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Old 08-22-2017, 08:42 AM   #1
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Hey all, I introduced myself a few months ago and thought I was retiring on June 9th, but I'm still working part-time. This is something I agreed to and I'm fine with it. It actually feels pretty good and is a nice transition as opposed to stopping work "cold turkey"!

But, I would like your thoughts on our situation and whether or not an Annuity, using part of our nest egg, is a good idea. I love that I found this site and I've done a lot of reading here. There is a lot of wisdom here and I would like some!!

Out finances:
- Need $72,000 per year to live on
- I'm almost 61 and will draw SS when I'm 62. DW is 10 months behind me and will also draw SS at age 62
- Our combined SS when we are both drawing will be $31,200 annually
- I have a military pension of $15,000 annually (tied to COLA)
- We have a nest egg of $700,000
- We have savings of $30,000

I'm wondering the wisdom of turning $400,000 of our nest egg into a Joint Survivor Immediate Annuity which I think will pay approx $1600 per month or just over $19,000 annually (online calculators gave me this estimate).

If I did that, we would have guaranteed income for life of: SS $31,200 + Pension $15,000 + Annuity $19,000 = $65,200.

We would still have $300K in a nest egg to hedge inflation. In addition, our home will be paid off in 9 years and then my expenses drop by $16,000 annually. At that point we wouldn't need $72,000 per year to live on , but more like $56,000 - $60,000.

We have Tricare Health insurance because of my military service, so healthcare costs are not a big concern.

So....what do you think?

And thanks! Major
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Old 08-22-2017, 09:09 AM   #2
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Personally, I would not tie up this much in an annuity, but if that is what lets you sleep at night then your plan can certainly work.
How much do you have left on your mortgage and what is the interest rate? It may be worth paying off the house instead of buying an annuity if you want to "de-risk"
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Old 08-22-2017, 09:12 AM   #3
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Personally, I would not tie up this much in an annuity, but if that is what lets you sleep at night then your plan can certainly work.
How much do you have left on your mortgage and what is the interest rate? It may be worth paying off the house instead of buying an annuity if you want to "de-risk"
euro, we owe just over $100K and the interest rate is 3.125%. I considered this option, and paying it off over several years in large chunks (3 years?), but not sure of the wisdom of this since the interest rate is so low, plus the taxes I would pay by withdrawing that money from our nestegg.
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Old 08-22-2017, 09:31 AM   #4
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Why not set up a home-made annuity with TIPS? IMO the idea of "guaranteed income" when talking about fixed payments over a long period is delusional. Using the inflation rates from the past 30 years, that $1600 will be worth less than half in purchasing power when you're 90. And inflation has been very tame during that period.

A TIPS ladder and a flexible withdrawal strategy is what I'd be looking at. The fact that your expenses will drop in the future is also an argument against locking in an annuity payment. Finally, in the military you know well that no plan survives first contact with the enemy. Fixed payments in a variable world give you no flexibility.

Good on you for a COLA'd pension, though. I'm jealous.
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Old 08-22-2017, 10:07 AM   #5
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There is a big flaw in your total lifetime numbers you will not have that SS number guaranteed for both of your lifetimes..it will only be that until one of you passes away and then it drop immediately to a survivors benefit.

Do you realize that SS is an annuity and by you both collecting at 62 you are locking the lowest possible benefit for both of your lifetimes? In fact one of you will be left with lowest ss number, whatever survivors benefit your pension offers (if your DW survives which is more likely) and maybe 300 K plus some market gains. I think you have better options then what you considering with that annuity. Don't do anything until you clear understand how these numbers work.
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Old 08-22-2017, 10:36 AM   #6
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There is a big flaw in your total lifetime numbers you will not have that SS number guaranteed for both of your lifetimes..it will only be that until one of you passes away and then it drop immediately to a survivors benefit.

