Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Immediate annuities
Old 03-11-2013, 11:45 AM   #1
Recycles dryer sheets
 
Join Date: Mar 2013
Location: Walnut Creek CA
Posts: 63
Immediate annuities

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
__________________

__________________
rodiy2k is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-11-2013, 11:53 AM   #2
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,613
Immediate annuities producing a steady income stream (purchased from a low-cost provider that doesn't generate large commissions) aren't a terrible financial product in the general case and, under the right market conditions, can be a reasonable way for people to "buy a pension", so to speak. The biggest problem with immediate annuities today is that with interest rates so low, the cost of a guaranteed income stream is currently exorbitant.

Depending on my circumstances in a few years, I might be in a position to consider an SPIA with part of my retirement savings, but not at current prices (caused by low interest rates).
__________________

__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 03-11-2013, 12:10 PM   #3
Recycles dryer sheets
FinancialDave's Avatar
 
Join Date: Nov 2012
Location: Olympia
Posts: 110
Quote:
Originally Posted by rodiy2k View Post
Hi all


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
Interest income is taxed at your ordinary marginal income tax rate - the same as other normal income, such as a salary.

Annuity income is partially taxable based on IRS tables, and what is called the exclusion ratio, which determines how much of the income stream is your own after tax investment and what is income from the insurance company.

fd
__________________
FinancialDave is offline   Reply With Quote
Old 03-11-2013, 12:31 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,470
I'm not sure if an annuity is necessarily a good choice. The internal rate of return on the 10 and 15 year period certain annuities on immediateannuities.com are 1.2% and 1.9%, respectively, by my calculations.

With 12 month CDs around 1% and 10 year CDs around 2%, I wonder if a CD or CD ladder might be better. At least with CDs if for some reason you need access to your money you can get it. If you buy a SPIA, you can't get to your money if you need it.

If SPIAs were paying more than CDs I might have a different view, but to me the ability to access you funds is important.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   Reply With Quote
Old 03-11-2013, 01:45 PM   #5
Recycles dryer sheets
 
Join Date: Mar 2013
Location: Walnut Creek CA
Posts: 63
Quote:
Originally Posted by pb4uski View Post
I'm not sure if an annuity is necessarily a good choice. The internal rate of return on the 10 and 15 year period certain annuities on immediateannuities.com are 1.2% and 1.9%, respectively, by my calculations.

With 12 month CDs around 1% and 10 year CDs around 2%, I wonder if a CD or CD ladder might be better. At least with CDs if for some reason you need access to your money you can get it. If you buy a SPIA, you can't get to your money if you need it.

If SPIAs were paying more than CDs I might have a different view, but to me the ability to access you funds is important.
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?
__________________
rodiy2k is offline   Reply With Quote
Old 03-11-2013, 01:56 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,979
Quote:
Originally Posted by rodiy2k View Post
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.
I had the very same question re: what annuity yields might do when interest rates rise and was never able to find answers via Google despite several attempts. And maybe you've already noticed, but I confess that I used the immediateannuity.com site many times before noticing the site itself had some very good history/reference info. Check it out Annuity Trends - Interest Rate Trends.

It shows history on interest rates, inflation and what various types of annuity yields were during the same period. I thought it was really helpful, once I stopped overlooking what was right under my nose.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 03-11-2013, 02:17 PM   #7
Thinks s/he gets paid by the post
 
Join Date: Jul 2012
Location: Mississippi
Posts: 1,878
You can have the earnings from a CD deposited to a checking account or mailed to you. It doesn't have to be reinvested in the CD. Discover has a 10yr at 2% and there are some 5yr @ 1.8%. With a CD, if rates takes big jump you can break the CD ( for a penalty ) and reinvest at the new rate. At these rates an IA is mostly just giving you your own money back.
__________________
rbmrtn is offline   Reply With Quote
Old 03-11-2013, 04:29 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,820
Quote:
Originally Posted by pb4uski View Post
I'm not sure if an annuity is necessarily a good choice. The internal rate of return on the 10 and 15 year period certain annuities on immediateannuities.com are 1.2% and 1.9%, respectively, by my calculations.

With 12 month CDs around 1% and 10 year CDs around 2%, I wonder if a CD or CD ladder might be better. At least with CDs if for some reason you need access to your money you can get it. If you buy a SPIA, you can't get to your money if you need it.

If SPIAs were paying more than CDs I might have a different view, but to me the ability to access you funds is important.
+1
The typical reason for buying a SPIA is that people want income streams they can't outlive. If I wanted income for a fixed period, I'd look at laddered CDs first. The key is to do the numbers.
__________________
Independent is offline   Reply With Quote
Old 03-11-2013, 05:23 PM   #9
Recycles dryer sheets
FinancialDave's Avatar
 
Join Date: Nov 2012
Location: Olympia
Posts: 110
The smarter move if you must have immediate annuities, is to ladder them over 5-10 years. This will hopefully hedge your interest rate risk. In the meantime I would still max out the I-bond route, if you aren't going to invest in a good Total Stock Market Index Fund.
__________________
FinancialDave is offline   Reply With Quote
Old 03-11-2013, 05:28 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,979
Quote:
Originally Posted by FinancialDave View Post
The smarter move if you must have immediate annuities, is to ladder them over 5-10 years. This will hopefully hedge your interest rate risk. In the meantime I would still max out the I-bond route, if you aren't going to invest in a good Total Stock Market Index Fund.
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...
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 03-11-2013, 05:37 PM   #11
Recycles dryer sheets
Richard4444's Avatar
 
