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What % of savings should go to annuity?
Old 04-07-2013, 09:02 AM   #1
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What % of savings should go to annuity?

Due to the fact that I have the midas touch in reverse when it comes to investing, my wife and I decided that we should purchase a fixed immediate annuity when I retire. Is there a rule of thumb (like the 4% drawdown theory) as to what percentage of your 401K savings can safely be converted to an annuity? One advisor told me not to do it that way, but to simply see how much of a monthly deficet I am running (income vs. monthly expenditure) and get an annuity that can fill that gap. Seems reasonable to me. Any thoughts or advice? Thank you for sharing your time and expertise.
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Old 04-07-2013, 09:27 AM   #2
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No, there's not really a rule of thumb. I think the decision should be based on how much of your expenses you want covered by guaranteed, fixed income. You should also consider interest rates when you buy. For example, you won't get much now (relatively speaking) as compared to when interest rates are much higher. You could look at buying fixed annuities in smaller pieces, assuming an annuity makes sense for you at all. Just my thoughts.
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Old 04-07-2013, 09:41 AM   #3
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I would be VERY careful in shopping for annuities as there is a HUGE difference in costs. This tends to be a high profit margin business for many firms. Make sure you understand the details of any you might consider (e.g. sales charges, early withdrawal penalties, survivor benefits, etc.). And remember any annuity is NOT like an FDIC-insured bank acct. This is a complex area & I would invest my time before investing my $$.

Annuities
http://ezinearticles.com/?Pros-and-C...ies&id=2510758

NOT endorsing any specific product, but this site calculator gives some idea of current payouts for some common types of annuities:
Immediate Annuities -- Income Annuity Quote Calculator.
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Old 04-07-2013, 09:43 AM   #4
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No, there's not really a rule of thumb. I think the decision should be based on how much of your expenses you want covered by guaranteed, fixed income. You should also consider interest rates when you buy. For example, you won't get much now (relatively speaking) as compared to when interest rates are much higher. You could look at buying fixed annuities in smaller pieces, assuming an annuity makes sense for you at all. Just my thoughts.

+1. Good answer on both points IMO.
  • How much floor income do you need (projected essential spending/mo - SS/mo - pension/mo = desired annuity income/mo) and
  • interest rates make this a bad time to purchase annuities, though it may be years before they're a better deal.
As usual, no universal answer.

I'm not a fan of annuities as part of our plan A, especially at these interest rates, but a SPIA later in life (75 +/- years old?) is an option for our plan B.
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Old 04-07-2013, 10:04 AM   #5
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Originally Posted by ERhoosier View Post
I would be VERY careful in shopping for annuities as there is a HUGE difference in costs. This tends to be a high profit margin business for many firms. Make sure you understand the details of any you might consider (e.g. sales charges, early withdrawal penalties, survivor benefits, etc.). And remember any annuity is NOT like an FDIC-insured bank acct. This is a complex area & I would invest my time before investing my $$. ...
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Due to the fact that I have the midas touch in reverse when it comes to investing, my wife and I decided that we should purchase a fixed immediate annuity when I retire. ....
Isn't purchasing an annuity an 'investment'? And it seems to be one of the most complex and least flexible, often with large surrender charges that lock you in after you might decide it isn't right for you.

I'd say your fear of investments is taking you from the frying pan to the fire. Beware!

-ERD50
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Old 04-07-2013, 10:06 AM   #6
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Since you say you do not have a good investing sense, before handing your dough over to a company that promises a stream of lifetime payments best to make sure of their financial strength. This is not difficult to do - look before you leap!
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Old 04-07-2013, 10:23 AM   #7
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I am not certain that now is the time to be purchasing an annuity. They are more expensive when the interest rates are low.

You may want to shop around and gain an understanding of the market and the offerings.

When interest rates rise, the price of your annuity contract will decrease accordingly.

I recently read a book....'Pensionize Your Nest Egg' by Milevesky. I found it to be a very good book-especially for those without a defined benefit pension.
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Old 04-07-2013, 10:31 AM   #8
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I doubt if you will find much enthusiasm here for buying an annuity at this time. The low interest rates being a good reason to wait, or to buy a ladder of annuities over a 5-10 year period.

Personally, I was not an annuity fan, but I must admit that after having read Dr. Pfau's comparison of stocks/bonds versus stocks/SPIAs, there is a very small possibility I might buy one in the future - say a 10% chance.

