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Swerdloe article on annuitization
Old 04-11-2016, 05:27 PM   #1
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Swerdloe article on annuitization

Some may be interested in a recent article on annuitization (immediate or deferred, not indexed) by Swerdloe.
http://www.etf.com/sections/index-in...-12?nopaging=1


While most of this has been discussed on other forum posts, I wonder if any are considering some use of deferred annuitization--or have implemented it--, after the ruling allowing deferred annuities to satisfy (or actually decrease) annual RMD requirements:

" In July of 2014, the Treasury department issued new regulations surrounding the purchase of deferred-income annuities in tax-deferred accounts.
The new regulations allow for the purchase of deferred-income annuities in qualified retirement accounts that begin payments after age 70.5 without violating RMD rules. However, there are certain requirements the qualified annuity must meet in order for the IRS to allow for annuitization after age 70.5:
  • Only 25% of any retirement account (or 25% of all pre-tax IRAs aggregated together) can be invested into a deferred income annuity.
  • The cumulative dollar amount invested in all deferred-income annuities across all retirement accounts may not exceed the lesser of $125,000 or the 25% threshold. The $125,000 amount will be indexed for inflation, adjusted in $10,000 increments.
  • The limitations will apply separately for both spouses with their own retirement accounts.
  • The deferred-income annuity must begin its payouts by age 85 (or earlier)."
I'm not sure how this works in practice, but assume that the RMD annual amount would be figured on the amount in retirement funds excluding the annuitized amount.

At this point, I'm not planning to do it, based on the current interest rate environment, but would consider it in the next few years if/when interest rates rise.


The scenario table was also interesting (particularly the spending improvement line), but I'm not sure how to interpret it, other than as a theoretical increased spending rate, based on annuitization.
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Old 04-11-2016, 05:55 PM   #2
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There are some real benefits of buying a deferred annuity. Mainly by having that income guaranty later in life one could spend down the remaining nestegg in a more thoughtful manner than assuming that one lives to be really old with it's associated parsimonious spending planning. The deferred annuity approach will probably give you more expected income and more fulfillment (because you can plan the decumulation spend-down better) over your lifetime than the self-fund approach. That's the good news.

The other news is that a deferred annuity is almost certainly a poor bet to take. If you look at longevity rates for people, waiting to collect at 80 or 85 will probably mean that you don't get most of your money back. From an investment standpoint the insurance company will come out very well.

Still, by having the deferred annuity backstop, you'll be able to plan much better and utilize your remaining nestegg with a much more certain plan. You just may go out fulfilled but sans the really large remaining nest-egg for your heirs.
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Old 04-11-2016, 06:07 PM   #3
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The other news is that a deferred annuity is almost certainly a poor bet to take. If you look at longevity rates for people, waiting to collect at 80 or 85 will probably mean that you don't get most of your money back. .
actually you will probably get more of your money back if you make it to 80/85 - there are lots of people who die prior to those ages who will forfeit their death benefits under the contract

these are called Qualified Longevity Annuity Contracts (google QLAC)
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Old 04-11-2016, 06:16 PM   #4
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actually you will probably get more of your money back if you make it to 80/85 - there are lots of people who die prior to those ages who will forfeit their death benefits under the contract

these are called Qualified Longevity Annuity Contracts (google QLAC)
Actually no...

Look at this picture from a Michael Kites article: for a 70 year old.


Then decide for yourself how many installments you'll get before you go. Almost all won't even get half their money back.


Still, I see value in having one of these even if I lose money as it will allow me to (safely) spend down the rest of my nest-egg in a time-frame which is favorable to me. The problem with self-funding is you have to plan for a really old age (ie. the longevity problem). The self-funding approach almost always leaves gobs of unspent money behind.


Whether the deferred annuity is inside or outside an IRA (the QLAC) is sort of secondary to the decision to use one.


Here's the Kites article: https://www.kitces.com/blog/why-a-ql...md-obligation/
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Old 04-11-2016, 06:47 PM   #5
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I can make any investment look good compared to an annuity if I used an 8% rate of return. I'll have to price a qlac and do my own calculations.

Lower that to 4% and the story changes.

