buying an immediate annuity

[Curt]

Hi everyone! I have a question about my upcoming, forced retirement. The company that I now work for is about to go under. I have lost ALL of my benefits. No more health insurance, sick days, paid holidays or vacations. So I want to retire a couple of years early. I wanted to retire at 65 but will have to do it now at 63. I have no retirement from my workplace. I want to purchase an immediate annuity for $300,000 that will give me $1,840 a month for life in addition to the $1200 SS I will also receive. I still will have $75,000 to use if I need it. I know I will lose all control of the money and that's fine as that's what I saved for all my life. I could draw on it but if I live long enough I would run out of money where the annuity will go on til I die. The state of Ohio only has a guaranty fund for annuities for $100,000. If my annuity company goes under I could lose most of my $300,000. Would it be better to buy three $100,000 annuities from three different companies then if one (or all) go under I then could be insured by the state and recover my loses? I thought I had it all figured out years ago about my retirement planning. Interest was high and things were good. I didn't know it was going to be this hard. Thank you for your help, Curt

 

[easysurfer]

Sorry to hear that the company you work for is going under.

I'm sure some will say, are your sure you want to go this route? 300,000 into annuities? Anyhow, you can do the number estimates at

Immediate Annuities - Instant Annuity Quote Calculator. which for 300K gives you pretty much the $1800 a month for life.

Yes, I think it's safer to spread them into three 100k annuities than all in one.

 

[Curt]

Thank you for your quick reply easysurfer. My insurance agent of course tells me that a $300,000 is perfectly safe as there are so many steps that the insurance company has to go through to go under that it never happens.

 

[easysurfer]

I can't speak for how perfectly safe it is with the insurance companies. But I bet during the AIG scare, many asked what if? Seems that if you separate the annuities in 3 instead of 1, you'd get the extra measure of safety but would just get 3 monthly checks instead of one.

 

[Katsmeow]

There is no way I would buy an annuity for more than what is covered by the guaranty fund. You do need to check to find out whose guaranty fund covers the annuity -- is that the one for the state where you live or where the insurer is headquarterd? I don't know. Also if you pay $100k for an annuity that pays $600 per month and the insurer goes under how does the guaranty work? Do they pay you back part of your purchase price or just pay the $600 a month or what.

 

[REWahoo]

In addition to the question of spreading the risk among three companies, you might also want to consider which companies:

You want a very strong, solvent insurer. My preference runs to large, AA-/Aa3 or better rated mutual companies. Examples of these companies include: TIAA-CREF, NY Life, MassMutual, NorthwesternMutual and Guardian, although there are certainly others.

 

[ziggy29]

Apart from the decision as to whether putting a full $300K into SPIAs is the best idea (maybe it is, maybe it's not, depends on a number of factors), assuming my mind was made up on that front I would absolutely break it into three $100K annuities with different companies. REW's quote to Brewer's list is a good place to start as these are generally strong and fairly conservatively managed insurers.

 

[easysurfer]

Curt,

Another item you'd want to consider before diving into an immediate annuity is are you willing to accept the payout at this time of such low interest rates or would you be willing to bide your time awhile until interest rates go up. Remember, it's a lifetime decision.

Easysurfer


http://www.decumulation.org/RetirementPlans/ImmediateAnnuities/tabid/101/Default.aspx

 

[Moscyn]

I'm not sure about putting the bulk of your monies in annuities but if you have considered that to be the best course of action in your case, then it is advisable to have 3 different annuities with 3 reputable large insurance companies respectively. It's an added protection and is not troublesome and has the element of spreading your risk even though you are buying the same product.

 

[W2R]

If you have decided to put that $300K into annuities, then so be it. You should consider inflation, and you can do that by making sure these annuities are fully inflation protected. This is important.

I'm not sure if you are looking for suggestions, but if so, here is another approach that I considered at one time. You could put $100K into annuities, which would give you $613/month. Then you could invest the other $200K, which at a 4% withdrawal rate would give you another $667/month. This would give you a total income of $2480/month as opposed to $3040/month with your plan. Doesn't sound like much of an improvement, does it? However, you would be putting your money into a variety of investments (instead of putting all into annuities). Also if you needed that money to deal with illness or other emergency expenses, you could access most of it.

