What would you do? Money question.

Discussion in 'Wildcat Rant Board' started by Deeringfish, Jun 21, 2020.

  1. Deeringfish

    Deeringfish Well-Known Member
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    Mrs Fish and I are building a new house. $600,000.

    I'm turning 65, ready to retire.

    A 15 year mortage may be available for a little as 2.5% at our local credit union.

    I will have $400,000 from the sale of our old place. Do I leverage this low rate and take a bigger loan or do I put the whole $400,000 down? Real-estate here is on a tear, they are already selling the same house we are building for 5% more than we paid and they are going like hot cakes even in this pandemic.

    What do you think investing mavens?
     
  2. Fitzphile

    Fitzphile Well-Known Member
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    If you don't need the money in the medium term, put the whole $400,000 into the new house. You will lock in a 2.5% return versus taking a loan. Interest rates will be so low that holding the money as cash is just a waste. And equities will be all over the place in the next several years, which will make it more difficult to sleep at night for you.
     
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  3. Deeringfish

    Deeringfish Well-Known Member
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    The thing of it is there are some great companies like Merk, Southern Co. IBM, AT&T that pay almost twice that in a dividend.
     
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  4. corbi296

    corbi296 Well-Known Member
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    If you don’t need the money for liquidity purposes, I would put it all down and take out a smaller mortgage. Your alternative investment options are not attractive as I continue to find the equity markets unattractive and the savings rates are abysmal. In addition, with the new tax laws the tax shield you can generate from the deductibility of mortgage interest and real estate taxes is capped so that creates an additional disincentive to taking out a bigger mortgage.
     
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  5. corbi296

    corbi296 Well-Known Member
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    Yes but that dividend rate is not guaranteed and you also subject yourself to loss of principle value given current equity valuations. If real estate is doing as well as you described in your market, I think that is your best option.
     
  6. MRCat95

    MRCat95 Well-Known Member
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    Need more info...
    - Was the original loan you planned to take $200K?
    - How much does your retirement nest egg afford annually in terms of spending?
    - What tax bracket are you in? A decent high quality muni (non-taxable) fund can get you 2.5% plus with zero federal income taxes. 2.5% plus tax exempt plus a tax deductible 2.5% is an easy tax arbitrage.
    - Retirement plans + Social Security + annual income from savings?

    My general advice to you (not knowing the above) is to leverage yourself to gills on the new mortgage (borrow all day long at 2.5%) and hold on to your cash so long as the shit hitting the fan doesn’t break you.
     
    6 MRCat95, Jun 21, 2020
    Last edited: Jun 21, 2020
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  7. Deeringfish

    Deeringfish Well-Known Member
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    I've been playing with the amount of the loan for a while. I could sell some stocks and buy the house outright and be just fine but I have the ability to shelter my pension of $18,000/year if I spend it on housing allowance. That is an unusual tax break available only to Military and Clergy as I understand it, HOA and taxes will be about $6,600 a year so a small mortgage of $1,000, mo. is a no brainer tax wise.

    I've never been in a very high tax bracket about 12% after all the deductions.
    I think I'm retiring this year. Career doesn't jive with old age.

    I can retire well by my fairly modest standards but I'd like to protect the principle I have acquired through some sacrifice for my children.

    I guess the bottom line is, can I do better with cash at 2.5% over 15 years when I have other liquid assets I can fall back on.
     
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  8. MRCat95

    MRCat95 Well-Known Member
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    Cash is pretty much zero now. However, here’s a fairly low octane High Yield muni bond fund with a current ~2.7% yield. It’s over 90% Investment grade. It has a duration of about 7 years, so it’s not without interest rate risk. For example, if muni bond yields yield rise by 1% (from 2.7% to 3.7%) overnight, expect to lose about 7% in market value. Although you’d now be compounding over the next 15 years at 3.7% rather than 2.7%.

    Your 2.5% Mortgage (interest payments) are tax-deductible and the yield from muni bonds is exempt from taxes. Seems like a modest arbitrage opportunity. The higher your highest marginal tax bracket, the more the home mortgage interest deduction matters. Even if you’re only in the 20% tax bracket, that 2.5% mortgage rate has about a tax-equivalent cost of 2.0%.