Not sure whether it's a poor strategy to avoid rmd taxes. I look at it more from an avoiding financial ruin perspective.

I'll do my own calculations and report back. It may be difficult for me to find wholesale spda pricing though
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Old 04-11-2016, 06:55 PM   #6
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I can make any investment look good compared to an annuity if I used an 8% rate of return. I'll have to price a qlac and do my own calculations. Who peer reviews this guy?


Lower that to 4% and the story changes. He seems like an armchair actuary.
It's not some exagerated rate of return that's the issue, it's that not so many people live past 85 and for those that do many don't live that long. The number of installments in your payout that you can expect isn't large.

Again - look at it as longevity insurance, not a great investment. I see value in having one of these even if I lose money as it will allow me to (safely) spend down the rest of my nest-egg in a time-frame which is favorable to me.
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Old 04-11-2016, 07:00 PM   #7
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Correct - it's insuring against financial peril, like LTC insurance.


The other issue with these as they will likely to be required to use unisex mortality which will hurt males.
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Old 04-11-2016, 08:46 PM   #8
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The Treasury Dept's new regs are not new news, as evidenced by the Kitces post. I don't know why Swedroe is treating it like it is. A flurry of articles/blog posts about it were floating around last year, year before.

I looked into DA's last year with an eye toward reducing/delaying partial RMD's until age 85, and decided against it. Can't remember why now. You read enough of this stuff and the arguments for/against any of it become circular. Personally, I decided laddered immediate annuities possibly as part of my Plan B, if required, and even then only after age 75.
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Old 04-11-2016, 09:21 PM   #9
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The other news is that a deferred annuity is almost certainly a poor bet to take. If you look at longevity rates for people, waiting to collect at 80 or 85 will probably mean that you don't get most of your money back. From an investment standpoint the insurance company will come out very well.
I agree with your first point and think it mostly overwhelms the second "bad news" caveat.

Unless you're investing for posterity, it's hard to see how buying an annuity that allows you to spend more money in retirement than you otherwise would could ever be a poor "investment."

I understand the math. And I understand that I probably won't receive more in annuity payments than I spend on annuity premiums. But if that means I can draw down my nest egg to near-zero rather than leaving a huge pile for someone else to blow, that's an enormously successful investment in my book.
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Old 04-11-2016, 09:58 PM   #10
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I wonder if the focus on spending money may not be not so good for people. The Stoics' idea that control of one's appetites for food, for drink, for whatever, may not be a greater and more secure source of happiness than trying to figure out how to maintain an orgy of consumption even into old age.

Historically old age was in the ideal, for cultivation of one's personal virtues and understanding of life.

Ha
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Old 04-12-2016, 11:34 AM   #11
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I wonder if the focus on spending money may not be not so good for people. The Stoics' idea that control of one's appetites for food, for drink, for whatever, may not be a greater and more secure source of happiness than trying to figure out how to maintain an orgy of consumption even into old age.

Historically old age was in the ideal, for cultivation of one's personal virtues and understanding of life.

Ha
I choose the orgy of consumption plan over the starvation plan. What I end up consuming may not be things so much as experiences. My orgy of experiences sometimes may cost a bit.

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Old 04-12-2016, 11:50 AM   #12
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I choose the orgy of consumption plan over the starvation plan. What I end up consuming may not be things so much as experiences. My orgy of experiences sometimes may cost a bit.
And for those of us who prefer living in vibrant cities, even a modest lifestyle can still be quite expensive.
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Old 04-12-2016, 01:59 PM   #13
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I wonder if the focus on spending money may not be not so good for people. The Stoics' idea that control of one's appetites for food, for drink, for whatever, may not be a greater and more secure source of happiness than trying to figure out how to maintain an orgy of consumption even into old age.

Historically old age was in the ideal, for cultivation of one's personal virtues and understanding of life.

