Is an Annuity a good way to get over a SWR of 5%?

[JohnEyles]

Re: Jonathan Clements Article today - Contrary Advice

If you die early, yes it was a poor financial decision. - But you're dead, so why should you care?

Yes, exactly, except of course for the issue of heirs for whom you may wish to provide.
But I would certainly never put more than 25% of my money into a SPIA, so I figure
my heirs (if any) would do ok on the remaining 75% and other bequeathed property.

My main reservation about SPIA is Brewer's oft-repeated warning
about the risk of insolvency of the insurance companies. I think it makes as much
sense to diversify sources of income stream as it does to diversify investments. So I
intend a Vanguard/AIG SPIA with some money, a TIAA-CREF variable-annuitization
with some, and either a "self" or purchased annuitization to make up SS 'til 64yo or
thereabouts. The 3 combined will be about 40% of my portfolio - but no two will
be with the same company, one is with a company in which even Brewer puts faith,
and one is only for 10 years or so (less scary in terms of potential insolvency and
inaccessible principal).

If you look in one of the TIPS threads, you will see a little spreadsheet analysis
that shows laddered TIPS doing as well as the current Vanguard/AIG quote on
a CPI-inflation-adjusted SPIA. Big caveats - it assumes TIPS coupon rate
stsy at 2.375% and the price is always par. Also, the SPIA wins big if you do
not put a guaranteed-certain period, which seems only fair in the comparison,
but doesn't matter if contribution to the inheritance is irrelevant.

 

[mathjak107]

you need the assets to live on if you retire before 66 or 70 if you dont take ss and most people that an annuity would be good for probley wont be able to retire until 70 anyway .

my ex-wife is a spender she will blow thru any amount of money she gets her hands on. For her to retire she will end up working until 70 im sure but even then will need to find a way to increase her withdrawl rate.

an annuity is perfect for her. she could have more income from the annuity then she could ever get on her own.

for most of us with some assets an annuity is not something we need, nor is delaying ss.

i ran the numbers so many different ways and waiting to draw ss at 62 vs 65 on a starting amount of 2 million resulted in either a slightly higher withdrwal rate or if i kept the withdrawl rate the same it gave us an extra 50,000 left at the end.

while 50,000 bucks sounds like alot in 30 years its probley like an extra 5,000 or so. hardley worth waiting for.

 

[OAG]

Inflation 1980: 14.3%
Inflation 1981: 11.2%
Inflation 1982: 7.4%

Don't know what it was before that but it has not exceeded 5.4% since 1983. For some reason my sorce for these numbers skipped 1983 but I think that number was 4.3%. No indication of the future but a 10% cap would be pretty generous as I am sure the insurance companies would never expect it to happen -- which goes to safety of the plan.

 

[donheff]

Well, this has been a real eye-opener to myself! - I did take an hour or so and create a basic spreadsheet and my numbers agree with yours! It seems that delaying SS for myself is like buying an annuity for about $150K that has a payout of over 9.5%!

This makes sense to me but it is really the same concept as buying an SPIA. If you die the day before you start social security that $150K is lost. Yet you (sensibly, IMHO) look at the positive (9.5% WR) effective over the long haul if you live. This is the same equation someone faces in deciding to annuitize or not. On the one hand, he can "safely* pull 4% per year and probably leave a nice nest egg or go on a spending spree in his final days. On the other hand, he can get 5.x% per year (inflation protected to 10% - not shabby) as long as he lives and leave no nest egg. On an actuarial basis the former is a far better financial deal. But if 4% means a so-so life style in retirement and 5.x% means fun, fun, fun, the emotional equation is entirely different.

 

[donheff]

Re: Jonathan Clements Article today - Contrary Advice

My main reservation about SPIA is Brewer's oft-repeated warning
about the risk of insolvency of the insurance companies. I think it makes as much
sense to diversify sources of income stream as it does to diversify investments. So I
intend a Vanguard/AIG SPIA with some money, a TIAA-CREF variable-annuitization
with some, and either a "self" or purchased annuitization to make up SS 'til 64yo or
thereabouts. The 3 combined will be about 40% of my portfolio - but no two will
be with the same company, one is with a company in which even Brewer puts faith,
and one is only for 10 years or so (less scary in terms of potential insolvency and
inaccessible principal).

Have you looked at your state annuity guarantee policies John. Some of them are pretty generous (I think up to $250K). If the coverage applies to multiple policies you will be at even lower risk with three.