Join Date: Jul 2011
Location: South Florida
Posts: 402
Timing the rise in interest rates sounds too much to me like timing the market. I think purchasing SPIAs using a ladder and keeping the remainder in CDs would relieve a lot of anxiety and having to deal with the 'wait one or two more year(s)' syndrome.
__________________
Richard4444 is offline   Reply With Quote
Old 03-11-2013, 05:41 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,979
Quote:
Originally Posted by Richard4444 View Post
Timing the rise in interest rates sounds too much to me like timing the market. I think purchasing SPIAs using a ladder and keeping the remainder in CDs would relieve a lot of anxiety and having to deal with the 'wait one or two more year(s)' syndrome.
I would agree if interest rates could go up or down, but there's almost no downside possible. I must be missing something (really) unless...

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?
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 03-11-2013, 06:27 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,525
(this might deserve its own thread)

There was a pretty interesting video on M* (with transcript available) that discusses why retirees avoid annuities. Reasons Retirees Avoid Annuities

One point I found interesting, was that customers were pretty good at self-selecting. So unless the annuities were offered by a pension system that pooled everyone in a large population, the "pooling" effect was reduced, thus reducing the payouts. I hadn't thought of that, nor that mostly people who felt fairly confident of longevity (and apparently for good reason) would buy one.

This perhaps explains some of the discrepancy between the pension deals some folks can get from their employer versus buying an annuity on their own with a lump sum payout.

I thought it was a pretty interesting presentation but didn't know where to share it.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote
Old 03-11-2013, 06:32 PM   #14
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,139
Quote:
Originally Posted by audreyh1 View Post
(this might deserve its own thread)

There was a pretty interesting video on M* (with transcript available) that discusses why retirees avoid annuities. Reasons Retirees Avoid Annuities
Agreed it deserves its own thread - and it already has one: M* article on some of the problems with SPIAs
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 03-11-2013, 06:33 PM   #15
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
I do not think it makes much sense to buy SPIAs until one reaches 70-80+ years of age, to make the most of mortality credits.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 03-11-2013, 07:01 PM   #16
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 719
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.
__________________
rayvt is offline   Reply With Quote
Old 03-11-2013, 07:11 PM   #17
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,613
Quote:
Originally Posted by audreyh1 View Post
One point I found interesting, was that customers were pretty good at self-selecting. So unless the annuities were offered by a pension system that pooled everyone in a large population, the "pooling" effect was reduced, thus reducing the payouts. I hadn't thought of that, nor that mostly people who felt fairly confident of longevity (and apparently for good reason) would buy one.
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.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 03-11-2013, 07:24 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,470
Quote:
Originally Posted by rodiy2k View Post
.....Any input?
You could have a ladder of CDs that flow into an online savings account as they mature and have the online savings account make an automatic monthly transfer of a fixed amount to your checking account.

You might make slightly less than a IA but could access you money if needed and if rates did increase you could break the CDs and reinvest at the higher rates.

Think of it as rolling your own IA.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   Reply With Quote
Old 03-11-2013, 09:21 PM   #19
Recycles dryer sheets
 
Join Date: Mar 2013
Location: Walnut Creek CA
Posts: 63
Quote:
Originally Posted by Midpack View Post
I had the very same question re: what annuity /URL].

It shows history on interest rates, inflation and what various types of annuity yields were during the same period. I thought it was really helpful, once I stopped overlooking what was right under my nose.
Thanks for that information. I never thought t look at historical information
__________________
rodiy2k is offline   Reply With Quote
Old 03-11-2013, 09:50 PM   #20
Recycles dryer sheets
 
Join Date: Mar 2013
Location: Walnut Creek CA
Posts: 63
Lots of good information. Thanks to everyone who contributed. Didn't really convince me that the IA idea is a bad thing even given the horrible rates of return. Bottom line is that we will have a cash infusion of about 600k and savings of about 65 to 100k in liquid taxable investments or CDs

My biggest dilemma is the smartest way to create an income stream that is the only source of income for about 3 to 5 years and then will be supplemented by a pension first (eligibility will start at about that time depending in the finalized revisions of the company budget that will change the retirement age from 50 to 52 or 55) and will be supplemented more by Roth withdrawals at age 59 1/2, 6 years onto ER

I want the income stream to be enough to generate about 45 to 50k from the beginning of ER until the 600k outlives its income steam at which time we can rely on the pensions, 2 Roths and two rollovers. Logically that leaves an approximate time frame of 10 to 12 years. Whether or not the CD laddering will outweigh the limitations of the non lifetime AI is the main question.

I should also mention that we intend to use the first 10 years as a bonus for being able to retire early with lots of activity and travel (mostly around SE Asia which is inexpensive) leaving the US helps enable us to live higher off the hog on 50k
__________________

__________________
rodiy2k is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 12:01 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.