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  • Smackdown: Dividends vs Annuities, The Main Event [View article]
    A number of posters have mentioned the fear that if the company they've bought their annuity from fails, they've lost everything. Here are the facts on that;

    http://cnnmon.ie/15UIn6M

    Note the part about rating agencies and the state level organizations that step in in the unlikely circumstances that an insurance company fails. Also note that while it seemed every bank was about to go bust in 2008, that wasn't the case for insurance companies that produce annuities.
    Mar 17 07:29 PM | 1 Like Like |Link to Comment
  • Smackdown: Dividends vs Annuities, The Main Event [View article]
    A much better article on the topic than prior efforts, but a couple of points;

    1) You compare the two, active investing versus a fixed annuity income stream , as if “either/or” is a rational choice. Most people who consider the form of annuity you’re talking about do so to guarantee PART of their income stream and leave another part to active investing and the market’s risk. It’s a complimentary strategy. The equity strategy provides the growth lacking in a SPIA.

    2) The purpose of a single premium annuity is to ensure against longevity risk and market risk.

    a) By assuming the buyer would die before his life expectancy of 82 ( http://1.usa.gov/WxtzrP ) you’ve eliminated the longevity risk. It’s like trying to justify NOT buying fire insurance because you’ve created a scenario where you never have a fire. Lives are getting longer, that risk is only getting greater. Assume the buyer lives just 5 years beyond the average, to age 87, and see what happens to the results.

    b) By assuming the buyer doesn’t want to make sure the income stream continues past the end of his life, you’ve eliminated one of the primary reasons people consider SPIAs, the protection of a spouse.


    3) You assume the investor will be ready, able and willing to run a portfolio until the very days he or she dies and that’s very unlikely.

    3) The biggest error, however, is using an AVERAGE growth rate for the equity investment comparison. The use of an average eliminates market risk the OTHER thing a SPIA insures against.

    5% each year for two years produces a 5% average, but so does a combination of -8 and +18. Since the year 2000 the S&P 500 has experienced four years of a total return of -9 or worse (-9.1, −11.89% ,−23.37%, −37.00% ) . You can’t wish those away by providing an average for that time period. Here’s a detailed explanation of how real world returns effect withdrawal rates and why using an average gives you useless data;

    http://bit.ly/WxtzrQ


    If you’re drawing from a portfolio and have to sell stock or bonds to make the 6% withdrawal (because your dividend average is below that point or you dividend payments have been lowered), you’re selling more shares at a lower price and fewer shares when they’re at a higher price. That’s the opposite of dollar cost averaging. Some call it dollar cost ravaging and it will drag down a portfolio value significantly in short order.

    There’s also the effect of the risk of sequence of returns (if you’re selling shares to meet outflow the ORDER of the market returns you experience has great effect on the value of your portfolio). Here’s an explanation;

    http://bit.ly/Yi4DoT

    Bottom line, a 6% withdrawal rate of the average diversified portfolio will deplete it, meaning run it to zero, inside 20 years, most of the time. A distinct disadvantage to any equity growth strategy.

    An annuity income stream (most of the time, there are exceptions) has no adjustment for inflation. If that’s all you have for income your buying power will shrink dramatically and disastrously before you know it. A real disadvantage to the SPIA-alone strategy.

    Something else to consider, with historically low interest rates, buying a SPIA now will assure you low rates even when rates return to normal. Many people who think there’s a value to a SPIA will, in effect, dollar cost average into them by buying one now for part of what they want to commit to their SPIA total target and wait another 12 to 18 months to buy the next “slice” of them.
    Mar 17 07:22 PM | 2 Likes Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    Your article, Mr Molzahn says, among other things;

    "Let's be clear. Annuities in and of themselves aren't bad. For some people -- typically those who are younger or quite well off -- they might be a good investment choice, depending on circumstances. But as a general rule, most types of annuities are not a good choice for seniors."

    I couldn't agree more.

    It also says;

    "Variable Annuities: Your money's invested in stocks or stock funds -- notoriously high risk."

    So our source says annuities aren't right for seniors and neither are stocks or stock funds. Do you think all stocks are "notoriously high risk"? Isn't this whole thread about using stocks?
    Mar 17 06:14 PM | Likes Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    "it is amazing what you can spin."

