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larrywww

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Reply with quote  #1 
I have been investigating this financial product and it seems rather interesting.  For one thing, I got a quote on an income annuity and even though the quote was for something like 2500 a month in income, only a quarter of that (roughly $600) was reportable as income.  Which I guess means the remaining portion can be received tax free.  (Which, to my way of thinking means that the return is arguably alot better than its face value).

But there are both qualifed and non qualified annuities---and non qualifed annuities are purchased with after tax money.  And there is something called the exclusion ratio, namely:

The exclusion ratio is the percentage of the annuity payment classifed as non-taxable income. The amount of payment excluded is calculated by dividing the after-tax money used to buy the annuity by the life expectancy of the person receiving the annuity payments.

There are alot of complications.

Another thing that I have discovered is that there may be alot of fees associated with annuities.  

This passage from a column on the subject is interesting in this regard:


So, Jeff called up the client’s insurance company and started asking questions. What was the mortality expense? 1%. Was there an administration expense? 0.5%. How about an income rider? 1.05%. What about the subaccount fees for the mutual funds held within the annuity? 2%. And the fee paid to the client’s broker? 1%. After all that, the person was paying 5.55% in annual fees.

https://www.financial-planning.com/news/how-to-find-fees-in-annuities

I am informed that the variable annuities (as opposed to the fixed variety) have ALOT of fees)---as listed in the above article.

I also believe that if you want lower fees you should ask Vanguard (which quoted fees of 2%) and some of the low load type funds for a better deal.

Does anyone have experience with this financial product?
rickencin

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Reply with quote  #2 
I own four annuities.  These are fixed term (1-4years) annuities, some with a fixed return, some indexed to the S&P 500.  They are complicated.  Lot's of little details.  Really significant surrender fees if you find out it doesn't suit you. 

I always say that you don't really understand an investment until you have exited it and paid the taxes on it.
 
These annuities ARE NOT the lifetime income annuities that most people think of.  There are a huge category of annuities.  Some get special tax treatment as retirement accounts.  Some have a 1031 type ability to tax defer.  Getting tax free money isn't that remarkable if it is return of principal.  (That principle/principal thing is as bad as navel/naval.) I bought several books from Amazon.com on annuities. The ones with four to five stars.  This helped define the various categories.  I don't want to specifically recommend the annuities I own as I am still finding things out about them as I go.
If you can start with a smaller amount and get your feet wet, then you can go up the education curve with less risk.  Avoid plunging everything on what looks like a hot deal.
That said, I got 10% on an annuity indexed to the S&P 500 last year and it looks like that could repeat this year.   It is an options thing so the upside is limited but so is the downside. I had six figure money getting 3 basis points in FDIC insured accounts for the last decade.  Even supposedly "risk free" Treasuries are paying 2 - 3% now.  As I said in another post, I think there are a lot of momentum chasers in the stock market reacting to noise.  Who knows where my year will end up?  Bull markets always end, eventually.  Exit strategies are a wonderful thing.

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larrywww

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Reply with quote  #3 
Are there any of these books that you particularly recommend? 

Given that I am a member of the Kindles Unlimited I have found that it saves me alot of money.  But I also must say that alot of these kindle books I see on Kindles Unlimited aren't great and significant books in many instances.   (FYI, I have been ripped off in the past when I see a great sounding title and the book turns out to be 30 pages long, double spaced, and just published for marketing purposes---so to brag "Hey, I must be an expert----I published a book".)

And I also feel that there have been a flood of publications on real estate and investment related subjects and in many instances I am not impressed with their quality.

I agree with the "go slow" approach on a new financial product.   I think that it is not easy to do an apples to apples comparison of a product that has so many bells and whistles.  But since you can do term annuities, one thing I plan to do is ask for a 30 year fixed annuity so I can compare it to the real estate products I am familiar with.

FYI, it appears that the author of How Not to Get Ripped Off When buying an Annuity (4.5 stars) is actually from the San Diego area.

Given that I am selling things off, I may decide it is worth the trouble to get insurance and investment licenses in my spare time.

