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Old 03-08-2012, 10:33 AM   #141
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Before you decide on an annuity (SPIA) or not you need to define the problem that you are trying to solve....

If you decide that always having a baseline standard of living (no matter what) is more important than managing a portfolio for better payouts. Some of us here will not optimize the (spending) utility of our portfolio's because we have to plan for longevity risk. Longevity risk almost always means leaving money on the table when you pass (perhaps gobs of money).

The other issue is that if you are managing your own portfolio, you just might want to have some conservative investments in there (perhaps bonds) to insure that a down market doesn't wipe out your livelihood. However if you had an annuity to cover a basic living standard, then the risk level (and potential upside payout) of the remaining nest-egg could be substantially higher. In addition the remaining nestegg could be spent down (somewhat) more aggressively because your basic living standard is covered by the annuity. It just may be that with an annuity covering your downside then, that overall you can then outperform what a nestegg-only portolio could do in terms of usable cashflow during your lifetime.

It just may be that your usable cash-flow, and peace-of-mind is greater if you can cover basic living standards.

And lastly, The annuity referred to here is a low-cost Single Payment immediate annuity (SPIA), not some high fee deferred variable annuity plan that gets poor reviews on this forum.
+1.

And this is a bad time to buy an annuity if you can wait, though I realize not everyone can. Don't take my word for it.
Quote:
If you buy an annuity today, the currently ultra-low interest-rate environment will depress the payout you receive. (It's not a perfect analogy, but it's somewhat akin to buying a long-term bond with a very low coupon. Rates may go up in the future, but you'll be stuck with your low payout.) The average fixed annuity rate plunged from 5.55% to 3.94% between December 2008 and December 2009, according to National Underwriter. That negative rate environment is why financial planner Harold Evensky flatly stated in a recent video interview that it's a bad time to buy an annuity, even though he thinks the vehicle will be an extremely important part of retirement planning in the future.
The Error-Proof Portfolio: For Annuities, Timing Is Key
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Old 03-08-2012, 03:03 PM   #142
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good luck, although I agree now is not the best time. Wondering if you can go to CDs for 12-18 months to see what happens.
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Old 03-08-2012, 03:06 PM   #143
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+1.

And this is a bad time to buy an annuity if you can wait, though I realize not everyone can. Don't take my word for it.

Quote:
If you buy an annuity today, the currently ultra-low interest-rate environment will depress the payout you receive. (It's not a perfect analogy, but it's somewhat akin to buying a long-term bond with a very low coupon. Rates may go up in the future, but you'll be stuck with your low payout.) The average fixed annuity rate plunged from 5.55% to 3.94% between December 2008 and December 2009, according to National Underwriter. That negative rate environment is why financial planner Harold Evensky flatly stated in a recent video interview that it's a bad time to buy an annuity, even though he thinks the vehicle will be an extremely important part of retirement planning in the future.
The Error-Proof Portfolio: For Annuities, Timing Is Key
over on BH it seems that some feel that waiting for higher interest rates wont buy you that much. the rational is that 1) you will be pulling from your FI portion of your AA to buy the annuity. 2) when interest rates go up the value of your FI goes down so even though you can get a bigger payout/$ spent on the SPIA, if you wait for higher interest rates you will have fewer $ to spend on said annuity. 3) on top of that, to get the same spendable $ you would get from the annuity if you bought right now you will have to start spending out of your portfolio (the FI part for an apples to apples comparision) which is invested currently at a low rate so you will be depleting that part of your portfolio and therefore will have even fewer $ to buy the SPIA in the future.
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Old 03-08-2012, 03:22 PM   #144
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Not discounting these risks, but how are 1 and 3 different? And if I could add to 2...
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over on BH it seems that some feel that waiting for higher interest rates wont buy you that much. the rational is that 1) you will be pulling from your FI portion of your AA to buy the annuity. 2) when interest rates go up the value of your FI goes down so even though you can get a bigger payout/$ spent on the SPIA, if you wait for higher interest rates you will have fewer $ to spend on said annuity. However, for a given $/year payout, the cost decreases the older the annuitant is, at any given interest rate. Example: Joint Life Income annuity - $1K/mo begin age 60 = $224,958 cost. Begin age 62 = $215,549. 3) on top of that, to get the same spendable $ you would get from the annuity if you bought right now you will have to start spending out of your portfolio (the FI part for an apples to apples comparision) which is invested currently at a low rate so you will be depleting that part of your portfolio and therefore will have even fewer $ to buy the SPIA in the future.
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Old 03-08-2012, 03:38 PM   #145
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Not discounting these risks, but how are 1 and 3 different? And if I could add to 2...
Quote:
Originally Posted by jdw_fire
over on BH it seems that some feel that waiting for higher interest rates wont buy you that much. the rational is that 1) you will be pulling from your FI portion of your AA to buy the annuity. 2) when interest rates go up the value of your FI goes down so even though you can get a bigger payout/$ spent on the SPIA, if you wait for higher interest rates you will have fewer $ to spend on said annuity. However, for a given $/year payout, the cost decreases the older the annuitant is, at any given interest rate. Example: Joint SPIA $1K/mo begin age 60 = $224,958 cost. Begin age 62 = $215,549. 3) on top of that, to get the same spendable $ you would get from the annuity if you bought right now you will have to start spending out of your portfolio (the FI part for an apples to apples comparision) which is invested currently at a low rate so you will be depleting that part of your portfolio and therefore will have even fewer $ to buy the SPIA in the future.
1) is a loss of FI principle value due to interest rates rising and 3) is a loss of FI principle value due to spending principle. your addition to 2) is correct so i think the thought on BH is all these make it a wash, i.e. not advantagous to wait on interest rates
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Old 03-08-2012, 03:47 PM   #146
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1) is a loss of FI principle value due to interest rates rising and 3) is a loss of FI principle value due to spending principle. your addition to 2) is correct so i think the thought on BH is all these make it a wash, i.e. not advantagous to wait on interest rates
Let's say there's not a consensus on that by any means, on BH or anywhere else. Wade Pfau had a blog exploring the hypothesis, but by his own admission that thought has not been fully developed yet...he has not concluded anything. We've had this difference of opinion before...
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Old 03-08-2012, 08:26 PM   #147
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Let's say there's not a consensus on that by any means, on BH or anywhere else. Wade Pfau had a blog exploring the hypothesis, but by his own admission that thought has not been fully developed yet...he has not concluded anything. We've had this difference of opinion before...
"the thought on BH" i was referring to in my last post was the thought i brought up earlier in
Quote:
Originally Posted by jdw_fire View Post
over on BH it seems that some feel that waiting for higher interest rates wont buy you that much. the rational is that 1) you will be pulling from your FI portion of your AA to buy the annuity. 2) when interest rates go up the value of your FI goes down so even though you can get a bigger payout/$ spent on the SPIA, if you wait for higher interest rates you will have fewer $ to spend on said annuity. 3) on top of that, to get the same spendable $ you would get from the annuity if you bought right now you will have to start spending out of your portfolio (the FI part for an apples to apples comparision) which is invested currently at a low rate so you will be depleting that part of your portfolio and therefore will have even fewer $ to buy the SPIA in the future.
where i said "over on BH it seems that some feel that waiting for higher interest rates wont buy you that much." i didnt say there was a consensus. i am sorry i was unclear.

i look forward seeing results from further analysis.
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Old 03-09-2012, 10:16 AM   #148
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i look forward seeing results from further analysis.
Me too, cheers.
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