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

[Mr._johngalt]

You are the master of puns!

Yes I am, and you have been punished enough.

JG

 

[HFWR]

You guys are making my brain hurt...there are too many variables here: ROR, Longevity, Inflation, Taxes, SWR, personal goals, etc. I think this problem is way too complex to "talk out" a reliable solution.

Surely there is some powerful software available that can accurately model this problem?

Here...

 

[brewer12345]

Is this perhaps a rather heroic assmumption?

Ha

Heh, speak for yourself, Ha. Some of us venture out beyond TIPS once in a while.

 

[haha]

Heh, speak for yourself, Ha. Some of us venture out beyond TIPS once in a while.

Including me. But I thouight that if one is going to take SS early he would likely stick to a very conservative path with that money. To gamble and win is great, to gamble and lose sucks. Even if the gambles are well informed.

Ha

 

[sgeeeee]

I used to say, "Tell me when you are going to die and I will tell you when to start taking social security benefits." Now I realize that even that's not true. I don't want to optimize my benefits, I want to optimize my satisfaction. Tell me how much the 70 year old version of me will enjoy my 70 year old benefits as compared to the 62 year old version of me and I can begin to answer this question. Of course factors that contribute to the enjoyment of benefits question include: how much you have in investments, how much you spend annually, how long you are going to live, how healthy and active you will be, etc. . . .

This is not a deterministic problem.

 

[mathjak107]

This has been my reaction to the annuity arguments as well. If you think in terms of investments (building a bigger pile for whatever reason - leave it to heirs, pay for assisted living in your 90s, etc.) annuities and delayed SS are not a good deal. If you think in terms of getting a larger safe income stream (e.g. with a 4% SWR you are barely able to cover your lifestyle) annuities and delayed SS can get you higher spendable income at the expense of a smaller estate.

boy of you look at the earlier discussions we had an annuties i have been saying this for sooooooo long. finally you guys are getting the point that annuties arent a bad thing.

it all depends on why you want them.

now lets think about taking ss later at 70 and utilizing an immeadiate annuity too.

 

[2B]

boy of you look at the earlier discussions we had an annuties i have been saying this for sooooooo long. finally you guys are getting the point that annuties arent a bad thing.

it all depends on why you want them.

now lets think about taking ss later at 70 and utilizing an immeadiate annuity too.

Immediate annuities can be wonderful things. The problem with every one I've seen is that they are poor investments. After being a poor investment, they are frequently not used/purchased correctly.

Every other annuity I've run across should be outlawed. I have never seen any reason why anyone would be better off buying them.

Social security is one annuity almost all of us have already bought. I beleive that for what I've put in (including employer contributions) it is also a poor investment and I would have been better off keeping my money. Unfortunately, that was not one of my choices. Since I've got it, the goal is to maximize the return.

 

[Cut-Throat]

Now I realize that even that's not true. I don't want to optimize my benefits, I want to optimize my satisfaction. Tell me how much the 70 year old version of me will enjoy my 70 year old benefits as compared to the 62 year old version of me and I can begin to answer this question.

This is exactly why you should delay your benefits to age 70. Because you get to spend more at age 62-70. If you don't have to be saddled with an SWR of 4% at age 62, because you know down the road that your benefit checks will cover you, you can optimize your satisfaction.

 

[FIRE'd@51]

http://www.ssa.gov/retire2/delayret.htm

Notice that for those born later that the rate of increase in delaying SS after full retirement age is larger (per year) than for those born earlier.

If I remember correctly the benefit at 70 should be independent of which year you were born. Perhaps Martha (or someone else) knows more about this.

MB,

I have had a chance to look at the links you posted more carefully. I agree that the ratio of age 70 benefit to the age 62 benefit increases for those born later. The highest ratio would occur for those born in 1960 or later (full retirement age 67).

If we take a full benefit at age 67 = 100

The benefit at age 70 = 100 + 3 x 8 = 124 (from your second link)

The benefit at age 62 = 70 (from your first link)

The ratio = 124/70 = 1.77

This ia a 77% increase, not 82%

 

[FinanceDude]

Immediate annuities can be wonderful things. The problem with every one I've seen is that they are poor investments. After being a poor investment, they are frequently not used/purchased correctly.

Every other annuity I've run across should be outlawed. I have never seen any reason why anyone would be better off buying them.

Social security is one annuity almost all of us have already bought. I beleive that for what I've put in (including employer contributions) it is also a poor investment and I would have been better off keeping my money. Unfortunately, that was not one of my choices. Since I've got it, the goal is to maximize the return.

Well.............I could not disagree more............. I think immediate annuities are a crap shoot. Even with period certain, the IRR is less than 3%. $1000 a month now may not look so hot 10 years from now, when your medi-gap and LTC insurance have doubled...............

Albeit RARE instances, it is always better to have CONTROL............

And don't get me started about Social Security...........I'll be lucky to get any...............