 

[Rich_by_the_Bay]

One variable which I think is important but hard to factor in to the calculations: if you purchase a SPIA, it takes pressure off your withdrawals. These funds are left to compound in the stock market -- opportunity earnings, as it were.

Your SPIA payments may be fixed, but the opportunity earnings on the money thus untouched continues on in real dollars. Still, all of this can be set up independently and self-funded without the insurance overhead. So in the end, I still look upon a SPIA as longevity insurance and/or enforced disciplline. I'll probably have a small SPIA as part of diversification when the time is right.

 

[donheff]

Just to throw some numbers up concerning how much you can get with an inflation protected SPIA. I used Vanguard's calculator since I am not aware of any other online calculator that will give you instant numbers on an inflation protected (10%) SPIA.
- Two 65 year olds taking an inflation protected
100% joint SPIA would get ------------------------------ 5.3%/year.
- The 65 YO man taking a self only annuity would get ------ 6.76%year
- The 65 YO Woman taking a self only annuity would get --- 6.1%/year

So the old single guy with $1M could spend $40K safely versus $67K - likely big pot at the end vs zip.

Or he could compromize at $53.5K/year by annuitizing 1/2 of his nest egg - pulling $33.5K from the annuity and $20K using 4% of the remaining nest egg.

 

[Rich_by_the_Bay]

Just to throw some numbers up concerning how much you can get with an inflation protected SPIA.

As an alternative to inflation-guard annuities, consider getting a plain vanilla SPIA and every 3-5 years adding a small supplemental SPIA to catch up or keep up with inflation. The advantages are that a) if you don't need it, you don't buy it -- say inflation is very low or your other assets have done very well, b) you buy later and older, meaning that the same return costs you less actuarially, and c) you can diversify your insurance carriers even further as well as shorten your period of risk exposure for insolvency, since you are older. Rates may vary, but that's effectively DCA'ing, generally a good thing.

 

[Dawg52]

I'm gonna play it by ear. As I said earlier, I plan to self annuitize until age 62. At that time, I will evaluate what social security looks like for me at 62,66 and 70. Who knows, there may be cuts between now and then. I'm not closing the book on a small annuity but I think it would be prudent to wait until my 60's anyway, for a larger payout.

 

[Cut-Throat]

So the old single guy with $1M could spend $40K safely versus $67K - likely big pot at the end vs zip.

Not only that, but He would never have to be concerned with the market dropping to gut-wrenching levels! He could continue to spend without wondering if he would have enough money next year.

On the other hand, Don't discount the few people that get their daily 'sport' watching the pile grow, even though they won't get to spend it at the end. For these folks not having a pile' to watch would be truly 'gut-wrenching', and take most of the fun out of their lives.

 

[Dawg52]

On the other hand, Don't discount the few people that get their daily 'sport' watching the pile grow, even though they won't get to spend it at the end. For these folks not having a pile' to watch would be truly 'gut-wrenching', and take most of the fun out of their lives.

Thats very true. I guess we all have a little of that in us. In my case, it's gonna be more 'gut-wrenching' watching it go down. Hmmmm........maybe an annuity will help balance it out.

 

[RockMiner]

Some interesting points being made here...I especially like 2B and Cut-Throat's discussion about how waiting to take SS at 70 is like buying a 9.5% annuity. Very compelling. Even better, you are not giving the 150k to an insurance company, more like loaning it to the SS system. I have to think this "investment" is safer than with an insurance company. True, a SS benefit cut could eat into your return.

I'm trying to keep an open mind about this topic.

 

[Cut-Throat]

One variable which I think is important but hard to factor in to the calculations: if you purchase a SPIA, it takes pressure off your withdrawals. These funds are left to compound in the stock market -- opportunity earnings, as it were.

Your SPIA payments may be fixed, but the opportunity earnings on the money thus untouched continues on in real dollars.

I played around with some numbers on my spreadsheet and with a 2% 'real' return on the invested money lowers the payout at age 70 to about 8%.

The amazing part is that to lower the payout of the 'annuity' to under 4% you have to earn over 19% 'Real' interest(over inflation) every year on the money you took from SS for the 8 years until age 70! - very doubtful indeed!

I think I now understand why a lot of 'Financial writers' advise the delay of S.S. to age 70, if you can afford it!

 

[MasterBlaster]

The risk to the 9.5% annuity is that the rules will change.

An insurance company, if they don't go broke, must pay what they promised.

With SS you are at the whim of congress. So the risk is SS means testing, income-based taxation levels, and payment caps.

In my mind it works under the present rules but is not without risk.

