Income Annuity - Good Idea?

[KateM]

Hello everyone,

I have a question that I was hoping to get some guidence on:

Our Fidelity advisor has recommended that we consider an income annuity given the current interest rates. She is recommending a ~1M investment and that will get us ~$5,000 per month starting between now or in the next few years (depending on the option), with a 20-year guaranteed beneficiary. The annual payout rate is 6.2%.

It’s not an area that I know much about. As I’m learning, there are a lot of different options / factors when it comes to annuities, but I am just curious what your thoughts are overall on annuities at this time.

A little bit about us for context:
I am 42, and my husband is 44. We would like to retire / become financially independent in the next 3 – 5 years. We estimate that we’ll need around $12K - $14K for monthly expenses but this will vary as we get older (e.g., we won’t be traveling as much)

Our current portfolio is $3,040,645 and consists of the following

• 401Ks: $892,386
• Employer Stock Options: $139,688
• Fidelity Investment Portfoilo: $2,008,571
- Domestic Stock (47%) / Foreign Stock (18%) / Bonds (27%) / Short Term (8%) - we usually don’t have this much cash, we just haven’t rebalanced in awhile

Thank you in advance for any advice or wisdom you have.

 

[Sunset]

How much will your fidelity advisor make when you are sold this product ?

That annuity will not come anywhere close to supplying the $$ you want.

Using your number of $13K/mo you will need income of: $156,000

To get that income you will need aproximately $5M to retire so young, or risk running out of money too early.

Why do you think you need that income, have you actually tracked your actual spending for a year or longer ? Or is it just a guess/estimate ?

 

[pb4uski]

Horrible advice IMO. Why would you lock up for posterity $1 million that you might need sometime for a 6.2% payout rate? Crazy. And at the end your $1 million has gone poof!

That's half your Fido account and 1/3 of your total.

You can invest in a corporate bond ladder and get almost 6.2% depending on your target credit quality and still have your $1 million at the end of 20 or 40 or 50 years.

There is also credit risk to consider. While insurers are generally safe, that is a lot to place with a single issuer. It would be akin to putting $1 million into a single highly rated corporate bond. Diversification.

ETA: You could buy a 10 year ladder of iBond target maturity corporate bond ETFs (2024-2033) and it would yield 5.92%. Sprinkle in 10% high yield at a 8.41% yield and you are at 6.2% and get to keep your $1 million.

https://www.ishares.com/us/resources/tools/ibonds

 

[Chuckanut]

Given your relative youth compared to most retired persons, I would think inflation would be a big factor in deciding on the annuity. I assume it's fixed at $5,000 a month. The Rule of 72 tells us that with a 3% inflation rate your annuity would only be worth $2500 a month in inflation adjusted dollars after 24 years. So in your mid 70's how do you make that up?

Have you considered using the remaining 2 million or all 3 million to build a bond ladder, perhaps including TIPS for some inflation protection? You will be retired long enough to also consider common stocks. 30+ years gives a lot of time for growth.

I would be very careful about locking up the money in an annuity at this time.

 

[RunningBum]

I agree that inflation is the biggest issue here. You don't know what that $62K/yr will buy in 30-40-50 years, but you can be sure it won't buy as much as it does now.

 

[pb4uski]

...Have you considered using the remaining 2 million or all 3 million to build a bond ladder, perhaps including TIPS for some inflation protection?...

You could build a TIPs ladder that would provide $60,000 a year of inflation adjusted cash flow for 30 years for $1.257 million. That would be much better than a fixed annuity.

https://www.tipsladder.com/build?in...ap=NearestBond&bondChoiceWithinYear=BestYield

Year funded	TIPS holding	Purchase cost	Real income for the year
2024	30 × 912828B25	$39,191	$59,863
2025	25 × 912810FR4	$40,501	$60,501
2026	26 × 912810FS2	$39,609	$59,116
2027	28 × 912810PS1	$42,400	$60,616
2028	29 × 912810PV4	$41,175	$59,610
2029	24 × 912810FH6	$47,725	$60,691
2030	38 × 912828Z37	$39,038	$60,318
2031	38 × 91282CBF7	$37,688	$59,734
2032	25 × 912810FQ6	$45,739	$57,403
2033	48 × 91282CGK1	$43,874	$62,622
20341	48 × 91282CHP9	$43,975	$59,367
20351	49 × 91282CHP9	$44,891	$60,377
20361	49 × 91282CHP9	$44,891	$60,377
20372	35 × 912810QF8	$46,516	$60,031
20382	35 × 912810QF8	$46,516	$58,976
20392	37 × 912810QF8	$49,174	$60,728
2040	37 × 912810QF8	$49,174	$59,612
2041	39 × 912810QP6	$51,004	$60,592
2042	40 × 912810QV3	$39,197	$59,481
2043	41 × 912810RA8	$37,781	$59,507
2044	43 × 912810RF7	$45,204	$60,841
2045	43 × 912810RL4	$38,648	$59,659
2046	44 × 912810RR1	$41,128	$60,113
2047	45 × 912810RW0	$39,576	$59,799
2048	47 × 912810SB5	$41,263	$60,538
2049	48 × 912810SG4	$40,986	$60,001
2050	49 × 912810SM1	$32,405	$59,586
2051	50 × 912810SV1	$30,797	$59,923
2052	54 × 912810TE8	$30,680	$60,442
2053	58 × 912810TP3	$46,978	$60,305
Totals		$1,257,727	$1,800,731