Ha
Ha, this is a very good point. Many people preparing for retirement fail to take into account that during the later stages of life, our values change. People plan as if the values they have now (i.e., consumption, adventure, external gratification, various pleasures) will remain constant. Accordingly, they plan financially to fund these external pleasures when in fact many of these desires fall away in later years. Many studies have shown values shift to a more contemplative stance as the various later stages of life are experienced. There are also many excellent books on this subject.
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Old 04-12-2016, 06:45 PM   #14
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Ha, this is a very good point. Many people preparing for retirement fail to take into account that during the later stages of life, our values change. People plan as if the values they have now (i.e., consumption, adventure, external gratification, various pleasures) will remain constant. Accordingly, they plan financially to fund these external pleasures when in fact many of these desires fall away in later years. Many studies have shown values shift to a more contemplative stance as the various later stages of life are experienced. There are also many excellent books on this subject.

Can you name a few? Thanks!


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Old 04-12-2016, 07:26 PM   #15
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Does purchasing in IRA mean that the future annuity payments are tax free? Thus avoiding tax on investment amount of up to $125,000 (assuming maximum allowable).
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Old 04-12-2016, 07:32 PM   #16
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My TIAA-Traditional account is a deferred annuity, but I get the choice of when to turn it into an annuity. Right now it is paying 4.89% interest.
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Old 04-12-2016, 09:12 PM   #17
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... orgy of consumption ...
Ha
Sounds like a good name for a rock band!


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Ha, this is a very good point. Many people preparing for retirement fail to take into account that during the later stages of life, our values change. People plan as if the values they have now (i.e., consumption, adventure, external gratification, various pleasures) will remain constant. Accordingly, they plan financially to fund these external pleasures when in fact many of these desires fall away in later years. ...
You fail to consider the other expenses old age can bring, like 24/7 caregivers. My Mom is now in Assisted Living, and it ain't cheap! Not only that, but she's not ready to sell her house (hoping to get back some day - unlikely), so she's got those expenses too. She may spend quite a few years in a kind of limbo - well enough to take some pleasures from life and visits from friends/family, but bad off enough to require a high level of care to be comfortable (needs assistance to get from bed to chair, or to dining or to the toilet, and needs that several times a night).

She stopped travelling several years ago, her home is paid for, so she is now spending far, far more than she was when she was a younger retiree.

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Old 04-12-2016, 09:39 PM   #18
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I agree with your first point and think it mostly overwhelms the second "bad news" caveat.



Unless you're investing for posterity, it's hard to see how buying an annuity that allows you to spend more money in retirement than you otherwise would could ever be a poor "investment."



I understand the math. And I understand that I probably won't receive more in annuity payments than I spend on annuity premiums. But if that means I can draw down my nest egg to near-zero rather than leaving a huge pile for someone else to blow, that's an enormously successful investment in my book.


My dad is starting to get frail and is worried about going to home and draining all the money and leaving nothing for his wife who has some very long heredity genes. They are both near 80. We were looking around at annuities and did not realize this income stream is protected from nursing home payments provided it is in her name. She could draw around $2200 a month instantly by paying $250,000 for the annuity. I personally dont think that is bad considering that with SS provides a basic floor for her needs considering they have no debts.
We started talking budgets and how much they spend and they didnt really know....I thought that was very odd, but then when I dug deeper and found out they do not even spend all their SS and small pension, leaving their near almost 7 figure stash forever untouched, I guess it makes sense that they wouldn't have any idea.
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Old 04-12-2016, 09:45 PM   #19
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I choose the orgy of consumption plan over the starvation plan. What I end up consuming may not be things so much as experiences. My orgy of experiences sometimes may cost a bit.
Yup.

I have 2 nights at a hotel on Cannery Row in Monterey booked. Cost a grand. Worth every cent, you can spit into the ocean from the balcony. Entertainment is just sitting there for hours listening to the waves on the rocks, watching the otters feed and feeding the birds sitting on your knee with a novel, binoculars and a cocktail.

Good for the soul.
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Old 04-13-2016, 05:48 AM   #20
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Many people preparing for retirement fail to take into account that during the later stages of life, our values change. People plan as if the values they have now (i.e., consumption, adventure, external gratification, various pleasures) will remain constant.
The way to plan for an uncertain future is to make sure you have the resources to handle whatever may come.

Planning for an old age of reduced consumption, meanwhile, becomes a self fulfilling prophecy, regardless of whether you actually want to spend less when those later stages of life finally arrive.
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