Old age insurance?

[imagep]

Would this be a feasable alternative to social security?

Over and over again I have tried to figure out the minimum amount that I need to save to have a comfortable retirement. I can't do it because I don't know how long I am going to live.

Sure, I could come up with an amount if I assumed that I will never dip into the principle, but that may easily exceed $2,000,000 in savings at time of retirement for just $60,000 a year in income for my wife and myself (assuming a 3% roi after inflation). It would take saving nearly $3,000/mth for 40 years to do that. A lot of people don't even make $3,000 a month. I can see why a lot of people just give up trying to save or invest for retirement when they realize that it is not likely that they will ever be able to save that type of dough.

But what if I knew that I only had to save enough until a certain predetermined age? Like an age that is beyond the average life span - lets say age 85.

At that point, assuming that someone wanted to retire at age 65, they could fairly accurately judge the amount of savings that they would need, and it would be significantly less than they amount they would need assuming living forever. Saving $1200 a month for 40 years as opposed to saving $3,000 a month for 40 years.

Seems like people would be much more motivated to save, if saving for retirement was more realistic and if meeting goals was more realistic, instead of just giving up and deciding that one will just have to survive off of social security.

It also seems like having an "old age" insurance policy would be much less expensive than social security costs. We would be cutting the length of time that people draw benefits by 20 years, and significantly reducing the number of people who draw any benefits at all. The cost of social security could be reduced from 13% of payroll (FICA) down to maybe just a percent or two or three - allowing people to save more of their own money.

Pros and Cons?

 

[Diogenes]

Over and over again I have tried to figure out the minimum amount that I need to save to have a comfortable retirement. I can't do it because I don't know how long I am going to live.

It's called an annuity, and they are sold by insurance companies.

 

[Dittohead not!]

It's called an annuity, and they are sold by insurance companies.

Yes, I have one. I plan to live a long, long time so I can collect the max.

 

[Goshin]

The problem with insurance, is that insurance companies intend to make a profit off most of their customers... and indeed, enough of a profit off them, to offset the losses they pay out to the few.

Generally speaking, there are better ways.

 

[Kushinator]

The problem with insurance, is that insurance companies intend to make a profit off most of their customers... and indeed, enough of a profit off them, to offset the losses they pay out to the few.

Generally speaking, there are better ways.

The profits realized are based upon investment vehicles, e.g. taking the payment streams and investing them in bonds, stocks, swaps, etc.... An insurance company does not make a profit from collecting premiums.

 

[justabubba]

consider investing in stocks, bonds, and treasury certificates
give yourself a year and see how good you are at it
begin becoming informed about securities
when you start investing money in them, you will likely become quite a student of the market
find investors whose investment approach resonates with you. for me, Warren Buffett's annual letters are a must read: Shareholder Letters
in short order, you should become well acquainted with investing
and remember, pigs get fed while hogs get slaughtered
good luck in making and executing the financial plans for your future. more folks should do this

 

[Goshin]

The profits realized are based upon investment vehicles, e.g. taking the payment streams and investing them in bonds, stocks, swaps, etc.... An insurance company does not make a profit from collecting premiums.

Exactly my point. Invest the same money in stocks, bonds, etc, cutting out the middleman, and you'll have more money in the end.

 

[Kushinator]

Exactly my point. Invest the same money in stocks, bonds, etc, cutting out the middleman, and you'll have more money in the end.

Maybe. Remember the point of insurance is to contain risk; which is fundamentally different than an anuity product.

For example: A $100,000 life insurance policy for a non smoker aged 45 is about $7,500 paid in full. Depending on your policy (life vs whole life), there will be a cut off date for coverage (say 80 years). Again, depending on the terms of your policy, your policy can be worth a "cash value" via premium payments. I am not an insurance expert, and maybe someone can clarify this point.

 

[cpwill]

Exactly my point. Invest the same money in stocks, bonds, etc, cutting out the middleman, and you'll have more money in the end.

or, just, index funds.

 

[Dittohead not!]

Maybe. Remember the point of insurance is to contain risk; which is fundamentally different than an anuity product.

For example: A $100,000 life insurance policy for a non smoker aged 45 is about $7,500 paid in full. Depending on your policy (life vs whole life), there will be a cut off date for coverage (say 80 years). Again, depending on the terms of your policy, your policy can be worth a "cash value" via premium payments. I am not an insurance expert, and maybe someone can clarify this point.

