Immediate annuities

[Alan]

Quote:

Originally Posted by rodiy2k Thanks for that information. I never thought t look at historical information

While you want a steady income stream, I suggest also looking up the historical exchange rates for the country you plan live in and see how the income stream varies in local currency.

[audreyh1]

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Originally Posted by REWahoo Agreed it deserves its own thread - and it already has one: http://www.early-retirement.org/foru...ias-65526.html

Oh thanks! Somehow I missed that one.

[audreyh1]

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Originally Posted by ziggy29 True. Like any "optional" insurance product, those who perceive the highest risk (whether it's the sickest for health or life insurance, or the "healthiest" for an SPIA) are the most likely to drive demand for it -- resulting in significant adverse selection.

I was just surprised they were so good at it. People don't die only due to health problems....

[walkinwood]

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Originally Posted by rodiy2k Hi all ... We are thinking of a term of 10 or 15 years with survivor benefits (lifetime will not generate enough income and we will have ample pension/401k cash anyway). .... Thanks for any comments suggestions or advice

Here's my thinking (ie. I haven't gone out and done the research or math)
Lifetime immediate annuities are able to provide a higher (as percentage of purchase price) return because of the "pooling effect" (ie. some people die sooner than others in the pool).

A 10-15 year IA, especially at a young age, cannot benefit too much from the pooling effect since it is probably a significantly shorter term than life expectancy at your age.

So, the insurance company can only rely on rates of return that are pretty close to what you can get in the market yourself. Plus, they need to account for sales & administrative costs and profit margins.

Are you willing to give up some (or maybe more than "some") return for the convenience of having a single income stream?

You could put the proceeds of your house sale into a short-term bond fund (Say treasuries or investment grade corporate) and set up a systematic monthly withdrawal into your checking account.

It should be easy to do the math & see the difference between what an IA will give you and the systematic withdrawals that leave 0 balance at the end of 12 years (using a conservative interest rate).

[ERhoosier]

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Originally Posted by rayvt You can get a quote from our friend Mr. Buffett at EZ quote They tell you right there what interest rate you get. At those rates, it makes more sense to put in in CDs, IMHO. For a single life w/10 years certain it says right there on the quote: Your investment of $100,000 will yield 2.34% based upon our mortality assumptions and the U.S. Treasury yield curve as of March 8, 2013. This investment will provide you with $519 every month for the longer of 120 months or as long as you live, beginning on May 1, 2013. For just 10 years certain: Your investment of $100,000 will yield 0.96% based upon the U.S. Treasury yield curve as of March 8, 2013. This investment will provide you with $874 every month for 120 months, beginning on May 1, 2013.

+1
You can beat those rates just buying ladder of investment grade US corp bonds.
Composite Bond Rates: Bonds Center - Yahoo! Finance

[rodiy2k]

Quote:

Originally Posted by walkinwood Here's my thinking (ie. I haven't gone out and done the research or math) Lifetime immediate annuities are able to provide a higher (as percentage of purchase price) return because of the "pooling effect" (ie. some people die sooner than others in the pool). A 10-15 year IA, especially at a young age, cannot benefit too much from the pooling effect since it is probably a significantly shorter term than life expectancy at your age. So, the insurance company can only rely on rates of return that are pretty close to what you can get in the market yourself. Plus, they need to account for sales & administrative costs and profit margins. Are you willing to give up some (or maybe more than "some") return for the convenience of having a single income stream? You could put the proceeds of your house sale into a short-term bond fund (Say treasuries or investment grade corporate) and set up a systematic monthly withdrawal into your checking account. It should be easy to do the math & see the difference between what an IA will give you and the systematic withdrawals that leave 0 balance at the end of 12 years (using a conservative interest rate).

That makes a lot of sense to me. Not sure of I'd use a short or ultra-short bond find due to the interest rate risk. There is a small possibility of loss of principal if the fed hikes by half a basis point or more at. But perhaps the highest paying interest bearing savings account might work.