Do you realize that SS is an annuity and by you both collecting at 62 you are locking the lowest possible benefit for both of your lifetimes? In fact one of you will be left with lowest ss number, whatever survivors benefit your pension offers (if your DW survives which is more likely) and maybe 300 K plus some market gains. I think you have better options then what you considering with that annuity. Don't do anything until you clear understand how these numbers work.
Thanks for your feedback! We are very aware of the upside/downside of taking SS at age 62. We've decided to take the money while we are younger so we can enjoy our life while we have the health and desire to do things. I created a spreadsheet that shows what happens if we collect at age 62, 63, 64, 65 and age 66.5. If we wait until age 66+ to collect, it's age 81 where we begin to pull ahead in total earnings. Granted, we may live a long time, or one of us might live a long time, but given normal longevity tables, we are willing to take the risk. But, I appreciate your thoughts.

Regarding the annuity, you mentioned we may have better options. What options are you thinking? Major
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Old 08-22-2017, 11:08 AM   #7
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You didn't indicate in your OP that you knew the SS was not guaranteed for both your lifetimes in fact you indicted that it was guaranteed.One check for one person that's the way it works.

Yes IMO the better option would be one of you takes at 62 or later and one of you doesn't take until FRA... at these interest rates to doesn't make sense to me to pay market rates for an annuity and at the same time turn your back on the built in SS annuity that you have access to. When you buy an annuity you are focusing on permanent income NOT the max amount of income. You want to take over 50% of your assets and lock in a low return for safety. I just feel your comments are inconsistent and worry that the surviving spouse could be left short.

Are you focused on having fun and spending money now, nothing wrong with that. Or are you worried about having enough guaranteed money to last until the last one of you is gone? It sound to me a though both SS checks will go on current living expenses and not add anything to your savings.
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Old 08-22-2017, 09:42 PM   #8
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SS is a far better annuity for less money than a private one.
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Old 08-23-2017, 05:51 AM   #9
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Sorry, but your "take the money early and enjoy life" reason makes no sense at all. The " break even" age means nothing. Do you normally look at your income as how much you could collect by a certain age? All you care aboutnis income.

Naturally you could not likely get a $1600/mo increase from one SS, but very possible with two depending on what each of you get. The cost of living on your nest egg, equal to what you would be getting w/o delayed filing is essentially the "cost" of the added COLA adjusted increase to your SS annuity. And is a far better ROI than your private annuity example. For one, you are paying over time, not a lump sum irrevocable cost, and change your mind at any time and even get 6 months retro active. Once past FRA, you can claim, then after a year keep the earnings and pay it all back, and start collecting at the higher rate. Or not. I have yet to see any example of a private annuity that should be considered while filing for SS at 62.

Money is fungible. It matters not "where" it specifically comes from. All that matters is the income, and what you have left in principle. For instance, just roughly going to FRA instead of 62 (say 66 & 6 months) is about a 40% increase in your SS. So rounding off to an increase of $14880/yr for both of you (that's $1240/mo), the cost is $31.2k x 4.5 = $140,500. (What you would have gotten if you collected SS@62. ) Add in the time delayed cost of the annuity, (ie pay yourself the delayed annuity you will be getting at 66.5) so an added $1240x 54 months, and it is less than $67k as your retain your principle to earn during that 4.5 year period. So for the total cost of the $1240/mo COLA SS annuity ($140k + $67k = < $207k ), you get to "enjoy life now" . Or you can pay $400k for a $1600 non COLA private annuity?. Not exactly rocket science. So you have $193k more in your nest egg, to generate $360/mo or $4320/yr. That's about 2% compounded interest a year. You can get that in CDs.

Go another year to delayed filing, at 67.5 and gain about $3800/yr more, for an out of pocket "cost" of $46k. So at 67.5 you would have been enjoying the same income since 62 you WOULD have had with a private annuity, and have $147k more in your nest egg.
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Old 08-23-2017, 06:54 AM   #10
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Quote:
Originally Posted by Retiredmajor View Post
Hey all, I introduced myself a few months ago and thought I was retiring on June 9th, but I'm still working part-time. This is something I agreed to and I'm fine with it. It actually feels pretty good and is a nice transition as opposed to stopping work "cold turkey"!

But, I would like your thoughts on our situation and whether or not an Annuity, using part of our nest egg, is a good idea. I love that I found this site and I've done a lot of reading here. There is a lot of wisdom here and I would like some!!