Watch the charges and fees. Check out Vanguard for an idea of the price of a low cost annuity.
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Old 04-07-2013, 10:38 AM   #9
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Originally Posted by Dino1 View Post
Due to the fact that I have the midas touch in reverse when it comes to investing, my wife and I decided that we should purchase a fixed immediate annuity when I retire. Is there a rule of thumb (like the 4% drawdown theory) as to what percentage of your 401K savings can safely be converted to an annuity? One advisor told me not to do it that way, but to simply see how much of a monthly deficet I am running (income vs. monthly expenditure) and get an annuity that can fill that gap. Seems reasonable to me. Any thoughts or advice? Thank you for sharing your time and expertise.
have you taken social security. although i took at 62 if my choice was strictly between buying an annuity or taking social security at 70-i would take SS at 70 and use that as my annuity.
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Old 04-07-2013, 01:22 PM   #10
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You really don't need a Midas touch for ordinary investing. Just follow a few very simple allocation rules and you'll do as well as the market, less a tiny drag from costs. Where your personal skill or luck might come into play is if you should deviate from this plan, to make active decisions.

The whole philosophy of passive investing (be it right or wrong) is that you get the average return. You won't do significantly better, but you also will not do significantly worse.

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Old 04-07-2013, 04:08 PM   #11
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With respect to your question, for me - zero. Psst....... Wellesley.
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Old 04-07-2013, 05:08 PM   #12
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With respect to your question, for me - zero. Psst....... Wellesley.
Yep. When it comes to annuites, psst on 'em - other than the govt one known as SS, that is.
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Old 04-07-2013, 05:18 PM   #13
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Another vote from me against an annuity. Diversify, rebabalance, and take a bit each year. It's easy to do. You can always decide later to go with an annuity (hopefully once they start yielding something closer to their historic rates, they are very low now). But you can't go the other way--once you give that money to the helpful annuity salesman you can't get it back. (But he'll be very grateful you did it.)
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Old 04-07-2013, 05:37 PM   #14
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If you want the income from an SPIA I'd use it to replace part of your bond allocation, don't eat into your equity allocation. I'd also think about laddering or just keep the first SPIA short duration as interest rates can only go up. FYI I've had an annuity with TIAA for 25 years and its minimum annual return was 3% and the max was around 7%.. I'll be keeping it when I ER as part of my fixed income allocation.
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Old 04-07-2013, 05:43 PM   #15
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Actually the more I think about it the more I like my TIAA-CREf Traditional.....guaranteed min of 3% return and also an option to get at the principal by systematic withdrawals over 10 years without penalties.
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Old 04-07-2013, 05:46 PM   #16
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Otar provided some guideline as to how much of your portfolio to annuitize in his book "unveiling the retirement myth". I'm too young to consider annuities at this point, but I will probably annuitize enough of my nest egg to cover basic expenses beyond SS once I reach my 60s or 70s.
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Old 04-07-2013, 06:18 PM   #17
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I would not suggest buying an SPIA with more than 25%-30% of your portfolio, maximum, no matter what the interest rate environment. (Right now, the latter is terrible which is one reason why so many are against buying one right now.)

Inflation can be a huge problem over time, especially with fixed payment annuities. Inflation adjusted annuities are harder to find, and expensive. If you only have 10-15 years to live, inflation may not be so devastating but if you can expect 25-30 years to live, it can be disastrous. For these reasons, I plan to wait until I am 80-85 before buying a small SPIA.
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Old 04-07-2013, 08:37 PM   #18
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For what it's worth, Fidelity suggests 10%. I like the idea of holding off till 8 as mentioned above so inflation is not as big a factor. You could also look at inflation adjusted SPIAs, you can get quotes through the Vanguard site, don't know if you have to a have an account though. There are a couple other places that sell them but you'd have to dig to find them.
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Old 04-07-2013, 09:19 PM   #19
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I took out an annunity 2.5 years ago that has a 6% earnings rate. I have the option to get the contract value back after three years (6 months from now). I think it may have been a good buy. Don't know yet. It was a little less than 10% of my net worth. I can reclaim the contract value in February which is a little more than what I invested. We'll see...
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Thank you all
Old 04-08-2013, 06:47 AM   #20
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Thank you all

I appreciate your time and expertise. Thanks again. I will share with my wife.
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