[teknochild]

Originally Posted by Hawkshaw

That number is relatively accurate using the following assumptions:

Annuity purchase rate of 5%
A male age 35
Mortality following the unisured pensioner's mortality table from 1994 projected to 2015
Single life annuity with no guarantee period

The government of Canada long term bond rate as at Dec 31, 2006 is 4.1%, i.e., your risk free income on $1,000,000 would be $41,000 per year for the length of the bond (let's say 20 years). At the end of that period, assuming you were still alive, you would have your $1,000,000, but it would be worth about $673,000 in today's dollars assuming 2% inflation over the 20 years.

To continue your income stream, you would have to buy another bond at that point, and therefore you're taking the risk that the rate in 20 years may be lower than 4.1%. It is possible, of course, that the rate is higher in 20 years.

The purpose of the annuity is the security of the payment stream, and not taking any interest rate risk in the future. Well, unless you get into variable rate annuities, but they're a whole different beast.

If the insurance company paid you $100,000 a year for your million, they would lose money for sure. On the aggregate, they would likely become insolvent, and then you'd lose all your money.

im still not getting why anyone would pay an insurance company 1mil $ to pay them the same amount that they can make yearly while keeping the principle, especially when they can make twice as much taking some risk

i meen the insurance company is baically getting to invest your money and make more from it than they are paying you, and on the offchance you die, they get to keep your money too

that sounds like a pretty shitty deal for the guy with the money

[BK]

Originally Posted by 07335-06325

i am 24, i am living germany because i am in the Army. ...

Congrats on the inheritance. I haven't read the whole thread, so maybe this has already been suggested, but I recommend you work with USAA Financial Services. Since you are military, you can become a USAA member if you are not already one. They are excellent and do not work on a commission basis, like many (most) financial advisors.

No offense, but it sounds like you need a lot of help. Do yourself a favor and talk with an advisor sooner rather than later.

[scottwww]

One other thing I would give strong consideration to doing is finding a sponsor in a financial planning firm. Get yourself licensed (maybe series 7 and series 66 as well as insurance). It only takes a few short months of study to be prepared for the exams. While you learn investing from your co-workers go beyond what they are doing taking greater care that you are not just haphazardly placing your money in this or that. You won't need to be as concerned with your next sale as they might be. But you do have to sell or you will not be kept on with them.

A great advantage to being NASD and insurance licensed is that most commisions are waived for your own investments. This is significant. With insurance products you not only save the initial commissions, but your annual fees are much less. Over the longterm, it's something like 50% of your business can be controlled. That means your own and your immediate families investments and insurance that are commission free.

Being an investment advisor is an interesting and fun career that you could pursue, and with that kind of wealth you should be in a good position to find success.

You might find www.investmentadvisor.com to be a source of information for you. I haven't been on their website in years, but it gave me some very good information.

[Hawkshaw]

Originally Posted by teknochild

im still not getting why anyone would pay an insurance company 1mil $ to pay them the same amount that they can make yearly while keeping the principle, especially when they can make twice as much taking some risk

i meen the insurance company is baically getting to invest your money and make more from it than they are paying you, and on the offchance you die, they get to keep your money too

that sounds like a pretty shitty deal for the guy with the money

"Keeping the principal" is a bit misleading here. If you're going to take that $1,000,000 and invest it such that you're getting the interest every year for life and not touching the principal, then you're essentially handing that principal over to the financial institution (i.e. you never actually get to spend it). So, you're never actually getting to spend the $1M, and when you die, it goes to whomever your beneficiary is. With an annuity, spending the $1M plus interest over time is factored into your annuity payment.

You are correct that there are investments that you can get into that, on average, will pay you more than the rate on an annuity. However, the only true risk free securities are government treasury notes and bills. As I said, the current Government of Canada long bond will pay you 4.1% as a risk free rate. The higher the risk, the higher the return. Again, which is why I suggested annuitizing only half of it.

The insurance company will make slightly more interest on the money than they will pay out, that is true. However, every financial institution you could possibly invest with will do the same, it's how they make money. For a mutual fund, for example, the investment company will take a flat %, say 1.5%, put it in their pockets, and pay you out the rest. So your money might earn 7%, but your account gets credited 5.5%. If you lose money, they still get paid, i.e., if your money returns -7%, your account gets dinged -8.5%. The insurance company is no different.

There is actually quite a lot of competition for annuity business, which in turn shrinks profit margins for companies which helps consumer pricing. This competition will only grow as baby boomers with RRSP's and 401k's start to annuitize their balances to provide income for life, like pensions. It may not sound like a good deal to you, but mathematically and statisitically speaking, it's certainly fair. It guarantees a rate of return on your money FOR LIFE of whatever the annuity rate is (5% or so right now in Canada).

What you're buying is peace of mind that you will not outlive your money. Conversely, if someone retires at 65, doesn't buy an annuity, but withdraws a bit each year. If they live to 85 or 90 or beyond, they'll outlive their money and likely be below the poverty line. It's all about how much risk you're willing to take, for most older people, financial risk isn't something that they can afford to take, for obvious reasons.