At what rate would you annuitize (SPIA)

[MattInAustin]

Great points being raised both for and against annuitizing a portion of ones portfolio regardless of realistically possible payout rates.

Risks that annuities might help mitigate to consider:
Longevity risk,
Sequence of returns risk,
Portfolio complexity risk (annuities don't require much to manage),
Market timing risk (post purchase),
Risk of lawsuit and creditors (I believe annuity payouts are largely protected from lawsuits and creditors because they are insurance? Probably depends on state),
Probably some others I am missing.
I think annuity payments are not included in financial aid qualification calculations for school.

 

[bada bing]

If you are talking about "annuitizing" by opening a simple SPIA, one aspect not mentioned is the lag in interest rates used to calculate the bond segment rates that are a factor in the payout. AFAIK, most SPIAs use interest rates from 2-4 months back to calculate their payout rates today. That allows a few months of free market timing, if a person chooses to factor that in. You will already know if payout rates will be a little better/worse a couple months out.

I have a cash balance pension plan, which basically functions like a MYGA with a 5% guaranteed floor and a little better than market payout rates if/when I choose to annuitize. I've been watching the projected payout rates climb every month with the segment rates for future annuitization dates but the calculations project today's rates into the future. I'm not in a position to start an annuity now as I have Roth conversion plans ongoing, but I hope that interest rates will be elevated at decision time, sometime 6-8 years from now. I also have the choice to take the cash balance anytime, but there is no hurry because the 5% floor rate is better than any risk free rate available now.

 

[cloudeleven]

Yep, the best laid schemes o' Mice an' Men, / Gang aft agley:

"A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years.

Thus, any estimate of long-term financial success greater than about 80% is meaningless."

The Retirement Calculator from Hell, part III

Indeed. As retirees with a possible 40-year retirement time frame, our best course is to be truly flexible if things don't work out.

I suppose there are some things a retiree can do to make themselves more "anti-fragile" (Taleb's term). Things our Great-Depression/WW2 grandparents did (or at least mine did)...live in a rural area, live in a paid-off house, grow your own large garden, keep a large freezer full of survival food, can & jar things for the pantry, develop hunting and/or fishing skills and basic survival skills such as knowing how to start a fire, keep some survival cash in a shoebox, know your neighbors and be on good terms with them, be a well-known member in your local church. Maintain a healthy weight (not obese or overweight), exercise if you can (my Great Depression grandfather liked to go for long daily walks in the woods near his house, lived to 89), eat healthy.

During the Great Depression, a person in the year 2022 might think there would have been massive social chaos, rioting, looting on a major scale, etc. And maybe that's how things would be if it happened today. But in the 1930s neighbors were actually helping one another with things they needed. There wasn't mass insanity...people just helped one another.

 

[cloudeleven]

Over a 50 year period the greater risk to portfolio survival won’t be the withdrawal rate, it will be how one reacts to any number of unforeseen events that are highly likely. Natural catastrophe, war, pandemic, resource scarcity, financial crisis.

There is no 50 year period in modern history free from multiple occurrences of these, they have powerful impact on global asset prices, and how we react in the face of these threats will be the determining factor for most portfolios.

Yes, definitely. Admittedly, a global pandemic wasn't on my radar in 2019, although there had been some virus scares in earlier years (Swine Flu in 2009, Ebola in 2014, Zika in 2016, etc.).

Maybe I have a nervous, panicky disposition (I'm prone to anxiety problems), but when Covid went full-chaos in early March 2020, a part of me wanted to think it was rather apocalyptic. A "different this time" black swan event. Even though Covid was pretty mild compared to the other catastrophic things that could potentially happen.

Since I'm retired and living entirely off my portfolio (no other income), I did make one minor "tweak" to my investment strategy in March 2020 since my portfolio had declined -35% by March 23, 2020, and I realized that was well beyond my emotional "sleep at night" risk tolerance, but other than that small change I held on to my strategy. The tweak I made did result in me having a 1% lower return for the year 2020 compared to if I hadn't made the tweak, but it should reduce porfolio drawdowns in the future and help me sleep at night better.

I'm definitely working on trying to stick to my investing strategy 100%, no changes or "tweaks" no matter what happens. It's hard but VERY necessary, especially when things get crazy and chaotic. When things get crazy, you have to "stay the course" and hang on to your investing strategy for dear life. No changes or even small tweaks allowed. Make the needed changes *before* a major crisis event happens in the country/world/financial system.

 

[SecondAttempt]

Same boat here, no heirs just a DW to look out for after I kark it. I am still on the fence as buying MYGAs and then taking a withdrawal every year does the same ..... sort of anyway. Another option would be a 10 Year certain (When rates top 5%), while everything is gone after 10 years, if there is no one to leave it to, does that really matter, and is it that different that taking an annual stipend from one's savings. Decisions, Decisions.

My partner has her own pension and will inherit plenty of home equity and other assets. She also has her own savings. So while I want and intend to leave her enough, I already am.

Just for kicks I went to an online calulator, happened to be Fidelity, For depositing $100,000 I can get $441 per month ($5,292/yr) starting in a year and a half when I plan to retire. Plus my entire $100,000 is returned to my heirs when I die. This was not something where you put in the rates. This was an actual sales quote.

Frankly, this is already fairly attractive but I think rates would have to improve more before I personally would pull the trigger. Others should do their own analysis because everyone's situation is unique and I do not want to give anyone blind financial advice.

I would effectively be getting a 5.3% SWR on the $100,000 I sacrifice from other returns with essentially no risk to principle I would leave my heirs. As someone who has expected 4% for decades, this seems like a good deal. I lock up $100k that I expected to get $4000/yr from and in exchange I get 32% more.

I am taking an insurance company risk (they could go bankrupt) and I take an opportunity cost on the $100,000 (Treasury rates could skyrocket but then we are all screwed anyway).

I am not ready to pull the trigger now but this could get very attractive.

 

[gauss]

Does anybody know how....

With non-qualified funds it looks like there is some exclusion ratio so you would pay taxes on some amount of the payout as if it was paying interest and principal back. I can't seem to find any way of calculating that exclusion ratio. Based on what I found, once principal is returned, the entire payout is taxed as regular income. Seems like a bit of double taxation going on? Also seems like a disadvantage of annuitizing with non-qualified funds.

I believe that the exclusion ratio is prescribed by the IRS as part of a concept referred to as the "General Rule".

Checkout IRS Publication 939 General Rule for Pensions and Annuities for the details.

You may also find the Simplified Method discussion in Pub 575 Pension and Annuity Income, of interest for reference, but I believe that this method usually only applies to qualified plans. Pub 575 also has discussion of when the General Rule can/must be used vs. the Simplified Method.

I think this is also referenced in the instructions (to financial institutions) for IRS Form 1099-R.

-gauss