Plan B Annuity Approach

[Midpack]

Thread question: For those of you who consider an annuity as part of your Plan B only, what methodology or trigger(s) do (or did) you plan to use to initiate purchasing an annuity? $ threshold? Age target? Stepwise annuitization? Other? Haven't thought about it yet?

Assumptions: We don’t have pensions and Soc Sec won’t guarantee an acceptable minimum retirement income we’d be comfortable with. Our withdrawal rate is (hopefully) very conservative, but who knows what the next 40 years will bring. If all goes well and the market provides historical average or above real returns, we won’t need to annuitize any of our portfolio. But as part of our plan B, if things go south we realize it may be in our best interest to annuitize part of our portfolio before we ever let the portfolio deplete too far.

This is the best (conceptual) article describing how we plan to evaluate the need to annuitize http://www.schulmerichandassoc.com/Modern_Portfolio_Decumulation.pdf. Along with others I have posted links to this article here several times over the past few years, so you may have seen it already. There are a few other books, articles along the same lines. We are actually plotting our actual nest egg and the cost of a minimum acceptable income annuity quarterly, similar to the graph late in the article. We understand we can't wait for the lines to cross to act, odds are we'll miss the opportunity. And we would probably break the annuities into 2 or 3 steps for this reason.

I plan to listen on this thread...not debate others POVs.

Note: This thread is not intended to target those for whom annuitization is part of your Plan A, or those who have Soc Security and/or pensions totaling (more than) enough to meet your projected retirement expenses. It’s also not intended to rehash the question of waiting vs not waiting for an interest rate increase to purchase an annuity. Very legitimate but separate topics.

 

[LRDave]

Link broken?

 

[Midpack]

Link broken?

Fixed, thank you very much!

 

[rescueme]

Actually, the only difference of a plan A or B is the timing of the decision to execute.

Plan A is to use an annuity from the start; plan B (if enacted) is nothing more than a delayed decision, IMHO.

Since we entered ER with an SPIA (plan was formalized a few years before actual retirement), I won't comment further.

 

[Midpack]

Actually, the only difference of a plan A or B is the timing of the decision to execute.

Plan A is to use an annuity from the start; plan B (if enacted) is nothing more than a delayed decision, IMHO.

May be semantics (on my part), but I guess the distinction in my view be plan B is where the retiree hopes to avoid annuitization at all (and a potentially higher residual $), whereas Plan A hopes to avoid future risk/uncertainty instead. Nothing wrong with either approach, I am just more interested in the Plan B approaches.

 

[ejman]

Thank you for the link very interesting as I have not really considered a possible annuity at all in my planning. The main conceptual issue I have with this approach is this. I've been retired for 9 years now and my portfolio has served me well for this time period and in fact has increased since retirement. This time period has included severe market turmoil in a scale not seen for many years. As I see it, for the annuitization scheme proposed to work out, I would have to utilize exquisite timing in that I would have to catch "a falling knife" just at the right time because a tremendous catastrophe is happening (much worse than what we have seen) and then trust that the markets and the insurance companies are functioning well enough that my few remaining sheckels will result in a solid annuity income stream. Think back to late 2008 and how insurance companies looked then.

To summarize if the markets continue shuffling along, no annuity needed. If catastrophe happens implementation will be very difficult. But please correct my view as needed.

 

[Animorph]

Sort of a Plan C or D, but a large annuity if the portfolio starts tanking is in the back of my mind. I'm don't have a trigger and don't track the annuity cost, at this time.

 

[Midpack]

As I see it, for the annuitization scheme proposed to work out, I would have to utilize exquisite timing in that I would have to catch "a falling knife" just at the right time because a tremendous catastrophe is happening (much worse than what we have seen) and then trust that the markets and the insurance companies are functioning well enough that my few remaining sheckels will result in a solid annuity income stream. Think back to late 2008 and how insurance companies looked then.

I agree with your characterizations. Having a more conservative AA with less equity would reduce the velocity and distance on the "falling knife," but timing is the biggest issue as far as I can see too. I know I would not have the nerve to wait for a recovery (even though it could happen) if our portfolio dropped below the cost of the minimum acceptable SPIA, so we recognize the need to be proactive. If we get to 70 or 80 in good shape, I wouldn't rule out annuitizing some of the portfolio even if we're nowhere near the crossover point, just to 'end the suspense.'

As for insurance company risk (definitely a factor), if it comes to that it won't make much difference if we've already bought an annuity or not. Thanks...

 

[Gone4Good]

I'd basically look for payouts to hit a specific threshold . . . which probably means waiting until equity markets are rip-roaring and everyone is back on the bandwagon that annuities are for suckers. Waiting until markets are swooning before annuitizing necessarily means locking in lousy payouts. Not my Plan A, or Plan B.

For me, I can see locking in rates (either through a TIPS ladder or though annuitization) once real 10-year yields get north of 3%. At 4% I'd probably back up the truck. Until then, I've got too far to go to start seriously amortizing principal. When I reach 60 or 70, that may change . . . along with my return bogie.

