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immediate or deferred annuities
Old 04-08-2017, 03:39 PM   #1
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immediate or deferred annuities

I am thinking that when I retire in a few years I will probably buy an annuity with some part of our savings because I do not have a pension and I will feel better knowing that I have some "guaranteed" income each month for my and my wife's life. I am not talking about a variable annuity - no interest in that. I would buy either an immediate annuity or one that is deferred for a few years because I will have another source of income for a few years post retirement.

My tentative idea would be to buy several of these, over a period of time, so that I can: (1) reduce counterparty insolvency risk (by purchasing from different issuers); (2) stay below the state guaranty limit for each purchase, and maybe (3) by buying at different times diversify from an interest rate perspective.

For those who think immediate or deferred annuities are a reasonable option, does the strategy outlined above make sense to you? For state guaranty purposes, is the applicable state the one that you live in when you buy the annuity? Or the state that you live in at the time of the default/insolvency?

Any other considerations? (I realize there are good reasons not to buy an annuity at all, but I am looking for considerations for someone who IS going to buy some annuities, but wants to do it in the smartest way).
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Old 04-08-2017, 03:45 PM   #2
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My crystal ball is telling me that interest rates will likely rise in the next few years. Of course, it's been proven wrong in the past so I can't guarantee results.

But if interest rates do rise, a deferred annuity makes no sense right now. If you want the income stream immediately you have to live with today's low rates. But if you don't even need the money for a number of years, why not wait and see if interest rates rise? There's little chance they will go down, so you don't have much to lose by waiting.
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Old 04-08-2017, 03:57 PM   #3
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My crystal ball is telling me that interest rates will likely rise in the next few years. Of course, it's been proven wrong in the past so I can't guarantee results.

But if interest rates do rise, a deferred annuity makes no sense right now. If you want the income stream immediately you have to live with today's low rates. But if you don't even need the money for a number of years, why not wait and see if interest rates rise? There's little chance they will go down, so you don't have much to lose by waiting.
Yea -- that makes sense -- but (if I can tolerate it) I probably won't retire for a few more years. So we will see where rates are at that point. Higher than now says my wild guess.
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Old 04-08-2017, 04:21 PM   #4
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I am a bit confused about your inclusion of a deferred annuity in the mix. They are generally used in the accumulation stage as a tax shelter and should have many, many investment options some not tied to interest rates directly.
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Old 04-08-2017, 06:05 PM   #5
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Just off the top of my head I'd guess that if you want to go the deferred route you'd be better off putting the purchase money in a Roth then liquidating the Roth to purchase an immediate annuity at the point where you need to do that. The insurance company is going to rake off a handsome fee during the deferral period and, as @Ready says, rates seem likely to rise for at least a while. So the immediate annuity might well be cheaper when you buy it.

And ... when that day comes, you may decide you don't need the annuity at all. Better to remain uncommitted until commitment is necessary.
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Old 04-08-2017, 06:12 PM   #6
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Just off the top of my head I'd guess that if you want to go the deferred route you'd be better off putting the purchase money in a Roth then liquidating the Roth to purchase an immediate annuity at the point where you need to do that. The insurance company is going to rake off a handsome fee during the deferral period and, as @Ready says, rates seem likely to rise for at least a while. So the immediate annuity might well be cheaper when you buy it.

And ... when that day comes, you may decide you don't need the annuity at all. Better to remain uncommitted until commitment is necessary.
Agreed - I'm taking the wait-and-see approach on this as well. My dad did the same - he is almost 90 now and still hasn't pulled the trigger... 25 years ago, he was convinced that he eventually would.
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Old 04-08-2017, 06:31 PM   #7
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Originally Posted by COcheesehead View Post
I am a bit confused about your inclusion of a deferred annuity in the mix. They are generally used in the accumulation stage as a tax shelter and should have many, many investment options some not tied to interest rates directly.
In my case it would not be long term deferral. It is just that I get some money each year for 5 years after I retire. So I would defer the annuity payments, if I went this route, until the end of that period.
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Old 04-08-2017, 07:45 PM   #8
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I'd feel more comfortable if I spread it out over multiple companies.

I don't see much value in buying a deferred annuity, I'd just buy when I'm ready to start payments. It's not like life or health insurance where a health issue could prevent you from buying.

I agree that locking in today's low interest rates for a long time can be frustrating. Note that if you're selling a bond mutual fund to get the money, there is some reduction in the interest rate risk. i.e. the "risk" is that interest rates will go up, premiums will drop, but you'll miss that because you bought too soon. But, if interest rates go up, your bond mutual fund price will fall. So you won't get as much when you sell.

I said "some" reduction because the duration of most bond funds is shorter than the duration of bonds that insurance companies use to fund SPIAs.
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immediate or deferred annuities
Old 04-09-2017, 08:24 AM   #9
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immediate or deferred annuities

Depending on your needs - as an example If you were to buy 50% IDV and 50% DVY both are highly diversified mutual funds holding dividend stocks I would argue that you'd get the same thing. But it would grow with inflation. I've looked at dividend flows and they aren't quite as fickle as valuations. That is to say the price of SO (Southern Company) will vary with the market it dividend stream is pretty steady. Plus it is taxed at 15%.
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Old 04-09-2017, 11:25 AM   #10
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I have purchased two SPIAs one year apart and will periodically do so to create a SPIA ladder with the $ that doesn't need to go to any heirs, and is within the % of my assets that I am comfortable with. So far, I have been receiving a return of 6.93% 'guaranteed' which is higher than I can 'guarantee' to get from any other mindless investment (although I understand that this is insurance and not an investment). I think it will be a very long time until Bonds or CDs yield 6.93% and if they do, I will have accumulated more than otherwise. This is within my Bond allocation, not confusing it with growth/stocks.

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Old 04-09-2017, 01:07 PM   #11
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I have purchased two SPIAs one year apart and will periodically do so to create a SPIA ladder with the $ that doesn't need to go to any heirs, and is within the % of my assets that I am comfortable with. So far, I have been receiving a return of 6.93% 'guaranteed' which is higher than I can 'guarantee' to get from any other mindless investment (although I understand that this is insurance and not an investment). I think it will be a very long time until Bonds or CDs yield 6.93% and if they do, I will have accumulated more than otherwise. This is within my Bond allocation, not confusing it with growth/stocks.

Rich
That 6.93% is not an investment return.....its interest, principal and mortality credits.

I would not consider a fixed deferred annuity right now as interest rates will probably be higher in a few years, but an SPIA ladder for a portion of your funds is just fine. There are studies that people with pensions/SPIAs/SS are happier that those relying on less guaranteed income streams.

I've always liked the idea of annuitizing an income floor so that with SS you can buy the essentials. However, recent interest rates have made annuities such bad value for money that even with mortality credits it was difficult to justify them when a CD/bond ladder was as good for a majority of people.
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