 

[MasterBlaster]

MB,

I have had a chance to look at the links you posted more carefully. I agree that the ratio of age 70 benefit to the age 62 benefit increases for those born later. The highest ratio would occur for those born in 1960 or later (full retirement age 67).

If we take a full benefit at age 67 = 100

The benefit at age 70 = 100 + 3 x 8 = 124 (from your second link)

The benefit at age 62 = 70 (from your first link)

The ratio = 124/70 = 1.77

This ia a 77% increase, not 82%

You are probably right. I just used the little SSA calculator to get my numbers. Perhaps I was in error.

Nonetheless the numbers are pretty close to what I posted, and the concept of delaying SS by spending down your nest-egg which is made-up for by the increased SS payment is still valid.

I haven't quite caffinated yet so I'm not going to jump into a discussion of the finer points on SS payouts just yet.

 

[MasterBlaster]

Lets beat this thing to death and have even more fun with immediate annuities, social security and safe withdrawal rates...

From my example posted earlier in this thread the 70 year old person would get around $14260 extra SS at 70 versus retiring at 62.

So what is that payment stream worth ?

I played around with the Vanguard immediate annuity calculator http://www.aigretirementgold.com/vlip/VLIPController?page=RequestaQuote

So based on the Vanguard calculator for a 70 year old man getting that $14k immediate annuity payment per year adjusting the payment for (CPI) inflation each year I get a value of ~ $207392.

Now using my example of depleting your nest-egg with a 4% SWR I suggested that waiting until 70 years old to collect SS was worth more than $356k.

so, I believe that the waiting approach clearly comes out ahead.

- Any comments ??

 

[donheff]

Social security is one annuity almost all of us have already bought. I beleive that for what I've put in (including employer contributions) it is also a poor investment and I would have been better off keeping my money. Unfortunately, that was not one of my choices. Since I've got it, the goal is to maximize the return.

That is something almost everybody felt in the booming 90s. I always assumed the sentiment was probably right since I could, of course, expect to earn about 10%/yr if I invested my own funds. 8) But the reality is, we can expect quite a bit less after inflation. So I decided to run a *reasonable* earnings scenario against DW's SS statement (I was a Fed without SS so I can't use my own). DW has paid 30 years of SS at the maximum rate and is 54. I projected her first year of SS earnings backwards for 10 years to approximate where she would be with 40 years in right now (this actually overstates her contribution since SS didn't tax as much income going back those ten years). I calculated the "contribution" as 14% of SS earnings and calculated the ROR as 4% real/yr - a rate that seems fair to me based on everything I have heard around here. Under that scenario she would have $432,937 to invest in an annuity today. I guesstimated an annuity with survivor benefit for a 66 YO to pay 5%/yr. That would be $21,647 or $1804/mth. Her SS statement says she would get $2152/mth at 66 ($2852 at 70).

Could you do better -- sure. Would you do better? --

 

[2B]

Well.............I could not disagree more............. I think immediate annuities are a crap shoot. Even with period certain, the IRR is less than 3%. $1000 a month now may not look so hot 10 years from now, when your medi-gap and LTC insurance have doubled...............

Albeit RARE instances, it is always better to have CONTROL............

And don't get me started about Social Security...........I'll be lucky to get any...............

Did you read my post? I said the idea of an immediate annuity is good concept but they don't make sense based on the poor IRR of all of the available products.

I also said that since we're stuck with SS we should attempt to maximixe its value.

 

[2B]

This is exactly why you should delay your benefits to age 70. Because you get to spend more at age 62-70. If you don't have to be saddled with an SWR of 4% at age 62, because you know down the road that your benefit checks will cover you, you can optimize your satisfaction.

Money is money CT. The key is that if the SS is safely growing at better than your SWR (or whatever) you are better off spending you own money and letting SS grow. If you die young, your heirs lose. If you deplete your capital, SS won't be enough to cover assisted living or nursing care.

People on the edge don't have a choice. Most people on this forum do.

 

[Cut-Throat]

Money is money CT. The key is that if the SS is safely growing at better than your SWR (or whatever) you are better off spending you own money and letting SS grow. If you die young, your heirs lose. If you deplete your capital, SS won't be enough to cover assisted living or nursing care.

People on the edge don't have a choice. Most people on this forum do.

And money is only money if you're alive! I don't think anyone on this forum would deplete their capital by taking SS at age 70. - Heirs? - We don't need no stinkin heirs!

As a side note - the thought of going in to assisted living or nursing care is far more scary to me than not being able to afford it!

 

[JohnEyles]

... the idea of an immediate annuity is good concept but they don't make sense based on the poor IRR of all of the available products.

We seem to keep going in circles about this ... Can we agree on a few
things ?

If you live to your life expectancy, the ROR is pretty poor, maybe 3% or a
little more (my analysis says that for my current Vanguard quote, a 54yo
male, I get a WR of about 4.5% with 3% inflation adjustment, which
computes to a ROR of 3.6% if I live to my life expectancy of 78yo).

