Dedicated to Deposits: Deals, Data, and Discussion
Featured Savings Rates
Featured Accounts

A Good Strategy For Increasing Future Retirement Income

Saturday, January 25, 2014 - 9:31 PM
“Social Security is even more valuable in a low (interest rate) environment. It’s gotten less attention than it deserves. But it’s a large component of any financial plan,”
ShorebreakShorebreak2,686 posts since
Apr 6, 2010
Rep Points: 14,551
1. Tuesday, January 28, 2014 - 10:38 PM
Whenever an article on DA mentions annuities, I am compelled to investigate the claims.

Since the article also mentions Social Security, I'd like to start with that portion of the article. The simplistic “wait” strategy maximizes the monthly SS payment at age 70. It does not, however, consider lifetime SS income that may be lost using this strategy. For a more in-depth discussion of maximizing total SS income, you might look at this WSJ article How to Maximize Your Social Secur...s - and a blog at a web site mentioned in that article

For reference, I went online to get my current SS benefit data. For every $ 1000 dollars received at age 62, I would receive $ 1326 at age 66 and $ 1751 at age 70. The ratios between these numbers do not correlate well with the ratios in the article.

Now, the fun part …

You accumulated a spare $ 100181, but need to solve a cash flow shortage averaging $ 2.84 per day.  A VP at an insurance company recommends buying an annuity. Who'd have thunk it! ;-)

Could you replicate the annuity, at lower cost, using only the information available on DA? Easily and conservatively, using only 2 financial institutions.

Based on monthly interest compounding, the present cost of a future dollar can be calculated as:

Future_Dollar = 1 / ((1 + ((APR) / (100 * 12))) ^ (Payment month – 1))

Easy Solution (cents truncated):

(Monthly payments per year are $ 1035,  $ 1060, $ 1087, $ 1114, $ 1142, $ 1171, $ 1200 and $ 1230.)

SFGI Direct -
Deposit $ 25024 into the savings account, 1.00% APR

Pentagon Federal -
Deposit $ 12690 into a 2 year CD, 1.40% APR
Deposit $ 12603 into a 3 year CD, 2.00% APR
Deposit $ 12566 into a 4 year CD, 2.20% APR
Deposit $ 12121 into a 5 year CD, 3.00% APR
Deposit $ 12062 into a 6 year CD, 3.00% APR *
Deposit $ 12004 into a 7 year CD, 3.00% APR
* Yes, I know there is no 6 year CD. It is a simple extrapolation.

The sum of these deposits is $ 99070. You have about $ 1100 “leftover” cash compared to the annuity and much more flexibility. This solution also guarantees the 2.50% annual increase, which is not fully specified for the annuity. Finally, the cost is overstated by about $ 400, as the CD's mature once a year, not once a month. Placing the proceeds from the matured CD’s in the SFGI savings account and using it for the monthly withdrawals would generate another ~ $ 70 per year.

The article incorrectly states that you recapture the annuity purchase price in 6 ½ years, but it is really 7 ½ years. Also, Mr. LaVoice “estimates that 92 percent of every dollar will be tax-free return of principal”. Would you consider the statement “Less than 8 percent of every dollar is income” to be a selling point?
CTMCTM41 posts since
May 6, 2010
Rep Points: 139
2. Wednesday, January 29, 2014 - 10:49 AM
Buying an annuity when interest rates are so low is a bad idea. It costs so much more. Same for allowing a cash out with a defined benefit pension plan. It is bad for the plan because so much more is withdrawn than when rates are higher. It is bad for the self funded plan. 
Ally6770Ally6770937 posts since
Jan 16, 2010
Rep Points: 2,727
3. Wednesday, January 29, 2014 - 6:04 PM
I am not interested in annuities personally but I heard something yesterday on tv that was new to me about annuities.  At noon each Monday our local station has this guy on who gives free seminars on helping savers and what they might consider for their investments.  He doesn't seem to be too excited about annuities but said in certain circumstances , he might advise a customer to buy one, especially if it is a fixed annuity.  What was new to me was that he said the Annuity company now pays him a commission to sell their products so there is no charge to the customer for buying the annuity.   He sells them fee free.  I wondered if others are still charging customers for them if the companies are paying them to sell them.  I think if any of our DA members are interested in Annuities, they might want to ask if theirs are fee free also and whether the seller is being paid by the company now.
paoli2paoli21,401 posts since
Aug 10, 2011
Rep Points: 6,135
4. Wednesday, January 29, 2014 - 6:39 PM
How can you tell an insurance agent is lying?  ;-)

Insurance agents have always been paid by the insurance company to sell annuities (or any other insurance product).  This is how the "agency" form of representation works.  If an insurance agent is charging anything on top of the already huge fees, it is time to find another agent.  Some will split their fee with the customer.

As an example, an agent might get 120% of the first year's premium on a whole life policy, and easily 7% - 8% of the face value of a variable annuity.  This is why annuities have such high "surrender charges". If you bail out of the contract, the agent has already been paid, so you make up the difference.
CTMCTM41 posts since
May 6, 2010
Rep Points: 139
5. Wednesday, January 29, 2014 - 7:37 PM
#4  You may have misunderstood what I was trying to post.  The man who has the financial program on tv is not an insurance agent.  He is a financial adviser who can sell Annuities.  From what I understood it seems financial advisers may be charging buyers to sell them these Annuities and he wanted people to know that the insurance companies pay the financial advisers to see their products.  It seems you don't have to buy the Annuity just from an insurance agency.  Many financial advisers also sell them.  My concern is that if the financial adviser is being paid by the insurance company, is the Annuity free of any fees to the customer.  He made it sound like it was.  I am not interested in Annuities or I would call his local office and clarify this with him.
paoli2paoli21,401 posts since
Aug 10, 2011
Rep Points: 6,135