Stocks and Trading Thread - Channeling your inner Mono

[DGuller]

NEVER    Reasons:

Annuities make sense for people who are so far from saving the needed amount of cash to retire early.  They need to export the risk.  I don't.  I am on track to achieve my goals.

I don't see how that follows.  Annuities take out the uncertainty that comes from your inability to manage your mortality risk. 

If you don't know when you're going to die, you can't plan your post-retirement spending appropriately.  You'll have to spend too little on average, because you have to self-insure against the risk of living too long. 

Self-insurance is almost always a very bad idea when the risk being insured against is a large portion of your net worth.  The reason insurance prospers is that it takes advantage of the Law of Large Numbers, and on average allows people to use much more of their assets instead of putting them away for a rainy day.  People like you don't see the forest for the trees.

[Monoriu]

NEVER    Reasons:

Annuities make sense for people who are so far from saving the needed amount of cash to retire early.  They need to export the risk.  I don't.  I am on track to achieve my goals.

I don't see how that follows.  Annuities take out the uncertainty that comes from your inability to manage your mortality risk. 

If you don't know when you're going to die, you can't plan your post-retirement spending appropriately.  You'll have to spend too little on average, because you have to self-insure against the risk of living too long. 

Self-insurance is almost always a very bad idea when the risk being insured against is a large portion of your net worth.  The reason insurance prospers is that it takes advantage of the Law of Large Numbers, and on average allows people to use much more of their assets instead of putting them away for a rainy day.  People like you don't see the forest for the trees.

1. All insurance companies are crooks.  I don't trust them.  Not one bit.  There is no way I'll entrust the final few decades of my life to these guys.

2. As I said, I already have an annuity.  Life long.  Guranteed by the government.  Indexed to inflation.  Defined benefit. I am already covered. 

3. Almost all annuities have life insurance components.  I don't need them.  My wife doesn't need them.  I'll be forced to buy something that we don't need. 

[DGuller]

Your pension insures you against becoming destitute.  It doesn't insure you against leaving too much assets unused when you die, unless you splurge for the first couple of years and then fall back on your pension.

Anyway, my advice wasn't just directed at you, it was an answer to a general question.  If you save a whole ton of money, and then draw down a percentage of it, you're leaving a lot of money on the table.  Good for your heirs, not so good for you. 

I have yet to see a criticism of annuities from financial advisers that address their primary role as an insurance.  All of the criticisms focus on how they're bad investments (duh, it's insurance, it's not the purpose of insurance to maximize returns).  That leads me to believe that those people are just typical financial advisers, and thus mind-bogglingly stupid.

[Monoriu]

I think annuities have to fit the person.  I do not deny that, for some people, having annuities maybe better off for them.  In my case, they are clearly unsuitable. 

One thing I don't get.  How do annuities insure me against leaving too many assets unused?  Assuming that I do buy an annuity, and very soon after that, I die.  How does the annuity benefit me exactly?

[DGuller]

One thing I don't get.  How do annuities insure me against leaving too many assets unused?  Assuming that I do buy an annuity, and very soon after that, I die.  How does the annuity benefit me exactly?

Assuming that you don't buy an annuity, and very soon after not buying it you die.  How does that bundle of money you didn't spend on an annuity benefit you?

As for how annuities insure you against leaving too many assets, it's pretty simple, and I've written about that before.  Without annuity, you have to plan for dying at a very old age, to be conservative.  With annuity, you can always live like you're going to die at an average age.  That means more money to spend per year, because you're planning for less years.

[Monoriu]

As for how annuities insure you against leaving too many assets, it's pretty simple, and I've written about that before.  Without annuity, you have to plan for dying at a very old age, to be conservative.  With annuity, you can always live like you're going to die at an average age.  That means more money to spend per year, because you're planning for less years.

Then my pension already serves the same purpose. 

Whether annuities are beneficial will depend on the numbers.  If the returns are too low and the terms too unfavourable, one maybe better off investing the money himself.  And who will help me if my insurance company fails?

[Ed Anger]

  And who will help me if my insurance company fails?

For Americans, http://www.winknightsmoney.org/features/archives/2009/01/krr_is_your_annuity_safe.html

You I assume, would be screwed over.

[Monoriu]

  And who will help me if my insurance company fails?

For Americans, http://www.winknightsmoney.org/features/archives/2009/01/krr_is_your_annuity_safe.html

You I assume, would be screwed over.

Most definitely!  I am taking on an awful lot of additional risk by buying an annuity.  Talk about putting all eggs in one basket.  Last year when AIG was nearly bust there were huge queues in their HK office to cancel insurance policies. 

This reminds me.  I have to give yet another talk to my wife to reassure her on the virtues of not buying any annuity, life insurance, mortgage insurance etc etc. 

[DGuller]

Then my pension already serves the same purpose. 

As I said short time ago, it insures you against destitution at very old age, which is something.  It still doesn't insure you against an inefficient allocation of your other funds due to lack of mortality risk management.

Whether annuities are beneficial will depend on the numbers.  If the returns are too low and the terms too unfavourable, one maybe better off investing the money himself. 

Obviously.  If the insurance company takes a 90% cut, annuities are not going to be a good deal.

And who will help me if my insurance company fails?

In US we have guarantee funds, which insure you against insurance company's insolvency up to a certain level.  Even before that point, insurance companies are heavily regulated to protect the capital that funds their policies.  I don't know what level of regulation there is in Hong Kong.

[MadImmortalMan]

Figures the insurance guy would pitch annuities. 

[Monoriu]

There were a couple of small bank failures in HK a few years ago.  Depositors got exactly zero dollars back.  No, I'm not going to trust them. 

You know what kind of people sell insurance policies here?  Youngsters, with no experience whatsoever.  They don't have a penny in salary.  The insurance companies give them like US$500 a month.  These are loans.  If they don't sign any contracts, the company will approach debt collectors.  These agents have every incentive to lie, deceive, exaggerate, distort, misrepresent, etc. 

[DGuller]

Figures the insurance guy would pitch annuities. 

I'm not working on the life side, that's not even in the domain of the actuarial society I belong to.  The only thing being an insurance guy does is make me aware of the need to mitigate the risks I can't afford to take.

[DGuller]

There were a couple of small bank failures in HK a few years ago.  Depositors got exactly zero dollars back.  No, I'm not going to trust them. 

You know what kind of people sell insurance policies here?  Youngsters, with no experience whatsoever.  They don't have a penny in salary.  The insurance companies give them like US$500 a month.  These are loans.  If they don't sign any contracts, the company will approach debt collectors.  These agents have every incentive to lie, deceive, exaggerate, distort, misrepresent, etc.

Life insurance salesmen in US don't enjoy the greatest of reputations either, although it's almost on par with the reputation of used car salesmen.  However, that's neither here nor there.

Sounds like the problem is not with insurance, but rather with a stupidly unregulated capitalism.  If there is any example of it being penny wise and pound foolish, it's this.  At some point the uncertainty has heavy costs in itself, and it definitely has huge costs when you can't rely on your bank deposits or your insurance policies.  Obviously if you can't trust financial institutions to honor their commitments, the value of any financial instrument goes down.

[MadImmortalMan]

Sure, but a lot of the biggest money advisers out there are very hard on annuities. I think it's mostly due to their costs compared to other things.

[DGuller]

Sure, but a lot of the biggest money advisers out there are very hard on annuities. I think it's mostly due to their costs compared to other things.

And, as I said, it's a stupid reason to bash them, which is not surprising, because money advisers are a stupid and corrupt bunch.  Insurance products aren't supposed to maximize returns, they're supposed to protect you against adverse outcomes.