Income Annuity - Good Idea?

[PatrickA5]

Way too young for an SPIA. And way too much money.

Fidelity does have some decent Deferred Fixed Annuities (MYGA) with some highly rated companies - 5 year at 5.2%. So, you could defer some interest for a few years and get a decent return, if that interests you. Oh, and you get your money back in the end. I've done one before and it worked out fine. I should note, you can find higher rates elsewhere, but usually at lower rated insurance companies. Fidelity only uses highly rated companies.

I have a meeting set up with my Fidelity advisor next week. First meeting since opening the account several years ago. I'll see if he tries to push annuities on me. Last time he didn't try to sell me anything.

 

[CRLLS]

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.

If I get you correctly, if you disagree with an advisor, or don't take their suggestion/recommendation, they are dead to you? To use your words, "I disagree strongly". Maybe not strongly. The alternative to disagreeing is to do everything that an advisor recommends. I don't suggest that. It should be a 2-way discussion. If this is a relatively new relationship and you are both in the getting to know you stage, I think it reasonable to cut him some slack and move on. If the relationship is a seasoned one, and he pushes hard after you dismiss that option, then I do agree with you.

I think a lot of how I would react depends on whether it was a suggestion in passing or whether the advisor was into the aggressive sales mode.

 

[oldtimer]

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.

Does your spending number include taxes?

Since the start of 2022 both the market and bonds are down. How is pulling $1M out of them now not withdrawing too much from our portfolio when the market is down?

 

[ShokWaveRider]

I did some research and for us, 70 and 64 respectively, an income annuity with 20 year certain, averaged only 3.11% interest return (Not Payout Percentage).

Here are the sites I used to get these numbers.

Schwab Annuity Calculator: I used Schwab as they only use AA+ companies. The problem with other calculators is they will show you the best rate which is usually from the worst rated companies.

https://www.schwab.com/annuities/fixed-income-annuity-calculator

I used this site to estimate the return.

https://iqcalculators.com/calculator/annuity-rate-of-return-calculator/

 

[pb4uski]

Hopefully the OP will report back with what they did.

Another consideration is whether there is a return of premium or minimum guaranteed payments feature. It would be horrible if the OP paid $1 million for a joint life annuity without such a feature and then they both died in an accident soon thereafter and their heirs lost out on $1 million.

 

[cyber888]

Maybe you can list your fixed expenses that do not go up a lot with inflation. Then get an annuity. Pensions are like annuity, but you have to study it's features. Instead of $5000/month, maybe you can start with $1000-$2000/month that may cover very basic expenses that do not inflate too much.

 

[PatrickA5]

Hopefully the OP will report back with what they did.

Another consideration is whether there is a return of premium or minimum guaranteed payments feature. It would be horrible if the OP paid $1 million for a joint life annuity without such a feature and then they both died in an accident soon thereafter and their heirs lost out on $1 million.

OP original post talks of a 20 year guarantee.

 

[pb4uski]

Good point, I forgot about that. But the IRR for 20 years of payments at a 6.2% payout rate is only 2.25%, so that's not at all attractive... today you could construct a 20-year CD/UST ladder replicating those cash flows and get more than double that.

 

[MikeTN]

I agree that it does not make sense to buy an annuity that is not inflation adjusted at a younger age. However, some who have been comparing this proposal to. a 30 year bond ladder seem to be missing something: Op is in early 40s and talking of annuitizing in the next few years. Thus the bond ladder would be much longer than 30 years to get them to 95.

 

[OldShooter]

If I get you correctly, if you disagree with an advisor, or don't take their suggestion/recommendation, they are dead to you? ...

Did I say that? In any financial relationship, lies, cheating, self-dealing, etc. are strikes. From the OP I think it is pretty clear that this FA is attempting to take advantage of her here. That is a strike.

And ... in the unlikely event that firing the FA is not necessary, so what? @KateM will find another FA and this FA probably has other clients. Life goes on. If firing the FA was necessary and @KateM did not do it, the FA will attempt to cheat the OP again, maybe successfully on the second try. Leaving the FA has no downside that's discernible from the OP anyway.

 

[pb4uski]

I agree that it does not make sense to buy an annuity that is not inflation adjusted at a younger age. However, some who have been comparing this proposal to. a 30 year bond ladder seem to be missing something: Op is in early 40s and talking of annuitizing in the next few years. Thus the bond ladder would be much longer than 30 years to get them to 95.

True, but a rolling bond ladder could be used and drawn from for the $5,167/month. If they could yield 5.5% then they could do monthly $5,167 withdrawals for almost 40 years, but more importantly if something changes in the next 10, 20 or 30 year that they need access to that money then they can get to it. With the annuity it is effectively locked up and inaccessible.