One thing I guess I didn't consider is the currency issue. We are expatriating to Malaysia. With the MM2H visa you are required to deposit 150,000 MYR (about 50KUSD) before you enter the country anyway and it has to be with a Malaysian bank in local currency. HSBC is the preferred bank of choice due to their ability to do this from the USA. In Asia you can get CD equivalents and interest bearing savings accounts that pay a semi-livable rate. So perhaps it makes sense to do one large transfer into local currency before leaving and then arrange for local interest bearing investments and systematic withdrawals once we arrive there. This would also eliminate the fees involved with constantly transferring and converting monthly payments from USD to MYR. I don't believe annuity payments can be directly converted to foreign currency even if you have an HSBC premier account with accounts in both USD and another local currency so the costs of the conversions might eradicate even more potential return, even if we only made them semi-annually instead of monthly.

Thoughts anyone?

[pb4uski]

Quote:

Originally Posted by rodiy2k That makes a lot of sense to me. Not sure of I'd use a short or ultra-short bond find due to the interest rate risk. There is a small possibility of loss of principal if the fed hikes by half a basis point or more at. But perhaps the highest paying interest bearing savings account might work. One thing I guess I didn't consider is the currency issue. We are expatriating to Malaysia. With the MM2H visa you are required to deposit 150,000 MYR (about 50KUSD) before you enter the country anyway and it has to be with a Malaysian bank in local currency. HSBC is the preferred bank of choice due to their ability to do this from the USA. In Asia you can get CD equivalents and interest bearing savings accounts that pay a semi-livable rate. So perhaps it makes sense to do one large transfer into local currency before leaving and then arrange for local interest bearing investments and systematic withdrawals once we arrive there. This would also eliminate the fees involved with constantly transferring and converting monthly payments from USD to MYR. I don't believe annuity payments can be directly converted to foreign currency even if you have an HSBC premier account with accounts in both USD and another local currency so the costs of the conversions might eradicate even more potential return, even if we only made them semi-annually instead of monthly. Thoughts anyone?

Or perhaps a 10 or 15 year annuity certain issued by a high quality Malasian insurer (if there is such a thing) in local currency might be more generous than US immediate annuities. If not, then invest locally in CDs and arrange for systematic withdrawals.

[sheehs1]

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Originally Posted by rodiy2k I agree with you wholeheartedly that the cost is exorbitant due to the interest rate environment. I have thought about taking the cash (probably 550 to 600k) and simply leaving it in a combination of cash and laddered CDs. If in fact the ridiculous occurs (2017 arrives and the fed Has left rates at or near zero for what will then be ten years I suppose that would make the most sense) Here is my honest issue. Although I budget well and have worked out multiple scenarios; as someone that will be living overseas I prefer to use the IA because it basically forces you to be on an allowance. Granted you could just stick to a certain weekly amount out of checking and keep using maturing CDs as cash runs low. But having the income steam not change every month absolutely positively forces you to either stick to your allocated budget or use savings/other retirement accounts slated for use later in life Additionally I would think 6 months would be the minimum term you'd be able to get CDs for so again that means you'd pay yourself semi-annually rather than monthly. I am vey anal so I find that a bit harder. Also, as an expat I would much prefer one income steam since funds will have to be converted and sent form our HSBC USD account to a local account. I don't believe they permit US sourced annuity income to be wired directly into a foreign account. Can someone confirm that ? So I am hoping that rates are at least anything but zero in five years but a an employee of the financial services industry, I do not expect interest rate movement in the US until 2015 at the earliest. Any input?

If you decide on an immediate annuity why not consider doing it for 5 year terms to minimize interest rate risk? You will have a better idea what interest rates are doing at that time. If you want $3,000 a month then put only $180,000 towards the first 5 year term and placing the remainder in CD's that accumulate the interest such that it is at the moment. Shuffle every 5 years.

[FinancialDave]

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Originally Posted by Midpack I understand laddering and SPIAs but I don't understand why you recommend this, can you explain further? Yields really can't go lower, so why isn't just waiting to buy a SPIA with or without laddering not a better choice? I'm seriously asking, not criticizing...

