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Should annuity purchase change AA?
Old 03-15-2008, 10:34 AM   #1
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Should annuity purchase change AA?

I have a portfolio of 60/40 equity/fixed and am considering taking about 15% of the portfolio to purchase a SPIA (not inflation adjusted) to cover some of my annual shortfall. Any opines on whether I should liquidate the 15% prorata and maintain the same AA or take it all out of the fixed and not rebalance? Thereby treating the PV of the annuity as part of the fixed allocation? Any place this may have been discussed before that I can be steered to? TIA.
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Old 03-15-2008, 10:36 AM   #2
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The SPIA in effect becomes a fixed income portion of the equation. Some on here will differ, but I believe the only hedge against inflation is a healthy dose of equities over time. If you are comfortable with 60/40, then look at the SPIA as part of the 40, and adjust accordingly.......

If you liquidate pro-rata, are we talking taxable or qualified monies??
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Old 03-15-2008, 11:10 AM   #3
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The bulk, if not all, of the money would be from qualified funds. Thanks.
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Old 03-15-2008, 02:36 PM   #4
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I am with Finance dude. If you are comfortable with a 60/40 asset allocation than I treat your 15% allocation as a long term bond holding. I am not sure how you'd value the SPIA going forward, but one simple approach would be to change your future mix to 70/30% (i..e 60%/85% +15% SPIA) which gets you close to the Efficient frontier mix of 75/25%
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Old 03-16-2008, 10:38 AM   #5
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This may help with some thoughts and has some good links within:

http://www.early-retirement.org/foru...ion-30975.html

Hope it helps.

Hillbilly
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Old 03-16-2008, 10:52 AM   #6
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One reason to buy a fixed immediate annuity is to free up a greater percentage of your funds for equity investments. So YES - - you will probably feel comfortable doing that.

Just don't forget that your AA should reflect what you feel comfortable with, not somebody else's theoretical idea of what your AA should be. So whether you compute it with or without the annuity, and call it 60:40 or 70:30 or whatever, is (in a sense) irrelevant. The sleep-at-night level is where it's at, and the recent market has been a wonderful test for determining exactly where that level is, for you.
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Old 03-16-2008, 12:23 PM   #7
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I'd suggest you don't get the annuity. We have historically low interest rates so your payout for a new immediate annuity has nowhere to go but up if you'll just wait a while longer. Also, waiting another 5 years will dramatically increase your payment even if interest rates remain flat.

I have wrestled with how to put my fixed pension (identical to an immediate annuity) into my asset allocation. From a classical sense you could assign it an effective interest rate and determine its pseudo value as part of your fixed income portfolio. I've seen numbers from 10% to 5% suggested. Scott Burns did an article and suggested 7% for non-COLA pensions/annuities and 4% for COLA pensions/SS/annuities.

For example, getting $7,000 per year in a fixed immediate annuity is like having $100,000 in "bonds." Your $20,000 per year in SS is like having $500,000.

Going past that, it comes down to what makes you comfortable. I have personally decided to ignore my small pension and my SS and stick with the 60/40 split.
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Old 03-16-2008, 12:26 PM   #8
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I'm almost never a fan of annuities except for a few well-designed annuities that don't carry punitive fees for a few individuals with specific situations, but if you do it, yes, treating it (and perhaps present value of pensions) as part of your bond allocation seems most appropriate.
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Old 03-16-2008, 03:47 PM   #9
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I would look at the annuity like fixed assets and adjust my portfolio accordingly. But I am not taking a very scientific approach. Essentially at a minimum, I want to have 10 years of income in fixed and (pension, ss, etc).

I could consider the annuity as a virtual riskless income stream (except for inflation). The same goes for other income streams (pension and SS).

My portfolio can be a bit more risky (in terms of the amount of equity) since I can tolerate the fluctuations a bit more.

