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Plan B Annuity Approach
Old 03-09-2012, 10:12 AM   #1
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Plan B Annuity Approach

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/M...cumulation.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.
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Old 03-09-2012, 10:31 AM   #2
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Link broken?
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Old 03-09-2012, 10:36 AM   #3
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Link broken?
Fixed, thank you very much!
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Old 03-09-2012, 10:44 AM   #4
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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.
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Old 03-09-2012, 10:59 AM   #5
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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.
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Old 03-09-2012, 11:37 AM   #6
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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.
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Old 03-09-2012, 12:19 PM   #7
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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.
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Old 03-09-2012, 12:59 PM   #8
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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...
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Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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Old 03-09-2012, 01:10 PM   #9
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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.
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Old 03-09-2012, 01:58 PM   #10
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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...
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Old 03-09-2012, 02:02 PM   #11
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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.'

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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.
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Old 03-09-2012, 02:05 PM   #12
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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
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Old 03-09-2012, 02:15 PM   #13
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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.
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Old 03-09-2012, 03:12 PM   #14
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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
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Old 03-09-2012, 04:37 PM   #15
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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.
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Old 03-09-2012, 04:48 PM   #16
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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...
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Old 03-09-2012, 05:59 PM   #17
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Exactly (that's what we did).

You are a very intelligent individual, IMHO...
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Old 03-09-2012, 08:40 PM   #18
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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.
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Old 03-10-2012, 03:04 AM   #19
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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.
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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?
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Old 03-10-2012, 03:10 AM   #20
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Pardon my ignorance but what is an SPIC - does it work the same as an SPIA ?
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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.
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