Of course waiting is always better UNLESS of course you lose some of the value of your money while waiting (such as in equities.) Since I am not a fan of annuities, I take the waiting to the extreme if you know what I mean and just keep the money in a good growth fund.

Yes, yields can't go lower, so why would you want to lock in your money at the lowest yields ever. The object is to diversify the interest rate risk, and also to increase the income payout by waiting until later, when interest rates could be higher, thus giving you higher payout. Even if the interest rates don't change, just by waiting you get a higher payout.

The other affect of laddering into retirement is you don't lock your money all up at once, such that if you need it you can't get it.


fd

[Midpack]

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Originally Posted by FinancialDave Of course waiting is always better UNLESS of course you lose some of the value of your money while waiting (such as in equities.) Since I am not a fan of annuities, I take the waiting to the extreme if you know what I mean and just keep the money in a good growth fund. Yes, yields can't go lower, so why would you want to lock in your money at the lowest yields ever. The object is to diversify the interest rate risk, and also to increase the income payout by waiting until later, when interest rates could be higher, thus giving you higher payout. Even if the interest rates don't change, just by waiting you get a higher payout. The other affect of laddering into retirement is you don't lock your money all up at once, such that if you need it you can't get it. fd

Thanks for your reply. I think I'd figured it out in a later post (#12).

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If outright waiting is not an option and it's strictly between buying a 5X SPIA now vs five 1X SPIAs over the next 5 years, I get it. Maybe that's what FD meant?

[Khufu]

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Originally Posted by rodiy2k Hi all My wife and I are planning to use house proceeds to purchase an immediate annuity which will serve as most of our income during the initial years of ER and then supplement with pensions and Roths as they become available. I've used immediateannuity.com as a good reference but can't really get a handle on how they might change when interest rates rise or specific terms because agents don't really want to speak to you unless you have cash right now (no incentive for them I guess) We are thinking of a term of 10 or 15 years with survivor benefits (lifetime will not generate enough income and we will have ample pension/401k cash anyway). Is there anyone out there that has used this as a strategy? I'm looking to see if terms are flexible since 12 years would work better than 10 or 15. Also thinking of using HSBC as we will be living overseas and isn't an HSBC Premier account so it seems easier to keep all funds in one place. But I'm willing to go with other reputable companies like NY Life. Also looking to confirm how taxation of interest works to firm up financial plans. Also would it be required to maintain a physical US address for payments to start or only a US bank account? Money laundering rules make expatriating kind of confusing and daunting Thanks for any comments suggestions or advice

You should plan to maintain a US address since it will make dealing with banks, etc. easier. However, the address should be in a state with no income tax so that you don't inadvertantly become liable. (If you currently live in a state with an income tax you will need to cut all ties according to the tax domicile rules of that state in order to escape paying your old state after you've gone.) The way to do this is to use a mail forwarding company that will provide you with a street address, not a P.O. Should cost about $20 per month for the basic service.

When I first moved abroad after retiring I used HSBC Premier, but changed to a local bank after a year. Transferring money from my US account to the local bank is cheap and takes 2 days, everything done online. HSBC Premier will let you transfer for free, but there is a large opportunity cost with HSBC Premier.

Your idea of simplifying your banking by using only one bank is a mistake in my opinion. My advice is to open several bank accounts at banks known to be amenable to expats as clients, such as: Pentagon Federal and USAA Federal Savings bank. You will be able to use their bill-paying services to pay your US expenses, such as credit cards. You should also open a variety of credit cards before you go since US credit cards have better fraud protection (i.e. no liability) than those offered in many other countries.

HSBC is expat friendly, but they are very expensive for services that are not included for free in the Premier service, i.e. brokerage fees, mutual fund management fees and loads, etc. Very old-fashioned in that regard. I would never use them for anything. For a commodity product like an annuity you should use the lowest-cost provider and that would never be HSBC.