 

[KateM]

How much will your fidelity advisor make when you are sold this product ?

That annuity will not come anywhere close to supplying the $$ you want.

Using your number of $13K/mo you will need income of: $156,000

To get that income you will need aproximately $5M to retire so young, or risk running out of money too early.

Why do you think you need that income, have you actually tracked your actual spending for a year or longer ? Or is it just a guess/estimate ?

Thank you for your response. Good callout on the commission, I will ask that question.

We’ve been tracking our spending for several years now, and the $12K - $14K is on the high side (depending on the travel / lifestyle we end up doing). We’re actually planning to spend more in retirement than we do now. It’s also not that high for the duration of our lives (just the beginning), it drops off as we get older. We actually need a LOT less to live on. We also have some “work in retirement” planned (e.g. sitting on a board) that will help supplement income. We’ve been using the Fidelity retirement calculator and have itemized our expenses over time, and we appear to be “on track” but are taking it one year at a time.

In terms of the annuity, our advisor recommended it as a way to get fixed income given the unknows of the market in the future and it could possibly prevent being in a situation where we have to withdraw too much from our portfolio if the market was down.

 

[Chuckanut]

You could build a TIPs ladder that would provide $60,000 a year of inflation adjusted cash flow for 30 years for $1.257 million. That would be much better than a fixed annuity.

https://www.tipsladder.com/build?in...ap=NearestBond&bondChoiceWithinYear=BestYield

Year funded TIPS holding Purchase cost Real income for the year

2024 30 × 912828B25 $39,191 $59,863

2025 25 × 912810FR4 $40,501 $60,501

2026 26 × 912810FS2 $39,609 $59,116

2027 28 × 912810PS1 $42,400 $60,616

2028 29 × 912810PV4 $41,175 $59,610

2029 24 × 912810FH6 $47,725 $60,691

2030 38 × 912828Z37 $39,038 $60,318

2031 38 × 91282CBF7 $37,688 $59,734

2032 25 × 912810FQ6 $45,739 $57,403

2033 48 × 91282CGK1 $43,874 $62,622

20341 48 × 91282CHP9 $43,975 $59,367

20351 49 × 91282CHP9 $44,891 $60,377

20361 49 × 91282CHP9 $44,891 $60,377

20372 35 × 912810QF8 $46,516 $60,031

20382 35 × 912810QF8 $46,516 $58,976

20392 37 × 912810QF8 $49,174 $60,728

2040 37 × 912810QF8 $49,174 $59,612

2041 39 × 912810QP6 $51,004 $60,592

2042 40 × 912810QV3 $39,197 $59,481

2043 41 × 912810RA8 $37,781 $59,507

2044 43 × 912810RF7 $45,204 $60,841

2045 43 × 912810RL4 $38,648 $59,659

2046 44 × 912810RR1 $41,128 $60,113

2047 45 × 912810RW0 $39,576 $59,799

2048 47 × 912810SB5 $41,263 $60,538

2049 48 × 912810SG4 $40,986 $60,001

2050 49 × 912810SM1 $32,405 $59,586

2051 50 × 912810SV1 $30,797 $59,923

2052 54 × 912810TE8 $30,680 $60,442

2053 58 × 912810TP3 $46,978 $60,305

Totals $1,257,727 $1,800,731

Bingo!

 

[SnowballCamper]

+1 on the TIPS ladder. You have a substantial nest egg. This makes TIPS appropriate because it can generate enough to cover essential expenses. As opposed to some of us with much smaller portfolios that need market growth to be more than inflation in the long term.

On the other hand, buying that annuity could make you a friend... just sayin.

 

[mrfeh]

There's no way I'd do this. You are way too young for such a product.