    The more you post the more obvious it is that you're not well versed in the subject matter. You're unable to define your numerous misstatments of fact, so you spend your time trying to denigrate me.

    " It is an insurance product (all of them) and not an investment..."

    Just because you claim something doesn't make it so. The owner of a VA with a living benefit that doubled in size during the 2000s (when the S&P gained nothing) and then was able to take 6% income from it, all the while keeping some or all of the original investment liquid or available as a death benefit, would say you're wrong.

    "they all cost more than anyone really can grasp,.."

    The only why someone can't grasp the cost is because they can't read a prospectus. If that's the problem, I suggest even DG investing is beyond them.

    " and the flexibility is limited unless you pay more for it."

    Flatly untrue. There are even VAs that are 100% liquid.

    "Get over yourself and your proclivity to comment with circular reasoning."

    See above, your need to insult to overcome your lack of knowledge on the topic.

    "Write an article, a complete one, about how wonderful you believe annuities are, compare it with dividend investing in blue chips over a 30 year or 15 yr period, variable or otherwise, and watch your argument crumble under the weight of your miseading comments."

    You continue to msistate what I've put forward. The question isn't "either/or", it's how two strategies can compliment one another. As to 30 year time horizons, it's a rare investor that will be retired and willing/able to run a portfolio for 30 years.

    " Otherwise, you are nothing more than a salesman who has an axe to grind here on this thread."

    Calling me a "salesman", which is incorrect, changes nothing about your inaccuracies. My "ax" is people who know little and spread this lack of knowledge to others.

    Now, if you'll excuse me, I have another brillant article to read about the "perfect stock". lol

    BTW, this thread reminds me of having conversations with other "true believers" throughout the years. The people who thought Iomega (remember their cassette tape computer drives?) was headed to the moon, and how if you mentioned their product was being over-run by CD-ROMs you must be an evil "short", or people who told me gold was headed to $8,000 (WATCH AND SEE, SONNY!!!, they'd say), or the folks that told me real estate will never going down (They're not making any more of it!!!) so they had all their retirement money invested in spec homes.
    Mar 17 03:55 PM | Likes Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    “Annuity salesmen, let's talk deal…”

    I’ve had enough of the subtle and not so subtle insults. I’m happy to answer any questions to the best of my ability for anyone with an open mind (that is not a member of the “you disagree with me, thus you’re dishonest and/or selling something“ lynch mob) but I’m not interested in entertaining questions from people who ask me to accept, with no evidence whatoever the performance of their portfolio, how it never dipped I the face of strong down markets, delivered 6% income and never declined in value during the process (why aren’t these folks making millions running REAL money?) while calling me a liar every time I say something. My aim was to counter some of the monumental errors of fact mentioned in the article and the ensuing thread and invite people to consult other sources. I’m not interested in continued uncalled for character assassination.

    A few closing points;

    If you’re going to debate annuities at least understand the difference between single premium immediate annuities, fixed annuities and variable annuities (there are other forms as well).

    Don’t tell people they’ll “have no control” over the money in their annuities (it’s true of some, not true of most).

    Don’t tell them they’ll have “no access to their money” (again, true of some, not of most).

    Don’t tell them “fees run 3 to 7%” (it’s an exaggeration of the fees in some and it puts fees in others where there aren’t any)

    Don’t tell people that Vanguard, USAA and Fidelity don’t offer annuities.

    Don’t pretend that reputable advisors would ever suggest people should put more than 30% of their investable assets in annuities. No one's saying end your current portfolio and put it al in an annuity.

    Don’t tell people that portfolio withdrawal rates above 4% are sustainable most of the time, much less 5-6-7%. They aren’t and there’s no shortage of academic studies to prove it. Google it yourself for some respectable, objective sources.

    http://bit.ly/Yi4DoT

    When you’re dismissing the case for putting a guarantee on some part of your income stream give some consideration to the possibility that you may not be capable of running your current income producing portfolio forever and what might happen to people that depend on you find you’ve ended your ability in a rapid, early and unexpected manner.
    Mar 17 12:49 PM | 1 Like Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    @ AgAuMoney

    "You chose to ask about a 5%-6% payout. You specified the cost. You specified the time. I had what you specified with ZERO need to sell assets. When I did sell those assets in 2010, they were worth more than I had paid for them, plus I had the payout every year."