The reason to have multiple cards and banks is that you might not be able to open such an account after you have left. It's not certain that you won't be able to, but it is possible. As time goes by, the initial advantages of one bank may change or become inferior to those of another bank. The last time I opened a CD at a credit union that offered an especially good rate, they insisted that I send them a utility bill with my name and my US residential address to prove that I lived in the US. I wouldn't be able to open that account now that I no longer have such an address.

An immediate annuity to bridge the gap between early retirement and age 59.5 might be reasonable. You wouldn't get the chief benefit of an immediate annuity, which is mortality credits. When you are ready to pull the trigger I would compare against long-term CD rates at Penfed or a credit union that will pay you interest monthly instead of re-investing it. For a period as short as 10 to 15 years I don't think the difference between the CD and the annuity would be very much. You can also attempt to negotiate a better rate with someone like Penfed for a custom CD with a term of 12 years.

After age 55 you can draw from a 401k without a penalty as long as you are separated from the company. However, I wouldn't keep my money in a 401k after leaving because of the probable high fees. You can also do 72t distributions from IRAs beginning earlier than 59.5, but that has the disadvantage of locking you into a distribution schedule.

[FinancialDave]

The other reason to buy 5 annuities rather than 1 - if you need to buy one at all, is that when you buy 5 you can buy them from 5 good companies and spread out the risk of any one of them going bankrupt on you.

fd

[rodiy2k]

Quote:

Originally Posted by Khufu You should plan to maintain a US address since it will make dealing with banks, etc. easier. However, the address should be in a state with no income tax so that you don't inadvertently become liable. (If you currently live in a state with an income tax you will need to cut all ties according to the tax domicile rules of that state in order to escape paying your old state after you've gone.) The way to do this is to use a mail forwarding company that will provide you with a street address, not a P.O. Should cost about $20 per month for the basic service..

Thanks for the generous response. If you don't mind, I'd like to pick your brain a bit:

I am aware of the need for a physical street address in order to maintain bank accounts, credit cards and brokerage accounts and had already bookmarked a couple of expat mail service companies; However, I hadn't thought about the state tax issue; So the first company I looked at only issues addresses in California (my home state now)or Oregon. The second company told me "we are not listed as a domicile so there are no tax implications; we are a commercial mail receiving agency". Do you know what this means or have any suggestions for companies that can provide a street address in one of the 7 states with no income tax to use as a legal US street address while living abroad?

As for state taxes, why wouldn't you just not have your expat tax service not file any state returns after the first tax year of expatriation? We lived in Canada from 2001 thru 2006 and changed my U.S. brokerage accounts to my parents address in New York; but we never "established an exit policy" from California; we simply only filed Federal returns with a cross border tax preparer (not including the year we moved where we did have a tax liability due to partial employment income). Upon our return to California, we began filing state again once we had a liability and the state didn't seem to care that we didn't file while non-residents even though we never "officially moved" for tax purposes.

Quote:

Originally Posted by Khufu When I first moved abroad after retiring I used HSBC Premier, but changed to a local bank after a year. Transferring money from my US account to the local bank is cheap and takes 2 days, everything done online. HSBC Premier will let you transfer for free, but there is a large opportunity cost with HSBC Premier.

Our intentions are to get the a/c open at HSBC with the minimum amount needed (100K in both cash and securities) give or take a bit but do well before selling the house and leaving the USA; we will only have about 65K liquid enough to use as cash; to get the other 35K, my plan was to open an IRA Rollover with HSBC and simply move the 35K in-kind, either as cash or preferably with in-kind transfers of our existing mutual funds. However, if they can't hold the funds we own now or charge ridiculous fees, I'd probably liquidate first in the old IRA at TD Ameritrade and just use cash to fund it; I suppose they must have some sort of target fund or proprietary instrument that will suffice in order to keep he a/c active; At a future point we might also close it like you did; In Malaysia, you have to keep the 150K RMG on deposit the whole time you reside there but it can be moved to another institution as long as it's in Malaysia

I know HSBC is not a discount house so fees are very high but it's still the easiest way to facilitate the opening of a foreign bank a/c and subsequent conversions/deposits while still in the USA, as far as I am aware. Do you have any input or thoughts on this?