 

[kyounge1956]

If you have decided to put that $300K into annuities, then so be it. You should consider inflation, and you can do that by making sure these annuities are fully inflation protected. This is important.(snip)

W2R, is there a rule of thumb comparing an inflation adjusted annuity to a non-adjusted one? That is, if investment of X dollars will get you a non-adjusted annuity for $10K a year, about what would be the starting payment of an inflation adjusted annuity costing X dollars? I'm guessing maybe $6500 - $7K?

I've visited some of the annuity calculation sites that people post links to from time to time, but the ones I've looked at only provide info on the plain vanilla annuities--if you want to know the other kinds, including inflation adjusted ones, you have to give your email address, which I've been unwilling to do.

 

[rescueme]

Current discussion on SPIA's on DH's, FYI:

Bogleheads :: View topic - Single Premium Immediate Annuity questions

 

[ziggy29]

W2R, is there a rule of thumb comparing an inflation adjusted annuity to a non-adjusted one? That is, if investment of X dollars will get you a non-adjusted annuity for $10K a year, about what would be the starting payment of an inflation adjusted annuity costing X dollars? I'm guessing maybe $6500 - $7K?

I'm sure that would most heavily depend on your age when you first take payments. Inflation protection will cost a *lot* more for someone who is 55 than someone who is 75, similar to inflation-adjusted LTCI.

 

[kyounge1956]

I'm sure that would most heavily depend on your age when you first take payments. Inflation protection will cost a *lot* more for someone who is 55 than someone who is 75, similar to inflation-adjusted LTCI.

Right, that makes sense. Do you know anywhere I can look up the difference between the two types by age of the annuitant? At this time I am looking for a ballpark idea to use in planning, not a specific quote.

 

[Curt]

My thanks to all

Thank you all for your replies and excellent advice. I just got word today from my boss that I will be working only 3 days a week, starting next week, for the foreseeable future so I will have no time to wait for the interest rates to go back up. I will have to act now. Tomorrow morning (Saturday) I am going to my bank to talk to their financial advisor about getting three immediate annuities and how the state's guaranty system works. I'm thinking now about easing myself into the three annuities maybe a couple of months apart along with my SS. Thanks again everyone, Curt

 

[clifp]

Sorry to hear about your job loss.

You should definitely split your annuity among 3 companies.
Ohio Life and Health Insurance Guaranty Association provides limited protection for 100K per annuity and max of 300K for all forms of insurance. Note that annuity insurance not the same as FDIC deposit insurance, although practically speaking it should be safe except under extraordinary circumstances.

You really don't need to rush into making such an important decision.

The nice thing about annuities is the longer you wait to buy them the more you get. For instance if you wait until age 65 the annuities payments will increase by more than $110/month.

One option you should seriously considered is to delay collecting social security, until 65 or possibly even 70 and live off the existing 300K. In many cases you will come out ahead by doing this.

 

[Darryl]

Curt, sorry to hear about your job.

As others have noted you don't need to rush this decision. If you're determined to buy get 100k now and study some more before committing the rest.

If interest rates go up in the future you will get a higher payout on annuities you purchase in the future. As you age you will get a higher payout for the same amount of dollars committed.

Living off some of this money and delaying SS might be the best possible investment. This is a big decision, certainly worth studying before committing.

Good luck

 

[Dawg52]

Thank you all for your replies and excellent advice. I just got word today from my boss that I will be working only 3 days a week, starting next week, for the foreseeable future so I will have no time to wait for the interest rates to go back up. I will have to act now. Tomorrow morning (Saturday) I am going to my bank to talk to their financial advisor about getting three immediate annuities and how the state's guaranty system works. I'm thinking now about easing myself into the three annuities maybe a couple of months apart along with my SS. Thanks again everyone, Curt

Another slight twist to what others have suggested would be to buy a short term annuity for let's say 5 years for your income needs. Invest the rest in something safe like a cd. Then after 5 years, you will get much more from SS. You could then buy a lifetime annuity for the difference and get more bang for your buck as rates should be up by then. Just a thought anyway.

