Am I nuts?

[ARB57]

55 - just retired - and need some advice. While not something that I thought I'd ever do, I'm considering putting 15-20% of my nest egg into an Immediate Annuity. There's something about getting that check every month that sounds attractive. Overall, I'm a very conservative investor (largely in cash.)

Am I crazy?

 

[samclem]

Am I crazy?

Yes.

Well, maybe not. Search around here and you'll see lots of very strong opinions about annuities. Mostly "con."

Still, a case can be made for them. Some questions to mull over:
- What are the costs/fees?
- Will I be comfortable knowing 20% of my entire nest egg depends on the financial health of one company?
- If I do this, will I allow myself to take more risk with my other money (thereby improving the chances of keeping up with/beating inflation compared to a portfolio with more cash)
- Inflation--Does this annuity adjust for it?
- Timing: With interest rates near historic lows, is this the right time to sign an annuity contract?
- Flexibility: Once you sign the contract, that money is gone. Can you envision a case when you might need ready access to the cash? (medical expenses, helping out a family member in an emergency, etc).

 

[Purron]

Since you just retired, I'd advise taking some time before making a big decision like this. Do some research on the pros and cons of annuities. If you do decide to go this route, make sure to research the company too - an annuity is only as good as the company you purchase it from

For what it's worth, I'm not crazy about annuities. I think you can do better with a balanced portfolio plus will have more options to move your funds around as things change in you life and/or in the economy.

 

[REWahoo]

- Inflation--Does this annuity adjust for it?
- Timing: With interest rates near historic lows, is this the right time to sign an annuity contract?

These are two very big questions.

At your age you could easily live another 35 to 40 years. With no inflation adjustment and a modest 2.5% inflation rate, that monthly check will lose roughly half its value by year 25, and folks think out future rate of inflation will be much, much higher.

 

[Rich_by_the_Bay]

There may be a place for single premium fixed annuities but even in such scenarios, a) you are very young for this kind of product (extended risk for insurer problems, runaway inflation suppressing your real return, crisis where you need to get your hands on your money early), and even wonderful markets which will make this unnecessary.

Have you thought about setting up ladders of TIPS to meet your desire for conservative, safe, assured withdrawals? They don't perform well against traditional bonds but might meet your needs, protect against inflation, and if you change your mind you still have your principal.

 

[GregLee]

Well, do at least compare what the annuity would bring you with what interest you would get from bonds. I did that a long time ago (early '70s), and found that the annuity income would be less, which is remarkable, since of course it should be more.

 

[FIREd]

I think SPIAs have a place in retirement planning. Whether you should consider purchasing one or not depends on how well funded your retirement is IMO.

 

[MasterBlaster]

I could see buying a SPIA to give you a baseline living standard along with Social Security. So yes I could see the usefulness of that. If you are serious about purchasing one find a seller with low underlying fees and a great credit rating.

Then the other assets could be invested more aggressively if that suits you. If you have a baseline living income you could spend down the other assets as you age. It just may be that an approach like this gives you more spendable income than a fund-yourself approach. Since anyone can't really predict the year of your demise, a large stash for the fund-yourselfers must be kept in reserve. Many of these people will leave large unspent/unutilized sums when they go.

Also, from what I read, those with steady income tend to be happier in retirement than those without steady income. I suppose worrying about markets takes it's toll.

And by the way, some of the other posts in this thread confuse a variable annuity with a SPIA. The variable annuities get low marks on this forum. Mainly due to their very high fees.

 

[73ss454]

Pssst, Pen Fed CD at 5% for 10 years. Uncle Mick would be proud.

 

[Rich_by_the_Bay]

If you are committed to buying a SPIA this is a terrible time to do it given low interest rates. If it were me I'd wait til they rise at least to routine levels.

 

[REWahoo]

And by the way, some of the other posts in this thread confuse a variable annuity with a SPIA.

Looks to me as if all prior to your post were directly related to SIPA's. Which posts are you referring to?

 

[dex]

Am I crazy?

Wait for awhile and buy Vang High Yield Corp Bonds fund or FAGIX - get the same return and you have your $.

 

[Nords]

55 - just retired - and need some advice. While not something that I thought I'd ever do, I'm considering putting 15-20% of my nest egg into an Immediate Annuity. There's something about getting that check every month that sounds attractive. Overall, I'm a very conservative investor (largely in cash.)
Am I crazy?

Not necessarily. If your portfolio doesn't already include some sort of annuitized income (like Social Security or a corporate pension) then it can make sense to annuitize a portion of it.

Milevsky's "Are You a Stock or a Bond?" book contains guidelines for adding an annuity to a retirement portfolio. He's gone from his 1990s anti-annuity stance (excess expenses, insufficient income) to agreeing that they do not suck.

Otar's retirement calculator will nudge you toward an annuity if your current portfolio is judged to have a high risk of failure.

But financial wisdom & security aside, generally the phrases "nest egg", "immediate annuity", "getting that check every month", and "very conservative investor" are like chumming for [-]sharks[/-] high-pressure annuity sales tactics.

As has been previously mentioned, you might be better off sitting on your assets right now while rates are so low, and re-evaluating the concept when the Fed raises its rate to 5-6%...