Quote:

Originally Posted by Khufu The reason to have multiple cards and banks is that you might not be able to open such an account after you have left. It's not certain that you won't be able to, but it is possible. As time goes by, the initial advantages of one bank may change or become inferior to those of another bank. The last time I opened a CD at a credit union that offered an especially good rate, they insisted that I send them a utility bill with my name and my US residential address to prove that I lived in the US. I wouldn't be able to open that account now that I no longer have such an address.

We do intend to leave our US based Bank of America Visa, Citibank MasterCard and American Express cards all open and utilize our existing Bank of America checking account for payment of US bills such as the expat mail issue or online purchases. We would also apply for credit in Malaysia and see if they will issue a local card. Cash is a better option in a lot of situations but not for airline tickets, hotels etc. We each have credit ratings over 800 so re-establishing US credit later would make no sense. As for CD's, before we leave we might compare BofA with credit unions but as a long time premier customer, we will get the best possible rates as too big to fail banks go and I find the convenience of keeping your long term relationship more advantageous than seeking a few extra bucks, especially in a low interest rate environment which I expect will improve but not to anything like it used to be.

Quote:

Originally Posted by Khufu An immediate annuity to bridge the gap between early retirement and age 59.5 might be reasonable. You wouldn't get the chief benefit of an immediate annuity, which is mortality credits. When you are ready to pull the trigger I would compare against long-term CD rates at Penfed or a credit union that will pay you interest monthly instead of re-investing it. For a period as short as 10 to 15 years I don't think the difference between the CD and the annuity would be very much. You can also attempt to negotiate a better rate with someone like Penfed for a custom CD with a term of 12 years.

Quote:

Originally Posted by Khufu After age 55 you can draw from a 401k without a penalty as long as you are separated from the company. However, I wouldn't keep my money in a 401k after leaving because of the probable high fees. You can also do 72t distributions from IRAs beginning earlier than 59.5, but that has the disadvantage of locking you into a distribution schedule.

I see your point and am now leaning towards all CD's for cash to stay in the US versus the annuity (my wife hates the annuity idea). This way the cash is always available should we need it. As long as that part of our assets stays out of the market, I'd be comfortable.

I will be less than 55 before I resign and will be rolling all of both of our existing 401k, 403b and 457b's into our existing IRA's before we leave the USA. There is not enough flexibility in either of our plans to leave it there. My 401k will get rolled and then converted to my Roth in the first year after we have no US employment income which will drastically reduce the one time tax liability for the conversion; this also allows the 5 year window to be reached by the time I am 59 1/2 (year 6 of ER) and we can therefore supplement income with tax free systematic withdrawals (assuming we actually need any additional cash). I'd leave all my wife's retirement assets in a Rollover, probably until RMD's would be required which is 23 years into ER anyway. We hope not to need that part of our assets until mid 70's or later, if at all.

Do you mind if I ask where you expatriated to and when? Thanks for all the information and please comment on my replies

[Khufu]

Rodiy2k,

1. Tax domicile issues - First of all, why would you even consider relying upon the legal opinion as to your possible tax liability coming from a vendor attempting to sell you services? I use and highly recommend this company that will provide you with a street address in Florida:

Mail Forwarding Services at St Brendan's Isle

Second, you should be aware that CA is the second most aggressive state in coming after former residents (after VA) to collect back taxes, penalties and interest. Among the evidence CA considers when deciding whether you legally retain tax domicile in the state are: owning property in the state, have a driver's license, using the services of professionals in the state, having friends in the state and more, any of which can indicate an intent to return to the state at some time in the future thereby preserving CA as your current tax domicile. It goes without saying that legal concepts like tax domicile don't have anything to do with common sense notions of where you might be a resident. You need to look up all of the regulations regarding tax domicile in CA and make sure that you don't run afoul of any of them. You can forget voting for one thing. Whether the state's enforcement mechanism is efficient enough to catch you is one thing, but my goal would be and was to avoid any unnecessary risk, since the stakes are so high.