Unfortunately, some reps push these products. I'm sure it would be a very nice bonus for her.

Keep working and saving.

 

[mrfeh]

There's no way I'd do this. You are way too young for such a product.

Unfortunately, some reps push these products. I'm sure it would be a very nice bonus for her.

Keep working and saving.

Oh, and I suggest you start looking for a new rep. After such a proposal, you now know you can't trust this person.

 

[Bruno]

I like MYGA annuitys but I believe this guys just trying to get a BIG commision for the sale. I had a $279k MYGA that paid me $5k for 5 yrs and the interest was a lot less.

 

[Jerry1]

Oh, and I suggest you start looking for a new rep. After such a proposal, you now know you can't trust this person.

I differ on this point. You can trust that person - - - to be a sales person.

You should just tell her you’re not interested and move on to other discussions. It’s not a good option for you.

If you’re determined to pursue this, ask for a copy of the contract (an annuity is a contract with an insurer) and once you’ve read it and understand it, come back and let us know why you think it’s what you want. Never buy something you don’t understand.

 

[AlmostThoreau]

Absolutely terrible advice. If you do an annuity at all, start one at 80+ if in good health.

 

[brett]

Terrible advice. I would never advise, in most circumstances, that anyone NOT look at an annuity until their early/mid 70's.

Your financial advisor is NOT working in your best interest.

Sales commissions on annuities are high. This is the motivation.

My advice....

Forget the annuity.

Fire your advisor, switch firms. But bring this to the attention of the management.

 

[VanWinkle]

For all of the reasons above, Just say NO. Don't let emotions guide your investment
decisions.

VW

 

[DrRoy]

Do NOT do the annuity. You have better ideas above.

 

[pb4uski]

Oh, and I suggest you start looking for a new rep. After such a proposal, you now know you can't trust this person.

+1 recommending a payout annuity for someone so young given other alternatives available is definitely not in the OPs best interest.

 

[Time2]

Kate, I think you have heard the collective opinion.
I agree, heed the warning and find a way so you still keep your million.
And don't buy the salesman/broker a new pool.

 

[easysurfer]

I like the suggestion of just saying NO, not interested.

Mental note on how to relate to advisors "Don't call me, I'll call you." Heelots.

 

[Aerides]

It’s not an area that I know much about.

Good that you asked. Avoid anything that meets that criteria, or at least spend a lot of research on it - especially if your existing investments are meeting your needs.

It looks like you're doing pretty well in your own.

 

[CRLLS]

Oh, and I suggest you start looking for a new rep. After such a proposal, you now know you can't trust this person.

I'm not so sure the OP should do this, at least not yet. From many posts here, I believe that suggesting annuities to their clients is a fidelity thing, pushed down to their reps by the management. I have seen it firsthand with the several advisors that I have had over the years. I do have to say that once I tell them annuities are not in my future, the advisors don't bring it up again.

Tell the advisor "No!" now. If they bring it up again, then it may be time to seek another advisor.

 

[OldShooter]

... Our Fidelity advisor has recommended that we consider an income annuity ...

Fidelity !??!?! This is the kind of thing I would expect from Fast Eddie. To this point I have had a higher opinion of Fidelity's ethics. Hopefully her management will soon weed out this greedy and dishonest rep.

@KateM, just for grins I suggest that you brokercheck this rep (https://brokercheck.finra.org/). Most checks are clean but I have seen some with amazing histories of customer disputes over suitability and (even) forging customer signatures on documents. Be sure to brokercheck your new advisor too.

 

[Chuckanut]

Something for the OP to consider:

2021 inflation rate - 7%
2022 inflation rate - 6.5%

$5000 turned into $4650 at the end of 2021 in real terms.
$4650 turned into $4248 at the end of 2022 in real terms.
In two years $5000 turned into less than $4300 dollars in real terms.

Each person needs to make their own decision. I don’t know the OP’s situation. Do your due diligence. YMMV.

 

[OldShooter]

I'm not so sure the OP should do this, at least not yet. From many posts here, I believe that suggesting annuities to their clients is a fidelity thing, pushed down to their reps by the management. I have seen it firsthand with the several advisors that I have had over the years. I do have to say that once I tell them annuities are not in my future, the advisors don't bring it up again.

Tell the advisor "No!" now. If they bring it up again, then it may be time to seek another advisor.

I disagree strongly. In any financial relationship, a good rule is "one strike and you're out." There is absolutely no upside to the OP sticking with this rep and there is downside that the rep will again try to take advantage of her.

The only upside to the OP continuing the relationship is for the rep.