Who has/will have annuity?

[Midpack]

Did you or do you plan to use a purchased annuity for income in retirement? Not asking how much you've annuitized, but only purchased annuities (not pensions or other annuitized income streams).

 

[cashflo2u2]

I am considering a SPIA (without inflation coverage) to cover a portion the amount that I am withdrawing from my retirement portfolio during retirement. According the several respected writers AND Firecalc a SPIA with a premium that represents about 15-20 of my portfolio balance and about 60% of my distribution amount actually extends the life of my stash. OTOH, the new VG managed portfolio funds have me thinking twice. It's all very confusing.

 

[W2R]

Probably I will not purchase an annuity, and I do not have one in my revised financial plan, so I voted that I wouldn't use a purchased annuity for retirement. I used to have one in my plan when I was expecting a much more frugal, nearly bare-bones retirement (consistent with my expected assets at that time). After my recent windfall I removed it from my financial plan.

If interest rates eventually exceed 200% of their present level, I might consider it. Or, I might buy one in my 80's when they are a more attractive option, especially if I am struggling financially at that age.

Right now, I tend to think not. I have nothing against inflation adjusted immediate fixed lifetime annuities for retirees over 60 (especially if they are retiring on a shoestring), but my current situation doesn't call for one.

 

[Dawg52]

Probably not but leaving the door open.

 

[Jake46]

No plans to purchase annuity for retirement or any other purpose.

 

[Notmuchlonger]

Might think about it if we weren't getting a pension and there was only 1 of us. I like to keep an open mind about things

 

[2B]

I am considering a SPIA (without inflation coverage) to cover a portion the amount that I am withdrawing from my retirement portfolio during retirement. According the several respected writers AND Firecalc a SPIA with a premium that represents about 15-20 of my portfolio balance and about 60% of my distribution amount actually extends the life of my stash. OTOH, the new VG managed portfolio funds have me thinking twice. It's all very confusing.

I, of course, have no plans to have any form of annuities I can avoid.

Most of the "respected writers" are shills for the annuity industry in one way or another. Unfortunately, most of the financial writers have a vested interest in people becoming their clients.

I do agree with you that FIRECalc values a "guaranteed" income higher than the risk adjusted return/withdrawl of the remaining portfolio. Right now interest rates are historically low. This isn't the time to buy. I would think if someone was interested the time to shop is when they are approaching 75 and their doctor says they are as healthy as a 55 year old. This would get you the highest payout plus the lack of inflation indexing is not likely to be a major concern to the plan. Even then a 10 or 20 year guaranteed term may be better. I'd still want to run the numbers and see if a self-annuitized CD/bond ladder would provide a better return after assuming living 10 years past your mortality table lifespan.

 

[Texas Proud]

As most have said..

No plans to do it... but if interest rates spike and buying one will lock it in for life... well, then maybe...

I don't see high interest in our future..

 

[OAG]

Probably will not since I already have two COLA'd Annuities. However, later I may consider one or the new Vanguard Funds.

 

[Alan]

I don't plan to because I will have 3 pensions coming in covering all the essentials.

 

[cashflo2u2]

I, of course, have no plans to have any form of annuities I can avoid.

Most of the "respected writers" are shills for the annuity industry in one way or another. Unfortunately, most of the financial writers have a vested interest in people becoming their clients.

I'm not talking about shills. I talking about contributors to the Journal of Financial Planning or publications of college professors.

 

[Bestwifeever]

I'm considering a pension and SS as annuities, so probably would not purchase one. But never say never--

 

[2B]

I'm not talking about shills. I talking about contributors to the Journal of Financial Planning or publications of college professors.

I hate contributing to your losing your virginity but the people who write for the Journal of Financial Planning (which I read pretty reguarly) are a mixture of PhDs of finance types, financial planners and insurance types. Most of the authors are building their credentials to attact clients or pushing the products of their companies. JFP tries to come across as a scholarly journal of financial planning but it is forced to rely on authors that can not completely step away from their personal vested financial interests.

