Author Topic: A twist on a retirement plan.  (Read 5636 times)

Rich M

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A twist on a retirement plan.
« on: April 28, 2012, 06:01:45 PM »
My wife works for a big company....a big one. 

She just got an option for a new retirement plan called "Lifetime income strategy"

If she ops-in (or doesn't opt-out?), she will soon be under the umbrella of the plan which claims to pay her retirement indefinitely through some insurance mode until she dies.  And of course there is a fee associated with this in percent of her portfolio per year that starts at a certain age, increases and levels out. 

First glance, I see it as some sort of annuity or whole life insurance packaged under this new name. It's like some sort of way to make a retirement plan (401k) into a lifetime pension.  But the employee foots the cost.

Anyone here have experience with this type of employer offered plan?

I feel the safe mode is to opt-out because one should never do something they don't understand and I'm quite sure there is a huge trade-off in this beyond the fees I just mentioned.

« Last Edit: April 28, 2012, 11:00:30 PM by Rich M »

arebelspy

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Re: A twist on a retirement plan.
« Reply #1 on: April 28, 2012, 06:23:21 PM »
Whole life or annuity is exactly what I thought right before I read your sentence thinking the same thing.

It's probably worth looking in to, and then probably worth opting out of.
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Rich M

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Re: A twist on a retirement plan.
« Reply #2 on: April 28, 2012, 11:04:25 PM »
Whole life or annuity is exactly what I thought right before I read your sentence thinking the same thing.

It's probably worth looking in to, and then probably worth opting out of.
I think you are right.

Sparafusile

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Re: A twist on a retirement plan.
« Reply #3 on: July 05, 2012, 06:01:55 AM »
In my opinion, it would depend on your age and where you are in your retirement goals. If she hadn't saved anything yet and is nearing retirement age, the no risk investment might be exactly what she needs. On the other hand, if you're relatively young and have a good head on your shoulders I'm sure you can get a much better return by putting your money in more risky investment.

My father, who retired unexpectedly early, put all of his stock investments into a state guaranteed fund that will pay him a certain amount for the rest of his life. It's not something I would do at my age, but for him it was exactly what he needed.

BenDarDunDat

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Re: A twist on a retirement plan.
« Reply #4 on: July 05, 2012, 11:15:35 AM »
I've seen my assets plunge to be worth a fraction of what they were just a month before time and time again. Of losing and gaining of losing and gaining like some kind of stalemated war. The average person has a net worth that's been trimmed by 40% and worth back what they were in 1988. In Japan, it's a lost generation.

You've got some of the best and brightest, the top 1% in brain power, losing their asses at hedge funds.  I've received a small annuity as part of a pension buyout and I consider it an enormous benefit for when I eventually retire. Think of all the old folks living off of interest income now that interest income has dried up or those dependent on market gains in a market that's right about where it was 12 years ago. Most of these folks thought they had their head screwed on the right way too.

I'd seriously investigate the annuity she is being offered and then decide before turning it down out of hand, because you don't understand it (haven't tried to understand it either).

arebelspy

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Re: A twist on a retirement plan.
« Reply #5 on: July 05, 2012, 01:15:13 PM »
Where do you think the insurance companies providing these annuities get the money to fund them?

Market investments.  (Ditto whomever is paying for them, such as private companies - generally pension funds are invested, or inflation would eat them alive.)

You may not be able to stomach the volatility, and I respect that, but counting on an annuity provider means they are taking on the risk for you, which leads to one of two things:
1) They are able to make more than they promised, and they can continue to pay you (i.e. they promise you a 6% payout, and they make more than that in the market long term, and they can pay you that 6%).  Which means you're giving up a lot of the upside, the extra money they're making.

or

2) They can't make more than that (say they promised you 6%, but we have that decades long flat market you're talking about, a lost generation, and they can only make 3% on the money). They overpromised, run into problems, and suddenly your annuity doesn't look so secure.  How do you think an insurance company can pay their 6% annuity when the market is returning 0% real return?  It can't.  So annuities you may think "feel" safe.. but there very well could be one day where the * hits the fan.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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sol

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Re: A twist on a retirement plan.
« Reply #6 on: July 05, 2012, 08:57:54 PM »
So annuities you may think "feel" safe.. but there very well could be one day where the * hits the fan.

Generally speaking insurance companies offer annuity rates that are significantly more conservative than their market predictions over the same time frame.

For example, when I was hired back in 2008 they were offering annuities at 5.25%.  This month's rate is 1.875%.  I'm pretty sure the market is going to do better than 1.875% over the next thirty years.

See https://www.tsp.gov/whatsnew/rates/annuityRateIndex.shtml for a rate history.

