What % of savings should go to annuity?

[obgyn65]

I do not think there is a rule re: the percentage you need to invest in an annuity. I would just annuitize using SPIAs what I need at a specific age.

Due to the fact that I have the midas touch in reverse when it comes to investing, my wife and I decided that we should purchase a fixed immediate annuity when I retire. Is there a rule of thumb (like the 4% drawdown theory) as to what percentage of your 401K savings can safely be converted to an annuity? One advisor told me not to do it that way, but to simply see how much of a monthly deficet I am running (income vs. monthly expenditure) and get an annuity that can fill that gap. Seems reasonable to me. Any thoughts or advice? Thank you for sharing your time and expertise.

 

[Meadbh]

I agree with obgyn65. The purpose of an annuity is to provide a basic level of income. Therefore, if the individual already has, and always will have, in excess of that basic income, the value of an annuity diminishes. There is no linear relationship between income and desired or actual spending on annuities.

 

[Midpack]

Deciding to buy an annuity shouldn't depend on interest rates, but on your circumstances and need for income. You might get a low interest rate on an annuity if you buy it now......but your bonds also have low interest rates so that's a wash.

Excellent point. In fact I was reading just over the weekend where the current low interest rates might remain with us for not just a couple more short years but even longer than that like maybe another decade or more.

Of course you can always buy an annuity anytime, tomorrow, a decade from now, or any time in between. It's by no means a now or never decision, but it's irrevocable once you buy the most common types of annuities. If you buy today and interest rates increase in a few years, you'll have locked yourself in to historic low yields.

It's true bonds aren't paying much now, but bond yields will increase, the yield on an annuity won't (unless you pay dearly for a COLAd annuity). You could buy a 5-year CD or a CD ladder if you don't want any risk and get some guaranteed return. And bonds aren't your only alternative to buying an annuity, presumably most retirees have some equities in our AA. It's not necessarily a wash at all.

But we all make our own decisions based on our own unique circumstances, interest rates are just one of several factors that deserve consideration. I certainly wouldn't make a major decision like buying an annuity without at least considering all the potential inputs. YMMV

 

[timo2]

Due to the fact that I have the midas touch in reverse when it comes to investing, my wife and I decided that we should purchase a fixed immediate annuity when I retire. Is there a rule of thumb (like the 4% drawdown theory) as to what percentage of your 401K savings can safely be converted to an annuity? One advisor told me not to do it that way, but to simply see how much of a monthly deficet I am running (income vs. monthly expenditure) and get an annuity that can fill that gap. Seems reasonable to me. Any thoughts or advice? Thank you for sharing your time and expertise.

I just recently completed this same analysis for myself, and in addition to planning to wait until 70 for SS, I'm starting a CD ladder that I'm hoping will substitute for an annuity and also have more flexibility than an annuity. I just can't justify to myself with the interest rates like they are getting an annuity. I did one estimate of an annuity at one company, and the total payout ended up being less than the initial amount!

 

[wmc1000]

I purchased a single premium variable life policy 15 years ago when I rolled over a 401K from a previous employer. It allows me to convert to an annuity any year starting this year. It has a guaranteed 6% growth until I exercise the guaranteed annuity clause. While the value of the investments has only grown about 25% in 15 years, ( I would be crying if that's all I had now!), the guaranteed value will provide at least a third of my retirement asset income when I choose to implement the joint survivor annuity. If I were to die prior to that it pays the guaranteed value to my wife as a death benefit. I don't know if such vehicles exist today but if so, I would recommend a similar plan to some of the young future early retirees on this board. Like anything else it is dependent of the financial security of the insurance company.

 

[nun]

It's true bonds aren't paying much now, but bond yields will increase, the yield on an annuity won't (unless you pay dearly for a COLAd annuity). You could buy a 5-year CD or a CD ladder if you don't want any risk and get some guaranteed return. And bonds aren't your only alternative to buying an annuity, presumably most retirees have some equities in our AA. It's not necessarily a wash at all.

That's why I suggested an annuity ladder and the use of the annuity as part of the fixed income allocation, not as a substitute for equities.