Income arrangements for an 80 YO (including an annuity !!)

[samclem]

I've managed the finances for my MIL for the last 6 years, and have just used a conservative AA mix, given her an increasing amount of the year end amount, and rebalanced. She's 80 YO now. She gets a SS check, and (for discussion) let's say this approx $400K portfolio provides for withdrawals of about $20K each year.

I'm rethinking this approach. It has two problems:
1) It's subject to market declines, which means she could see a cut in her annual "allowance." Since I still have to plan for a possible 25 year withdrawal window, I can't totally disregard the need to keep pace with inflation, with some moderate growth. So, I've still got approx 30% of her portfolio in equities. This ain't much, but given the low returns of everything else right now, if stocks take a tumble she'd get less to spend for awhile. I can accept that for my own plan, but it would be uncomfortable to ask this of her.

2) If I keep with this plan, I'll have to keep a lot of her money tied up for a long time to cover the potential that she lives a long time (she's a wonderful lady, I sure hope she does!). I'd rather her be able to spend this money while she can appreciate it.

I'm thinking that, by buying an annuity ( ), I can cover the longevity issue, and because she's already up in years, the mortality credits are substantial.

So, here's my plan, for comments/ridicule, etc.
- Divide her money into three parts:
1) A CD ladder to cover the next 5 years. (Or, I could use TIPS, but CD's are easier). My assumption is that CDs will track general interest rates and not lag substantially behind inflation. (Rather than buy 1,2,3,4,and 5 year CDs now, I'd probably go for shorter term CDs, take the annual spending out and roll them over to get to 5 years or so). Total cost:$100K

2) Buy an annuity which starts paying at age 85 to cover her baseline annual spending for life. The perfect product would be from a top-tier company with full inflation indexing, but I haven't found this to be available. If I assume that matching her present $20K/yr withdrawal, after inflation, will take $23K/yr in 5 years, I can choose from products like these deferred annuities:
Pay $162K for a full CPI -linked annuity from Principal Financial
Pay $173K for a 3% annual increase annuity from NY Life.
I'd be happier with NY Life, but would sure like to be covered for any inflation rate, especially as we are buying this to cover possible expenses many years from now. I suppose I could split the purchase between the two.
TBD/question: Better to buy this as a deferred annuity now, or get an immediate annuity for an 85YO in 5 years? It is about 10% more expensive to buy the same coverage as an immediate annuity (mortality credits . . .), but we may know more about her health 5 years that allows us to make a better informed decision. If she needs LTC starting in 4 years, I'll might be really sorry we spent $170K already for a deferred annuity that won't even start for another year.

3) With the remaining approx $130K of her money, keep it invested in a conservative mix of equities, bonds, etc. This provides some spending flexibility for her, I hope she'll use it to buy whatever she wants. She's very careful with her spending, I'm guessing she'll probably take it on an increasing age-based withdrawal schedule. It might also be needed to cover some LTC costs or other assistance, though obviously it won't cover a long stay.

Sorry for the long note. Observations, comments, better ideas solicited!

 

[FI_RElater]

SamClem

from immediateannuities (dot) com it seems that the current output for $175 k for single life 80 y o female is:

immediate— — — > ~ 18300 / yr
2 year delay— — — > ~ 21300 / yr
3 year delay— — — > ~ 24200 / yr
5 year delay— — — > ~ 31800 / yr

(all are w/o inflation adjustments)

I didn’t get any real idea of needs after SS, but your mention of $20 k in the post seems to imply that

If so, I might be tempted to put the first year in money market ( I think vanguard mm pays just over 2%) and have the next two years in CD’s. Buy the 3 yr deferred SPIA and keep the rest in the lower allocation {between 30 - 50% equities depending on risk tolerance and health needs.} If you look at the allocation that seems to keep up with inflation longer term, I recall that about 45% equities works for longer term.
{ actuarial results indicate that, again on average, 80 y o female has just under ten years life expectancy}

so $24 k for first three years (plus say $3 k extra) plus payment for 3 yr delay SPIA would leave $150 k residual investment ( that should cover current nominal inflation until SPIA starts).