Nords

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Re: A twist on a retirement plan.
« Reply #7 on: July 05, 2012, 09:23:34 PM »
My wife works for a big company....a big one. 
She just got an option for a new retirement plan called "Lifetime income strategy"
First glance, I see it as some sort of annuity or whole life insurance packaged under this new name. It's like some sort of way to make a retirement plan (401k) into a lifetime pension.  But the employee foots the cost.
Anyone here have experience with this type of employer offered plan?
I feel the safe mode is to opt-out because one should never do something they don't understand and I'm quite sure there is a huge trade-off in this beyond the fees I just mentioned.
If you can post a link or a (redacted) image of the marketing information, we can help figure out the details.

A few years ago Vanguard and Fidelity were both hot on "Guaranteed Minimum Withdrawal Benefit" funds.  Of course they got started just before the recession hit, so now there's some doubt how well even their 3% withdrawal fund will hold up, let alone 5-7%.

MegaCorps seem to have little incentive to be cost-efficient with your money, so you're right to be skeptical.  But it's worth figuring out the benefits & costs so that you can make an informed decision, and so that you can jump back in if your situation (or their expenses) change.

arebelspy

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Re: A twist on a retirement plan.
« Reply #8 on: July 05, 2012, 10:16:50 PM »
So annuities you may think "feel" safe.. but there very well could be one day where the * hits the fan.

Generally speaking insurance companies offer annuity rates that are significantly more conservative than their market predictions over the same time frame.

For example, when I was hired back in 2008 they were offering annuities at 5.25%.  This month's rate is 1.875%.  I'm pretty sure the market is going to do better than 1.875% over the next thirty years.

See https://www.tsp.gov/whatsnew/rates/annuityRateIndex.shtml for a rate history.

Oh, I completely agree.

I think the scenario 1 I outlined is much more likely than scenario two.  Which means you're giving up a lot of your return to them, as opposed to just doing it yourself due to being scared of volatility.

However, if you do think the market will be flat for a long time (like Japan, like BenDarDunDat mentioned), thinking annuities will save you isn't the answer, IMO, as they'd be just as screwed in trying to payout their promises.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Jamesqf

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Re: A twist on a retirement plan.
« Reply #9 on: July 05, 2012, 11:39:16 PM »
How do you think an insurance company can pay their 6% annuity when the market is returning 0% real return?

Humm...  By attracting people who'll put large amounts of money into annuities that will start paying off sometime in the future?

Now please don't ask me to explain exactly how this differs from a Ponzi scheme, because I can't.

Oh, and they can always hope that inflation will ramp up again, and in a few years that $X/month payout will only be worth $X/2 in today's dollars, while the stock values & dividends have kept up with inflation.  That's the main reason I took a payout from the pension plan of a company I worked for some years ago: by the time I would have started getting the monthly checks, their purchasing power would have been reduced significantly, even at today's low inflation rates.

arebelspy

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Re: A twist on a retirement plan.
« Reply #10 on: July 06, 2012, 10:46:23 AM »
How do you think an insurance company can pay their 6% annuity when the market is returning 0% real return?

Humm...  By attracting people who'll put large amounts of money into annuities that will start paying off sometime in the future?

Now please don't ask me to explain exactly how this differs from a Ponzi scheme, because I can't.

Oh, and they can always hope that inflation will ramp up again, and in a few years that $X/month payout will only be worth $X/2 in today's dollars, while the stock values & dividends have kept up with inflation.  That's the main reason I took a payout from the pension plan of a company I worked for some years ago: by the time I would have started getting the monthly checks, their purchasing power would have been reduced significantly, even at today's low inflation rates.

Sure of course, but that leaves you in a situation equivalent to the scenario 1 I proposed ... I.e. you could have DIY with investments that would have gone up with inflation and be getting a lot more money than from the annuity which is now tiny in terms of buying power.  Again, you gave up all of your upside to them.

They're massively profitable at doing this.  Why not keep the profit for yourself?

I just don't see a way out of those two scenarios.. either the real return is larger than the payout and you're better DIYing it.. or it's not, and at some point the annuity companies run into trouble.

Now for peace of mind, lack of faith in onesself, etc. an annuity might not be a bad option.  Heck, there are multiple scenarios where I'd be recommending an SPIA for someone.

But there are many, many more where I wouldn't.  And the idea that the market will be flat for a long, long time probably isn't one of them.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Jamesqf

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Re: A twist on a retirement plan.
« Reply #11 on: July 06, 2012, 12:11:21 PM »
And the idea that the market will be flat for a long, long time probably isn't one of them.

Even if the market is flat, there are always dividends.  To be honest, I've always been more than a little skeptical on the idea that the overall market can, over time, keep rising at a rate much beyond inflation.  (Just as I was skeptical about rising house prices.)  But if you've got a bunch of sound companies paying a few percent annual dividends, that's your worst-case scenario (other than complete economic meltdown, zombie invasion, etc).