 

[Cut-Throat]

The risk to the 9.5% annuity is that the rules will change.

An insurance company, if they don't go broke, must pay what they promised.

With SS you are at the whim of congress. So the risk is SS means testing, income-based taxation levels, and payment caps.

In my mind it works under the present rules but is not without risk.

Understand that we are talking about someone who is age 62 or greater! - When the rules change, it will be for those well under that age. Certain politicians have found out how popular it is to mess with SS. Defaulting on Treasury Bills is a likely comparison.

 

[MasterBlaster]

Understand that we are talking about someone who is age 62 or greater! - When the rules change, it will be for those well under that age. Certain politicians have found out how popular it is to mess with SS.

You may or may not be right here.

It just may be that SS gets capped at X dollars a month. When there won't be enough to go around it just may not be the best position to be in to be getting more than everyone else. Why should someone else get less just cause you are older than 62. That is one of the options that congress has to "fix" SS.

again - The SS as annuity is not a risk free option

 

[REWahoo]

I played around with some numbers on my spreadsheet and with a 2% 'real' return on the invested money lowers the payout at age 70 to about 8%.

The amazing part is that to lower the payout of the 'annuity' to under 4% you have to earn over 19% 'Real' interest(over inflation) every year on the money you took from SS for the 8 years until age 70! - very doubtful indeed!

I think I now understand why a lot of 'Financial writers' advise the delay of S.S. to age 70, if you can afford it!

We've probably had a half-dozen or more threads on this subject in the past couple of years and each time it comes up it seems like a few more light bulbs go off on the forum. In my case it was this discussion that helped me understand the possilbe benefits of delaying. As stated in that thread, this is a complex subject and it takes a while for some of us non-MENSA types to get a grasp on the subject.

 

[Cut-Throat]

Why should someone else get less just cause you are older than 62.

That is the way it is now. Most pension systems work this way also. Older people planned on benefits and can no longer adjust to them being changed. - And they Vote!

 

[Cut-Throat]

As stated in that thread, this is a complex subject and it takes a while for some of us non-MENSA types to get a grasp on the subject.

You have the natural ability to call me an idiot, and somehow I feel good about it! 8)

 

[Cut-Throat]

It just may be that SS gets capped at X dollars a month. When there won't be enough to go around it just may not be the best position to be in to be getting more than everyone else.

again - The SS as annuity is not a risk free option

Understand the Social Security is one of the only fiscally sound programs that the government is running. Won't be running in the red until 2041. Where do you think they get the money for the $200 Billion Deficit that the government is racking up today?

Also, Social Security is not the problem. Bush Jr. wanted to 'put a feather in his cap' by being the Neocon who got the FDR program eliminated. - If he was really concerned with finances of the govenment, he would have addressed Medicare first (the real problem) - Social Security only needs a few tweaks, like what was done in the early 80's.

BTW- There are no risk-free things in Life.

 

[REWahoo]

You have the natural ability to call me an idiot, and somehow I feel good about it! 8)

Well, it takes one to know one. At least I lumped you in with some pretty good company!

 

[MasterBlaster]

CT:

Can't you have a simple discussion without bringing in your bizarre worldview ?

BTW:

I disagree with you about when SS goes into the red. Some of us know that the "trust fund" was spent long ago. I predict around 2017 as the year in which the Chinese and others quit buying US gov't bonds. That will be the year when major changes are introduced. Major changes are inevitable.

 

[Cut-Throat]

CT:

Can't you have a simple discussion without bringing in your bizarre worldview ?

BTW:

I disagree with you about when SS goes into the red. Some of us know that the "trust fund" was spent long ago. I predict around 2017 as the year in which the Chinese and others quit buying US gov't bonds. That will be the year when major changes are introduced. Major changes are inevitable.

I just told you what happened last year, if you were paying attention. Nothing but history.

Bizarre World views is when someone predicts that they know what will happen in the year 2017!

 

[HFWR]

I know I'm gonna regret this... NOT!!

I'm to the right of CT on most issues, but I'll have to agree that getting rid of SS was/is one of the goals of the so-called "neocons"...

One of the first things the Iraqi "administrator" (Bremer?) did upon arriving in Iraq was institute a flat tax! Just what was needed to restore the economy...

Of course, since most of the industrial base had been "flattened", maybe it was appropriate...

 

[astromeria]

Neocons are primarily concerned with world domination foreign policy. It's trditional conservatives and garden-variety libertarians who want to destroy undermine confidence in get rid of finagle to the advantage of the well-off privatize Social Security.