I'm not an insurance expert, nor an annuities expert, nor a financial expert of any kind. That's why I go to someone who is. I pay an expert to fix my car, another to work on my plumbing (except for simple things), and someone who has been to dental school to fix my teeth. Some things are not do it yourself projects.

 

[Kushinator]

I'm not an insurance expert, nor an annuities expert, nor a financial expert of any kind. That's why I go to someone who is. I pay an expert to fix my car, another to work on my plumbing (except for simple things), and someone who has been to dental school to fix my teeth. Some things are not do it yourself projects.

This is true.

 

[imagep]

The problem with insurance, is that insurance companies intend to make a profit off most of their customers... and indeed, enough of a profit off them, to offset the losses they pay out to the few.

Generally speaking, there are better ways.

So what if the insurance company makes a profit? If my issue with retirement planning is not knowing how long I will live, and if I can purchase an insurance policy that will make it so that I can predetermine within a reasonable likelyness the number of years that I need to plan for, then the the insurance product has solved my issue and I shouldn't mind paying a price for that product.

It really shouldn't cost that much as most people would never recieve a penny of the annuity and even if they did they would not be likely to recieve that many months or years of it before they expired. So maybe puchasing such an annuety at age 25 would cost $10k, or at age 35 $15k or at age 45 maybe $20k. It would be worth that price to be able to know that you only have to save X amount of mony for retirement.

If it is just the fact that a private insurance company is going to make a buck that is the issue, then what would be the objection if our government offered such a product in leu of social security and at a profitless price?

 

[Dittohead not!]

So what if the insurance company makes a profit? If my issue with retirement planning is not knowing how long I will live, and if I can purchase an insurance policy that will make it so that I can predetermine within a reasonable likelyness the number of years that I need to plan for, then the the insurance product has solved my issue and I shouldn't mind paying a price for that product.

It really shouldn't cost that much as most people would never recieve a penny of the annuity and even if they did they would not be likely to recieve that many months or years of it before they expired. So maybe puchasing such an annuety at age 25 would cost $10k, or at age 35 $15k or at age 45 maybe $20k. It would be worth that price to be able to know that you only have to save X amount of mony for retirement.

If it is just the fact that a private insurance company is going to make a buck that is the issue, then what would be the objection if our government offered such a product in leu of social security and at a profitless price?

Could the government compete successfully with private enterprise? Why should they try?

 

[FilmFestGuy]

Could the government compete successfully with private enterprise? Why should they try?

I can only tell you anecdotally, but my Federal Direct Student Loan was MUCH easier and MUCH cheaper than my old USA Financing Student Loan. And customer service has been much easier to deal with. They were so much cheaper, efficient, and better that I consolidated everything with the government.

 

[imagep]

Could the government compete successfully with private enterprise? Why should they try?

What I am suggesting is that this may be a way to reduce government involvement with our lives, by using old age insurance as a mechanism of replacing social security and one or more of the primary reasons that we need social security (lack of knowledge of how long we are going to live).

The only advantage of using the government as a source for this product would be stability. It's a long range product, one that we buy now but may not use for decades. It scares me to pay a private company, that may or may not be around decades from now, but our government will most certainly be around in some form or fashion.

The "profit" motive to the government would be a great savings in operating cost and payments for todays social security program. It would save billions, allowing our gov to reduce or eleminate social security taxes, while still providing the American public with some security in old age (but in a much more sensible and financially responsible manner than what we have now).

 

[Dittohead not!]

What I am suggesting is that this may be a way to reduce government involvement with our lives, by using old age insurance as a mechanism of replacing social security and one or more of the primary reasons that we need social security (lack of knowledge of how long we are going to live).

The only advantage of using the government as a source for this product would be stability. It's a long range product, one that we buy now but may not use for decades. It scares me to pay a private company, that may or may not be around decades from now, but our government will most certainly be around in some form or fashion.

The "profit" motive to the government would be a great savings in operating cost and payments for todays social security program. It would save billions, allowing our gov to reduce or eleminate social security taxes, while still providing the American public with some security in old age (but in a much more sensible and financially responsible manner than what we have now).