    I’m your shoes, I’d probably go for the mortgage and invest the difference, but I understand the allure of being mortgage free.

    I could sell some of my muni bonds and pay off my mortgage tomorrow, but am continuing to play the yield/tax spread.

    https://investor.vanguard.com/mutual-funds/profile/VWAHX
     
  9. MRCat95

    MRCat95 Well-Known Member
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    I think the new interest deduction cap is on loan principal over $750K, so it doesn’t apply to him. Also, it sounds like his state income + property taxes are probably less than $10K (new cap on deduction) anyway, so he shouldn’t lose that benefit.

    Losing the SALT was a kick in the nuts for me. Just when I thought Trump couldn’t get any worse, he raised my taxes!
     
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  10. Fitzphile

    Fitzphile Well-Known Member
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    Actually, at his income level he is taking the stand deduction for him and his wife so there is no deduction for interest expense. The guy's pension is $18,000 and at that level social security will be tax free.
     
  11. MRCat95

    MRCat95 Well-Known Member
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    I think he implied there’s other income there (perhaps dividends/interest from investments). If the $18K pension and SS are it for income, I agree with you.
     
  12. corbi296

    corbi296 Well-Known Member
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    With the Salt Cap of $10k and mortgage rates at these low levels, it’s difficult for most to have itemized deductions that exceed the standard deduction. Not sure what the situation is in this case. I hear you on the Muni argument but I am scared shitless to invest in medium to long term bonds in this environment. Everything I know says that runaway inflation is right around the corner. I’d rather stay in cash and earn my 1.25% online savings rate for now.
     
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  13. Alaskawildkat

    Alaskawildkat Well-Known Member
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    I know annuities get a bad rap, but you can presently get 3% per annum on a 3 year annuity backed by a A- rated insurance company. The one I have been looking at allows you to withdraw 10% each year after the first year. Schwab offers one backed by an A rated insurance company but it only pays 2.4% and you can only withdraw 5% each year after the first year. My state has an insurance guarantee fund that adds an additional measure of comfort. (With an annuity usually when the insurance company runs into difficulty, other insurance companies buy up the annuity but that is of course the risk with an annuity in that you are relying on the insurance company to be around to back it up although unlike banks, insurance companies are required to back their investments 1:1)

    When the 3 year contract runs you can get all your principal back and then put the money into the house by paying down the mortgage or if CD rates have returned to 3% plus then you can put the funds into FDIC insured (or whatever the credit union insurance equivalent is where the CD rates will be better.)

    Given the numbers you offer my suggestion would be to purchase two separate $100,000 annuities just in case you have to cash in one for some reason then your penalty will be limited to half of the investment. If nothing else this having some annuities will allow for diversification of your portfolio. if you only want to put in $100,000, get two $50,000 annuities.

    I should have added that an annuity can act like a traditional IRA in that it is my understanding that there are no taxes to pay while the funds remain in the annuity earning interest and you defer taxes until funds are withdrawn. With a three year annuity you have the option of renewing it for another three years at whatever the interest rate is at that time. If you think interest rates will go lower you can alternatively get a five year annuity to lock in today's 3% rate. Then there are lifetime annuities but that is a whole different strategy with in my view added risks. What I am focusing on here is a way to get a decent interest rate on large sums of cash that you don't want to risk putting into the stock market during these turbulent times as an alternative to holding the funds in CDs or a money market that pay minimal interest right now.
     
    13 Alaskawildkat, Jun 23, 2020
    Last edited: Jun 23, 2020
  14. Deeringfish

    Deeringfish Well-Known Member
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    There are. Annual income for all sources is about $70,000.
    I haven't started drawing out of my IRA yet so I may have more taxable income in the future. Not sure how that is going to go. This is such a transition time from work to retirement. It is hard to be certain how it all pans out until it does.

    These are good suggestions, some I haven't considered at all. Keep it coming if there is more.
     
    14 Deeringfish, Jun 23, 2020
    Last edited: Jun 23, 2020
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  15. CatManTrue

    CatManTrue Well-Known Member
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    One additional perspective: you only mentioned stocks in your potential investments. Unless the vast majority of your current portfolio is in bonds, it’d be risky for a 65YO to take that money from a sound real estate investment into the stock market.