But I must say the idea of an income annuity may not be a bad idea.  I got a quote for a half million dollar contribution and the insurer agree to pay something like $2500 a month, only $600 of which was reportable as taxable income.  (Keep in mind that I didn't specify this was to be IRA or 401K related----though maybe assumptions were made about that).
rickencin

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It's been a year since I read these books, but I did manage to find the pile I left them in.  The most information dense is "Life Annuities: An Optimal Product For Retirement Income" by Moshe A. Milevsky. $9 paperback, but free for Kindle (is that possible?). If you have an analytic bent you might like Chapter 2: "Ten Formulas to Know".  The kind of stuff Insurance actuaries talk about around the dinner table (my father worked in insurance).  Life expectancies and the time value of money.  "The Gompertz Annuity Pricing Model" assumes that you know the Greek letter "Sigma" means the Sum (from a to b).  The other two book decidedly do not have anything technical like this.  The next best is "Annuities For Dummies" by Kerry Pechter.  Lots of definitions in non-technical language.  Well, the basis of science is "Observation, Classification, Hypothesis and Testing."  "How Not To Get Ripped Off When Buying an Annuity" by Alessanda Derniat.  Non-technical Will Rogers type folksy advise: "Jim and Jane (both age 56) had just returned from Jim's father's funeral the previous week."  This is in the chapter Fictional Case Studies where you match your situation with fictional characters.  As is common in publishing, not a single equation.  Don't wanna scare the livestock.
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Rick
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Reply with quote  #5 
Quote:
Originally Posted by larrywww

I also believe that if you want lower fees you should ask Vanguard (which quoted fees of 2%) and some of the low load type funds for a better deal.


I had a conversation a month or so regarding annuities with a financial planner who is a social acquaintance.  When I told him that variable annuities in particular are so expensive that they make no sense to me, he countered that Vanguard sells many types of annuities with much better than average expense ratios, and should be considered regarding any annuity needs.

Annuities are generally "sold" rather than "purchased", so there has to be a provision for paying salespeople fairly hefty commissions.  Vanguard waits for you to call them, so they don't have to budget for sales commissions.  Additionally, Vanguard is mutually owned (so there are no shareholders wanting a share of the profits), and has good economies of scale.  

Vanguard has lots of information available on-line.  As always, it pays to be well-informed and to know what you want/need and what you don't want/need.

One question Larry - how are you planning to deal with the inflation risk?  

brycewheeler

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Reply with quote  #6 
I think Annuities in financial media have the worst reputation of all asset classes and several books are currently touted warning NEVER to buy an annuity.  But best to keep an open mind depending on your goals and circumstances.

That said, I had couple Variable Annuities for my wife and I in few years around 1990 with USAA.  They were very profitable for those few years and USAA was one few companies around that permitted withdrawals and cancellations at no or reasonable costs.  Don't know if they are still that flexible.

Now I find myself after all these years getting a new annuity in order to qualify for a real estate loan.  I have tons of loans and finally lenders are questioning my ability to pay.  My ratio of income to expenses were deficient to get the loan approved but the lender came up with the idea of my funding a large "Immediate Annuity" which would pay out to me a monthly $4,000 or so  which the lender could treat as income to get me successfully over their hurdle of income ratios and to qualify for the loan.

I checked Fidelity and Vanguard.  They had 5 year (5 years is minimum length) " Immediate Annuities"  which would qualify and satisfy my lender.  Vanguard was the clear winner on cost.   My lender backed off a little and was eventually satisfied with a somewhat smaller annuity than what they originally demanded.  But anyway to me it was a novel and excellent solution to qualify for a nice Fixed 30 year loan.  Who would have thunk it!!!
Paul

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Reply with quote  #7 
I've had a variable annuity at Jefferson National since 2007. They were the first to offer a flat-fee rate, and it's been $20 a month. There are no other fees charged, and withdrawals are allowed at any time. 

