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Putting bulk of savings into immediate annunity at age 35 am I crazy?
Old 11-20-2012, 10:45 AM   #1
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Putting bulk of savings into immediate annunity at age 35 am I crazy?

First let me say hello i'm new here.

I have been looking at my retirement plans at the ripe old age of 35 and if there's one word that describes my generation's economic future it's "screwed".

I am very pessimistic about the future state of social security, health care, as well as America's ability to maintain a growing healthy economy. The current U.S. GDP per capita seems like the high water mark especially with the constant outsourcing of industries that is going on. I have a bad feeling that the middle class is going to get squeezed very hard with prolonged rising unemployment in the next 30+ years. Wealth inequality will grow, standard of living will go down for most of the nation. The performance of the S&P 500 has been abysmal if you look at the last 10 years as a whole.

But I digress..

I am lucky in that I have been working ever since I was out of high school and right now I have a decent job that pays about 60k a year. I have accumulated a hefty savings of around 500k from a house I recently sold. I am seriously considering putting a 150k down payment on a new home in the area I live in now and putting the rest (approx. 350k) in a single premium immediate annuity that would give me about $1,100 (with inflation adjusted payments later) a month for the rest of my life.

My rationale in doing so is to give myself a permanent financial umbrella in case things turn really bad. I don't feel that I can get better than 4-5% yield anywhere else anytime soon. For the next 20 years i'll use the annuity to pay a big chunk of my mortgage and work as usual in order to rebuild my equity. I calculate that i'll have a completely paid off house long before retirement age in about 10 years and a nice source of new equity in case I want to sell or refinance. I'll also still have a nice rainy day source of monthly income to tap into for emergencies with my SPIA.

This also means I will not be liquid but there aren't any other major purchases i'm interested in. I have also considered that if things really go south in the next 30 years I can always take my monthly income and skedaddle to some other country where COL is lower and the dollar will go farther.

I am unmarried, have no children, and no beneficiaries.

So what do you guys think?
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Old 11-20-2012, 10:58 AM   #2
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If things go really bad the insurance company won't pay your annuity.

A portion of 20th Century growth was fueled by borrowing, and it's tough to see that rate of borrowing continue in the 21st. Hence going forward US living standards will likely be lower, but still much higher than most of the rest of the world. The news is not all bad: the recent abundant energy finds, such as shale gas, can be an economic boost.
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Old 11-20-2012, 11:04 AM   #3
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If things go really bad the insurance company won't pay your annuity.
That's what I was thinking.

To answer the OP's first question, YES.
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Old 11-20-2012, 11:12 AM   #4
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Putting bulk of savings into immediate annunity at age 35 am I crazy?
Yes.

Your negative perception of the future is warping your ability to make rational decisions. You might benefit from looking at the future from a different perspective. I suggest you read Abundance the Book - by Peter Diamandis and Steven Kotler and put down the black paint brush.
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Old 11-20-2012, 11:22 AM   #5
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I think it would be foolish to to lock up such a large amount of your net worth in a SPIA at such a young age at today's low interest rates.

You are NOT getting a 4-5% yield. The yield is probably less than 3%.

You may be confusing the "payout" rate which would be 4-5% with the yield. The $1,100 a month you would be receiving is partly yield and partly a return of the $350k premium that you paid.

IF you decide on a SPIA you should also shop around as the payout rates for a Californian male on immediateannuities.com was substantially higher than $1,100 a month. Think of it this way, if you live another 50 years to 85, then $580 of the $1,100 a month is a return of your $350k and your "yield" is only 2.9% ($1,100 a month for 50 years discounted at 2.9% annual interest rate = $350k premium paid today)

I would be less concerned with the insurer not performing but you can partially mitigate that risk buy buying SPIAs from a number of highly rated companies.
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Old 11-20-2012, 11:30 AM   #6
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Just how inflation adjusted are the annuity payments? If things go as bad as you think, inflation could be a giant concern. I'm calculating about a 3% return if you live to 90 and inflation and annuity inflation adjustments are zero. Sure you can't do better with something else?
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Old 11-20-2012, 11:32 AM   #7
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Just how inflation adjusted are the annuity payments? If things go as bad as you think, inflation could be a giant concern. I'm calculating about a 3% return if you live to 90 and inflation and annuity inflation adjustments are zero. Sure you can't do better with somethng else?
Psst......
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Old 11-20-2012, 11:46 AM   #8
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I am in my mid 50's and it seems like the majority of that time the sky was falling for one reason or another promising only more of the same going forward. Terrible recessions, out of control inflation, energy supplies dwindling with gas lines, wars, the S&L debacle, Y2k stopping the world, deflation, stock market collapses, etc... I'm not minimizing the current issues and surely it doesn't take a math genius to suspect a significant amount of future growth was moved forward based on the staggering levels of debt. However, there is so much we don't and can't know about what will happen in the future. Who saw the internet coming decades ago? How about ubiquitous hand held computers? Who waited on a gas line thinking they'd someday see a projection that the US would produce more oil than Saudi Arabia by 2020?

Maybe this time the sky will fall but I'm not betting on it.
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Old 11-20-2012, 12:15 PM   #9
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I feel the OP's pain and share some of the same concerns. But I would not put the bulk of my savings into a SPIA when I was still working. I might put some into a deferred annuity with someone like TIAA-CREF if the rates were higher, but you'd do better in some CDs or I-Bonds today.

https://www.tiaa-cref.org/public/pro...ies/why-choose

I've owned a TIAA-CREF deferred annuity for 25 years and it's given me an annual average gain of 6% and will yield 3% this year which is a good foundation, but you can't get those rates unless you have access to TIAA-Traditional. So I would also look at a CD ladder, I-Bonds, buying an income property and investing in the equity and bond markets......as some one said "pssst" has been a good option for years.
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Old 11-20-2012, 01:33 PM   #10
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Originally Posted by GrayHare View Post
If things go really bad the insurance company won't pay your annuity. ...
Another way to put that (I think someone else mentioned this recently):

How in the world can any of us "purchase" future security? The insurance company does not have a crystal ball, they are just humans, investing our money, attempting to make a profit. They are subject to the same financial future that we all are.

