Annuities and Social Security

[bongo2]

All the experts seem to agree that optimal retirement investment allocation 1) includes some annuitized wealth, and 2) includes delaying social security payments.  It doesn't seem like anyone on the board has an annuity, and it seems like everyone is taking their social security payments at 62.  I realize that some people here have pensions (which substitute for 1 and 2), but many here do not.  Are there some people here with true annuities?  Is anyone delaying social security payments?  Is there a good explanation for this disconnect between ER practice and theory?

 

[Nords]

All the experts seem to agree that optimal retirement investment allocation 1) includes some annuitized wealth, and 2) includes delaying social security payments.  It doesn't seem like anyone on the board has an annuity, and it seems like everyone is taking their social security payments at 62.  I realize that some people here have pensions (which substitute for 1 and 2), but many here do not.  Are there some people here with true annuities?  Is anyone delaying social security payments?  Is there a good explanation for this disconnect between ER practice and theory?

Yeah, maybe it's because the experts are wrong! They seem to assume that if the math works then the institution paying the income will always be able to fulfill their obligations.

The two biggest ER issues are inflation & healthcare (which usually goes right back to inflation). Annuitized wealth can't help with those issues. Deferring SS won't help either if you go broke beforehand.

A COLA pension is a big help with those ER issues, but only if there's some reasonable degree of expectation that the pension will be around for the life of the pensioner. I'm not happy that I'll be serving the rest of my life at the pleasure of the President, but if I'm gonna have a COLA pension then I suppose that this is the best one available. (It's not why I chose the military in the first place, but it's a nice benefit.) I trust the U.S. govt for a COLA pension a lot more than I'd trust an insurance company, but I'd trust self-annuitizing my own retirement portfolio before either the U.S. govt or an insurance company. It's a lot cheaper, too, it's just not "insured".

My instinct on SS says to take the money & run. This is an instance where deferred gratification may be severely disrupted by death or even the system's insolvency. When I approach age 62, the situation may have changed to the point where I'll defer the payments. But when that payment is less than $10K/year in today's dollars, it's not a very significant decision worthy of obsessive extensive analysis.

Besides, it's not really my decision. If my spouse is still around in 17 years then she'll appreciate my deferred gratification (although her own benefits may still be higher). If I'm single then, I know many find businesses on Ke'eamoku Street that will happily compensate me for spending my SS largesse on their products...

 

[brewer12345]

I'll have to dig up the link, but some researrch I have seen from the TIAA-CREF institute and Prof. Moishe Milevsky indicate that using a chunk of on'e portfolio does not increase the survivability of one's portfolio. Put another way, the research says that buying an annuity isn't a smart move.

I think the SS question depends on A) whether you can afford to delay on SS and B) whether you think there is a good chance SS will not be there for you. My MIL has a pension that more than covers her income needs, so she can easily afford to leave SS for later. Somebody who is barely making it probably needs the income now.

 

[uncledrz]

Annunities are priced high at this time, similar to bonds. If one believes that interst rates (long term) will increase, then waiting to purchase the annuity will increase the return. Perhaps one reason.
As to the Social Security delay question, that is many faceted. Spousal benefits, system integrity, possible systemic changes, desire to tap into the annuity aspect, all apply. When to take the Social Secuity benefit is not as cut and dry as eating a ripe banana now or it will go bad.

 

[grumpy]

I do have a variable annuity but it is one I inherited from my mother who inherited it from my father. I tried to talk him out of buying it many years ago but he thought it was a good idea despite the surrender charges and high expenses. He thought it was a way to guard income from Medicare if mom needed to go into a nursing home because of alzheimers. I keep it because it is accumulating tax deferred and the returns have been fairly competitive with what I could get outside of the annuity after paying the taxes due. It is with John Hancock. At some point I will probably annuitize it even though I do not anticipate needing the income stream.

I was a fed employee and retired under CSRS so I am not eligible for Social Security. My wife will take hers at age 62 under the philosophy that a bird in the hand ...

Grumpy

 

[brewer12345]

Hey grumpy, beore you annuitize, shop around. You can transfer non-qualified annuities tax free from one contract to anther, so there is no reason you couldn't annuitize elsehwere besides Hancock if you can get a better deal. In the mean time, Hancock isn't a bad company.

 

[grumpy]

Hey grumpy, beore you annuitize, shop around. You can transfer non-qualified annuities tax free from one contract to anther, so there is no reason you couldn't annuitize elsehwere besides Hancock if you can get a better deal. In the mean time, Hancock isn't a bad company.

Thanks brewer, I didn't know that. I'm only 58 so I won't be annuitizing any time soon. I will just let the account grow.

Grumpy

 

[Mr._johngalt]

Thanks brewer, I didn't know that.  I'm only 58 so I won't be annuitizing any time soon.  I will just let the account grow.

  Grumpy

"only 58"?

JG

 

[Dawg52]

"only 58"?

JG

Be nice JG. 

 

[MJ]

Be nice JG.

Isn't that a paradox?
Besides, I think JG is a bit jealous since he's a tad older than 58.