Best of luck on whatever you decide.

 

[brewer12345]

Thank you all for your replies and excellent advice. I just got word today from my boss that I will be working only 3 days a week, starting next week, for the foreseeable future so I will have no time to wait for the interest rates to go back up. I will have to act now. Tomorrow morning (Saturday) I am going to my bank to talk to their financial advisor about getting three immediate annuities and how the state's guaranty system works. I'm thinking now about easing myself into the three annuities maybe a couple of months apart along with my SS. Thanks again everyone, Curt

Curt:

If you are set on the immediate annuities, that is fine. However, please be very careful which companies you buy from and definately split your purchase into 3 100K annuities. This is your salvation: if your payouts cease you are in real trouble. I would also strongly suggest that you stick with the strongest companies you can find, since you have little room for default risk on the part of your insurer. Insist on a Aa3 (Moody's) and AA- (Standard and Poors) minimum rating (rough equivalent from AM Best would be A+).

 

[LOL!]

Since this is important money for the rest of your life, you really need to take some time to study all the options. You cannot rely on an insurance gal or even few anonymous message board posters. Yes, they can be very helpful, but they cannot guarantee results.

You should read Jim C. Otar's book "Unveiling the Retirement Myth" which has LOTS of discussions about annuities. He also discusses laddering annuities and not exceeding the guaranty of the appropriate government authority. He has a web site and calculators which you can find by a web search.

Further help can be found at Bob's Financial Website and in particular Maximizing Predictable Income in Retirement where a combination of SS, fixed annuity and a TIPS ladder are described. He also describes several scenarios where delaying SS benefits or a purchase of annuity may be helpful. Study this carefully.

Do not make any decisions without becoming very well informed. This will require time and effort on your part to get informed.

I cannot imagine that a financial advisor at a bank will be in your best interest. That sounds like you will lose 2 to 3 years of income in hidden fees to the bank and advisor. In any event you will want to get several quotes from different sources for similar annuities.

Good luck!

 

[rescueme]

Another slight twist to what others have suggested would be to buy a short term annuity for let's say 5 years for your income needs. Invest the rest in something safe like a cd. Then after 5 years, you will get much more from SS. You could then buy a lifetime annuity for the difference and get more bang for your buck as rates should be up by then. Just a thought anyway.

We actually did this in a manner due to our situation.

I retired at the age of 59 (no pension) and had a decision to make concerning my retirement income. I could draw from my portfolio (e.g. cash bucket) till age 62 or my FRA of 66 and claim SS.

However, my desire was two fold. That is to have a base income (much like a pension) to draw, supplemented by my portfolio withdrawls and also take advantage of any SS "step-up benefits" since SS is COLA adjusted (how much? That's another discussion).

Anyway, I did go long term when I purchased my SPIA. That means that it was purchased for a guaranteed period (joint life expectancy for me/DW) which meant that if we lived longer the payments would continue if either/both were still alive, but if we both passed before the guarantee period, the payments would continue to our estate.

We did not opt for the inflation adjusted product. We did not feel that we needed it, since the goal was to get from age 59 to age 70 and the expectation was that it would just be a supplement to our SS when we drew that income.

It also allowed me/DW to take advantage of other SS provisions rather than drawing at age 62 since we needed immediate funds. Those are the ability to place a spousal claim against my wife's SS at my FRA age of 66, along with delaying my SS for both the higher benefit, but more importantly to protect my DW in a financial sense, since the odds are that I will pass first (we're the same age). Also, with this plan my DW will be drawing SS at her FRA age of 66 rather than age 62.

So rather than delaying the purchase of an SPIA till a later date, we used it as "gap insurance" to cover part of our ER expenses, and allow us to use SS in a manner that is financially better - in our case.

Not to be done by everybody, but just to show how we actually did it (rather than just theory)...