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Approaching FIRE, immediate annuity in my 50's?
Old 01-07-2016, 05:03 AM   #1
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Approaching FIRE, immediate annuity in my 50's?

So, I'm 47 this year and thinking about retiring when I'm 50ish, probably in 3 - 5 years, taking 6 months off, then part time or contract type work until 55 just to stay mentally sharp (concerned with dementia or other illness).

2015 and beginning of 2016, the stock market was not generous, so I looked at ImmediateAnnuities in a what if scenario. So, $250k purchase, income starting in 8 years (age 55) provide $3440/month, 10 Year Period Certain. This should cover the barebone budget. Other funds to cover discertionary activities, etc.

Or, should I just do a 50/50 Wellington/Wellesley allocation and pull annually?

Is an ImmediateAnnuities that bad to leverage for years 55 to 65?

Additional details:
Family of 4, SAHM, 2 kids (9 and 8 now, 529 fully funded by 2019, not included in net worth)
Net worth at end of 2015, $3M ($1M taxed account, $1M investment real estate, $800k IRA/401k, $200k Roth)
Current annual expense is about $80-85k, but may relocate to lower cost of living in a few years.
Small pension at age 62 ($13k a year, non-col)
Eligible for SS, probably delay it until 70
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Old 01-09-2016, 04:44 PM   #2
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Just seeing the other annuity threads, I guess it's against most POV here.
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Old 01-09-2016, 04:54 PM   #3
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I have heard they can be a good tool for retirement, but usually I see them recommended to be purchased later in life if you're going that route because it's more likely you'll get your money's worth. Was just reading a Larry Swedroe book the other day ("The Only Guide to Alternative Investments You'll Ever Need") and per his calculations the best time to buy them is in your 70's or even 80's.

Whitecoatinvestor has a different view though (SPIA- The Good Annuity | The White Coat Investor - Investing And Personal Finance Information For Physicians, Dentists, Residents, Students, And Other Highly-Educated Busy Professionals), he thinks it is not necessarily a bad idea to buy one (even at 50) if you want to provide a floor for your income with part of your savings.

I have probably 30 years before I would consider one, but will definitely give it some thought when I am in my 60's.

Interest rates are something to consider, since annuities issued at a time of low inflation and low expect inflation are said to generally pay less. And on the flip side, if you get an annuity you'll have the choice of no increases, fixed percent annual increases, or inflation-indexed annual increases.
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Old 01-09-2016, 05:00 PM   #4
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Food for thought:

3440 * 12 * 10 = 412800

(412800 / 250000) ^ 1/18 - 1 = 2.83% (nominal)
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Old 01-10-2016, 03:34 PM   #5
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Quote:
Originally Posted by zesty View Post
Whitecoatinvestor has a different view though (SPIA- The Good Annuity | The White Coat Investor - Investing And Personal Finance Information For Physicians, Dentists, Residents, Students, And Other Highly-Educated Busy Professionals), he thinks it is not necessarily a bad idea to buy one (even at 50) if you want to provide a floor for your income with part of your savings.

I have probably 30 years before I would consider one, but will definitely give it some thought when I am in my 60's.
Thanks for the link. I'm looking at 55, but probably won't decide for awhile. Once I get to SS, it'll be less important, so I guess I'm just looking for some type of "floor" support.
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Old 01-10-2016, 03:41 PM   #6
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Originally Posted by hnzw_rui View Post
Food for thought:
3440 * 12 * 10 = 412800
(412800 / 250000) ^ 1/18 - 1 = 2.83% (nominal)
I agreed it's quite a low return, but better than a loss/rocky market and some CDs. I won't be deciding for awhile as I have a variety of incentives to stay working.

Some of my thoughts were 1/12 of my current net worth to give me a reasonable income "floor" without worry for 10 years. Sure I can probably do the same with CD/Bonds/Stable Value Funds, perhaps.

Thanks.
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Old 01-10-2016, 03:45 PM   #7
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Is the income stream from this type of annuity taxable if it is purchased with after-tax money?

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Old 01-10-2016, 03:58 PM   #8
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Quote:
Originally Posted by Aiming_4_55 View Post
I agreed it's quite a low return, but better than a loss/rocky market and some CDs. I won't be deciding for awhile as I have a variety of incentives to stay working.

Some of my thoughts were 1/12 of my current net worth to give me a reasonable income "floor" without worry for 10 years. Sure I can probably do the same with CD/Bonds/Stable Value Funds, perhaps.
Not saying either way is right or wrong. Just a question of whether you're willing to accept the low but guaranteed return.

Quote:
Originally Posted by scrinch View Post
Is the income stream from this type of annuity taxable if it is purchased with after-tax money?
It's pro-rated, I believe. You do get a cost basis for the after tax principal.
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Old 01-10-2016, 04:02 PM   #9
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It's pro-rated, I believe. You do get a cost basis for the after tax principal.
That's my understanding as well. Taxed only on the gain.
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Old 01-10-2016, 04:07 PM   #10
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Originally Posted by hnzw_rui View Post
Not saying either way is right or wrong. Just a question of whether you're willing to accept the low but guaranteed return.
Yup, for the last week, I would of accepted 2 - 3% gain vs a down market. but no one can promise the future.

I sometimes sit on large cash balances at less than 1% interest, so it's relative in some sense. This is down payment money for a place in LA area, but leaning toward leaving in a few years vs. buying now. Lost opportunity, oh well, cost of having a flexible choice.
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Old 01-10-2016, 04:42 PM   #11
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Yup, for the last week, I would of accepted 2 - 3% gain vs a down market. but no one can promise the future.
Again, up to you whether it's an acceptable rate.

Honestly, I'm buying EE-Bonds as part of my EF. The current rate is a paltry 0.10% but there's a one-time adjustment in 20 years so you get double the face value (which makes for a mere ~3.5% CAGR).
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Old 01-12-2016, 10:14 PM   #12
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Even in a down stock market you should see a dividend yield of around 2.5% -- darn close to the annuity yield - but with possible upside in your equities / principle and the ability to access that principle at any time. Once you buy an annuity your principle is gone.

There is downside risk to equities but thinking they will go to zero and stay there for 10-15 years is unlikely - and you'll be hard pressed to collect on the annuity if that kind of market happens anyway. Don't forget you have counter party risk with an annuity.

Maybe Buy a 30 year bond and hold it to maturity. You'll get nearly 3 percent with your principle returned after 30 years Or Buy a muni ladder and get a similar return with zero taxes. Or an approach might be to buy a deferred annuity that starts to pay at age 80 or 85 just as longevity hedge. Or maybe a 25 year level term life insurance policy on DH.
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