 

[Mr._johngalt]

Isn't that a paradox?
Besides, I think JG is a bit jealous since he's a tad older than 58. 

Actually, it's contradictory (oxymoronic?). I don't know about "jealous
of 58". I gotta tell you though............48 looks pretty damn good from where I sit.

JG

 

[grumpy]

Yes JG, only 58. I meant that since my life expectancy is still pretty long, if I annuitized anytime soon the monthly income would be tiny.

Grumpy

 

[MJ]

Actually, it's contradictory (oxymoronic?).

Merriam Webster dictionary paradox = one that possesses seemingly contradictory qualities or phases

Sooooo, sing along,

You say "contradictory", I say "paradox", you say "oxymoronic", I say "paradox",
"contradictory", "paradox", "oxymoronic", "paradox", let's call the whole thing off.

Now, I have added another point to my meaningless count.

 

[Gone4Good]

The two biggest ER issues are inflation & healthcare (which usually goes right back to inflation).  Annuitized wealth can't help with those issues. 

Insurance companies are starting to offer annuities that are indexed to inflation. You can also diversify away some of the credit risk by buying smaller annuities from several companies.

 

[GTM]

Insurance companies are starting to offer annuities that are indexed to inflation.  You can also diversify away some of the credit risk by buying smaller annuities from several companies.   

Yrs to Go,

Would you have the names of any of these companies and any opinions?

 

[dbr]

Vanguard offers inflation adjusted immediate annuities, I think through ING.

 

[brewer12345]

Insurance companies are starting to offer annuities that are indexed to inflation.  You can also diversify away some of the credit risk by buying smaller annuities from several companies.   

You can also just cut to the chase by buying from a single company that is never going to have problems (barring some of Greg's deranged fantasies coming true combined with a meteor strike). Ask me about specific companies hwen the time comes - I used to evaluate the creditworthiness of life insurers for a living.

 

[Marketneutral]

Think about ROTH IRA.

They rock.

I am not counting on social security in my retirement planning.

 

[Gone4Good]

Yrs to Go,

Would you have the names of any of these companies and any opinions?

I know New York Life offers an inflation index option on their annuities, and Vanguard does through AIG, I believe.  Other insurance companies might offer that too, but you'd have to check around.

You can also just cut to the chase by buying from a single company that is never going to have problems

Tall order given a 30+ year time horizon.  But I agree that credit risk is not a huge factor if you select your provider carefully.  I still wouldn't bet my entire nest egg on the solvency of one company.

 

[sgeeeee]

Think about ROTH IRA.

They rock.

I am not counting on social security in my retirement planning.

Roth is probably a plus for most people.

As for SS . . . even the most pessimistic projections indicate only a reduction of about 25% in benefits would be necessary. There are people with political motives who want to convince people otherwise, but ss will not need to be eliminated, merely cut back.

 

[Marketneutral]

Roth is probably a plus for most people.

As for SS . . . even the most pessimistic projections indicate only a reduction of about 25% in benefits would be necessary.  There are people with political motives who want to convince people otherwise, but ss will not need to be eliminated, merely cut back.   

If the COLA index is going to undercut the true inflation rate by 2-5% a year by the time you retire your SS will not matter.  Chuck in a 25% reduction on top of that - it is better to plan NOW on not having it then get to 55-60 and and they moved the retirement age to 72 from 62.

I know this sounds stupid but sooner or later they will say "we are living much longer" then adjust the rate up 5-12 years and really throw off your plans.

Plan for the worse, hope for the best - is the only way you can plan.   

 

[brewer12345]

Tall order given a 30+ year time horizon.  But I agree that credit risk is not a huge factor if you select your provider carefully.  I still wouldn't bet my entire nest egg on the solvency of one company.

Entire nest egg? Nope. But it sounds like the annuity grumpy is talking about is just the "icing on the cake", so a single annuity would likely be fine. There are several insurers I would be happy with up to, say, a quarter of my net worth at stake.

 

[Marketneutral]

Entire nest egg?  Nope.  But it sounds like the annuity grumpy is talking about is just the "icing on the cake", so a single annuity would likely be fine.  There are several insurers I would be happy with up to, say, a quarter of my net worth at stake.

Just read the stories of the retirees from Enron, Worldcom, Global Crossing.

If your company goes into bankrucpy they switch it over to that gov organization with the funny name and you are lucky to get 40% of your benefit.

Within a decade their will be no more company pension programs - mark my words.

 

[brewer12345]

Just read the stories of the retirees from Enron, Worldcom, Global Crossing.

If your company goes into bankrucpy they switch it over to that gov organization with the funny name and you are lucky to get 40% of your benefit.

Within a decade their will be no more company pension programs - mark my words.

MN, we were discussing annuities, not pensions. Big, bg difference.

 

[Marketneutral]

MN, we were discussing annuities, not pensions.  Big, bg difference.

True. Wonder how the annuitity companies are doing with the current yield curve?

Having 100% of your nuts in one hole makes me nervous.

With that said, who says an annuity company can not go bankrupt?

Plan for the worse, hope for the best.