 

[ejman]

I'd basically look for payouts to hit a specific threshold . . . which probably means waiting until equity markets are rip-roaring and everyone is back on the bandwagon that annuities are for suckers. Waiting until markets are swooning before annuitizing necessarily means locking in lousy payouts. Not my Plan A, or Plan B.

Yes I like your "don't follow the crowd" approach. Trouble is it's hard to do...

 

[ejman]

If we get to 70 or 80 in good shape, I wouldn't rule out annuitizing some of the portfolio even if we're nowhere near the crossover point, just to 'end the suspense.'

.

Interesting approach. I need to do a lot more research on the annuity subject. I'm now 62 and your time frame sounds reasonable. I like the "end the suspense" part, at least with a small part of my NW.

 

[jdw_fire]

I agree with your characterizations. Having a more conservative AA with less equity would reduce the velocity and distance on the "falling knife," but timing is the biggest issue as far as I can see too. I know I would not have the nerve to wait for a recovery (even though it could happen) if our portfolio dropped below the cost of the minimum acceptable SPIA, so we recognize the need to be proactive. ...

isnt that a good reason to replace some of your FI with an annuity ASAP? if the annuity covers all your needs, you can actually hold more equities and potentially have an even larger residual. oops, i guess doing that makes it plan A, huh? NM

 

[Gone4Good]

Yes I like your "don't follow the crowd" approach. Trouble is it's hard to do...

I don't find it too difficult. I think keeping a focus on your return requirements helps (and everyone living off their investments has a return requirement, even if they call it a withdrawal rate instead). It tells me that locking in yields at (26)bp real or 2% nominal in today's market doesn't come close to meeting my objective. Importantly, it also tells me that as equity prices increase, my need for equity declines and vice versa - a point most folks don't even consider.

Basically, it's just a matter of keeping your eye on the prize, acting accordingly, and not getting distracted by visions of untold riches. Sometimes, enough really is enough.

 

[RetireBy90]

I have pension and SS so my utility bills and house note will be covered. However, I'm trying to assist my dear mom with her finances, and I'm finding that there are times that it is not easy for her to keep a consistent thought. We talk about her needs and what the rest of the $$ is for, and then how to invest it (AA) but then after a couple days we have to cover it again.

My point is that while I don't have a plan A for annuity, I am mindful that as one ages gracefully, the mind doesn't always cooperate. I may move to SPIA at some point (not sure how to tell when) if I find it difficult to manage a portfolio. Maybe I need to be writing this down now before it is too late

 

[Gone4Good]

I am mindful that as one ages gracefully, the mind doesn't always cooperate.

A good point.

I'm reminded of a chart I saw showing the accuracy of responses to a simple math question plotted by age. The rate of decline in correct answers as folks got older was pretty startling.

 

[rescueme]

isnt that a good reason to replace some of your FI with an annuity ASAP? if the annuity covers all your needs, you can actually hold more equities and potentially have an even larger residual. oops, i guess doing that makes it plan A, huh? NM

Exactly (that's what we did).

You are a very intelligent individual, IMHO...

 

[jdw_fire]

Exactly (that's what we did).

You are a very intelligent individual, IMHO...

thank you, thank you very much (in my best elvis voice)

 

[stevelb]

I have read Fullmer's article many times and I like his idea. I review my situation annually. I am in Otar's green zone and thus I feel that an annuity is not necessary at this time. If I ever fell out of the green zone, I would consider a SPIC. Having said that, I still every once in a while consider an inflation adjusted SPIC. Inflation is the retiree's worst enemy and I do sometimes worry whether my equities will protect me. I do have a far share of I bonds, but of course you receive no income from them until sold. Likewise for the small amount of gold that I own. For better or worse, I have no interest in tips.

 

[obgyn65]

I have been considering annuities for a few months, learned about them on this forum. They have been part of my plan B. Recently decided to make the plunge, so I guess it's plan A now .... I have no SS, very little pension, no heir, and quite a lot of cash in CDs and munis. The main trigger for me was when my spreadsheet indicated that I could withdraw about 10% more cash per year (in absolute terms - for example 100k instead of 91k gross) and lower my SWR significantly, all this for a small premium today (I am 47 this year). After I FIRE, between the age of 48 and 61, I plan to buy more annuities with the money I won't spend, maybe up to the guarantee limits only (i.e. 200k or 300k). My annuities are laddered from age 62. Good luck, please let us know how it works for you.

Thread question: For those of you who consider an annuity as part of your Plan B only, what methodology or trigger(s) do (or did) you plan to use to initiate purchasing an annuity? $ threshold? Age target? Stepwise annuitization? Other? Haven't thought about it yet?

 

[obgyn65]

Pardon my ignorance but what is an SPIC - does it work the same as an SPIA ?