2. HSBC and bank transfers - Before you expat it seems like banking could be a big issue and it is appealing to think that HSBC Premier will be the most convenient solution, even if not the cheapest. It wasn't true for us and I doubt it will be true for you. We opened a Premier account in the US believing that we could open an account in Bangkok before we arrived. It might technically have been possible, but we were never able to get the BKK branch to open an account for us without an address in Thailand. After trying for a while we gave up in frustration. Add to that the fact that every service that HSBC offered was more expensive than the equivalent from a competitor, and the rationale for going with them evaporates in my opinion. When I sold a mutual fund position in my HSBC brokerage the commission was $125 vs $2 if I had sold it from my Vanguard account.

We did get an account at HSBC BKK after we arrived. It took more than a week versus opening an account the same day at Bangkok Bank. Transfers from a US bank took 2 days to HSBC BKK and 2 days to Bangkok Bank. Bangkok bank charges less than other Thai banks to receive a transfer, but it is not free. However, I think their charges compare favorably to the opportunity cost of parking the $100k at HSBC Premier.

The key consideration is to see if you can find a local bank that has a US branch and therefore an ABA number, like Bangkok Bank. In that case you can do ACH transfers from your US bank that should be free on the US end, although you may well have to pay something to the receiving bank, as we do. If that is not available pick a local bank that supports online billpay and that other expats use.

3. Credit cards - Just get credit cards before you leave from all of these places: Pentagon Federal, Capital One and, possibly, Schwab. (I don't have the Schwab card myself.) Keep the Amex cards for US use and throw away the major bank credit cards. Penfed and CapOne have cards that have no foreign exchange fees. Some of their cards have rebates; others have no late fees. All have no annual fees. There is no reason to get a local card and a lot of reasons not to. Although I don't follow the card situation in Malaysia, I'll bet it's like Thailand, i.e. no fraud protection and interest rates of 25%. End of story right there as far as I am concerned. Some expats in Thailand have to maintain a large deposit, more than their credit limit, to get a credit card from a Thai bank at all. Paying to borrow your own money back? Not for me, thank you. But the unlimited fraud liability alone would be enough to discourage me even if there were no other disadvantage. We keep the Penfed Visa, CapOne Mastercard and two Amex cards. We use each card every month and, of course, pay on time in full always. Consumers in SE Asia, or Asia generally, have few rights. US consumer protections are the best. However, Citibank and probably BofA will charge you 3% foreign exchange fee if you use the card abroad, even for a transaction in USD. The length of you relationship counts for zero, really. My Penfed Promise Visa charges 9.99% interest on purchases. I'll bet Citi and BofA charge more than that.

4. Roth conversion - I am doing Roth conversions from retirement at age 61 until age 70, but not all at once. I will use the capacity up to the top of my marginal bracket each year. That will enable me to convert as much as I need before the RMDs and SS bump up my bracket at age 70.

I assume you are delaying SS until age 70 also. Is that right?

We retired to Thailand a little less than two years ago.

The Malaysia My Second Home offers the advantage of the 10 year visa, but the requirement to maintain the bank balance is more stringent than Thailand, which requires a minimum balance only for the 60 days before visa renewal. From what I understand Malaysia is less corrupt among the police and the courts than Thailand, but the cost of living may be a little higher. People seem to like KL, although it is said to have more crime than BKK. Visa renewals are annual in Thailand and not guaranteed, although no one seems to have trouble getting them. Thailand does have a permanent residence status that I will seek eventually. Many expats in Thailand envy the MMSH program since participants can buy property, but I am not one of them.

For our long-range planning before retirement I found the Esplanner software to be indispensable. I recommend it. www.esplanner.com

Will you be in KL?