# Annuity Brokers



## Leading Edge Boomer (Apr 5, 2009)

Have any readers here used an Annuity Broker to purchase an annuity? Were you happy with there service? Are there any annuity brokers that you would recommend? I live in Ottawa.


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## leslie (May 25, 2009)

Annuities are sold by regular insurance salesmen or brokers


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## MoneyGal (Apr 24, 2009)

Annuities can be sold by anyone with a life insurance license, but the demand for annuities is weak -- and not a lot of brokers have in-depth experience with them. I have no experience with Annuity Brokers but I would seek out a sales channel with extensive annuity experience.


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## leslie (May 25, 2009)

That article was interesting. It mentioned a 10% number that I presumed meant that the buyers of annuities experienced death rates each year 10% less than the tables of total populations. It also indicated that 5% was needed for costs and/or profits. If that is still so (article is old) then I would not be buying Life Insurance Companies. 

I found a mortality table that is out of date, so longevity will be longer now. I played with it in a spreadsheet with the idea of pooling with some friends in a club, the $$ we would have in Gov debt anyways. It would pay out the current debt's yield and increase it with inflation. When we reached 100, the remaining pool would be split between everyone/heirs prorated by how much they had already been paid while living.

I found that simply breaking even was VERY touch and go. Simply assuming the buyers would be the healthy people, and so using the death rates from the next younger group, was enough to wipe out solvency. Forget giving the administrator any 5% fees.


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## MoneyGal (Apr 24, 2009)

The article isn't recent, but the concept of the annuity puzzle has been around for a while and that is a good brief overview, plus it references Yaari's classic paper (from 1965) on annuitization. 

I use the Society of Actuaries RP2000 life tables (for healthy retirees over 50) [warning: link is to actual tables -- large PDF]. (You can adjust the payouts by health status using a couple of different methods. I'm no actuary, though.) 

I haven't read the paper referenced in note 7 but I suspect the conclusion is not that annuitants have shorter lifespans than non-annuitants, but the opposite -- that annuitants live *longer* than non-annuitants, and the life tables used by insurance companies reflect those conservative assumptions, leading to lower payouts. Later mortality = fewer mortality credits = lower payouts to those remaining in the pool.

The tontine arrangement you described and the difficulty of breaking even is actually a reason to consider not retaining longevity risk but exporting some of it to an insurance company -- they have a much, much bigger pool to draw upon...


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## Leading Edge Boomer (Apr 5, 2009)

Here is a link to an article on annuities by David Aston in the Feb 2009 issue of Moneysense.

http://www.moneysense.ca/2009/02/01/retirement-a-25-better-life/2/

He argues that annuities are a suitable choice for certain people and not others.He argues that an annuity be only a part of your income stream, but as such can be very useful.

It is not the best time to buy an annuity now due to historically low interest rates, but I may consider it in two to three years time.


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## MoneyGal (Apr 24, 2009)

LEB: as your age advances, the sensitivity of annuity payouts to interest rates decreases. At advanced ages, annuities are remarkably insensitive to prevailing interest rates. 

The linked article from MoneySense quotes Milevsky. Here's a slightly more detailed look at "how much to allocate to annuities?" from him. (Published in a U.S. magazine, but the argument holds in Canada.)


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## leslie (May 25, 2009)

The idea that* "It is not the best time to buy an annuity now"* has often been said in the media. But the quotes are not different from historical quotes. You can see multiple year's quotes following. Sometimes you have to e-mail them to ask for an update.
http://www.ifid.ca/payout.htm


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## MoneyGal (Apr 24, 2009)

Leslie -- the link I provided earlier (in a different thread) to Milevsky's sustainable portfolio withdrawal index (here and here) provides more current, inflation-adjusted annuity payouts (for a 65-year-old male in good health). Just FYI, if anyone is looking for inflation-adjusted payout rates.


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## HaroldCrump (Jun 10, 2009)

I apologise if the following is a stupid question: given that the cost of buying annuity reduces with advancing age, is it possible for younger person to buy an inflation indexed annuity (if they have the cash to do so) and use the payouts from the annuity as supplementary (or even primary) income?
This takes the risk out of investing for a younger individual.
Do insurance companies sell annuities to younger folks.
By younger I mean someone in the range 25 - 45.


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## MoneyGal (Apr 24, 2009)

I'm not totally sure what you mean when you say, "given that the cost of purchasing annuities decreases with age, can a younger person buy them..."