I imagine that the amount they need to hedge their long-term bet really takes a huge bite out what they can "guarantee", and then they need to pull some profit out of it. You get the scraps that are left over. "Security" is an illusion.

-ERD50
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Old 11-20-2012, 01:44 PM   #11
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Another way to put that (I think someone else mentioned this recently):

How in the world can any of us "purchase" future security? The insurance company does not have a crystal ball, they are just humans, investing our money, attempting to make a profit. They are subject to the same financial future that we all are.

I imagine that the amount they need to hedge their long-term bet really takes a huge bite out what they can "guarantee", and then they need to pull some profit out of it. You get the scraps that are left over. "Security" is an illusion.

-ERD50
While you flirt with some valid points, the huge difference is that the more reputable life insurers are very safe. The majority of their investments are in bonds and there are regulatory constraints on what they can invest in and importantly, how much capital they need to have to support the policies they write which provides an additional level of safety. There were regulatory reforms in the 1990s that dramatically improved financial solvency and solvency monitoring by the regulators that withstood 2008 quite well (particularly compared to the banks) and any insolvencies were minor. On top of all of this, the guaranty funds provide an additional layer of protection (albeit imperfect).

Bullet proof - no, but about as safe as you can get other than a FDIC insured bank account or a US government bond (and even those don't look all so great some days).
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Old 11-20-2012, 02:22 PM   #12
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While you flirt with some valid points, the huge difference is that the more reputable life insurers are very safe. The majority of their investments are in bonds and there are regulatory constraints on what they can invest in and importantly, how much capital they need to have to support the policies they write which provides an additional level of safety. There were regulatory reforms in the 1990s that dramatically improved financial solvency and solvency monitoring by the regulators that withstood 2008 quite well (particularly compared to the banks) and any insolvencies were minor. On top of all of this, the guaranty funds provide an additional layer of protection (albeit imperfect).

Bullet proof - no, but about as safe as you can get other than a FDIC insured bank account or a US government bond (and even those don't look all so great some days).
I'm not saying they aren't safe. I'm just saying there is no 'silver bullet'. As you say, they need to invest in relatively safe investments, and that has a cost. If we want to purchase safety, we will pay.

All things considered, I'm not sure the individual investor is getting any kind of a 'deal'. Though the 'longevity insurance' that comes from being able to pool with a larger group has advantages for some.

-ERD50
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Old 11-20-2012, 02:36 PM   #13
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Psst......
Dare I say it?..Wellesley No I can't....(OP won't have a clue).
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Old 11-20-2012, 04:28 PM   #14
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I'm not saying they aren't safe. I'm just saying there is no 'silver bullet'. As you say, they need to invest in relatively safe investments, and that has a cost. If we want to purchase safety, we will pay.

All things considered, I'm not sure the individual investor is getting any kind of a 'deal'. Though the 'longevity insurance' that comes from being able to pool with a larger group has advantages for some.

-ERD50
Nothing is certain. The best way to hedge your bets is to diversify. An annuity has the attraction of the "guarantee" and the backing of the insurance company's assets so it will pay something if equities tumble, but it's important to choose a good insurer who will pay out right up to the apocalypse. However, right now CDs or I-bonds look better. So I advocate spreading your money around in index equity funds, bond funds, real estate rentals, cash, and quality annuities with good and safe returns and failing those CDs or I-bonds.
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Old 11-20-2012, 05:50 PM   #15
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Hi Bob

You will find many posts if you google "annuities" on this website. Many participants here have different views on this topic. To answer your question, I would wait until my 70s or 80s to buy a SPIA. I am in my 40s and this year I bought deferred annuities, as documented in other threads.

Good luck


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So what do you guys think?
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Old 11-20-2012, 08:34 PM   #16
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I'll agree with all the posters who have said that the SPIA does not provide a 4-5% yield.

As an alternative, do the math if you use your $350k to buy the new house. You immediately have the house paid for, and you have your mortgage payment that you can invest somewhere every month (heck, buy little chunks of SPIAs if you like).

Also, consider the fact that something in your life might change, and the SPIA locks you into one investment for the rest of your life.
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Old 11-20-2012, 09:17 PM   #17
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Thanks for the advice everyone. Yes, I realize a SPIA doesn't give 4-5% Yield I misspoke and should have said payout.

I think what i'll do is put some into a short term bond investment for monthly income through vanguard and another chunk long term in their wellington fund. I'll increase my downpayment on the house. I like the idea of rental income from property and it's something i've considered but I don't like the hassles of being a landlord owner in CA. Being an absentee landlord in another state doesn't sound hassle free either also.

I'll see what interest rates do in the next few years then go from there.
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Old 11-20-2012, 09:47 PM   #18
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That sounds a lot more sensible.
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Old 11-21-2012, 07:30 AM   #19
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Don't do it. Just don't. You can do better.
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Old 11-21-2012, 07:59 AM   #20
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Don't do it. Just don't. You can do better.
I am in a similar situation to OP (a bit older and hopefully wiser now) and considered the same thing when younger and have to admit the though still crosses my mind occasionally.

I have come to realize this is just a reaction to fear/fatigue/etc. And, I would give the same advice as MDJO at this point. Others have explained why in some detail above.
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