There are some great articles that show up. Guyton has done a couple classics. Bernicke has also raised some interesting issues worth considering. I usually find one or so a month I read thoroughly.

There are also some real stinkers. I can't remember the author but it was an article last year that showed how to improve your financial plan with Indexed Annuities. The improvement was at best marginal at very high withdrawl rates (well beyond anything anyone here would suggest). The big problem I saw was the numbers he assumed for fees were lower than any commercial product I've stumbled upon (~1% I think). I'm sure if he used the more typical 4+% the conclusions may have been not the desired outcome. There were other problems but it's been awhile.

As far as the real scholarly journals are concerned (by the university professors), I'd have to look at their article with their assumptions. These are where much of the investment allocation and index justifications that are pretty much taken for granted here have been "proven" over the last 40 years. I'd still be cautious and not take a line out of the abstract or conclusion too far.

The bottom line for a SPIA involves deciding how long you plan to live, what inflation will be between your buying and dying and what investment return you think you can achieve on your own during the same period. SPIA opportunities are usually pretty straight forward to analyze. You can either determine the IRR for dying at your mortality lifespan or for some "extra" time period. You can then compare them to a ladder of high quality corporate paper (that's what the insurance company holding the annuity contract is) that matures over the "safe" extra life span you want to assume. High quality corporate bonds usually beat out a SPIA unless you plan on living 15 or 20 years beyond your mortality table life span. That covers you down to the 5% or so of the population.

I know that a SPIA "feels good" but you have to truly have the high longevity gene to make them make any sort of financial sense. I know I don't have to worry about making it to 100 but with a reasonable SWR I should still have money to live on comfortably if I do.

I see people that are attracted to a SPIA are frequently analytical types that want to "be safe" with their retirement income. Trying to rush a retirement date is usually part of the picture. I just don't have that much faith in insurance companies.

 

[megacorp-firee]

Not planning on it ... but if the market ever comes around and becomes attractive (lower fees, ...etc.), then I would consider it.

 

[Delawaredave5]

I think the currently available annuities are high margin products for the insurance industry and offer poor value to the consumer.

I keep hearing of "good ones" and "situations where they are ideal" -- nothing I have seen convinces me differently from the first sentence above.

As insurance companies compete and these offerings develop, I guess it is possible that these products might become a "good deal" for me in the future (but I doubt it).

 

[cashflo2u2]

2B, interesting answer! I will post 1 or 2 of the articles I read soon. I wish there was an instructional article that would show, in detail, how to construct your own annuity type investment. Is it as simple as laddering fixed income products?

 

[ziggy29]

I'd consider rolling part of my IRA into an SPIA if we had a return to 1981 interest rates. At current interest rates that determine the payout, it doesn't seem like a good deal. And even then I'd consider it more of an insurance policy to lock in a certain income stream than a good investment.

 

[2B]

2B, interesting answer! I will post 1 or 2 of the articles I read soon. I wish there was an instructional article that would show, in detail, how to construct your own annuity type investment. Is it as simple as laddering fixed income products?

It's really pretty simple if you are willing to go to all of the trouble. Say you want $12,000 per year. You start at age 70 and figure you'll be dead or nearly so by 90. You would plug in a interest rate for the bonds with maturities over the next 20 years. If the interest rate was 5%, you'd buy $150,000 in $1,000 bonds. At the end of year 1 you would receive $7,500 in interest. You would then have to have another $5,000 in bonds maturing. So the payout at the end of year 1 would be $12,500 and you would have $145,000 in bonds left. Year 2 would generate $7,250 in income and you'd have to have another $5,000 in bonds mature so the payout at the end of year 2 would be $12,250. This would continue with the extra payout eventually being recovered in later years by collecting less than $12,000. All-in-all, it would work.

In the real world there would be a yield curve with the rates increasing as maturities became longer. If you plug those rates into Excel, you could quickly calculate the bonds needed at each maturity.