Out finances:
- Need $72,000 per year to live on
- I'm almost 61 and will draw SS when I'm 62. DW is 10 months behind me and will also draw SS at age 62
- Our combined SS when we are both drawing will be $31,200 annually
- I have a military pension of $15,000 annually (tied to COLA)
- We have a nest egg of $700,000
- We have savings of $30,000

I'm wondering the wisdom of turning $400,000 of our nest egg into a Joint Survivor Immediate Annuity which I think will pay approx $1600 per month or just over $19,000 annually (online calculators gave me this estimate).

If I did that, we would have guaranteed income for life of: SS $31,200 + Pension $15,000 + Annuity $19,000 = $65,200.

We would still have $300K in a nest egg to hedge inflation. In addition, our home will be paid off in 9 years and then my expenses drop by $16,000 annually. At that point we wouldn't need $72,000 per year to live on , but more like $56,000 - $60,000.

We have Tricare Health insurance because of my military service, so healthcare costs are not a big concern.

So....what do you think?

And thanks! Major
First thank you for your service.

I think you have a spending gap of about $25K per year, for the next 10 years until the mortgage is paid, and then you still will have a $10K gap according to your numbers.

That money is going to come from someplace, working or your nest egg. If your investments throw off 5% all is good. If they throw off 2% well....

Many have argued that when you take SS doesn't matter, because it take so long to recoup the lost income. The biggest risk is survivor benefits, which will result in more of a spending gap.

I'm not a big fan of the insurance based annuities.
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Old 08-23-2017, 08:07 AM   #11
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Some have mentioned it in a different way than I will....

Who cares about break even on SS.... when you die you do not care... it is the surviving spouse that cares when one of the checks stop coming in... to me, maxing out what you get from SS is the best long term option for cash flow... it might not be the best 'investment', but as I said, who cares after you are dead....


Edit to add.... if you are single then the lost check is not something to worry about and the thought process is different....
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Old 08-23-2017, 08:09 AM   #12
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SS is a far better annuity for less money than a private one.
+1

There are pros and cons of deferring SS. They are similar to the pros and cons of buying a private annuity. However, in today's low interest environment, SS has better numbers. The CPI adjustment on SS is a big deal.

It is not true that "we can spend more money early on if we take SS right away". In fact, if you do a back of the envelope SWR calculation, you'll probably find you can spend more early on if you defer SS.

Or, run FireCalc both ways.
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Old 08-23-2017, 09:28 AM   #13
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Exactly. And one other point, which I forget as for me it is a minor point, but for you it is not. If you fund the annuity with pre tax dollars, then the annuity will be taxed as income. The exact same income from SS, for you would be untaxed. So you get to keep, as net income an extra $2500+ a year....unless you cross the Tax Torpedoe threshold, which you are actually directly at.

For instance, depending on your deductions (state tax, etc. etc) if you have income of $15k pension + $31.2k SS + $19k taxable annuity your estimated fed tax is $2024 for an income of $65.2k. Delay SS such that your income is $15k + $47k SS + $3.2k from IRA and your taxes drop to $0. Same income but $2000 more in your pocket. You can actually increase your IRA withdrawals to $5000 before you pay any Fed tax. Tax free withdrawals are VERY nice to have :-)
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Old 08-23-2017, 10:07 AM   #14
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Thanks for all the responses thus far. I'm reading them and absorbing. That's why I came here and love this site. I'm not going to do anything regarding this decision anytime soon. I'll re-run my numbers looking at taking SS later and drawing down the nest egg more in the early years.

