annuities?

[Rich_by_the_Bay]

... which also means that had you "invested" a month and a half ago you would have been screwed out of 4.6% ... for the duration of the annuity.

The smarter strategy is to DCA into annuities by purchasing portions as separate contracts over a year or two. No different from equities - rarely pays to try timing the market. If you DCA among several different companies, it also minimized the risk of business failure.

 

[d]

The smarter strategy is to DCA into annuities

... but only if rates are rising ... even then it would have been smarter to wait ... i'll let you borrow my cystal ball

 

[jdw_fire]

Yeah, you covered it.  Requires that a half dozen assumptions all fall in the right place at the right time.  They wont.

I think everyone "gets" that you're going to buy an annuity and have a story that you feel supports that decision.

Actually I have not yet decided to buy an annuity and I've been retired (@47 yrs old) for over 2 years.   If sometime in the future I decide that I don't want to monitor my investments anymore I might purchase one. 

The reason I started posting on the subject was that I noticed that many posters seemed to think that people that retired with a pension had an easier time of it and were at less financial risk in retirement.  A pension pegged to CPI was even better.  Wanting to assist anyone who wants to RE I decided to do some number crunching.  I made up a set of circumstances (retiree's age, portfolio size, porfolio life) to run an annuity against in an attempt to find a way for anyone to have a pension (thinking this would help them retire easier, with less risk).  What I noticed was that under those circumstances the annuity produced an equal cash flow and a larger residual value than a FIRECalc analysis of the same portfolio size/life at a stock/FI mix of 50/50.  What was interesting was that I hadn't had to hunt up the circumstances that worked in the annuity's favor, the first set I used worked. 

Then once I posted them CFB's posts made me look even closer at my example and his concerns (mainly survivorship, insurance co survivability, income produced and residual remaining for heirs) and the annuity example held up pretty well (however, not in CFB's mind).  Unfortunately when it came to the income and the residual CFB didn't compare the annuity to FIRECalc, he compared it to his investment ability or a single MF that "averaged" better (as an aside; if picking one MF that "averages" better than FIRECalc results is an acceptable method of retirement planning what is the point of using FIRECalc?).  He also got hung up on the terminology that I used when I called the annuity "inflation adjusted" instead of "CPI adjusted". 

I just hope he didn't scare off the people that might benefit from using an annuity in their retirement plans.

 

[region2]

Is this a stupid idea - please let me know.

My two sons are soon to graduate from college aged 21 and 19, - one has had a good job to help pay for expenses and the other, no job, but has a great athletic scholarship - actually he works harder for his scholarship than son number one. We have matched their earned incomes for years to bolster their Roth IRAs. And to even out the score, I am considering buying my son number 2 a variable IRA for it's deferred tax qualities in order to even out their bottom lines. I've thought of other investements, but a deferred variable annuity has the "benefit" of severe surrunder fees and hopefully this would keep my kid from cashing it in at an early age. I know, I know, what about good old blue-chip stocks - but again I want to even out their tax deferred accounts and son number 2 hasn't been making earned income lately. And son number 2 would be prone to cashing out any investemnt that doesn't have an early-out penalty.

Ideas?

 

[LOL!]

...
Ideas?

Why not open an IRA in your name and make your son the beneficiary? When you die, he gets it and can have a so-called stretch IRA. Or if he cashes it in, then he pays big taxes all at once.

OTOH, kids tend to resent it if they are not treated exactly the same as their siblings.

 

[Rich_by_the_Bay]

Is this a stupid idea - please let me know... a deferred variable annuity

There is consensus here and elsewhere (even among those of us who see a role for IMMEDIATE annuities) that VARIABLE annuities are usually unwise: severe restrictions on liquidity, big hit from insurance company fees, bad choice of investment funds, etc. etc.

Maybe yours is one of those few situations where it sorta makes sense, but I bet there are preferable workarounds.

 

[region2]

Thanks for the advice. I agree, in general, I would never buy a variable annuity for myself. I can contribute to IRAs of several types.

But from what I know, there are only 3 types of tax-deferred vehicles - IRAs, annuities, and life insurance. My younger son does not qualify for the first, and he doesn't need the last as he has no dependents and hopefully won't for awhile. So that leaves annuities.

Are there any other types of tax-deferred investments that I am missing.

I will leave all of my estate to my sons split 50-50.

 

[brewer12345]

Thanks for the advice. I agree, in general, I would never buy a variable annuity for myself. I can contribute to IRAs of several types.

But from what I know, there are only 3 types of tax-deferred vehicles - IRAs, annuities, and life insurance. My younger son does not qualify for the first, and he doesn't need the last as he has no dependents and hopefully won't for awhile. So that leaves annuities.

Are there any other types of tax-deferred investments that I am missing.

I will leave all of my estate to my sons split 50-50.