 

[Jenna]

Can someone direct me as to where I can learn about TIPS I have no knowledge of them

 

[OldShooter]

Can someone direct me as to where I can learn about TIPS I have no knowledge of them

Search is your friend. There was quite a good thread here just recently.

 

[Sunset]

Can someone direct me as to where I can learn about TIPS I have no knowledge of them

Certainly read about there here: https://www.treasurydirect.gov/

It's the gov site that sells them and all the other treasury type bonds.

You should buy TIPs in IRA/ROTH only, and at a brokerage.

 

[ral3210]

I agree that the OP can do better. I think SPIAs can be great for many investors presently--especially if you believe the overwhelming evidence that spending generally goes down as we age and a dollar in your 60s is much more valuable than one in your 80s. With this in mind I looked at investing 100k with a 25 year certain annuity and compared it to a [mod edit] 40-60 (stock, bond) portfolio. One could withdraw $73k (per Blueprint income portal) per year and 55% of each withdrawal is tax free. Leaving the tax advantage aside, one would only have a 41% success rate (using a 0.5% expense ratio) over all 25 year rolling periods since 1870 to match this with significant volatility (and a zero median balance). Even a 50-50 allocation failed 46% of the time with a median $62k ending balance. Also remember that the USA had the best stock performance of any country in the 20th century (will that continue?). Furthermore, the average investor return is much worse than the indexes in general due to behavioral issues and mutual fund trading fees and expenses. So, for many, it is a compelling argument for many.

 

[MarieIG]

Can someone direct me as to where I can learn about TIPS I have no knowledge of them

There is a lot of information about TIPS (and links) in this thread.

https://www.early-retirement.org/forums/f28/tips-119676.html

 

[Chuckanut]

Can someone direct me as to where I can learn about TIPS I have no knowledge of them

Try this site.

https://www.investopedia.com/terms/t/tips.asp

 

[Sunset]

I agree that the OP can do better. I think SPIAs can be great for many investors presently--especially if you believe the overwhelming evidence that spending generally goes down as we age and a dollar in your 60s is much more valuable than one in your 80s. With this in mind I looked at investing 100k with a 25 year certain annuity and compared it to a [mod edit] 40-60 (stock, bond) portfolio. One could withdraw $73k (per Blueprint income portal) per year and 55% of each withdrawal is tax free. Leaving the tax advantage aside, one would only have a 41% success rate (using a 0.5% expense ratio) over all 25 year rolling periods since 1870 to match this with significant volatility (and a zero median balance). Even a 50-50 allocation failed 46% of the time with a median $62k ending balance. Also remember that the USA had the best stock performance of any country in the 20th century (will that continue?). Furthermore, the average investor return is much worse than the indexes in general due to behavioral issues and mutual fund trading fees and expenses. So, for many, it is a compelling argument for many.

You want to lock up your money for 25 years in the hope you live long enough to collect on an annuity ?
That withdrawal rate of 73K/yr seems too high, is this annuity actually only going to payout for 5 or 6 years then it's done ?

 

[cyber888]

I used this calculator, mine is at 6.61% for my annuity. Sounds good.

I did some research and for us, 70 and 64 respectively, an income annuity with 20 year certain, averaged only 3.11% interest return (Not Payout Percentage).


I used this site to estimate the return.

https://iqcalculators.com/calculator/annuity-rate-of-return-calculator/

 

[pb4uski]

^^° I just use the RATE function in Excel.

 

[cyber888]

^^° I just use the RATE function in Excel.

Tried it. Works too. Thanks.

 

[Closet_Gamer]

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

Very cool web site! Thanks.

In the above, the "Real income" includes consuming the original investment/principle, correct?

This is why its roughly comparable to a 30 year SPIA because at the end of the SPIA term, the principle is consumed as well?

 

[pb4uski]

That was my interpretation... that the proceeds from each maturing rung would be used for spending so there would be nothing left after 30 years... sort of like buying a 30 year inflation adjusted annuity with a 40k benefit. But I'll concede that I didn't study the results very much.

 

[Morgan22]

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 agree with this. Also, we don't know if they OP stated to the advisor at one point that they wanted conservative investment ideas, etc. And that could be why the advisor suggested an annuity. Once you simply say No Thanks to a Fidelity rep, at least in my experience, they drop the subject completely.

 

[retired1]

If the insurance company goes bankrupt there is no federal guarantees like CDs have. One of the biggest issues with Annuities is that it is considered *fixed* income (does not go up every year with Inflation) for rest of life and you've to pay taxes on it. I believe even Social Security Admin considers it as income which can reduce your SS amount (I think but not sure). 2nd issue is that $1 mil. is gone ! you have no access to your principal b/c it's now with Insurance company.

Maybe put $1 mil in short-term bonds or CDs where you can always get your principal even though you may not have a guaranteed monthly income.