    MRCat’s muni bond suggestions are nice, and there are a lot of great low cost bond funds to consider. Good luck with your decision.
     
    15 CatManTrue, Jun 23, 2020
    Last edited: Jun 25, 2020
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  16. DaCat

    DaCat Well-Known Member
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    Me too. High real estate taxes makes it compelling to move, thanks to Trump taking away my deductions.
     
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  17. Alaskawildkat

    Alaskawildkat Well-Known Member
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    I should have added that an annuity can act like a traditional IRA in that it is my understanding that there are no taxes to pay while the funds remain in the annuity earning interest and you defer taxes until funds are withdrawn. With a three year annuity you have the option of renewing it for another three years at whatever the interest rate is at that time. If you think interest rates will go lower you can alternatively get a five year annuity to lock in today's 3% rate.

    Then there are lifetime annuities but that is a whole different strategy with in my view added risks. What I am focusing on here is a way to get a decent interest rate on large sums of cash that you don't want to risk putting into the stock market during these turbulent times as an alternative to holding the funds in CDs or a money market that pay minimal interest right now.
     
    17 Alaskawildkat, Jun 23, 2020
    Last edited: Jun 23, 2020
  18. corbi296

    corbi296 Well-Known Member
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    I would hold off. The Trump tax bill will likely be unwound through budget reconciliation when Biden gets into office. Not ideal but certainly better than the current tax structure.
     
  19. Zootcat

    Zootcat Well-Known Member
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    My wife and I just retired also. +1 re: predicting financial performance in this environment vs retirement needs.

    Also, it’s weird making the change toward a capital preservation strategy vs. growth/income. All my life, I’ve been used to making money, not staying flat or spending assets.

    We have an opportunity to buy some Illinois farmland at a reasonable price. While it wouldn’t be our residence, we’re going through a similar thought process.

    Thanks folks. I’m also appreciating some of the responses on this string.
     
  20. Medill90

    Medill90 Well-Known Member
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    Hey, there are some farm oriented funds....one at Mesirow and another PE firm here in Chicago. Could be good to talk to them and get a sense of where things stand.
     
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  21. MRCat95

    MRCat95 Well-Known Member
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    I
    Can’t quibble with your thinking. However, I’ve been waiting for runaway inflation given Fed/fiscal policies for like 10-20 years like I’ve been waiting for Godot.

    If runaway inflation hits soon, I wasn’t wrong... I was just 1-2 decades early...
     
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  22. MRCat95

    MRCat95 Well-Known Member
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    The more I hear about your situation, the more I think you’re in the “behavior finance zone” and should do what feels right rather than try to engineer in the “actual finance zone” stuff. I don’t think the right or wrong answer is likely to cost you six figures either way, but what are sleepy vs. sleepless nights worth to you?
     
  23. WestCoastWildcat

    WestCoastWildcat Well-Known Member
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    Build an off the grid “tiny home” in the boondocks somewhere and bank the remaining proceeds!
     
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  24. Deeringfish

    Deeringfish Well-Known Member
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    My experience in investing is mostly stocks. I guess I've done well in that I never made a big salary but by investing 10% each year from my early 20's I got my kids through college and put together a nice nest egg. Nice by my standards anyway.

    The last time the market showed a loss over a 5 year period was almost 100 years ago. Things are different now and some safety feature exist that didn't exist back then. The Siren song of 2.5% for 15 years is compelling but I think I'm going to just borrow what I need and keep the mortgage small.

    I try to have a short prayer time each day and in June I read a proverb a day so this year I'm reading Eugene Peterson's paraphrase "The Message". Proverbs 22:26 he paraphrases,

    "Don't gamble on a pot of gold at the end of a rainbow, hocking your house against a lucky chance."

    That was kind of timely for me.:)

    Thanks for all the input. It was nice to be in a thread where no one was fighting about politics and stuff. Just helping each other out.
     
  25. Alaskawildkat

    Alaskawildkat Well-Known Member
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    Sounds like a plan. The one thing you might want to do before putting most of the funds into the house would be to check whether the tax benefits would make that 2.5% in interest a beneficial deduction. If so then getting 3% on an annuity for the next 3 or 5 years could in effect give you tax free income on 2.5% of those annuity earnings.
     
