Convert my 401(k) into an annuity?

[RetireAge50]

It is 100% return of capital for a long time (20 years). By then your money has doubled a couple times (for the insurance company) so they start giving you some return on capital. I'm pretty sure even if you live to 120 the insurance company still wins so it is better to stay out of the casino. At least for the bulk of your money.


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[pb4uski]

.....I'm pretty sure even if you live to 120 the insurance company still wins....

No way. If you live to 120 then the insurer would take a hosing unless your "cohort" as other buyers who die earlier than assumed in pricing the annuity.

 

[nun]

It is 100% return of capital for a long time (20 years). By then your money has doubled a couple times (for the insurance company) so they start giving you some return on capital. I'm pretty sure even if you live to 120 the insurance company still wins so it is better to stay out of the casino. At least for the bulk of your money.


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With an annuity you are buying insurance, but not all annuities are created equal. If your megacorp or state employer offers a defined benefit plan with a COLA, which is increasingly rare, they can be excellent foundations for a retirement. Personally I'm jumping at the chance of trading my DC account balance for a DB plan with a payout rate of 6.9% and an interest rate of 7% using actuarial mortality numbers.

 

[clifp]

+1 to Nun's comments.

I would also recommend William Bernstein's book the Ages of the Investor which goes over the methods of achieving safe cash flows for your basic needs in some detail.

 

[RetireAge50]

Agree not all are equal as I am also trading money for a guaranteed cola pension.

As far as the insurance company not winning, seems to me if the market averages 10% and the annuity pays out 5.6% then the insurance company gets richer regardless of how long you live.


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[nun]

No way. If you live to 120 then the insurer would take a hosing unless your "cohort" as other buyers who die earlier than assumed in pricing the annuity.

Well the annuity company isn't really bothered if one person lives to 120 because its such a small fraction of their annuitants. And even if someone lived forever the annuity company would probably still be ok because all they have to do is make more than the initial payout rate (plus fees) on your money to keep paying you. For the OP that payout rate is 5.6%.

 

[pb4uski]

Agree not all are equal as I am also trading money for a guaranteed cola pension.

As far as the insurance company not winning, seems to me if the market averages 10% and the annuity pays out 5.6% then the insurance company gets richer regardless of how long you live....

The flaw in your thinking is that the insurer invests principally in bonds to back the annuities, not equities.

 

[pb4uski]

Well the annuity company isn't really bothered if one person lives to 120 because its such a small fraction of their annuitants. And even if someone lived forever the annuity company would probably still be ok because all they have to do is make more than the initial payout rate on your money to keep paying you. For the OP that payout rate is 5.6%.

On the first part, that is what I said, but on the second part there is no way they would earn 5.6% in today's interest rate environment.

 

[nun]

But there is no way they would earn 5.6% in today's interest rate environment.

Not today, but what about tomorrow....anyway the insurance companies don't think in terms of individuals so they will do just fine in aggregate, they know that their numbers work. It's wrong to think of the insurer getting hosed if someone lives to 120.....it's better to think of the individual making out big time.

 

[pb4uski]

Not today, but what about tomorrow....anyway the insurance companies don't think in terms of individuals so they will do just fine in aggregate, they know that their numbers work.

Tomorrow doesn't matter because they would receive your SPIA premium today and have to invest it today so the pricing of today's SPIAs reflect today's interest rate environment.

I agree they don't think in terms of individuals, they think in terms of cohorts or PYA (plan, year of issue, age) blocks of business. My earlier point was that if one person lives to 120 then that is no big deal, as long as the cohort mortality is consistent with mortality pricing assumptions which means that over lives in the cohort would need to die earlier than expected.

 

[nun]

Tomorrow doesn't matter because they would receive your SPIA premium today and have to invest it today so the pricing of today's SPIAs reflect today's interest rate environment.

I agree they don't think in terms of individuals, they think in terms of cohorts or PYA (plan, year of issue, age) blocks of business. My earlier point was that if one person lives to 120 then that is no big deal, as long as the cohort mortality is consistent with mortality pricing assumptions which means that over lives in the cohort would need to die earlier than expected.

I don't think we are in disagreement here......actuarial calculations have been working since the 17th century and I predict they will continue to work...

 

[RetireAge50]

Ok I can see what you are saying. The annuity is priced based on what the insurance company invests in (bonds).

I guess I thought insurance companies would want to make more money by investing in stocks but maybe not. Thanks for education!


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[nun]

Ok I can see what you are saying. The annuity is priced based on what the insurance company invests in (bonds).

I guess I thought insurance companies would want to make more money by investing in stocks but maybe not. Thanks for education!


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The advantage of my state defined benefit plan buy in is that the state pension fund doesn't limit itself to bonds and, of course, it has the back up of taxation. Last year the MA state pension plan had an investment return of 17%...so maybe an interest rate of 7% on their pension when I do the annuity calculation is a bit mean.

 

[gauss]

I wish there was more of that meanness to go around!

-gauss

 

[pb4uski]

.........I guess I thought insurance companies would want to make more money by investing in stocks ...

Since equities are so much more volatile they have a capital requirement that is probably 15 times or more than the capital required for investment grade corporate bonds so insurers have significantly dialed back their general account equity holdings.

 

[papadad111]

Op here.

All. Thank you for taking the time to reply and discuss this topic. Really nice to engage in this discussion and learn from you all. My humble appreciation.