An easier way would be to use zero coupon bonds. The interest rate would be lower since these are government bonds but then the security is higher. There you'd just buy $12,000 in zero coupon bonds for each year of your self-annuity. For tax reasons, you'd want these in an IRA.

This does not give you "longevity insurance" since your ladder will run out while the SPIA would pay if you lived forever and the insurance company remained solvent. The secret is to buy enough extra years where you feel comfortable you won't live that long. Go for 110 if you feel lucky.

The benefits of self-annuitizing is that if you need a surge of money for long term care it is available. Getting $1000 per month from a SPIA won't help much if you don't have the assets to get into a decent LTC facility. Medicaid would take your $1000 and you'd still be in the ward with the other indigents.

 

[Khan]

I keep going back and forth considering how to withdraw the TSP: SEPP, IRA,annuity, some combination thereof?

 

[MooreBonds]

Like TexasProud, I currently don't have definite plans to buy one.

However - when I actually reach retirement age (or, more like my 60s/70s since I sure hope I RE ), I will still go through the number crunching to see what they are paying at that point in time. Then, compare it to what I could do on my own (combination of a fund like Wellesley, building my own zero ladder like another poster suggested, etc.).

I certainly don't expect to ever wind up buying an immediate annuity because a financially-aware person with just a little time on their hands can usually build their own homegrown version which produces a similar income stream (with possibly a slightly higher risk) that still has nearly all of the original cash available in an emergency. But...I'm an open-minded enough guy to consider one IF (and that's a big IF) the numbers work out.

 

[cute fuzzy bunny]

I have way too many ways to generate income without giving a bunch of money away to an insurance company so they can make money off of it and give me part of that back.

 

[cashflo2u2]

It's really pretty simple if you are willing to go to all of the trouble.

Not really. That's why I'm considering an annuity. Of course that begs the question, do I really need an annuity. Firecalc says I have 100% probability of not experiencing total financial ruin. Realizing Firecalc relies solely on historical results, how much reliance can I place on that in my thinking that maybe I don't need an annuity? Also, I have a joint LTC policy, a good one with JH, that should fund a substantial % of the total cost if needed.

Most FP's are under 50 and don't have a sense that a retiree's portfolio is an irreplaceable asset and not just a bunch of lines on a graph that say how many bazillions it may be worth in 30 years. They trash annuities because it is not included in the assets under management that even the so called Fee Only are biased cause they want your stash to manage.

 

[cashflo2u2]

I have way too many ways to generate income without giving a bunch of money away to an insurance company so they can make money off of it and give me part of that back.

Cute, is it as simple as that? Does it not eliminate several risks, e.g., longevity, return, etc.? Let me on on some of these way to make $$.

 

[2B]

Cute, is it as simple as that? Does it not eliminate several risks, e.g., longevity, return, etc.? Let me on on some of these way to make $$.

You are still a newbie on the forum. There are some of us (most actually) who are totally "do it yourselfers" (DIY). We will argue about the many ways to determine your SWR and whether Guyton and Bernicke are applicable. Annuities address many psychological issues you mentioned but ultimately you have to decide whether you believe in your ability to beat the insurance company returns over the long term.

The argument of letting the insurance company take care of you sounds nice and comforting. Unfortunately, they make a significant profit investing the way most of this forum advocates and paying a lower return to the people they have given their guarantee to.

You need to read some of the "best of" threads. You need to read some of the boglehead forum.

An annuity is simple and easy. An annuity makes lots of money for the person selling it and the company issuing it. You can ususally do better on your own unless you live to be 100.

 

[Ronstar]

I'm embarassed to say that I bought an annuity from my accountant's financial planning subsidiary at the advice of my accountant. It grossly underperforms my other investments. Last year up 1.6%. Maybe it is supposed to lag other returns because of the provision that the principal can not go below a certain level. Maybe I dont understand annuities, but it seems like I'm getting burned. This is something that I'm going to research heavily in the near future, and maybe convert to something else.