Am I nuts?

[johnoh]

Annuities provide way to much profit to the provider to be good for the consumer except in unusual circumstances

 

[Emeritus]

This is something that has been on my mind recently. My mother had dementia and my father is in an advanced state of dementia right now. My brothers who live close to home took care of everything for our parents. I however, am not married and have no kids. I'm currently in my late 40's but do want to start coming up with some kind of a game plan for what to do should I lose the mental ability to look after my affairs, as my parents did.

Perhaps I'll just start giving my stuff away while I'm relatively young, bequeath my money to a good charity, and leave my own care to chance.

Hmmm.....

A number of charities I know of do this as a free/volunteer service for people who have created charitable remainder trusts. Usual case is person already acting as a guardian becomes ill and can no longer take care of the affairs. They use pro bono retired law and medical types to look after the affairs of the clients. Internal controls prevent conflicts of interest and it all seems to work out well.

 

[Emeritus]

Annuities provide way to much profit to the provider to be good for the consumer except in unusual circumstances

We had a thread on this. There is an extensive literature on whether annuities are "fairly priced". Current cost from best providers seems to be about 5-7% over the actuarial value. About the same range as life insurance

 

[Nords]

Good points. To the first, I would get updated annuity prices at least annually as it won't be a smooth curve at all.

Yep.

There is no way to anticipate the "game over" point, odds are we'd miss it. However, your first point tells me you realize that depending on interest rates and political risk at the time, it's possible that one might actually recover from missing game over - but I would not count on it or make it part of a strategy at all.

I didn't mean to imply disagreement. My personal problem is that when I get to one of these squishy decision points then I sit there and keep waiting for the heavens to open, the trumpets to flourish, and the choir to sing "Do it!" At the very least I'd be waiting for [-]God[/-] the Fed's next decision on interest rates. Doing a little annuitization at a time over 5-10 years might help avoid doing it at history's lowest rates. But you're right, once you start doing it you have to finish the process. I'm not hoping to get a do-over just because the stock market comes roaring back.

But the decision process is the same struggle we have with rebalancing... no matter how quantitative spouse and I make our criteria, as we approach the trigger point we find plenty of intriguing potential reasons why it might just possibly really be different this time. The way we've solved that problem, for ourselves anyway, is to sell covered calls on the shares we need to sell. That means we get to have a little cake before we have to eat it.

If the decision is made to purchase the annuity all at once, it would probably be safer to spread the purchases out over 2-3 different providers, just to avoid single-company risk.

Annuities provide way to much profit to the provider to be good for the consumer except in unusual circumstances

If you've read anything from Milevsky's previous opinions of annuities, then your opinion may be updated by reading his "Are You a Stock or a Bond?"

If Milevsky thinks that SPIAs are fairly priced then I'm pretty sure that they're fairly priced. But of course that doesn't mean they're cheap... and I'm not sure I'd want to buy a bargain-basement annuity even if it was being sold by Berkshire or Vanguard's provider.

 

[Midpack]

If you've read anything from Milevsky's previous opinions of annuities, then your opinion may be updated by reading his "Are You a Stock or a Bond?"

If Milevsky thinks that SPIAs are fairly priced then I'm pretty sure that they're fairly priced. But of course that doesn't mean they're cheap... and I'm not sure I'd want to buy a bargain-basement annuity even if it was being sold by Berkshire or Vanguard's provider.

Given the source here, I will definitely read it. Thanks for the heads up...

 

[Dawg52]

Good point. Another aspect is will the retiree be mentally able to 'run his money' at an advanced age.
Even if a person does a simple asset allocation and rebalanced once a year, will age issues screw things up. Those with children might turn the finances over to them.
UncleMick's one fund psst Wellesly - is looking attractive.

Yes, that's pretty much the only reason I might get one. But when to buy is always the tough decision. For me, certainly not now. Will play it by ear.

 

[FIREd]

MIL bought a couple of SPIAs earlier this summer. She is absolutely thrilled with them. She gets a check like clockwork every month. The SPIAs brought her peace of mind.

Was it the right time to buy a SPIA? I think it was as good a time as any. Yes, her payout would have been higher if interest rates had been higher. But interest rates are what they are and nobody knows where they are going. Other investments providing a regular and secure source of income pay very little at the moment and that's what SPIAs should be compared to. SPIAs might be a very bad deal when placed in an historical context but fixed income instruments are too.

 

[dex]

But interest rates are what they are and nobody knows where they are going.

I'm guessing those are the same people who never leave their house. They never know if they will make it back home again.