As we age... I will step down the equity holdings to reflect the possible need to spend the assets... possibly for health reasons. But we will always hold some equity.
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Old 03-17-2008, 12:46 PM   #10
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Thanks for the thoughtful responses. The link was especially helpful as it steered me to some morningstar discussions which specifically addresses my issue. The question now is how much faith can I put in AIG (the insurance co. VG uses for annuities)?
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Old 03-17-2008, 02:55 PM   #11
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The biggest issue if a 60-40 no annuity portfolio is changed to 85-15 or 75-25 with the annuity is that if stocks slide, you have less to rebalance with.

Meaning what is 75-25 portfolio becomes a 50-50 portfolio because market crashed, you really don't have more bonds, you just have less equities. To rebalance might require some pain on bond side.

I would not consider 100% of annuity to be same as 100% bond.

Maybe if annuity is valued at $100k, consider that to be a $50,000 bond allocation.

So you have enough money to rebalance with if needed.
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Old 03-17-2008, 08:09 PM   #12
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That is a very good point. I suppose that could be especially risky if one was still taking significant withdrawals after the annuity purchase. Also, would the relative state of the equity market be a factor, i.e., do it at a historically low point in the averages? Of course it can always go lower.
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Old 03-17-2008, 08:15 PM   #13
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Say you were 55, can someone swag me an idea on what the payout rate would be for a single life on $100k. Just wondering.
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Old 03-17-2008, 08:29 PM   #14
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Originally Posted by RockOn View Post
Say you were 55, can someone swag me an idea on what the payout rate would be for a single life on $100k. Just wondering.
Vanguard has an annuity calculator.
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Old 03-17-2008, 08:30 PM   #15
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Just go to the VG website and find the retirement page and immediate life time annuities and you can get free quotes all day long.
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Old 03-17-2008, 08:33 PM   #16
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Vanguard has an annuity calculator.
Thanks I didn't know it was there.
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My situation...
Old 03-17-2008, 08:39 PM   #17
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My situation...

I currently have a SPIA
- and VA disability monthly income.

along with future..
- SS for me
- SS for DW
- 2 small pensions for wife

None of these current/future income streams affect my/DW's combined AA of 60/40.

What the current/future income streams do is reduce the amount of withdraws against that 60/40 retirement portfolio mix. It has nothing to do with changing what the mix "represents".

Anyway, that's how I do it in my life...

- Ron
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Old 03-17-2008, 08:44 PM   #18
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None of these current/future income streams affect my/DW's combined AA of 60/40.

What the current/future income streams do is reduce the amount of withdraws against that 60/40 retirement portfolio mix. It has nothing to do with changing what the mix "represents".

Anyway, that's how I do it in my life...

- Ron[/quote]

I see Ron, but maybe you started out that way. I am 5 years into retirement and want to buy a SPIA and said purchase will change my AA depending on how I do it.
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Old 03-17-2008, 08:48 PM   #19
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The biggest issue if a 60-40 no annuity portfolio is changed to 85-15 or 75-25 with the annuity is that if stocks slide, you have less to rebalance with.

Meaning what is 75-25 portfolio becomes a 50-50 portfolio because market crashed, you really don't have more bonds, you just have less equities. To rebalance might require some pain on bond side.

I would not consider 100% of annuity to be same as 100% bond.

Maybe if annuity is valued at $100k, consider that to be a $50,000 bond allocation.

So you have enough money to rebalance with if needed.

I should be rebalancing now, but don't have the cajones. What makes me think I would do it then. I wonder people who preach rebalance are finding it hard to do right now.
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Old 03-17-2008, 08:49 PM   #20
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I'm almost never a fan of annuities except for a few well-designed annuities that don't carry punitive fees for a few individuals with specific situations, but if you do it, yes, treating it (and perhaps present value of pensions) as part of your bond allocation seems most appropriate.
What if spouse is money ignorant? Would this be a good planning option if I should die first, rather than pay for trusts costs (not cheap from what I see) or take a chance on someone cleaning out the accounts?
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