Theoretically, sure. In reality, though, look at what has happened to the Social Security program. For decades, the government put the money collected via payroll taxes into the general fund, and spent them on day to day expenses instead of investing them in something that would give the clients a return. Now that the baby boomers are reaching retirement age, all of a sudden there is a crisis, one that should have been foreseen and could have been provided for. The government may be around in one form or another, but it doesn't look out for the long term. Moreover, government is notoriously inefficient compared to private industry.

If the individual were to place 16% of income into an IRA or a TSA or some similar product, and keep paying that amount from age 20 to age 65, then roll it over into an annuity account, the payout would be orders of magnitude more than he would get from Social
Security.

 

[cpwill]

median income is around 50K. 16% of that saved and invested at the S&P average rate of return (accounting for inflation) over 45 years of working and then converted into an annuity that pays 5% equals a monthly benefit of $14,650



but, i mean, i'm sure the government does a good job, too...



yup. good ole government....

 

[imagep]

median income is around 50K. 16% of that saved and invested at the S&P average rate of return (accounting for inflation) over 45 years of working and then converted into an annuity that pays 5% equals a monthly benefit of $14,650



but, i mean, i'm sure the government does a good job, too...



yup. good ole government....

Can you get a 5% annuity these days?

I'm not suggesting that the government could do a better job, thats part of the reason that I am suggesting that we replace traditional social security with essentually a new type of social security that would not kick in until we have outlived our normal life expectancy - the cost would be much less and the savings could be returned to the taxpayer by reducing or eliminating social security tax. Individuals could then use that tax savings as they please and invest in a better investment than social security.

The reason that I suggest that we use the government for the "insurance" part (to essentially insure us just for the likelyhood of reaching extreme old age) is because it is so many years out that believe it or not, I trust that the government will be around much more so than any one private insurance company. Not because the gov can do it better, but because the gov is more likely to be around 50 yrs from now.

 

[Dittohead not!]

Can you get a 5% annuity these days?

I'm not suggesting that the government could do a better job, thats part of the reason that I am suggesting that we replace traditional social security with essentually a new type of social security that would not kick in until we have outlived our normal life expectancy - the cost would be much less and the savings could be returned to the taxpayer by reducing or eliminating social security tax. Individuals could then use that tax savings as they please and invest in a better investment than social security.

The reason that I suggest that we use the government for the "insurance" part (to essentially insure us just for the likelyhood of reaching extreme old age) is because it is so many years out that believe it or not, I trust that the government will be around much more so than any one private insurance company. Not because the gov can do it better, but because the gov is more likely to be around 50 yrs from now.

Yes, you can get an annuity that pays 5%.

If the businesses that sell the stocks, and the public entities that sell the bonds that make up the portfolio you purchase as an annuity are not around in 50 years, then there won't be anyone around to support the government.

 

[justabubba]

Yes, you can get an annuity that pays 5%.

If the businesses that sell the stocks, and the public entities that sell the bonds that make up the portfolio you purchase as an annuity are not around in 50 years, then there won't be anyone around to support the government.

lehman brothers anyone?

 

[imagep]

Yes, you can get an annuity that pays 5%.

If the businesses that sell the stocks, and the public entities that sell the bonds that make up the portfolio you purchase as an annuity are not around in 50 years, then there won't be anyone around to support the government.

Sure, if you have a highly diverified portfolio it is unlikely that all of the companies in your portfolio would go under. I get it. But, but if you are buying a fairly large annuity, you are most likely only purchasing one annuity from one company. What if that one company happens to be the one to go under?

On this annuity thing, when yall are telling me that these already exist and that they pay 5%, I am not sure that we are talking about the same type of thing. What I am suggesting to me is more like insurance. You would recieve a fixed amount of cash each month or year, maybe adjusted for inflation, from a particular pre-determined point in time until death, however long that would be. The insurance company would be taking the risk that you are going to live long enough to draw any of it and you pay them for taking that risk up front and possibly years in advance.

Exactly what is is that you get paid 5% on? Your initial investment? So like if you initially invest $100,000 you would get 5% interest on that $100,000 until you start to withdraw from it? Why would any annuity company pay you 5% when they can borrow money from the bank cheaper than that (heck morgage rates are below 5% now). Are these annuities setup so that they last for the remainder of a life span regardless of the life span? If you die before drawing from the annuity does the annuity still keep paying out? That really doesn't sound like what I am suggesting.

