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Deferred Income Annuity
Old 04-17-2014, 03:36 PM   #1
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Deferred Income Annuity

Hi folks, I am 50 years old, retiring at 55.

I decided to take about 1/4 of my IRA portfolio and invest in a deferred income annuity. I will start taking payments in 10 years, have enough cash to bridge the gap between 55 and 60.

I plugged the annuity into FIRE as a non-inflation based pension starting in 10 years and my success percentage was still 100% after changing my portfolio. In fact, there was a very slight positive shift in the scenarios.

Although the annuity does not include inflation provisions, I decided that I wanted to pay myself monthly for life in a pension type format. I went with lifetime for both myself and my wife. If both of die before we are 90, my kids will get the balance of the 30 year payments.

I am not a fan at all of annuities in general, and the DIA is not new, but I had not thought of it until my fee based FA brought it up. At first I laughed at him, but then after looking at it and running the numbers, it actually did make some sense. Could I have done better over the course of 10 years and then moving the new balance into a bond or CD ladder? Potentially, yes. However, I was finding myself stressing too much over market volatility and decided that creating a pension to ensure that the basic bills are paid seemed like an OK idea.

So, my logic was that if I can reduce some risk, and still achieve 100% in FIRE, then it seemed logical.

Would like to know if anyone else in the 50-60 range is looking at these.
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Old 04-17-2014, 03:43 PM   #2
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I am 40, but an annuity/pension features in my plans. There is lots of good academic research demonstrating that a pension/annuity bought with a portion of your assets and which covers a chunk of your income needs can materially improve your portfolio survivability. In my case, I have vested in a tiny pension that I can start any time beginning at age 50 and with a COLA. although the pension is bupkis, I have the option of buying additional pension credit with 401k money. Since the pension has zero carrier risk and CPI adjusted annuities are not all that easy to find in the open market, I left my 401k money there and plan to use it to buy additional pension credit when I am older, likely between 50 and 60.

Which insurer(s) did you buy from, if you don't mind me asking?
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Old 04-17-2014, 04:00 PM   #3
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I thought about it when I was in my 50's. (In fact, I w*rked for a "diversified financial services company" and pitched the idea to management as a product possibility.)

The advantage of an annuity over a simple bond portfolio is the "mortality credits" embedded in the annuity. The disadvantages are the insurance company loads and the inflexibility.

At age 50, the mortality credits are so small that I'd say the disadvantages easily outrun them. I kept the idea floating with the thought that I'd look at it someday when I was at a more appropriate age.

(PS. Most people start these discussion before they buy, instead of after.)
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Old 04-17-2014, 04:34 PM   #4
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Hey Independent, I went with Mass Mutual. They were A++ rated, and I liked some of the flexibility that they offered. For example, the start date for payments can be changed one time (pulling it in up to 5 years or pushing it out 5 years). I also liked the fact that if there were an emergency situation, I could pull 6 months of payments forward into a lump sum. I would never most likely do this (would draw from the portfolio), but never say never.

Their payout was nearly $100 more per month than New York Life and NW Mutual.
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Old 04-17-2014, 04:57 PM   #5
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All 3 are great companies. I'm older and between SS and my small pension, at age 70 they should cover about 60% of our living expenses and I'm comfortable taking the investment risk on the remaining 40% so an annuity is not in my plans.

I do have a deferred comp plan that is about 10% of our nestegg that has an attractive annuitization option. I may consider annuitizing if the annuitization option is still attractive when IU'm ready to annuitize. Meanwhile, it is in a 90/10 domestic/international equity fund.
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Old 04-17-2014, 05:37 PM   #6
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Before you buy a DIA make sure you understand exactly what you're getting. If you have access to a stable value fund or could even set up a CD ladder you might be better off. I'm not against all annuities - I have a DIA with TIAA-CREF myself - but I am against bad annuities. What is the payout rate of the DIA you were quoted......as a comparison the payout rate I was quoted by TIAA if I annuitize my TIAA-Traditional for a single life starting at 55 was 7%. If you wait a few years you will probably get a better quote, assuming rates go up.
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Old 04-17-2014, 07:30 PM   #7
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Has anyone come across a calculator that will allow you look at the after tax tradeoffs on Immediate or DIA that also allows you recognize the ability to reduce your RMD amounts as the result of using your IRA funds to purchase the annuity?
Nwsteve
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Old 04-18-2014, 05:04 AM   #8
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I thought about it when I was in my 50's. (In fact, I w*rked for a "diversified financial services company" and pitched the idea to management as a product possibility.)

The advantage of an annuity over a simple bond portfolio is the "mortality credits" embedded in the annuity. The disadvantages are the insurance company loads and the inflexibility.

At age 50, the mortality credits are so small that I'd say the disadvantages easily outrun them. I kept the idea floating with the thought that I'd look at it someday when I was at a more appropriate age.

(PS. Most people start these discussion before they buy, instead of after.)
one of the problems with mortality credits is as folks became more and more turned off to annuity products from bad press it left only those more suitable for annuity products in the pool.

those with poor health, no longeveity genes in the family ,etc have moved away from being sold these products so we now have a more narrow mix of folks.

annuity buyers now tend to be healthier and have longevity in their family history.

that has been putting a damper on mortality credits compared to the ooomph they used to give when everyone was falling in to the buying an annuity trap from salesman..
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Old 04-18-2014, 12:31 PM   #9
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Historically low interest rates = historically poor time to lock in to an annuity. If I wanted/needed such a product, I'd still try to wait a few years to get a more historically "normal" rate.
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Old 04-18-2014, 01:43 PM   #10
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Instead of forking over your $ to an insurance company today, why not wait until age 60, retain control of you funds and consider an immediate annuity at that time? A lot can happen in ten years.
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Old 04-18-2014, 01:47 PM   #11
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i like immediate annuities to but the sweet spot is really around 70.
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Old 04-18-2014, 02:05 PM   #12
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i like immediate annuities to but the sweet spot is really around 70.
50 yo OP was considering an annuity at age 60. Said nothing about a sweet spot.
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Old 04-18-2014, 02:06 PM   #13
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Historically low interest rates = historically poor time to lock in to an annuity. If I wanted/needed such a product, I'd still try to wait a few years to get a more historically "normal" rate.
+1.