  26. Deeringfish

    Deeringfish Well-Known Member
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    I know! that is what tortures me, But, what is .5% against inflation? and all that?
     
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  27. hdhntr1

    hdhntr1 Well-Known Member
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    Depends on what alternatives you have for the money. If you have have good ones, take the larger loan. If not.... I have better alternatives so I would take the larger loan
     
  28. hdhntr1

    hdhntr1 Well-Known Member
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    He/she still would not be mortgage free as he would still have a $200K loan so the question is if he has a $200K or $500K loan. These interest rates are a gift for the borrower (if they have something worthwhile to do with the money) I just bought a 7% yield( that grows at about 7%). If he bought something (or combination) similar,, 300K at 7@ is $21k and payment on 300K at 2.5% is $2007 per month. He could use that to pay the mortgage, and at the end of 15 years have the house and the $300K fund
     
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  29. hdhntr1

    hdhntr1 Well-Known Member
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    Interest on 500K at 2.5% is $12, 500. (at least initially) It really depends on the sources of income and where the person resides as to whether it is a limitation. And it could always encourage them to give a big donation to NU (just not for seating)
     
  30. hdhntr1

    hdhntr1 Well-Known Member
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    It isn't just if they need the money but what their alternatives for the money are.
     
  31. MRCat95

    MRCat95 Well-Known Member
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    Whatever you decide, Deering, good luck to you. This is a tough one where I have a hard time calling you an idiot either way you go.
     
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  32. CatManTrue

    CatManTrue Well-Known Member
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    That is probably the wisest move. You want your retirement to be a time of relaxation and less stress.

    Imagine you take a $200K larger mortgage than you need to invest in the market. Wiser minds than mine (Ray Dalio) believe that the market will have limited returns over the next decade. So you have the potential for some upside, but imagine the market crashes and takes years to rebound - you could lose $40K-80K very quickly which would not be a pleasant feeling at the start of your retirement. You could also gain that much but keeping it may be tricky in this market.

    Whereas if you keep that money in your house and reduce the mortgage, you can still tap a home equity LOC should you need money down the road and sleep easier at night knowing you have a smaller monthly payment due - and that your investment is more stable and likely safeguarded for your children.
     
  33. NU Houston

    NU Houston Well-Known Member
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    I'm nervous about debt and am pretty conservative financially. If I had a chance to reduce or eliminate my mortgage, especially in this current economic environment, I'd take it in a heartbeat. Maybe there are ways to make more money through investments, but I sleep better at night with less debt.
     
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  34. WestCoastWildcat

    WestCoastWildcat Well-Known Member
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    I’m going thru a refi now because even though my current mortgage is ok, interest rates may not be this low again for a long time. Particularly for those with mortgages that have ARMs/variable rates it might be a good time to lock in a fixed rate.

    I’m also looking at my budget to see where I can reduce costs that are not fixed. I’m going to be cautious about travel anyway for the foreseeable future. I’m investing in upgrades/home improvement esp upgrading my tech and home exercise equipment like a spin bike and new bench. I replaced my aging HVAC a few years ago and I’m saving on my utility bills and am more comfortable when I need to use the heating or a/c.

    I had some anxiety early on esp about my investments but my focus is on the long term and doing what I can to help family and friends during this period. I was raised a Methodist and though I feel I’m not really religious, I joined a local Methodist church a few years ago that has a strong mission of community service at many levels. I’ve found solace attending services, even with those on Zoom now. I’m still very involved with groups and activities at UC San Diego, which is my home away from home, even during this pandemic. I think regular exercise has helped me thru this period and staying in touch with family and friends and hearing their stories during these difficult times.

    I think we are faced with difficult times for years ahead, with or without Trump. The aftermath of the pandemic will linger for years to come. I try to stay optimistic and focus on doing things that help in maybe small ways. I’ve mentioned I believe we are in transition in a shift of leadership to the next generation- the current leadership- Trump, Pelosi, Biden, McConnell, etc all in their 70’s so their time in power is limited. Our current systems need to be revamped or reinvented and we should adopt and adapt as necessary to make structural changes. I hope the next generation can attain more success than my generation in dealing with climate change, social justice and inequality, public education, homelessness, housing, jobs, etc. Just have to hope that our society is resilient in dealing with all of these shocks.
     