[ I don’t think that the 5 % withdrawal currently used would be real long term sustainable, it would likely just run out at about 18 years (if prior studies were accurate), but that’s about what the max expected lifespan left for 80 yo female... but that doesn’t account for any potential increased costs, hence I’d agree that either an immediate or deferred SPIA seems prudent, as it leaves a remainder for those costs]

[ of course, you could go with the five year delay SPIA and then only have about $100 k residual investment (assuming about $27 k for those additional years) but then you would be far enough above (at $31.8 k) to probably not worry about inflation for some time... more likely would be the need for $$ for additional medical needs, hence the need for residual]

 

[pb4uski]

I would plunk the $400k in Wellesley, set up a $1,667/month or $20k/year automatic withdrawal and declare victory. According to FIRECalc the success ratio is 93% that the money will last 20 years to 100... but the earliest of the failures occurred 18 years out... when she would be 98.

Besides, how likely is it that she will need that $20k a year when she is 98?

And those are worst cases... on average she'll still have that $400k... or as much as $1 million to pass on.

 

[gauss]

Have you read Jim Otar's book "Unveiling The Retirement Myth"? Here is an ER.org link to a discussion of the book? I believe that he sets up formulas/decision points when offloading risk to an annuity company may be prudent.

Do MIL have plans if she needs LTC?

Is MIL/your family motivated to leave an inheritance?

We are currently in a similar situation with my 78 yo MIL who has been in assisted living for most of the year already.

-gauss

 

[samclem]

from immediateannuities (dot) com it seems that the current output for $175 k for single life 80 y o female is:

immediate— — — > ~ 18300 / yr
2 year delay— — — > ~ 21300 / yr
3 year delay— — — > ~ 24200 / yr
5 year delay— — — > ~ 31800 / yr

Yes, this decrease in the cost of the annuity (for a particular benefit level) if she waits to start drawing the benefit is why I am considering that CD ladder for the next 5 years or so. The same trend occurs for deferred annuities purchased now or if we wait and buy an immediate annuity at the time we want the payments to start.

I didn’t get any real idea of needs after SS, but your mention of $20 k in the post seems to imply that

Do MIL have plans if she needs LTC?
Is MIL/your family motivated to leave an inheritance?

Yes, key details:
Spending: I'd like to maintain her available withdrawal at $20K/yr, adjusted for inflation.
LTC: She has no LTCI. I know she'd like to remain independent and not depend on others for her care. At this point, I'm pretty sure LTCI would be crazy expensive. My guess is that she'd use her own funds first, family would pitch in, but that a long-term, high cost scenario would swamp these resources. I have read that some annuities have LTC riders available that allow increased benefits if a person meets certain criteria, I'll have to find out about these and their cost--it might be worth Inheritance: She's never mentioned this, but it is worth a specific discussion with her. Based on what she's told me, her main objective is to "avoid being a burden" on her kids, and I think she'd also like to help them out materially if she can do that as well.

In the past, I have always looked askance at the thought of buying any annuity that doesn't include full inflation protection. After all, this is supposed to be a secure lifetime income--secure against longevity risk, market downturns, and inflation. As I look at the offerings and their cost, I may have to self-insure against inflation (using the rest of her portfolio). The "value added" of the insurance company, to me, is the risk-pooling they provide that allows a higher safe "payout" than I can do on my own (i.e. covers longevity risk). They don't have any advantages in protecting against inflation since I can invest in the same things they can, and they seem to be charging a lot to cover inflation risk.

I would plunk the $400k in Wellesley, set up a $1,667/month or $20k/year automatic withdrawal and declare victory. According to FIRECalc the success ratio is 93% that the money will last 20 years to 100... but the earliest of the failures occurred 18 years out... when she would be 98.

Besides, how likely is it that she will need that $20k a year when she is 98?

And those are worst cases... on average she'll still have that $400k... or as much as $1 million to pass on.

Relying on our investment returns has been my approach for DW and I, and will be for a long time. But I'm looking at this differently for two reasons:
1) It's not for me and DW, it's for my MIL. I understand the risks, have weathered some market volatility, and have a realistic 40 year timeframe ahead that the portfolio will need to fund.
2) Offloading some of the longevity risk to an insurance company and gaining the mortality credits looks okay (to me) in this situation.

I am NOT looking forward to talking to a annuity salesman, but I think that may be the next step.

Have you read Jim Otar's book "Unveiling The Retirement Myth"? Here is an ER.org link to a discussion of the book? I believe that he sets up formulas/decision points when offloading risk to an annuity company may be prudent.

Thanks, I went to the link and reviewed the discussion, then went to his site. I may buy the PDF version of is book.

We are currently in a similar situation with my 78 yo MIL who has been in assisted living for most of the year already.

Best wishes. This 80YO+ "decumulation"/withdrawal stuff is something I haven't given much thought to, until recently.