I opened it because I've traded a trend-following-junk-bond system for over 20 years, and all traditional brokers became restrictive with "frequent" trading of mutual funds. I learned JeffNat was very liberal with switching, so I went there. After a couple of years, I handed the process off to an adviser because I started getting lazy and stopped subscribing to the only data service I knew that offered mutual fund data showing total returns and the NAV adjusted for dividend distributions. That's needed for proper calculations. There are so many junk funds that I knew nothing about that the adviser stays current with, and the deeper selection allows for more nimble switching.

I've been very satisfied with JeffNat, but the bond system's performance has lagged because of the time I'm in money market funds during sell signals. The extremely low interest rates are a drag on performance.
spanishlight1

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Reply with quote  #8 

We offer fresh cut bank instrument for lease, such as BG, SBLC, MTN, Bank Bonds, Bank Draft, T strips and others. Leased Instruments can be obtained at minimal expense to the borrower compared to other banking options. This offer is opened to both those and corporate bodies. We are RWA ready to close leasing with any interested client in few banking days, if interested do not hesitate to contact us via email. All relevant business information will be provided upon request. If Interested kindly contact me through my private email below. Mr. Rafael Robles Email: spanishlight1@hotmail.com skype: spanishlight1 Tel: +44 7700 900748


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We offer fresh cut bank instrument for lease, such as BG, SBLC, MTN, Bank Bonds, Bank Draft, T strips and others. Leased Instruments can be obtained at minimal expense to the borrower compared to other banking options. This offer is opened to both those and corporate bodies. We are RWA ready to close leasing with any interested client in few banking days, if interested do not hesitate to contact us via email. All relevant business information will be provided upon request. If Interested kindly contact me through my private email below.



Mr. Rafael Robles
Email: spanishlight1@hotmail.com
skype: spanishlight1
Tel: +44 7700 900748
Homeloanwisdom

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Reply with quote  #9 
Quote:
Now I find myself after all these years getting a new annuity in order to qualify for a real estate loan.  I have tons of loans and finally lenders are questioning my ability to pay.  My ratio of income to expenses were deficient to get the loan approved but the lender came up with the idea of my funding a large "Immediate Annuity" which would pay out to me a monthly $4,000 or so  which the lender could treat as income to get me successfully over their hurdle of income ratios and to qualify for the loan.


If your need additional income from an annuity or retirement accounts to qualify for a loan here is an alternatives:

 

 If You Are 59 ½ or Older

If you are 59 ½ or older and need income to qualify for a loan. If your money is in a retirement account (Keogh, SEP,  IRA )you can start taking a withdrawal of the amount need to qualify for the loan. In the “eyes” of the lender a draw-down of a retirement is the same as an annuity.  I’ve used this several times to get borrowers qualified provided the draw-down doesn’t deplete the assets in less than 36 months. Thus if you need $4000/month to qualify than I need to verify you have a minimum of $152,000 in your retirement account ($4000 x 36 months + 2 more mores months reserve). If retirement is in stocks and bond (riskier asset) than we’ll use just 70% of the assets. In this case 38 months worth of income at $4000/month is $152,000.$%152,000/70% = $217,1420. Thus $152,000 to $218,000 in your retirement can give you the drawdown (annuity) to qualify for a loan. The rules are:

  • Must be set up on auto deposit into a verifiable account (so we can see auto withdrawal from retirement account & auto deposit into demand/checking account)
  • We need to see paperwork setting up auto withdrawal *(continuity of income)
  • Must have received at least one auto deposit

You would still need to have verifiable reserves depending on how many financed properties you own but the above gives you a way to get a verifiable income acceptable to the lender which doesn’t require you to have a continuity of income history (pay check, tax returns.. etc.) that most all loans require.

I have had clients later discontinue the “draw-down” since they didn’t need the income other then for the purpose of qualifying for a loan.


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Thom MacFarlane
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brycewheeler

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Reply with quote  #10 
Thanks for the suggestions Thom, but I do not have any retirement accounts to draw from.  My lender seemed to want at least 4 years of income I believe, but you have some great ideas to consider in future.

Bryce
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