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  35. Deeringfish

    Deeringfish Well-Known Member
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    If you knew me better you wouldn't have any trouble.:)
     
  36. hdhntr1

    hdhntr1 Well-Known Member
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    And by raising standard deduction and lowering rates, he lowered taxes on most of the middle class
     
  37. MRCat95

    MRCat95 Well-Known Member
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    He gave the ultra wealthy ~$100 in breaks, took ~$50 from the merely wealthy (especially in blue states), then tossed a quarter to the middle class.
     
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  38. hdhntr1

    hdhntr1 Well-Known Member
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    Sorry but not true. 87% of the reduction in taxes went to the group that was not the top 1% In fact while they pay 37% of income taxes, they got 13% of the reduction. This article says they got 17% but others indicated it was 13%. Now the effect of tax reductions on business and estate taxes might be different but the top 1% got less of the reductions than they paid in total income taxes. Supposedly a family of 4 making 71K saw their tax liability drop by up to 50%. It has been a big boon to renters as they don't need to itemize and get the $12/24K in deductions without having to do so.
     
    38 hdhntr1, Jun 29, 2020 at 8:45 PM
    Last edited: Jun 29, 2020 at 8:50 PM
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  39. MRCat95

    MRCat95 Well-Known Member
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    Who owns the shares of corporations/ businesses and who pays the estate tax? The ultra-wealthy. I’m not talking about income tax. I’m talking about federal taxes generally (Income/Cap Gains/Dividends/Estate). A corporate tax cut leads to greater distributable cash flow for shareholders that can be used on increased dividends, Capex or share buybacks. The top 1% (merely wealthy) is very different that the top 0.1% (ultra-wealthy).

    Most of the top ~5-to-0.5% earners still earn much of their income through labor. Not so for the top 0.5% plus (AKA hundred millionaires-to-billionaires) who derive their income and wealth from return on capital. Now, if that group plowed that back into Capex, that would be great for everyone. They don’t do that much anymore (vs. dividends and buybacks).

    I don’t want to raise anyone’s taxes, but financing the top ~0.5% to 0.0% (highest earner in the country) on the backs of the top 5-to-0.5% seems a bit stupid to me.

    Almost like our President is a billionaire or something who earned all he has from his daddy.
     
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  40. ricko654321

    ricko654321 Well-Known Member
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    I would recommend against the annuity option. People who sell annuities are typically taking 3-7% off the top up front and are likely to make much more off the expected value of difference in outcomes. It's like buying equity structured products from a bank, they structure up complicated payoff profiles (that they can then hedge using various derivatives in markets on the back side) which have "no downside". You're effectively selling a credit default swap on the insurance company (which Alaska points out indirectly). And giving up your option to withdraw the money without penalty if one has unexpected costs (e.g. health care situation arises). You can do much better by investing in a desired mix of high-grade fixed income investments instead, or some combination of cash / fixed income / equity risk. Also if there is a minimum guaranteed rate then it is very likely that annual fees / costs are going to be deducted from that return; if there is anything other than a minimum guaranteed rate then a betting man or woman would guess that the actual rate paid out will decline from the number they quoted you when selling it.

    The package of things that you are secretly giving up are worth much more than what the insurance company is paying you, which is evidenced by that annuities are very consistently profitable for insurance companies. It's the definition of a complex financial instrument that is intentionally designed by financial professionals to take money out of the pockets of everyday people without them realizing that it is happening. In my opinion. I realize they provide a cash flow stream and perceived certainty which folks desire, but they should be giving you much better returns - just think that on that $100k annuity, ~$3-7k is going directly to whoever sold it to you up front, and then the insurance company will probably make $10k or more over the life of it (it's set up to basically guarantee that they do). Would you pay someone 15% to give you "guaranteed" cash flows over some period, and locking up your money with them for that period unless you pay a stiff exit fee, while also giving them for "free" certain hidden rights, and taking on the risk of them defaulting?

    (structured products are the same thing for the well-off but not particularly savvy retail investor / private bank client)
    (sorry for ranting, and it sounds like Alaska is a smart guy who has considered well the risks and challenges of annuities, but still has decided that they are good for him given his situation - I just think that annuity salesmen (and a lot of "private wealth advisors" are the types of people who give the financial services industry a bad name)
     

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