There is a thin market for annuities under normal retirement age but yes, they can be purchased. 

In general, though, you are talking about a deferred annuity -- you give the insurance company a lump sum or a series of regular payments and they give you an income stream starting not immediately, but at some point in the future, either for a guaranteed term or for your lifetime, and either with a guaranteed remainder or not. 

GMWBs can function like (but are not) a form of deferred annuity.


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## HaroldCrump (Jun 10, 2009)

MoneyGal said:


> I'm not totally sure what you mean when you say, "given that the cost of purchasing annuities decreases with age, can a younger person buy them..."


I meant that in general, the earlier you buy an annuity, the more expensive it is, isn't that so?
So buying at 60 is more expensive than at 65, etc.
So my question is - can a 30 year old pay lump sum money _now_ and buy an annuity that pays out starting immediately.


> There is a thin market for annuities under normal retirement age but yes, they can be purchased.


How early can they be purchased? 


> GMWBs can function like (but are not) a form of deferred annuity.


What's a GMWB?


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## MoneyGal (Apr 24, 2009)

I don't know the youngest age at which a person can purchase a [life] annuity. It will depend on the issuer. It would also be enormously expensive. 

GMWB = guaranteed minimum withdrawal benefit [product]. Aka "variable annuity."


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## ssimps (Dec 8, 2009)

MoneyGal said:


> I don't know the youngest age at which a person can purchase a [life] annuity. It will depend on the issuer. It would also be enormously expensive.


I'm in my late 30's and was told by my insurance agent that it would be stupid for me to buy one as a part of an early retirement / financial independence strategy at my age because of the cost involved. He wouldn't even bother giving me numbers.


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## MoneyGal (Apr 24, 2009)

It would be supremely suboptimal.


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## Leading Edge Boomer (Apr 5, 2009)

Globeinvestor.com prints up to date tables of what the major Canadian issuers are paying out monthly on a $100,000 annuity.

It is here-----

http://www.globeinvestor.com/servle...SL&sex=M&fund_type=R&province_of_residence=ON

Canadian Business Magazine On line has similar tables at:

http://www.canadianbusiness.com/my_money/rates/index.jsp

Both contain quotes for Life and Term Certain annuities, Registered and Non-registered, Male , Female and Joint annuities.

Unfortunately there does not seem to be any tables on current Variable Annuity rates.


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## MoneyGal (Apr 24, 2009)

Variable annuities are too variable for tables.


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## leslie (May 25, 2009)

Two of the posters above seem to looking at these products as a way to offload the risk of doing their own investing. They will not do that, so forget it.

The major reason is that their 'benefits' come from the deaths of your age cohort with which your money is pooled. When you are young, not enough of you are dying to provide any benefit. It is only after 65 or 70 that we start dying fast enough to provide any benefit.

In the interim before that happens, and after you buy the product, the insurance company is draining the kitty, paying out more than they are currently earning. They accept this risk knowing that soon the deaths will start piling up and they can play catch up.

When you buy an annuity any time younger than 65 they have to accept the risk of such a long, long time before breaking even, that they price the products to firmly discourage you from buying.


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## HaroldCrump (Jun 10, 2009)

leslie said:


> The major reason is that their 'benefits' come from the deaths of your age cohort with which your money is pooled. When you are young, not enough of you are dying to provide any benefit. It is only after 65 or 70 that we start dying fast enough to provide any benefit.


I love tontine schemes.
Ah, the wonders of capitalism.


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## Four Pillars (Apr 5, 2009)

I checked out the Globe Investor annuity chart and the payouts are higher than I expected. Keep in mind I know very little about annuities.

For example the BMO insurance pays out $544.62 monthly on $100k for a 55 year old which is $6335 per year. This seems quite high - it's higher than 4% (4% rule) and certainly higher than any kind of conservative fixed income products available.

Are these payments fixed payout and don't ever increase? Or am I missing something?


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## MoneyGal (Apr 24, 2009)

They are fixed. It is very difficult to get indexed annuity quotes (unless you work in the industry).


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## leslie (May 25, 2009)

The comment: (the payout is) "certainly higher than any kind of conservative fixed income products available" shows you don't understand the product yet.

