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three fund portfolio vs annuity

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  • three fund portfolio vs annuity

    Hi all, I honestly know nothing about personal finance or investing. All I know is to go to work and save as much money as possible in the bank. My parents and I are immigrants and after so many years we managed to save up several hundreds thousand dollars. We have no debts and are trying to figure out where best to park our money .

    I am trying to educate myself on this matter and I am reading the book on the three-fund portfolio- a boglehead's style of investment. Many of you are probably familiar with it and I think it may be simple and conservative enough for a novice like me to get started.

    I am trying to help my parents figure out and they want me to look into this annuity that pays 4.1% over 7 years (i know with fees and what not it will be less, just pretend like it is really 4.1%). I know comparing mutual fund and annuity is like apple and orange (insurance vs passive investment). but I am just wondering, giving $100,000 to start, is it reasonable to expect a simple portfolio like the three-fund to beat the 4.1% "guaranteed" rate of return in 7 years (from the brochure it is $132K after 7 years with the annuity). Of course the mutual fund has no "guaranteed" interest rate so I am just wondering what is the basis for people to decide?

    I know I could ask this question in the boglehead's forum but from what I see I will get killed for being so uninformed. So I would appreciate if anybody is willing to help me understand the matter a little better. Of anything, money matter seems to be the hardest thing for me to wrap my head around! Many thanks!

  • #2
    Is it a Single Premium Immediate Annuity (SPIA)? If not, then I would not even think about it. They hide under many names like variable or index annuities and make many promises and charge huge fees and give you a 50 page book on what you just bought that requires a Phd to understand what you just bought.

    Do not let them buy anything but a SPIA. And even then, they might not need it.

    You can visit to get an idea of what return you might expect from a SPIA. SPIA returns seem to be running around 5% for life annuities.

    The big thing to consider when looking at an annuity is why are you getting it? Once you buy it, you are guaranteed to lose all of the money. If you live longer than the mortality tables, you make out. If you live shorter, the insurance company wins.

    I often think about getting an annuity for the security of knowing I have a floor of income for life, but then I think about my kids and the inheritance they won't get and I go back to saving like crazy.


    • #3
      I think the BHers recommend a single premium annuity.

      Google this “ Spia” and you’ll get the wiki page and some discussions.

      Three fund portfolio is built across all of your investment accounts, if available.

      Usually try for tax efficient placement of the three fund portfolio.

      Age is an important factor with the three fund. This and your willingness to take risk help to determine your asset allocation, stocks:bonds.

      I am 41 and my allocation is 75:25.

      Those closer to retirement or in retirement might want anywhere from 40:60 to 50:50 to 60:40.

      Welcome and I completely understand your hesitation to post on BH.