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Early Retirement Extreme Forums » Money Questions

1. 

   Strick
   

   Novice
   Joined: Sep '10
   Posts: 9

   Anybody have one, know of someone who does, or has substantially looked into it for an ERE'r and has any opinion on these (or if you can even get one at the age of 40)?

   Once an ERE'r has determined how much is "enough", and assuming can get one that pays higher than their planned safe withdraw rate on their portfolio (maybe you can't as a 40-year old?), why wouldn't an ERE'r without heirs get one? It seems like you're basically paying any potential remainder of your portfolio at death as a premium to get rid of the chance of portfolio failure.

   They appear to be backed by state guaranty agencies up to a certain amount so that should probably set limits. But heck, I guess the chance of failure of the company and the state agency may be as high as the failure chance of any other portfolio anyway, so maybe this is just another example of false security.

   Other than a substantial emergency fund left over after purchase, why not do this? (I assume there are obvious issues I am missing because I never hear of this actually being done)

   Posted 2 years ago #
2. 

   JohnnyH
   

   Expert
   Joined: Jul '10
   Posts: 1,366

   I'm going to guess the inflation is calculated by CPI, or some other govt. metric... Trusting these figures is just asking to get robbed.

   From the CrawlingRoad permanent portfolio blog on TIPS (and other govt inflation calculations):
   http://crawlingroad.com/blog/2011/03/04/tips-are-a-bad-idea/

   Rule #1 – Don’t let the people causing the inflation tell you what the inflation adjustment rate on the investment will be.
   Rule #2 – Don’t let the people causing the inflation pay you in the same currency that is being inflated away.

   Posted 2 years ago #
3. 

   George the original one
   

   Expert
   Joined: Jul '10
   Posts: 1,943

   Useful annuity links:
   http://www.obliviousinvestor.com/single-premium-immediate-annuity/
   http://www.immediateannuities.com/

   So most states will insure only a $100,000 annuity. New York and Arkansas are the notable exceptions. I _think_ you can have annuities with multiple companies to create better state insurance options.

   Quotes for annuities at age 40 show that you'll currently get 5.1% fixed (no inflation adjustment) for your $100k. An inflation guaranteed annuity will knock that down to about 3% as I recall.

   So, basically, I believe one can do better by doing it themselves. It's reasonable if you want to provide a floor for a portion of your income or you feel that you're not capable of doing it yourself. The annuity doesn't provide anything except income, so if you have a need for a large infusion of cash, the annuity is not going to meet that need (nor would a typical emergency fund... e.g. a tsunami washes away your house and clothes and transportation).

   Posted 2 years ago #
4. 

   Strick
   

   Novice
   Joined: Sep '10
   Posts: 9

   These companies arent the one's figuring the index (e.g. CPI), but point well taken that the govt has an incentive to figure low on any of their indices and it may differ greatly from one's personal rate of inflation. I've seen annuities offer a set percentage increase per year to choose from, but there would be no way to guess an appropriate one to cover a 40 year retirement (the good chance of at least a few years of 70s type inflation would be the kind of risk one is obviously be trying to avoid by buying the annuity in the first place)

   Posted 2 years ago #
5. 

   CestLaVie
   

   Apprentice
   Joined: Jul '10
   Posts: 54

   My mother-in-law has one. She got it when she was 67 in order to supplement her social security income. I am only 36 and for someone my age I don't think it's a good option (the payout is too low). I might get one later though.

   Posted 2 years ago #
6. 

   Chad
   

   Expert
   Joined: Jul '10
   Posts: 1,006

   Also, you need to factor in that we are seeing the lowest interest rates on CDs and bonds in our lifetime. My point being that the current downside in interest rates is very minimal, as we are already near zero. While, the upside is quite large considering energy will get more expensive, rising inflation, the possiblity of QE3, normal market fluctuation (markets are rarely flat for long), etc. Thus, if you are looking for long-term inflation protected income producing assets guaranteed by the government I would wait for the interest rates to rise and buy TIPS.

   Admitedly, I don't like anything inflation adjusted, because, as JohnnyH stated earlier, they don't calculate CPI correctly. Thus, you get screwed while gas, food, and other necessities go up, while your iPad goes down in price (though I'm not sure how much longer that will continue with the poor countries getting wealthier and transportation costs rising). But, if you are looking for inflation adjusted investments, then TIPS would be my target over the next few years.

   Posted 2 years ago #
7. 

   christiehartshorn
   

   Novice
   Joined: Dec '11
   Posts: 1

   Some things to keep in mind: 1) Never let the individuals causing the inflation dictate to you what the inflation adjustment rate on the investment will be; and 2) Never allow the individuals causing the inflation pay you in the same currency, which is being inflated away.

   On another note, will you be able take down structured settlements as collateral for a loan? Find out at http://www.structuredsettlementreview.com.

   Posted 1 year ago #
8. 

   Mo
   

   Master
   Joined: Jul '10
   Posts: 442

   I looked into inflation adjusted annuities a while back. My interest started after reading this:

   http://www.retireearlyhomepage.com/inflannu.html

   When I looked into it, I could only find a few companies offering an inflation adjusted annuity. I think the minimum age was 40 or 45. I'm not there yet, so I didn't get too far down the road.

   In my state annuities are protected from creditors, and are backed by the state up to a certain amount ($250k IIRC). If we use George's numbers, you can reliably get 3% plus CPI-U, or 5% without the CPI adjustment, guaranteed by the state, and protected from creditors, with essentially zero effort on your part. People always say "you can do better", and I think they only mean that you can earn a better return, because I think it is incredibly hard for the individual investor to earn more than 5% each and every year, fully protected from creditors, backed by the state, with no effort. Protecting and guaranteeing assets and returns is expensive.

   I don't think any sane, smart investor would ever consider putting all of his money into annuities. So the common argument about having all of your money tied up is useless. Many companies offer the ability to withdraw a residual ammount from the annuity. So, if you put your $100k into an annuity and two days later your house is washed away and you want the $100k back, you can actually reverse the situation. There are penalties and fees, so you don't get the whole $100k back, but you aren't without options. I suspect the longer you've held the annuity, the smaller the residual becomes. Also, consider that it might not be hard to get a loan secured by an annuity payment-- I don't know this, I've never tried, but why not?

   In response to JohnnyH's rules, and christie's advertisement and redundant comment, realize that you can buy annuities in other currencies, Swiss Francs if you like.

   Posted 1 year ago #
9. 

   George the original one
   

   Expert
   Joined: Jul '10
   Posts: 1,943

   On the positive side, I think there's also a tax benefit with annuities (presumably because much of the income is return of capital). So if you're trying to reduce the tax bill because you're crossing a tax bracket, an annuity provides an alternative to avoiding the extra tax.

   Posted 1 year ago #

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