If I ever fell out of the green zone, I would consider a SPIC. Having said that, I still every once in a while consider an inflation adjusted SPIC.

 

[East Texas]

Our trigger to purchase a SPIA is when the rates improve and that won't happen until the long-term treasuries (10 year) stay above 2% for an extended period of time.

 

[W2R]

Thread question: For those of you who consider an annuity as part of your Plan B only, what methodology or trigger(s) do (or did) you plan to use to initiate purchasing an annuity? $ threshold? Age target? Stepwise annuitization? Other? Haven't thought about it yet?

My trigger is finding myself to be in decent health at about age 80-85.

Right now I am 63 and pretty sure I am doing OK for at least the next 20 years. My spending is down below 2%, I have a paid off home and a conservative investing strategy, and SS is yet to come. Sounds pretty good, but like many of us I wonder what the future may hold.

For now, I plan to live on less than 3.5% and not buy an annuity. I still have SS as my "ace in the hole" it could provide at least some help if the market goes south. Of course, SS could vanish too, although I am not expecting for that to happen. I think I am pretty well situated for the next 20 years.

When I am around 80-85, I will prepare more fully for the possibility of living to an extreme old age. At that point I will be better able to assess the state of my health, how I intend to spend the remainder of my life, and how my portfolio is doing. At that point I will consider buying an inflation adjusted immediate lifetime annuity using no more than 25% of my portfolio (at that time). At that age, an annuity should be pretty cheap and I doubt I would have to spend the full 25% to cover my living expenses.

As I see it, the first reason for me to consider an annuity at that age is to provide old age insurance. The second reason is to provide a direct deposit that I can rely upon month after month to pay the bills, as I experience the physical and mental decline of old age. This would be helpful if, like most people, I become less and less able to handle a portfolio on my own during my extreme old age.

 

[Koolau]

Thread question: For those of you who consider an annuity as part of your Plan B only, what methodology or trigger(s) do (or did) you plan to use to initiate purchasing an annuity? $ threshold? Age target? Stepwise annuitization? Other? Haven't thought about it yet?

As I see it, for the annuitization scheme proposed to work out, I would have to utilize exquisite timing in that I would have to catch "a falling knife" just at the right time because a tremendous catastrophe is happening (much worse than what we have seen) and then trust that the markets and the insurance companies are functioning well enough that my few remaining sheckels will result in a solid annuity income stream.

Midpack and ejman's thought processes got me thinking about my situation. I don't know that I had ever formulated a plan B as Midpack suggests, although I have lots of back-ups. But a plan B to include a later possible purchase of an annuity makes some sense. As ejman points out, one reason you might need a plan B is that the markets are plummeting and you need a way to insure your income. When/how do you recognize the right time to jump into an annuity and where do you get the money to do so if your ER stash has taken too big a hit (falling knife analogy)?

In my case, I have over-emphasized conservative (cash-like) investments. While this may (probably WILL) cost me a lot of potential gains, it would seem to set me up ideally for Midpack's Plan B strategy. If the markets plummet or I find myself burning through my conservative port. too quickly, I should still have enough money (and TIME) to invest in an annuity (or more than one). So, perhaps that would be a strategy to implement "Plan B" - keep enough set aside in relatively "market-proof" investments to some day fund an annuity. In my case, I may have already done that by long ago purchasing some SPDAs which have a floor of 4.5%. Annuitizing an SPDA should take a phone call or two.

Just the ravings of a conservative investor with no Plan B, so YMMV.

 

[donheff]

The idea of waiting until a crisis to purchase an annuity seems risky. I can see waiting 5 years or so to see if interest rates improve, although I have read they don't make a huge difference in any event. The other thing I would look at is a deferred annuity set to kick in at 80 or so (i.e. longevity insurance). I recently read an article discussing DIAs that mentioned that you can pick up such insurance at what feels like low costs since many participants will not live to draw anything out. Once you are covered for essentials in old age you could face extinction of your nest egg in the meantime with a bit of equanimity.

 

[rescueme]

The idea of waiting until a crisis to purchase an annuity seems risky.

True.

That's why we purchased ours at my ER date, since we could estimate our plan based upon certain "knowns" (such as the SPIA, future pension and SS).

Sure, you can wait till the "stars align" (if ever); we being of the conserative nature decided to base our plans at the minimum, at ER.

Five years in? We have no regrets...

BTW, we are ahead of our plan of five years ago (IOW, we have more retirement portfolio assets today, than at the time of retirement in early 2007). Some luck, of course, but we did get that "pesky" initial annuity decision out of the way early in our retirement and it did tend to stablize our portfolion during the latest downturn ...

The only thing you can count on is the later you decide to execute an annuity (e.g. an SPIA) your payments will be greater than today. Why? Simple - you don't have as many years to collect ... (and it has nothing to do with current interest rates)...

BTW, we do intend to purchase additional SPIA's as our age increases, and our mental abilities (assume) decrease ...