What I am thinking of is much more like insurance where one may or may not ever get a penny and at the time of death the policy also expires, and thus it would be fairly inexpensive. Yes, since it would involve recieving payments on a regular bases I guess technically it is an annuity, but funtionally, I think it would be more up the alley of an insurance company rather than an investment house.

 

[Missed AB]

lehman brothers anyone?

Paying 5% anually on original investment is not impressive. First, no revenue growth at all would allow one to pay that out over 20 years. If allowed to grow for 20 years before the first installment is made to the owner of the annuity, that same original deposit only needs to grow at about 3.5% to double in 20 years. That would make the annuity last for 40 years if moved to a non interst bearing account. If it is kept in that same boring 3.5% account, one would continue to grow the value of the account at a rate faster than the withdrawl on the original investment 5%. How hard is it to get 3.5% returns? What does the 30 year bill trade at today's LOW RATES?

Not really magic...

 

[imagep]

OK, I just looked it up, what I am suggesting is a "pure life annuity" according to Wilkipedia. Seems like those would be fairly inexpensive if purchased years in advance of the preset time to start withdrawing from them. It also seems like they would be designed to pay a set dollar amount and not a % although the seller of the annuity would certainly take into account interests rates and a variety of actuarial considerations when coming up with a price.

The advantage that I am thinking that these pure life annuities would have is that they would be fairly inexpensive. Maybe $10k for one to pay someone from age 85 til death several thousand bucks a month (assuming that it is purchased years earlier). How much at age 45 would you have to set aside in a traditional investment account to provide several thousand dollars of income a month from age 85 til death? You really don't know because we don't know when death is, so to be safe, we as individuals would have to assume that we would live forever. Insurance companies don't have to make the expectation of their customers living forever though, as they know that the average person who makes it to age X will likely die by age X+Y.

Just roughly working through the number using some rules of thumb provided by other posters on this thread, some guestimates that I frankly pulled out of my behind working backwards, and then working backwards, I come up with something like this:

Maybe the average age of death for people who make it to age 85 is 90. So assuming that this annuity may pay $30k per year, there is potentially roughly $150,000 in average payments that the annuity company may be obligated to for people who make it to age 85. Then assuming that only 25% of people alive at age 45 make it to age 85 then we can divide that by 4 to arrive at the potential obligation that the annuity company is taking on if the purchaser makes the annuity purchase at age 45 ($37,500). With the assumtion that the insurance companies cost of capital is the 3.6% that someone suggested, and that during the 40 year span inbetween the time that the purchaser makes the purchase and the time that the policy may (or may not) pay off, then the actual cost of the product should only be 1/4th of $37,500 or $9,375. Now granted the insurance company wants to make a profit, so they might charge something like $12,000. $12,000 at age 45 sounds like a bargain to me to be guaranteed financially secure from age 85 til death. Worst that can happen is the purchaser is out $12,000.

Compare this to 12% or so that we pay for social security. Assuming that the average income is around $50,000. Then in just two years of paying for social security, this annuity could be paid for. But if we divide that $12,000 by the 20 or so years before age 45 and the 20 or so years after age 45 that most of us pay for social security (for a total of 40 years), it works out to only about $300/year, or only abut 6/10th of one percent. Way freekin cheaper than social security. It really wouldn't hurt my feeling any if my social security bill was reduced from 12% to 0.6%. I could invest the rest (as someone else mentioned) and easily have a lot more income coming to me from my investments at age 65 than I ever could have had from social security.

Of course all this could also be indexed to the inflation rate which may alter the exact figures a little, but you get the idea.

 

[Missed AB]

Yes, you can get an annuity that pays 5%.

If the businesses that sell the stocks, and the public entities that sell the bonds that make up the portfolio you purchase as an annuity are not around in 50 years, then there won't be anyone around to support the government.

Someone doesn't understand the dynamics of investing... Many of the companies which were in the DOW just 50 years ago are no longer with us, but the DOW lives on. People still collect their annuity check. How is that possible?

Wollworth, GM, US Rubber, National Lead...

 

[phattonez]

Why insurance? Just save money and invest wisely.