If you live beyond your life expectancy, the ROR goes up sharply. (For my
quote, I find the ROR is 5% if I live 5yrs longer, and 5.8% if I live an extra
10 yrs). So they're not a bad idea if you worry about outliving your money;
but who isn't (unless you know your health is bad) ?

Due to inaccessiblity of principal, it's a bad idea to commit more than
somewhere in the range of 25-50% of your portfolio to a SPIA.

It's insurance against outliving your money (there, I said it). Like any
insurance (moreso than most) it's important to pick a company that is
reliable, and probably to diversify among companies. It's important not
to pay excessive fees. I think it's interesting that the CPI-adjusted
SPIA (the only one I know of being the Vanguard/AIG one) offers another
level of insurance - insurance againsy excessive inflation; it seems to provide
payouts roughly halfway between the 3% and 4% cases.

 

[Cut-Throat]

Did you read my post? I said the idea of an immediate annuity is good concept but they don't make sense based on the poor IRR of all of the available products.

Also, if you seem to be interested in a bigger pile of cash when you die vs. spending more while your alive.

This seems to be the big issue for me. I don't care how much I get to pile up. I care about how much of it I get to spend.

 

[2B]

And money is only money if you're alive! I don't think anyone on this forum would deplete their capital by taking SS at age 70. - Heirs? - We don't need no stinkin heirs!

As a side note - the thought of going in to assisted living or nursing care is far more scary to me than not being able to afford it!

Have you flip flopped??

I thought you were a 70 yr old SS man?

I would personally rather discuss assisted living with my good friend Mr. Ruger or even Mr. Remington before going. Unfortunately, the data I have is that the mind goes beyond recognizing the issue or the body blows out like a cheap retread leaving you without the option.

Assisted living costs bucks. You may not care about your heirs but they probably will care about coming up with the extra cash to get you in a good facility. I can assure you my in-laws would be in a different place if I didn't see their assets covering their stay for at least the next 10 years.

My goal is not to provide for my MIL and FIL's comfort while working until I'm 72 so I can retire broke.

 

[Mr._johngalt]

This seems to be the big issue for me. I don't care how much I get to pile up. I care about how much of it I get to spend.

I've noticed. Not that there's anything wrong with that.

JG

 

[Cut-Throat]

Have you flip flopped??

I thought you were a 70 yr old SS man?

I am. What makes you think I flopped? - Just because somone might delay SS to age 70, that would only cost around $150K-$200K. Most of us here have well over a Million? That would hardly deplete their portfoio. In fact it would protect the last $500K from totally depleting.

 

[2B]

I am. What makes you think I flopped? - Just because somone might delay SS to age 70, that would only cost around $150K-$200K. Most of us here have well over a Million? That would hardly deplete their portfoio. In fact it would protect the last $500K from totally depleting.

I'll bet your "way" is more than my "way" but I am trying to get my wife to go back to work. I keep telling her it will get her mind off her parents. That would be good if for no other reason I get to hear about something other than their day and menu. I'd love hearing about her office's petty politics again just for a break.

 

[Mr._johngalt]

I would personally rather discuss assisted living with my good friend Mr. Ruger or even Mr. Remington before going.

That's my plan. I now leave the key to the gun cabinet right in the lock
in order to eliminate any need to search for it.

JG

 

[2B]

That's far too messy! - I think I would buy a bottle of $200 Cabernet. Maybe 2 bottles. Go out to the Lexus in the Garage with some good Jazz CDs. - That way you can still have an open casket and the Mortician is not challenged beyond his abilities.

You're right. After two bottles of cabernet, I'd miss. I'd be forced to use an old Chevy Pickup.

 

[FIRE'd@51]

We seem to keep going in circles about this ... Can we agree on a few
things ?

If you live to your life expectancy, the ROR is pretty poor, maybe 3% or a
little more (my analysis says that for my current Vanguard quote, a 54yo
male, I get a WR of about 4.5% with 3% inflation adjustment, which
computes to a ROR of 3.6% if I live to my life expectancy of 78yo).

I agree with your numbers, but they are nominal returns. After subtracting the 3% inflation, the real return is only 0.6%. The 30-yr TIPS has a YTM of 2.25%. The price for the insurance (1.65% per year) just seems too high (to me, anyways). I keep thinking there has to be a better way to do this.

Does anyone know if they strip TIPS into an interest-only and principal-only part, like they began doing with mortgages 20 years ago (IO's & PO's)? If they do, the interest-only part could IMHO be very useful to some of us. If that doesn't exist, is there a zero-coupon TIPS? It could be shorted against the regular TIPS to create the interest-only piece, and we would have a 30yr annuity at a fair price.

Take a 30-yr TIPS bought at auction with a 2.25% coupon for 100

PV of principal repayment for 30 yrs at 2.25% = 51.30

100 - 51.30 = 48.70 = cost of annuity

2.25/48.70 = 4.6% SWR