Other investments providing a regular and secure source of income pay very little at the moment and that's what SPIAs should be compared to. SPIAs might be a very bad deal when placed in an historical context but fixed income instruments are too.

I don't know what you mean by secure or little. Check out this fund.
https://personal.vanguard.com/us/funds/snapshot?FundId=0029&FundIntExt=INT#hist=tab:1

Currently 6.32 % yield - 52 wk high 7.92%

What is the interest rate on the SPIAs?

I'm not saying to buy the Vanguard fund now.

 

[haha]

Currently 6.32 % yield - 52 wk high 7.92%


I'm not saying to buy the Vanguard fund now.

Wil you be sure to tell us when the time is ripe?

Ha

 

[GregLee]

She is absolutely thrilled with them. She gets a check like clockwork every month.

My mother was just as thrilled with her fixed interest securities, when I helped her set up her investments, but I wasn't nearly so enthusiastic. After all, if you invest in a mutual stock fund instead, you can probably arrange with the fund to have a fixed payout every month, if the clockwork dependability turns you on. (But obviously it wouldn't be guaranteed forever.)

 

[dex]

Wil you be sure to tell us when the time is ripe?

Ha

Don't I always?

 

[obgyn65]

Hello ARB - like you I am also a very conservative investor. Putting 15-20% of your nest egg into an immediate annuity does not sound crazy.

55 - just retired - and need some advice. While not something that I thought I'd ever do, I'm considering putting 15-20% of my nest egg into an Immediate Annuity. There's something about getting that check every month that sounds attractive. Overall, I'm a very conservative investor (largely in cash.)

Am I crazy?

 

[fchelp]

How would the answers/advice here differ if the 55-er was buying a 15 year period certain SPIA to add some certainty until SS kicked in?

 

[REWahoo]

How would the answers/advice here differ if the 55-er was buying a 15 year period certain SPIA to add some certainty until SS kicked in?

Although not my cup of tea, I can see the logic in a "bridge income" to SS.

 

[Nords]

How would the answers/advice here differ if the 55-er was buying a 15 year period certain SPIA to add some certainty until SS kicked in?

It usually takes a few back&forth posts to get the full picture.

Another answer to this question would be "Run it through FIRECalc and see how the portfolio survivability improves".

 

[haha]

How would the answers/advice here differ if the 55-er was buying a 15 year period certain SPIA to add some certainty until SS kicked in?

I am not an annuity expert, but I believe in a case like this there would be little gain from mortality credits, and you will have basically made yourself a into the economic equivalent of an investor who buys a 15 year fully amortizing mortgage, though the adminstrative and credit issues may be different. That might be cheaper to do, and somewhat more securely too, by funding whatever you decide is the most appropriate CD ladder and over the 15 years spend income and gradually spend down the principle too. An ordinary 15 year mortgage amortization with the proper interest rate for your current fund can give you guidance about how much capital you will need to fund the desired draw. Others on this forum have done a similar but less radical plan of taking a larger than usually thought prudent withdrawal rate from a conservative balanced portfolio. The limiting case here is the 15 year complete liquidation, provided you avoid any assets with volatile pricing.

Ha

 

[Purron]

I can't help but notice the OP has not joined in the lively discussion that's ensued since this thread was posted. Seems to happen often.

 

[rescueme]

Good points. To the first, I would get updated annuity prices at least annually as it won't be a smooth curve at all.

Actually, they change every week. When were were in the process of purchasing our first SPIA, we got a call the same day we returned (via overnight) the application to Fidelity (the SPIA provider).

They wanted us to know that the rates had changed, and they had another company (Fidelity acts as the clearinghouse for several SPIA providers) that had changed their return by a fraction of a percent.

They sent the new application data overnight and distroyed our first application.

SPIA rates are just like mortgages; they can turn in an instant...

 

[Nords]

Seems to happen often.

Drive-by poster?

 

[clifp]

I can't help but notice the OP has not joined in the lively discussion that's ensued since this thread was posted. Seems to happen often.

Yup my new rule is not spend more than 3 minutes responding to a new posters query until they've posted a follow up to their original post.

 

[ARB57]

Probably a good rule of thumb (the 3 minute rule that is.) I have digested the feedback and, for now anyway, have decided not to go the immediate annuity route. Thanks to all for your contributions. So what the heck do I do with the cash? (Right now it's parked in a bank money market account earning 1.2%.) I'm having a tough time getting into the market.

 

[73ss454]

You've missed the 5% for 10 years at Pen Fed. If it were me I'd be looking at Wellesley.