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Old 02-25-2014, 04:05 PM   #21
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Actually, the thread topic is a question about generating income now, and it would be a courtesy to the OP to get back on topic.

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I was wondering if I have a good chance of ER and was thinking of purchasing an annuity to generate monthly income, but not sure which kind would be best, what initial amount would be reasonable or if this is even a good option. Or maybe there are better options.

I would appreciate any advice.

Thank you,

Joe
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Old 02-25-2014, 04:09 PM   #22
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There can be a place in your ER planning for (SPIA) annuities to guarantee (along with SS) a minimum standard of living with a portion of your nestegg. Then given that a baseline is covered you can more aggressively deplete the remaining nestegg knowing that you'll never have to eat dog food. One can make the case that this approach allows for more spendable income while you are alive.

The alternative, which is widely touted on this forum, is to pick a very low SWR so as to never go broke. While this (SWR) approach certainly works it almost always leaves a large unspent - underutilized nestegg to the lifestyle detriment of the owner.

many people on this forum pooh-pooh the SPIA but (perhaps) could greatly benefit from it. You don't get a do-over when you wake up one morning and realize that you'll never spend all that money. The spendthrift beneficairies will enjoy it though !
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Old 02-25-2014, 04:21 PM   #23
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Actually, the thread topic is a question about generating income now, and it would be a courtesy to the OP to get back on topic.
That's exactly what is accomplished by purchasing a SPIA.
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Old 02-25-2014, 04:30 PM   #24
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I'm receiving $10,400 a year on a $100K annuity purchased at age 71. I guess in your mind that is a "really old person". So be it.
Bruce
Did you notice how much the stock market has gone up recently? 35% in the last 2 years. 151% in the last 5 years. Did you ever ask yourself how the insurance company is able to make the offers they make? They stack the deck in their favor and then they invest the money. So for people who fell for the insurance salesman bait back in 2009 and went ahead and made the cardinal sin of "selling low" the annuity wasn't such a great idea after all. So far the insurance company has been laughing all the way to the bank even with a diversified bond / stock mix.
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Old 02-25-2014, 04:33 PM   #25
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That's exactly what is accomplished by purchasing a SPIA.
Bruce
I don't advocate for or against but agree with your point.
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Old 02-25-2014, 04:37 PM   #26
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Did you notice how much the stock market has gone up recently? 35% in the last 2 years. 151% in the last 5 years. Did you ever ask yourself how the insurance company is able to make the offers they make? They stack the deck in their favor and then they invest the money. So for people who fell for the insurance salesman bait back in 2009 and went ahead and made the cardinal sin of "selling low" the annuity wasn't such a great idea after all. So far the insurance company has been laughing all the way to the bank even with a diversified bond / stock mix.
You still seem to be talking about equity indexed annuities and other insurance products - not SPIA's. In the meantime I'm quite happy with the guarantees from the insurance companies on my SPIA's along with the 35% equity position in my remaining portfolio.

As MichaelB, the moderator, said, let's move on and see if we can help the OP.
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Old 02-25-2014, 04:41 PM   #27
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Did you notice how much the stock market has gone up recently? 35% in the last 2 years. 151% in the last 5 years. Did you ever ask yourself how the insurance company is able to make the offers they make? They stack the deck in their favor and then they invest the money. So for people who fell for the insurance salesman bait back in 2009 and went ahead and made the cardinal sin of "selling low" the annuity wasn't such a great idea after all. So far the insurance company has been laughing all the way to the bank even with a diversified bond / stock mix.
Insurance companies are highly regulated and thus they are not allowed to do what you suggest. What they do is to match their obligations with (mostly) bonds that mature as the payments come due. They indeed make a profit but not nearly what you suggest.
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Old 02-25-2014, 05:35 PM   #28
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Consider that even with an immediate annuity, the day after you send in the check you have a -100% return on the money you spent as a premium. Even living years past your IRS expected mortality date doesnt get you close to 0% return on that money. Annuities are also not without risk.
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Old 02-25-2014, 05:41 PM   #29
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Consider that even with an immediate annuity, the day after you send in the check you have a -100% return on the money you spent as a premium. Even living years past your IRS expected mortality date doesnt get you close to 0% return on that money. Annuities are also not without risk.
Could you elaborate. A SPIA is insurance against living too long, not an investment. Also, what do the IRA tables have to do with it? When you insure your house against fire do you hope it burns down to avoid the risk of spending the premium without an adequate return?
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Old 02-25-2014, 05:51 PM   #30
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Could you elaborate. A SPIA is insurance against living too long, not an investment. Also, what do the IRA tables have to do with it? When you insure your house against fire do you hope it burns down to avoid the risk of spending the premium without an adequate return?
Bruce
The day after you buy an annuity you have a -100% return because the corpus is gone -- forever. All you are left with is a promise to pay, that may or may not be made good. The return gets marginally better but you would have to win the genetic lottery to ever really come out ahead on an annuity, even ignoring lost opportunity cost on the corpus. Call it an "investment" or "insurance" it doesn't matter -- it's a tool to generate income from a portfolio. The annuity is an expensive peddled product that does not give you complete protection from running out of money. Make your own annuity my living off of investments -- you dont have to surrender your corpus and you have more flexibility to alter course if a catastrophic event does occur.
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Old 02-25-2014, 05:52 PM   #31
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Dr. Wade Pfau has done some interesting research on the value of including a SPIA in a retirement portfolio to cover all or a portion of your fixed expenses. The idea is to provide a buffer against a stock market crash so that you're not having to draw at a high rate when the portfolio drops. Not sure I'm too excited about the idea right now given the low interest rate environment but the logic and research is solid. Something I would definitely consider for a piece of my portfolio someday after I FIRE. If you are interested in hearing more about Pfau's research, you could google Wade Pfau SPIA and I think you'd come up with lots of info.
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Old 02-25-2014, 05:53 PM   #32
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Palimp & MBMinor:

Perhaps you are looking at SPIA's in the wrong light. The real benefit of a SPIA is that those that die off early support those that live longer. In that manner nobody has to hold back large amounts of money - just in case they live too long.

It's not so much an risk-equity investment expected to grow and throw off returns. Think of it as a bond fund pooled between people to handle longevity risk.
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Old 02-25-2014, 05:56 PM   #33
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The idea is to provide a buffer against a stock market crash so that you're not having to draw at a high rate when the portfolio drops.
That's what bonds are for. When stocks go down people run to the safety of bonds. An annuity is also a long term financial product -- not short. Lets compare it to other options (ex- stock / bond portfolio) going 10, 15, 20 years out.
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Old 02-25-2014, 06:14 PM   #34
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Palimp & MBMinor:

Perhaps you are looking at SPIA's in the wrong light. The real benefit of a SPIA is that those that die off early support those that live longer. In that manner nobody has to hold back large amounts of money - just in case they live too long.

It's not so much an risk-equity investment expected to grow and throw off returns. Think of it as a bond fund pooled between people to handle longevity risk.
Those that die early and those that die late all support the entity that creates and markets the annuity. Annuities aren't evil and can be right for some, but it is undeniable that they are relatively expensive. Those who are more affluent could very well afford to lock in an income stream through an annuity product, but that isn't exactly the situation the OP was facing. With record low interest rates and the OP's relatively young age (many, many generators of mainstream annuities will not even sell one to someone younger than 60 or 61) my main concern would not be the chance that the OP might leave "money on the table" at his death. The analogy to home insurance is a false one. Immediate annuities are more like a reverse mortgage than a home insurance policy.
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Old 02-25-2014, 07:24 PM   #35
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Think of it however you like. I like the idea that I have essentially bought a pension, and now have a fixed base of guaranteed income regardless of the performance of my portfolio. If I die before I've received an adequate return, so be it. I will have had the peace of mind during my lifetime that I won't run out of money no matter how long I live.
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Old 02-25-2014, 07:36 PM   #36
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I will have had the peace of mind during my lifetime that I won't run out of money no matter how long I live.
But how realistic is it that over a long time period of 10 or more years an age appropriate bond / stock portfolio is going to under perform the true return of an annuity? Keep in mind that in the first X amount of years the annuity simply pays you back your original principal.
The False Promises of Annuities and Annuity Calculators - Forbes
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Old 02-25-2014, 07:45 PM   #37
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But how realistic is it that over a long time period of 10 or more years an age appropriate bond / stock portfolio is going to under perform the true return of an annuity? Keep in mind that in the first X amount of years the annuity simply pays you back your original principal.
The False Promises of Annuities and Annuity Calculators - Forbes
The point you seem to miss is that the immediate annuity GUARANTEES a return. Your stock/bond portfolio is only a hoped-for return. Believe me, I have both multiple annuities and a seven figure stock/bond portfolio, but I'm well aware one offers a guarantee and the other doesn't. A SPIA offers the highest guaranteed return available.
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Old 02-25-2014, 07:49 PM   #38
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The point you seem to miss is that the immediate annuity GUARANTEES a return. Your stock/bond portfolio is only a hoped-for return. Believe me, I have both multiple annuities and a seven figure stock/bond portfolio, but I'm well aware one offers a guarantee and the other doesn't.
Bruce
And if and when your stock / bond ETF's don't pay enough income you simply sell off a portion of your investment (which is almost certain to be growing by the way). Dividends, interest, and selling all equate to money in your hands. Enjoy paying the lower capital gains tax rate with the stock / bond portfolio. Enjoy the freedom of being able to sell it ALL if you need to.

It may be "hoped for" but over long term time periods of 10 or more it's a very very good bet.
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Old 02-25-2014, 07:53 PM   #39
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It may be "hoped for" but over long term time periods of 10 or more it's a very very good bet.
You take your "very good bet". I'll take my guarantee. Adios Amigo.
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Old 02-25-2014, 08:06 PM   #40
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50% stock / 50% bond average annual return = 8.3%
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