside? There are two. First, as with Variable Annuities, you want to get a 'no load' product. Otherwise your payout is going to be reduced by a sales commission. The other? It's a big one. You completely give up your principal. You get the cash flow, but not the cash.

For that reason, if it's something that interests you, I suggest splitting up your funds. If you have $100,000 and you want a safe cash flow, I'd may consider $50,000 in an SPIA, and the rest in some high grade bonds. The bond payout will be lower, but you can get at the cash in an emergency if you need it.

If you're interested, I'd once again go to Vanguard for a 'no load' SPIA. You can get a quote and find out about the numbers and see if it makes sense for you. You can check it out at:


The Truth About Variable Annuities

October 8th, 2015 at 09:55 am

You're worried about your income taxes and the nice insurance guy tells you about a product that is like an IRA, but that you can put in essentially an unlimited amount, and defer the tax hit. Best of all, it's invested in mutual funds that you get to choose. Sounds like a pretty good deal.

Truth to tell, there are a few people for whom variable annuities make sense, but only a few. A variable annuity is an insurance product, that has 'sub accounts' that allow you to choose mutual funds to invest the money. So far so good. But the problem with VAs are the fees.

First, that nice insurance agent who talked to you is collecting a commission of anywhere from 6 to 10%. So if you invest $100,000 he is taking up to $10,000 off the top. To find out how much it is, ask about the surrender charge. Then there is what is called the M&E (mortality and expense). That runs on average 1.5% per year. Then the mutual funds you choose will also have an annual fee of maybe 1% a year.

So you pay maybe $10,000 upfront, and pay 2.5% a year in fees. But you're saving on taxes right? Well maybe not. If you bought a low volatility ETF or an individual stock, you'll pay taxes at a low rate when you sell it if you hold it more than one year. But the gains on your variable annuity? They are taxed as ordinary income, like a savings account.

Variable annuities *do* make sense for two groups of people. If you are in a profession where you are likely to be sued (i.e. a plastic surgeon), the money you put in a VA is almost untouchable in a lawsuit. The other group are people who like to do frequent mutual fund switching. You'd be pay taxes frequently outside a VA, but inside the taxes will all be deferred.

If you really want a VA, get a 'no-load' VA from Vanguard at:


or from Jefferson National at:


There is no commission, and the fees are much less from these VAs.