    I'll take your word for it, and I'll take your word that your porfolio balance never dipped in 2000, 2002 and 2008. Could you take my word for it that yours isn't a common result and that a great many people would be scared to death watching the balance of their accounts drop significantly during those years?

    "If you are not prepared for anyone to accept your challenge, you should be a bit more careful to whom you issue that challenge."

    If we're going to claim that my question was answered with "I did it, trust me", fine. We're done.

    "I'm done with your dissembling while avoiding answering a simple question. "

    I did nothing of the sort. I answered your question in detail. I even offered to answer more questions. I can't be blamed if you we're happy that my answers didn't feed into your incorrect assumptions about when life payments end.

    Did you find any insurers that would issue a SPIA where the payments would end if you bought it today and died in three years? Did you find any VA companies that would sell a policy to your 88 yr old grandfather? Let me know when you do.
    Mar 17 12:09 PM | Likes Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    @ AgAuMoney

    "It wasn't my example. Read better next time."

    You provided the payout rate (you looked it up) you provided the 65 year old. That's why I called it your example.

    '''Your 65 year old didn't know if he'd live to 78 or 98'''

    "Neither did the insurance company. But the actuarials hired by that insurance company gave house odds that the insurance company would make money even if the 65 year old lived longer than typical.

    It would be almost impossible for the 65yr old to come out ahead in that deal, and with professionals lined up against him, difficult to even get a fair deal."

    With all respect, that's really not how it works. The insurance company uses the standard actuarial tables. There's no gaming of his payout rates to "make money even if he lives longer than expected". There's every chance the carrier will lose money on a specific case. They offset that buy knowing they'll have a percentage of lifes covered that will end BEFORE life expectancy. They're distributing risk exactly like a fire, wind/hail or car insurer does. Remember they have to make their payout rates competitive because they know you're going to shop them against their peers for the highest rate.

    They really make most of their money in the general account where they have the advantage over the indivdual investor of not having a lifetime time horizon (you and have an end date, GAs can be invested as if, like an endowment or foundation, they have infinity as a time horizn) and not having a sequence of returns risk. That means that 2008 type downturns means more to you and me than it does to a GA, endowment or foundation. They pay you 6.65 (or whatever the rate you quoted was) while they're expecting a considerably higher rate because they can look out further.

    I'm not telling you insurance companies are your pals, they're not, not any more than the market is your pal. Otoh, they're not some evil conspiracy designed to cheat everyone they can, either.
    Mar 17 12:02 PM | 1 Like Like |Link to Comment
  • General Electric: An Update On The Perfect Stock [View article]
    People will disagree about whether Welch caused the problems, but the fact remains there was a premium on the p/e Immelt hasn't enjoyed. As to being just another conglomerate, it may be the biggest, but it's by no means the only one. It's yet to be proved that tht structure is a superior obe in terms of shareholder value.
    Mar 17 11:41 AM | Likes Like |Link to Comment
  • General Electric: An Update On The Perfect Stock [View article]
    There's no such thing as a perfect stock. There's no place in investing for affection for an holding or boosterism. Never love a holding, it will never love you back. This is about cold, dead numbers. GE used to have a rock star CEO and garnered a rock star CEO p/e premium for it. Those days are gone. Now it's a common multi-national conglomerate just like a few others. There's no shortage of companies like that that have hum-drum returns.

    GE's underperformed the S&P for an unreasonable period, imho, but that may be ending. With the recent moves to shed NBC and the trimming back on the financial arm (long overdue, it juiced returns for far too long in the past) I'd expect above average returns as the world economy creeps upward and it won't hurt to see dividend levels return to where they were in the past.
    Mar 16 09:49 AM | Likes Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    AgAuMoney

    One last point. About your example of the 65 year old getting 6.64% (an unsustainable withdrawal rate of most any diversified 60/40 portfolio over a reasonable retirement span according to most analysis) and dying 14 years later.

    Remember, the risk is longevity and market performance. Your example eliminated the longevity issue my making sure the buyer died before the average life expectancy. That's not much different that asking a homeowner's insurance agent why I should buy a policy if I know I'll never have a fire.

    Your 65 year old didn't know if he'd live to 78 or 98 and to further stack the deck, you made sure he didn't leave behind a spouse he's worried about having to making ends meet.