The payments include a return of capital. You should not consider it income. Buy a financial calculator and learn to use it. Assuming you live for ...
40 years, your rate of return would be 5.6%
35.................................................5.3%
30.................................................4.8%

Of course you get longevity insurance on top of that. But still if you presume a reallllly long life span you are still only getting about 6% return. There are preferred shares that pay that amount, and keep your principal free for big expenses when sh.. happens.


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## Four Pillars (Apr 5, 2009)

leslie said:


> The comment: (the payout is) "certainly higher than any kind of conservative fixed income products available" shows you don't understand the product yet.
> 
> The payments include a return of capital. You should not consider it income. Buy a financial calculator and learn to use it. Assuming you live for ...
> 40 years, your rate of return would be 5.6%
> ...


Yes, I pointed out in my comment that I don't know much about annuities.

I do however know that return of capital is included in the payout. I should probably rephrase my question a bit. 

I'm a big fan of the 4% rule - when I see a payout significantly greater than 4% it makes me wonder how that is possible. I think MoneyGal answered my concern by confirming that the payouts are indeed fixed - so over time they are probably less than what you would get with the 4% rule. This makes sense since they are guaranteed.


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## HaroldCrump (Jun 10, 2009)

leslie said:


> There are preferred shares that pay that amount, and keep your principal free for big expenses when sh.. happens.


So if perpetual preferred shares paying out 6% dividend are out there, then why do products like annuties exist?
Is it only because of the guaranteed payout vs non-guaranteed dividend of preferred shares?


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## MoneyGal (Apr 24, 2009)

Annuities are not the same as equity investments. They are not structured in the same way, the payouts are not determined based on equity returns, and they should not be compared to equities. They are insurance products providing longevity insurance and (for indexed annuities) inflation protection.


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## OptsyEagle (Nov 29, 2009)

_"So if perpetual preferred shares paying out 6% dividend are out there, then why do products like annuties exist?"_

Well if the preferred shares were issued from companies like Nortel your retirement would soon consist of 40 hours per wekk asking people if they would like to "supersize their order" or if they "would like an apple pie with their combo meal".


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## HaroldCrump (Jun 10, 2009)

LOL. I was thinking more about perpetual preferred shares from the big 5 banks, the large insurance companies like GWH, MFC, etc.


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## OptsyEagle (Nov 29, 2009)

_"I was thinking more about perpetual preferred shares from the big 5 banks, the large insurance companies like GWH, MFC, etc. "_

You mean the companies that actually haven't gone bankrupt ... yet.

The point I am making is there is virtually no comparison of annuities to a preferred share. Truly apples and oranges.


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## HaroldCrump (Jun 10, 2009)

OptsyEagle said:


> _"I was thinking more about perpetual preferred shares from the big 5 banks, the large insurance companies like GWH, MFC, etc. "_
> 
> You mean the companies that actually haven't gone bankrupt ... yet.
> 
> The point I am making is there is virtually no comparison of annuities to a preferred share. Truly apples and oranges.


Maybe I read leslie's response wrong then.
He said:


> if you presume a reallllly long life span you are still only getting about 6% return. There are preferred shares that pay that amount, and keep your principal free for big expenses when sh.. happens


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## OptsyEagle (Nov 29, 2009)

I don't know what Leslie was alluding to, but my opinion is that it simply is not a fair comparison to take an annuity which is guaranteed by everything the insurance company has and perhaps everything Assuris (the CDIC protector in the insurance business) has to pay for your entire life, and compare it to a preferred share that is guaranteed by no one, whose dividend can be cancelled at the whim of a CEO, if he thought his future bonuses or stock options might be in even the smallest amount of jeapardy.

To retire with your entire financial future based on the ups and downs of the economy and the stock market, just does not sound like a very fun retirement, if you ask me.

Just my opinion of course. Good luck to you all.


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## Berubeland (Sep 6, 2009)

Have we learned nothing from the situations south of the border? 

There is no such thing as too big to fail. So you may spend your entire nest egg trading profits for security only to find that you are still asking people if they want Coke with their Happy Meal.

AIG for crying out loud. 

There is no such thing as "100% security". Full stop.


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## OptsyEagle (Nov 29, 2009)

What AIG annuity holder lost any money? Even a nickle.

