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

[2B]

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Originally Posted by mathjak107 for people with little assets even waiting until 70 to take ss may not do the trick for them. for them an annuity would be good.

If they have so few assets, the amount of an annuity they could buy would be irrelevant. The longer anyone can wait the higher to payout will be.

I still assert that everyone should plan on holding about $250,000 for "end of life" care -- inflation adjusted -- unless they are looking forward to Medicaid or assuming their children will be happy to pay for it.

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Originally Posted by 2B You have one of the best annuities in the world available to you -- social security. You can enhance your return by deferring your withdrawl date until age 70. The cost is whatever your earlier benefit was for a few years. Your payment for life goes up about 8.5% for every year you wait -- plus it's inflation protected. That's probably a better return for your money than you'll get from any annuity but I haven't run the numbers.

I'd like to see those numbers. IOW - The cost of the wait vs. the monthly payout. To me it is not relevant if you don't live long enough to collect it. When I'm dead, I am going to stop worrying about money - I promise!

I'd would be nice to see the numbers expressed somehow as SWR - IOW - Amount you are giving up (by spending your portfoilo down) vs. The extra Money payout as a % of the money spent to wait. - The decision would be a little easier then.

[2B]

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Originally Posted by Cut-Throat I'd like to see those numbers. IOW - The cost of the wait vs. the monthly payout. To me it is not relevant if you don't live long enough to collect it. When I'm dead, I am going to stop worrying about money - I promise! I'd would be nice to see the numbers expressed somehow as SWR - IOW - Amount you are giving up (by spending your portfoilo down) vs. The extra Money payout as a % of the money spent to wait. - The decision would be a little easier then.

Deferring SS all comes down to how long you plan on living. If you live off your assets you can grow your SS withdrawl. The SS Administration states that they design it to be equivalent based on life expectancies. That's better than the insurance companies that discount the actuarial tables by assuming only healthy people buy immediate annuities.

I don't have time or inclination to run the detailed numbers. The concept is the same as the logic behind an immediate annuity. In my case, I can take $1542/month at 62. I can wait until 70 and get $2720/month. That means (ignoring inflation increases) I can pay $148,032 over those 8 years and get an extra $14,136 annually (a 9.55% payout -- gasp ). I would break even around age 80 but don't forget my spouse is entitled to my payment on my death instead of only half until then. Questions abound about the proper interest rate to create a NPV for the annual deferrals and the future income streams. Inflation adjustments would also be on the higher amount creating an even larger delta -- making it more favorable. I will say that FIRECalc favors taking the money at 62 based on my runs. Scott Burns advocates waiting until 70 if you have the cash to defer.

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%!

My Social security numbers are very close to yours! And I never looked at it this way before. I used to think in terms of living long enough to recoup the difference. But if you look at it in the 'Insurance Way' - It really does not matter how long you live.

- For someone that has assets and wants to die broke this is almost a no-brainer! - Almost a 10% SWR on about $150K for delaying to age 70! -

Everytime I think I understand this stuff, something like this comes along and totally changes my mind.

Then there is also the question of what to do with the Spouse S.S. - Since you can only collect one in the event of a death. I have heard that it may be wise to delay 1 S.S. and take the other early?

This is where it can get a little tricky.

[JohnEyles]

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Originally Posted by Cut-Throat 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]

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Originally Posted by Cut-Throat 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]

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Originally Posted by JohnEyles 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]

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Originally Posted by donheff 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.

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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]

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Originally Posted by Cut-Throat 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.

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Originally Posted by Rich_in_Tampa 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.

Quote:

Originally Posted by 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.

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.