One question - Is there no thought that the government might reduce SS in the future to stay solvent. So, if I delay SS and am banking on getting X later, then they reduce the benefit and I get Y, instead?
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Old 08-23-2017, 10:12 AM   #15
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RetiredMajor- I, too, am retired military and a beneficiary of TFL. It works best when you are on Medicare (in fact, it doesn't work at all if you don't have Medicare). Prior to age 65, you still have numerous fees and copays under TRICARE. After 65 and when taking Medicare, TFL acts as Medigap insurance, so your out of pocket cost is very low. Not sure what the individual SS benefit is for you and your wife, but one who receives the higher benefit should wait until 70 to collect so the one with the smaller benefit will collect the larger benefit when that person passes. I agree with the posters who said that a private annuity is not a good idea. I'll go one step further - it's a waste of money. You will be far better off using the $400K that the annuity would cost by withdrawing the $19K a year from your savings - it would cost you approximately $160K by the time you are 70 and the remainder would still be growing. Not sure if you are saying your combined SS at 62 would be $31,200 or at another age. If you wait until age 70 for both of you, your combined SS would be about $54K a year with out compounded COLA. That's a rough, back of the envelope calculation, but it's probably not far from the actual number. Maybe a few more years of part time work instead of taking SS at 62 would make more sense.
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Old 08-23-2017, 10:17 AM   #16
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Thanks for all the responses thus far. I'm reading them and absorbing. That's why I came here and love this site. I'm not going to do anything regarding this decision anytime soon. I'll re-run my numbers looking at taking SS later and drawing down the nest egg more in the early years.

One question - Is there no thought that the government might reduce SS in the future to stay solvent. So, if I delay SS and am banking on getting X later, then they reduce the benefit and I get Y, instead?
No, not at your age....don't use that reasoning to start at the earliest possible moment.
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Old 08-23-2017, 10:48 AM   #17
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I'm wondering the wisdom of turning $400,000 of our nest egg into a Joint Survivor Immediate Annuity which I think will pay approx $1600 per month or just over $19,000 annually (online calculators gave me this estimate). .... So....what do you think?
Just because you asked, bad idea for you .... great idea for the insurance company and its shareholders. That 4.75% return will be diminished quite rapidly thru inflation. Major, you are capable of restraint. Either broad based total stock market ETF + total bond ETF or build your own ladder

As to reducing SS, yes there's chatter of reducing disability but as far as 'regular' SSA ... anticipate those over a certain age being grandfathered in. Like when they got rid of file & suspend for those born after 1/1/1954 last year (so basically the same for those 60+ which you are)
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Old 08-23-2017, 11:09 AM   #18
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... Is there no thought that the government might reduce SS in the future to stay solvent. So, if I delay SS and am banking on getting X later, then they reduce the benefit and I get Y, instead?
I wouldn't give it any thought. Seniors are the most diligent voters and a politician supporting a big, immediate, takeaway is very likely to be an ex-politician as of the next election. And even a politician is smart enough to do that math.

What they will do, as they have already done, is to take away from younger people who will feel no immediate pain and really won't understand clearly what has been done to them. Takeaways will probably include postponed retirement ages and removal of the social security tax cap, so will tax 100% of income. Maybe other stuff. I have not kept detailed track. But we old f@rts are safe IMO.
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Old 08-23-2017, 11:11 AM   #19
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One question - Is there no thought that the government might reduce SS in the future to stay solvent. So, if I delay SS and am banking on getting X later, then they reduce the benefit and I get Y, instead?
People certainly think about that. If you find one of the "Defer SS?" threads, it will show up.

I think it's a valid concern. When you do the numbers, it may tip the balance for you.

Speculation on decreases often drifts into political discussions, and that gets the thread shut down.

That said, I will say that one way to decrease benefits is through some sort of means testing. If I spend down assets while I'm deferring SS, then I may (or may not) be counted as a person with "less means" when the time comes.

Also, there is also a possibility that the people doing the reduction formula will understand the different impacts resulting from decisions to defer or not, and they might adjust the decrease to try to get some balance.

I can't predict either of those, just saying the practical details of a SS benefit decrease are both important and uncertain.
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Old 08-23-2017, 11:19 AM   #20
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Not really worried about SS at all for people our age (early 60s). I have a bit more saved than you and larger pensions, but basically not far from where you are income wise. SS is a major portion of our retirement income plan. The chances that the insurance company funding the private annuity would go belly up are far more likely. Too many people depend on SS for it to be affected so negatively. If you have income of $300-400k a year, then yes, I do believe we may see high alternate income level means testing SS benefits. And except for the principle of the thing, it would not affect them financially.
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