Hmmm, how about you establish a trust for each son that invests solely in the vanguard tax managed balanced fund (or similar). Tax efficient and you could specify pretty much any restrictions you like on accessing trust income and principal.

 

[LOL!]

But from what I know, there are only 3 types of tax-deferred vehicles - ...
Are there any other types of tax-deferred investments that I am missing.

I will leave all of my estate to my sons split 50-50.

You are missing plenty of tax-deferred investments.  If you simply purchase stock or ETFs that have little to no dividends and hold, then you pay no taxes until the stock or ETF is sold and gains realized.  You even pay the lower long term capital gains tax rate.  Of course, if you die, the gains become tax-free to your heirs because of the stepped up basis that capital assets get.

As for equal treatment of sons, why not make sons equal beneficiaries in one of your IRAs as well, rather than fund their own IRAs as gifts? At least in those years where one son does not have earned income for an IRA.

 

[spideyrdpd]

Buy them each a house. Its a great tool for delaying taxes.

I still dont get annuities

 

[cute fuzzy bunny]

I just hope he didn't scare off the people that might benefit from using an annuity in their retirement plans.

I think getting less money, having no flexibility, having to deal with frequently scummy sales people, giving up your principal at the end and possibly losing ground to inflation will do that nicely for most people. I dont need to add much 'scare'.

But if you're happy with the house of cards you laid out, by all means. Hope it works out for you!

 

[Rich_by_the_Bay]

For those who desire an almost sure-thing income stream for life, the sensible alternatives are self-annuitizing with something like treasuries or an immediate annuity.

If you don't feel such an income stream is wise or desirable, do not consider an annuity.

If you do, do-it-yourself solutions require that you assume a very long life span just in case you live that long, like 30 years if you're age 65. Insurance companies can use the population average life expectancy of 15-20 years and thus spread the risk. That is why the payouts from an annuity often solidly beat a sensible (read very long term) self-annuity plan -- they assume a much shorter amortization time. Yes, net of fees; you get something like 7.5% of your investment every year as a payout (some yours, some interest, some taxable as income, some not if after-tax purchase).

You end up behind if you die before your time and your estate loses the invested amount either way. But you get what you paid for in terms of a plump payout well in excess of SWR, the reduced longevity risk, whatever reassurance this brings you, and the resulting ability to have your remaining investment portfolio with a higher volatility tolerance (and, thus, probable higher returns over the long haul). All this in either case does not get inflation adjusted.

 

[jdw_fire]

if you're age 65 ...
Yes, net of fees; you get something like 7.5% of your investment every year as a payout (some yours, some interest, some taxable as income, some not if after-tax purchase).
...
All this in either case does not get inflation adjusted.

Or ~ 6.3% if you choose a CPI adjusted immediate annuity

 

[Rich_by_the_Bay]

Or ~ 6.3% if you choose a CPI adjusted immediate annuity

Right. I've never seen an inflation-adjusted annuity that made sense when I ran the numbers.

Seems to me a better strategy to keep up with inflation is buying a small additional non-adjusted IA from time to time - you only do it if you need it, you buy only what you feel you need, and they pay more the older you are when you purchase.

 

[donheff]

All of this annuity talk got me curious to see what the Federal Thrift Savings Plan would offer since they will always attempt to negotiate the best deal for their clients with minimal admin costs and no profit (to them). Kind of a useful benchmark about what is fair.

I ran the numbers for a CPI inflated annuity for a 60 year old with a 56 year old spouse payable until the last partner dies (that will be my situation in two years). The payout is 4.896% of the investment per year. That compares with a quote on a similar product from Vanguard that would pay at 4.296% of the invested amount per year. The Federal annuity inflates by CPI BUT ONLY to 3%/yr. I am not sure about Vanguard, but I think someone here mentioned that it goes significantly higher.

I ran a single only for the Fed program and got 5.964%.

I only looked at CPI adjusted annuities because that more closely compares with Firecalc SWR estimates.

I don't really need one of these because I already have a substantial CPI adjusted Fed pension. But it still appears that these devices have some appeal for a risk averse person who wants to use a portion of his or her portfolio to insure an income stream to cover survival expenses not handled by Social Security. Then they can be a bit more agressive with the rest of their portfolio in the hopes of some fun and a nice estate for the kids or whatever.

 

[Rich_by_the_Bay]

I ran the numbers for a CPI inflated annuity for a 60 year old with a 56 year old spouse payable until the last partner dies (that will be my situation in two years).

My experience is that CPI or other "inflation" adjusted annuities are not such a good deal and vary a lot among companies in their details. Simple single life or joint life annuities are the best way to compare companies. A better strategy for me is to buy a straight IA, then if inflation starts to whittle it a bit too much, simply add another small immediate annuity at that time (plus you get more per dollar invested being older).

You may also find, like I did, that if you wait until you approach 65, the payouts go up to the 7-7.5% range. In your 50s, payout is low and inflation exposure is high.