I am not a fan of annuity, especially, in this time of low interest rate.
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Old 04-18-2014, 06:39 PM   #14
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50 yo OP was considering an annuity at age 60. Said nothing about a sweet spot.
correct but at age 60 it is still not the greatest time to do it. as you get older the mortality credits become much greater, the pay out jumps a lot and rates should climb back to historical averages .

research has shown 70 to really be the most efficient entry point.
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Old 04-18-2014, 07:16 PM   #15
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Has anyone come across a calculator that will allow you look at the after tax tradeoffs on Immediate or DIA that also allows you recognize the ability to reduce your RMD amounts as the result of using your IRA funds to purchase the annuity?
Nwsteve

Your RMD is a function of account balances & mortality tables; using an annuity of any kind wouldn't necessarily alter the methodology, furthermore the payments from a qualified retirement annuity are taxed at ordinary income rates. There is no exclusion ratio.



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Old 04-18-2014, 07:27 PM   #16
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Hey Independent, I went with Mass Mutual. They were A++ rated, and I liked some of the flexibility that they offered. For example, the start date for payments can be changed one time (pulling it in up to 5 years or pushing it out 5 years). I also liked the fact that if there were an emergency situation, I could pull 6 months of payments forward into a lump sum. I would never most likely do this (would draw from the portfolio), but never say never.

Their payout was nearly $100 more per month than New York Life and NW Mutual.
Interesting features. It seems to me that the defer option has very little cost to the company, maybe some cash flow planning, so I'm surprised they limit it. Maybe it's a regulatory thing.

The other two both have some cost as people who develop health problems will bring payments forward. But, I can easily see that the sales appeal outweighs the cost.

The big "inflexibility" is of course the inability to pull all of my premium out and redirect it to something else.
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Old 04-18-2014, 07:31 PM   #17
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one of the problems with mortality credits is as folks became more and more turned off to annuity products from bad press it left only those more suitable for annuity products in the pool.

those with poor health, no longeveity genes in the family ,etc have moved away from being sold these products so we now have a more narrow mix of folks.

annuity buyers now tend to be healthier and have longevity in their family history.

that has been putting a damper on mortality credits compared to the ooomph they used to give when everyone was falling in to the buying an annuity trap from salesman..
AFAIK, pricing actuaries have always assumed that SPIA buyers are noticeably healthier than average.

SPDAs are a different and more complex story due to guaranteed lifetime withdrawal features. I don't know if there has been any trend in pricing assumptions.
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Old 04-18-2014, 07:44 PM   #18
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AFAIK, pricing actuaries have always assumed that SPIA buyers are noticeably healthier than average. ...
True. Annuity mortality assumptions are different from life insurance mortality assumptions because there is an inherent bias that people with in good health and with good longevity will more likely buy annuities.
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Old 04-18-2014, 07:50 PM   #19
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Has anyone come across a calculator that will allow you look at the after tax tradeoffs on Immediate or DIA that also allows you recognize the ability to reduce your RMD amounts as the result of using your IRA funds to purchase the annuity?
Nwsteve
I'm trying to understand this.

Suppose I have $1 million in an IRA and I'm 70. I really don't need to withdraw anything for spending this year as I have other sources of income. However, RMD rules say I have to make a withdrawal. If I'm using the life expectancy method, I need to withdraw $1,000,000/27.4 = $35,000.

I'd rather not do this from a tax perspective because I'm paying taxes this year that I'd rather defer.

Now, I could take my $1 million and buy an immediate annuity instead. My, limited, understanding says that this is another way of meeting the minimum distribution requirement.

Going over to incomesolutions.com, I find that I will get $78,000 per year from a straight life SPIA. That amount is all taxed, so I don't think I've accomplished my goal of reducing my withdrawals.

I could knock that amount down a little by specifying a 20 year certain period, but I'd still be getting $66,000.

This seems to be going in the wrong direction.
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Old 04-18-2014, 07:54 PM   #20
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I'm trying to understand this.



Suppose I have $1 million in an IRA and I'm 70. I really don't need to withdraw anything for spending this year as I have other sources of income. However, RMD rules say I have to make a withdrawal. If I'm using the life expectancy method, I need to withdraw $1,000,000/27.4 = $35,000.



I'd rather not do this from a tax perspective because I'm paying taxes this year that I'd rather defer.



Now, I could take my $1 million and buy an immediate annuity instead. My, limited, understanding says that this is another way of meeting the minimum distribution requirement.



Going over to incomesolutions.com, I find that I will get $78,000 per year from a straight life SPIA. That amount is all taxed, so I don't think I've accomplished my goal of reducing my withdrawals.



I could knock that amount down a little by specifying a 20 year certain period, but I'd still be getting $66,000.



This seems to be going in the wrong direction.

Correct because the annuity distribution calculation is different from an RMD; even if you played with the numbers the SPIA has to comply with the RMD, therefore you can't have a SPIA held by an IRA pay less than the RMD.


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