Now go talk to the people who hold their preferred shares


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## Spidey (May 11, 2009)

I think preferreds do offer a viable alternative, provided the investor understands the risks involved. As Leslie pointed out, annuities carry the risk of no longer having access to your principal. Personally I consider that a greater risk (or perhaps uncertainty is a better word) than the risk of a default of, say, a big bank preferred. For example, suppose an investor finds out he has a year to live -- maybe he would want to cash in those preferreds and buy a sports car, travel to Europe, or just be plain silly with his/her money. Call me wild and crazy but I would rather accept the very small default risks involved in holding a basket of big Canadian bank preferreds than to have my principal locked away forever with an annuity. Of course, I understand that it is a personal decision either way, with many factors involved.


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## ssimps (Dec 8, 2009)

Spidey said:


> I think preferreds do offer a viable alternative, provided the investor understands the risks involved. As Leslie pointed out, annuities carry the risk of no longer having access to your principal. Personally I consider that a greater risk (or perhaps uncertainty is a better word) than the risk of a default of, say, a big bank preferred. For example, suppose an investor finds out he has a year to live -- maybe he would want to cash in those preferreds and buy a sports car, travel to Europe, or just be plain silly with his/her money. Call me wild and crazy but I would rather accept the very small default risks involved in holding a basket of big Canadian bank preferreds than to have my principal locked away forever with an annuity. Of course, I understand that it is a personal decision either way, with many factors involved.


I think you have a good point. 

Also, if you are planning on retiring early, annuities are not really an option at all in terms of generating yearly cash, so in the early retirement case high quality preferreds are even more appealing.

Also, if you look at something like the CPD ETF, it seems like when stock markets drop, the ETF goes up, if stocks are up, the ETF drops a bit. ATleast that has been my eye ball impression over the last 9 months.


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## OptsyEagle (Nov 29, 2009)

_"For example, suppose an investor finds out he has a year to live -- maybe he would want to cash in those preferreds and buy a sports car, travel to Europe, or just be plain silly with his/her money."_

What if he finds out he is going to live a long, long time.

If you are told you have only a year to live, I doubt very much a sports car is going to be on your list of things to do. I would suspect the important things in life, might actually start to surface.

Anyway, I am not here to sell annuities to you people. I just wanted to point out that they are a significantly different animal than preferred shares and also point out that one cannot put a high enough price on safety and surety of your income source. I would never put all my money into an annuity, but for the minimum amount I need to live on, I think there is no better place. You guys can toss and turn all night worrying about your preferred share dividends. 

I would rather get some sleep and enjoy my sports car for many, many enjoyable years.

Good luck to you all.


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## HaroldCrump (Jun 10, 2009)

ssimps said:


> Also, if you look at something like the CPD ETF, it seems like when stock markets drop, the ETF goes up, if stocks are up, the ETF drops a bit. ATleast that has been my eye ball impression over the last 9 months.


That would make sense, theoretically, since common share price going up is a good sign for a company (and the index as a whole) and could mean a movement of capital from fixed dividend to increasing dividends.
However, I suspect, for an ETF (like CPD) the movement would be very small - almost get lost in all the noise in the market on a typical day.
What kind of movement have you noticed for CPD?
Is it worth timing the market for CPD?
I'm asking because CPD is on my horizon....


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## Spidey (May 11, 2009)

_What if he finds out he is going to live a long, long time._

You never find that out.  As well, that is just one example of a case where one might want access to their principal -- it's not hard to think of several others. 


That being said, I agree that there are certain personality types or situations where the annuity would be the preferred (no pun intended) investment. I'm just presenting "food for thought".


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## ssimps (Dec 8, 2009)

HaroldCrump said:


> That would make sense, theoretically, since common share price going up is a good sign for a company (and the index as a whole) and could mean a movement of capital from fixed dividend to increasing dividends.
> However, I suspect, for an ETF (like CPD) the movement would be very small - almost get lost in all the noise in the market on a typical day.
> What kind of movement have you noticed for CPD?
> Is it worth timing the market for CPD?
> I'm asking because CPD is on my horizon....


I'm not suggesting timing the market with anything; beyond my skills. 

I have just found that holding CPD is a good way to balance the other yield ETFs I have, because if they go down, CDP goes up, and visa versa. Another nice thing is that it is realtively stable; no huge jump from one day to the next. At least I think that is a good thing. It just seems more stable than other mainly dividend ETFs, so I like it as part of my portfolio. 

I have no math to back this up with, this is my sense based on what I have seen since I have become more active in my investing since the spring and watch things on a daily if not semi daily basis (yes I admit it).

Even with that said, it has risen 6% in about 9 months based on my average purchase price. If it drops, I will buy more I think.


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