Everyone's needs are different, of course. Just some observations to consider - buy late, by plain old IAs, and add a dollop more annuity every 8-10 years as needed if you want to keep payouts even with inflation, rather than buy an inflation-adjusted annuity right off the bat.

 

[cute fuzzy bunny]

...and just try looking at doing this for a 45 year old instead of a 60 year old...

 

[donheff]

My experience is that CPI or other "inflation" adjusted annuities are not such a good deal... A better strategy for me is to buy a straight IA, then if inflation starts to whittle it a bit too much, simply add another small immediate annuity at that time.

As I said, I don't need an annuity since I already have a pension. But, if I was considering one I would be doing so to cover myself in the event of a meltdown in my portfolio. Absent that, I agree with the other posters that you would be better off self annuitizing or just plan managing a diversified portfolio. Given the meltdown purposes I might not be able to buy a supplemental annuity if inflation ate up my purchasing power (the portfolio tanked) so I would want at least some degree of inflation protection - thus the CPI annuity.

 

[cute fuzzy bunny]

Yep, that 3% limit is sort of useless since CPI has averaged more than that for a while now. I checked and vanguards does limit to 10% in a single year as well.

No free lunch.

 

[Nords]

Yep, that 3% limit is sort of useless since CPI has averaged more than that for a while now.

The CPI has averaged 5%/year for the last 30 years (including the stagflation & high inflation of the '70s & '80s) and 3%/year over the last century.  (Dimson, Triumph of the Optimists)

 

[Alan]

I started putting money into a Vanguard variable annuity in my late 40's because I was maxed out on 401(k)'s and IRA's and I could use it like a IRA picking fiuds and re-balancing etc as it is tax free until withdrawals. I had planned on using it from age 60 to 65 when my SS and a couple of pensions kick in. In recent years however the increased limits in contributions etc have made it less of a tax haven. I have found that the fees are low, plus I don't believe you actually have to annuitize, you can make withdrawals similar to an IRA.

 

[Alan]

Flexible withdrawal options
Other annuities may charge surrender fees when you make withdrawals within the first several years of opening the contract. But the Vanguard Variable Annuity won't charge you any fees for withdrawing money (although you may be liable for income tax on earnings and a 10% federal tax penalty on investment earnings withdrawn before age 59½). You are not required to make minimum withdrawals from your annuity at age 70½ if it was purchased with nonqualified assets.

Individual withdrawals
You can make withdrawals of $250 or more at any time―with no surrender charges. Keep in mind, however, that you will owe income taxes on the earnings portion of your withdrawal. A 10% federal penalty tax may be imposed on withdrawals made before age 59½. For tax purposes, earnings are withdrawn first and nontaxable withdrawals of principal are made only when all earnings have been withdrawn.
I just checked the website to confirm that you can make withdrawals from a Vanguard cariable annuity, so you don't have to covert to annuity payments.

Systematic withdrawals—Set up a schedule to meet your needs
You can withdraw from the portfolios you specify or from all portfolios in your annuity (in which you have money) on a prorated basis. You can transfer money automatically from your annuity contract to your bank, savings and loan, or credit union account on a regular schedule. You may change the amount or frequency of your withdrawals at any time by mail or by phone. To be eligible for this service, your annuity must meet minimum balance requirements of $10,000 for the annuity and $1,000 per portfolio.

 

[brewer12345]

I started putting money into a Vanguard variable annuity in my late 40's because I was maxed out on 401(k)'s and IRA's and I could use it like a IRA picking fiuds and re-balancing etc as it is tax free until withdrawals.  I had planned on using it from age 60 to 65 when my SS and a couple of pensions kick in.  In recent years however the increased limits in contributions etc have made it less of a tax haven.  I have found that the fees are low, plus I don't believe you actually have to annuitize, you can make withdrawals similar to an IRA.

Yeah, that's about the only kind of annuity I can stomach, personally. But if you are investing in tax efficient stuff, you generally come out ahead skipping the annuity.

BTW, if you choose to annuitize, you can do a tax-free transfer to whatever insurer you want to buy a payout annuity from. No need to stick with VG for that.

 

[jazz4cash]

All of this annuity talk got me curious to see what the Federal Thrift Savings Plan would offer since they will always attempt to negotiate the best deal for their clients with minimal admin costs and no profit (to them).  Kind of a useful benchmark about what is fair.

Love this thread.........hope somebody is still watching.  Denhoff's scenario is similar to mine.  Wife just became federal employee a few years ago and annual statement listed the Annuity Option which struck me as pretty decent (esp since projected estimate for my private pension just got reduced by 20%).
Question: How did you come up with those TSP annuity estimates? Is there a calculator on a TSP website or did you use some other calculator?.........thanks

 

[JohnP]

jazz4cash

There is an annuity calculator on the www.tsp.gov website. You can run a variety of what-ifs to satisfy your heart's content.

JohnP