    Just a thought and thanks for your time.
    Mar 16 09:33 AM | 1 Like Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    @AgAuMoney

    '''IOW, what did your end of 2002 or 2008 balance look like after you took your 6% out.'''

    “YOU ASKED about 5%-6%, MY YIELD …“

    I asked what your portfolio balance looked like at the end of each year after you took out 6% for a reason. In down years in your portfolio your 6% withdrawal may have required you to sell securities in a down market. That amounts to the opposite of dollar cost averaging and if you have to do it often enough your portfolio declines rapidly. Watching the source of their income decline like that would scare the begezus out of many people and they’d go to cash, making matters even worst. They are th people who should consider an annuity, even if it makes no sense for you to have one.

    “Bull*t. Do you recommend people put 100% of their assets into an annuity? That would be STUPID.”

    I agree, it would be stupid, I’d never suggest that. I’d never suggest more than 30% in most cases. I’m really not trying to diss your portfolio choices, just pointing out that massive movements from one asset category to another worked out well for you, but it really wouldn’t qualify as diversified under MPT. Most people don’t have your skill.

    “'''But, to your question, can we assign an age to your grandfather? ... We need an age to determine the payout rate of a SPIA'''

    No, we don't. Because YOU ALREADY SET THE PAYOUT RATE at 5% to 6%.”

    We’re mixing apples and oranges here. The question you posed to me was about what’s called a single premium immediate annuity (a SPIA) and the payout rate is determined by the owner’s age. You have to have an age to work up a payout rate. The type of annuity I’ve been talking about is called a variable annuity, it doesn’t feature an immediate stream of income, that’s deferred until after some growth period, called the accumulation phase. The 5-6% (it can be higher, depended on the insurance carrier) is not based on age or the purchase amount, it’s the percentage applied to what the original investment has grown to during the accumulation phase.

    “No, "certain contract" means a guaranteed minimum payout. That costs extra.”

    I don’t know of any insurance companies that offer a contract that doesn’t feature AT LEAST a 10 year payout. That’s the “cheapest”, meaning the highest rate, payout there is. If you know of one that will sell you a contract that would end in month two if you died, or year three, or whatever, under ten years, let me know their name.

    “And by the way, grandpa laughed at such salesman, who hoped to make a quick buck selling to an 88yr old.”

    Most insurance companies won’t write an annuity, deferred or immediate to someone that age. He could buy a fixed annuity (and I doubt it would make sense for your grandfather) . Reputable insurers and agents have a rule of thumb that the buyer must be of a young enough age where they’d have to be able to withdrawal at least what they put it before they hit the average life expectancy.

    “With those long-lived genes, maybe I should buy an annuity... Nah. “

    So long as you’re able to manage your portfolios as well as you have, no. On the other and, someone in their 60s (I don’t recall seeing your age anywhere in this discussion) who has that sort of longevity in their family and doesn’t have your skill would do well to consider putting a guarantee around some part of their projected income in some manner. A simple Monte Carlo analysis of a 5-6% withdrawal rate of a 60/40 diversified portfolio over a 20-30 year time horizon shows how often the portfolio would fail to deliver that pay out rate. Bad odds are involved there for the investor.
    Mar 16 09:26 AM | 1 Like Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    “So let's see, you have no idea what YOUR commission rate is when you sell a policy?”

    As I said before, I am a fee only advisor, I don’t make commissions. I get paid the very same rate for advice if the client buys an annuity to guarantee a part of their income stream or if they use any one of the portfolios I run. Having said that, I don’t object to commissions, assuming they’re reasonable, since my homeowner insurance guy, the fella I bought my car from and the broker I used to buy and sell my homes have all been paid by commission.

    “When I buy ANY insurance I want to know about every single cost involved including the typical commission rate, yep you betcha.”

    Then ask the person you're buying one from. I'm curious, did you spend your working life at a charity?

    “As far as the buyer dying.....what is the actuarial table an insurance company uses..... "

    The actuarial tables use real death age averages, then a profit margin is added. Like I’ve said before, if you object to profits, use a mutual company where the policy owners are the shareholders. It’s sort of strange to hear an investor, like you, complain that a public company might make a profit for providing a service, btw.

    “Fidelity does NOT sell annuities sir, they promote for MetLife …“

    You’re making a distinction where there’s no difference. They sell (they get paid to get people to sign up for the MetLife product, that’s “sell” where I come from) a MetLife product AND they have their own products their own, internal insurance company produces. ALL annuities have to come from insurance companies, by law. That’s why companies like Vanguard and Fidelity have their own insurance subsidiary. Vanguard uses TransAmerica as their insurance carrier in NY state, since NY annuity laws are very unique and it wouldn’t make financial sense for them to register their own Vanguard insurance arm there.

    “Now, let me ask you this....how much is a deferred annuity paying as an interest rate as of today?”

    A deferred FIXED annuity? It will have to be low in a low interest rate environment like this one. I’m really not much of a fan of fixed annuities of any sort, the only advantage they present to a typical CD is tax deferral, which isn’t much to the average investor.

    “You want to discuss variable annuities? Fine and dandy, just another way of slapping lipstick on a pig, BUT it is tied to market movement and the payouts CAN be different....some might even luck out....most do not, or regret it at some point.”

    This is where you should familiarize yourself with the living benefits of some variable annuities. They are tied to market movements WITH the added benefit of having a benefit base (the figure the eventual income stream is based on) that is guaranteed to grow at a minimum rate, regardless of what the market does. Imagine being invested in the S&P 500 throughout the decade of the 2000s and instead of losing money in 2000, 2002 & 2008 (if memory serves) you made at least 6%, while getting the upside of the S&P every other year. That’s what happened to your benefit base even as your annuity's cash value went up and down with the market.

    “You cannot compare other insurance products to annuities, because MOST people do not have enough money to self insure for those catostrophic events…”

    Outliving your income and/or disruptive market returns that diminish your income stream ARE catastrophic events to some people. That’s the very point.

    “Please MR bing, lets get really real now. Take off your sales hat and lets talk REALITY. “

    I’m the on in this conversation that’s been “real” since the outset.
    Look, I think I've done enough to show the open minded among the readers here to research further befre they decide all annuities in all circumstances are rip-offs. They can explore further on their own.
    Mar 16 08:52 AM | 1 Like Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    "Fidelity does not sell annuities. They get paid by the insurance company to pimp for them."

    "Pimp" doesn't mean sell?

    I'm not sure what you're trying to say here, but in addition to the MetLife annuity Fidelity sells, they offer some with their own name on them. I've provided a link below.

    http://bit.ly/ZPnjKQ
    Mar 16 07:03 AM | Likes Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    "Lets assume a 65 year old forks over 100k in a plain vanilla single (not joint) fixed annuity TODAY, no extras to lower the monthly allowence....he drops dead at 78.....whats the bottom line.....whats the commission rate.....and how much monthly allowence payments. "

    You’re again asking about a single premium immediate annuity and all the points I made above about them still apply. The 7.9% I mentioned above applies to a 75 year old with the “plain vanilla” “10 year certain” payout. For a quote on a 65 year old you can do what I did and call a low cost provider to get the rate. You’re asking for ten years more in guaranteed payments, so you can be assured it will be much lower. I couldn’t tell you the commission rate, since it varies carrier to carrier if you’re working with a commission based advisor. If you’re using Fidelity, Vanguard or USAA I don’t believe there’s anyone to pay a commission to.

    Again, it would appear that after damning all annuities when it comes time to answer specific questions, you seem want to set the example situation in such a way as to handicap the annuity as much as possible. In your latest example, you’ve decided that you know the buyer will died well short of his life expectancy and he’s made no accommodation for a spouse that might outlive him. That’s not much different than asking your homeowner insurer “Why would I pay you for 40 years of fire, flood, wind and hail insurance if I’m never going to file a claim?”.

    BTW, when you buy car insurance, do you look for the best coverage at the premium you’re paying, or do you ask about the commission and then buy the policy with the lowest commission?
    Mar 16 06:43 AM | Likes Like |Link to Comment
  • Team Alpha Retirement Portfolio: Dividend Investing Vs. Annuity Purchasing [View article]
    Coaly1234. I'm sure you're right, but perhaps there's a reader who was about to take RS's word for it all who will now think for themselves and read other sources.
    Mar 16 06:43 AM | Likes Like |Link to Comment
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