 

[Meadbh]

Milevsky, along with Alexandra McQueen, has written a new book that should specifically help you to answer the annuity question. It's called Pensionize your Nest Egg. Here's a review. (I haven't read it, but plan to).

If you plan to live long, get a life annuity

 

[REWahoo]

If you plan to live long, get a life annuity

An interesting quote from the above review:

So, while current interest rates do impact the payments you receive, as you get older, interest rates become less important and mortality credits more so. ... the swing is from about 80% interest-rate influence in one's early 70's to about 80% mortality credits by one's late 70's.

That is a huge swing over a very short time period. I had no idea.

 

[Meadbh]

I searched a little further and came up with this review of Pensionize your Nest Egg:

Pensionize your nest egg | Today's economy blog

What’s the right time to annuitize?
The annuity decision is irreversible. You can’t go back and change it. So just as a general rule, we advocate doing this slowly over time. You want to start slow, and build up speed as you age. There are lots of academic papers which talk about the point at which you can routinely expect to out-earn a bond portfolio. So timing the annuity decision; as a rule of thumb it might be 70 for a man and 75 for a woman. Annuitizing everything at 55 would be a poor choice, partly because you have many more years of expected life and you’ve made this irreversible decision and partly because you’re going to get a very low payout by amortizing that.​

This is on the website of a financial institution that sells annuities. Are you convinced yet, ARB57?

 

[haha]

I searched a little further and came up with this review of Pensionize your Nest Egg:

Thanks for mentioning this book. I have put it on hold at my library, and I have an early position in the queue once they get their copies. His other books that I have read are to the point, easy to understand and well informed.

These concepts like the rapid change in valuation from interest rate dominance to mortality credit dominance is logical, but I had never really thought about how steep the mortality curve can be once you make it to advanced age. When the mortality curve goes steep, the mortality credits will become much more important. It may be that our plan should not necessarily be to fund our lives to 100, but to fund our lives til 80 or so and make careful plans to have liquidity to buy an annuity long about then. It would not do to have one's 80th birthday arrive during a stock market dive with a 70% equity allocation!


Ha

 

[rescueme]

Not necessarily. If your portfolio doesn't already include some sort of annuitized income (like Social Security or a corporate pension) then it can make sense to annuitize a portion of it.

Agree completely.

I retired at age 59 with no defined benefit (e.g. pension) along with the decision of delaying SS till age 70.

Even at lower rates when I purchased the SPIA (in mid-2007), I knew about the discussion on interest rates. However, I did not want to risk using only my retirement portfolio for my current required income requirements, at the time.

So what happened in that time? Interest rates continued to drop, along with a big drop in my holdings (yet to rise into positive territory). By purchasing the SPIA when I did, I removed a portion of my portfolio from market risk, along with no impact to income due to inflation. The purchase of the SPIA greatly enhanced my "sleep factor".

It worked out for me. Will it work for you/others? I have no idea. I'm just telling my story.

BTW, at age 70, I'll be "trading up" to a "life annuity" that is inflation protected; it's called SS. The SPIA is allowing me to do that with no muss or fuss, since it provides me a base income amount every month, deposited to my bank account (just like SS). The continuing SPIA income (assuming valued less due to inflation) will be "icing on the cake", at that time.

You can wait forever until what most would consider "the proper time" to purchase an SPIA. I didn't, and am glad (3+ years later) that I did.

Just my POV, based upon my actual experience (not just my opinion )...

 

[Midpack]

Putting interest/return aside for a moment - the longer you wait, the cheaper an annuity becomes because you'll have fewer years to live. Couple that with historically low interest rates right now and there may not be a worse time to buy an annuity - odds are decidedly for getting cheaper if you wait. I'd be in no hurry right now.

Below is the most enlightening article I've ever read on the OP's question and the path I will follow in retirement distribution. Hopefully I will never annuitize but I want to be conscious well in advance if I approach the "annuitization hurdle" point of no return. I hope you find it helpful.

It's essentially the same concept as Jim Otar's Unveiling the Retirement Myth recommends (free before publication), but condensed to 12 pages vs Otar's 525 pages!

http://spwfe.fpanet.org:10005/public/Unclassified%20Records/FPA%20Journal%20August%202007-%20Modern%20Portfolio%20Decumulation_%20A%20New%20Strategy%20for%20Managing%20Ret.pdf

 

[Nords]

It's essentially the same concept as Jim Otar's Unveiling the Retirement Myth recommends (free before publication), but condensed to 12 pages vs Otar's 525 pages!

That's a great article, and it's a lot easier to explain to a spouse who isn't thrilled about slogging through Otar!

One flaw in the analysis is the changing cost of an annuity. Sure they get cheaper as we get older, but their prices may also be subject to interest rates and political risk. In other words it's probably at least as difficult to predict annuity prices as it is to predict market returns.

A final nagging issue would be the implementation. Instead of pushing the annuity button when the Xbox says "Game over!", it would probably make more sense to start annuitizing income over a 5-10 year period to ensure diversification across insurance companies and to not be punished by a few years of low interest rates.

Wouldn't it be great if FIRECalc could handle setting minimum portfolio values for annuity purchases?

 

[dex]

A final nagging issue would be the implementation. Instead of pushing the annuity button when the Xbox says "Game over!", it would probably make more sense to start annuitizing income over a 5-10 year period to ensure diversification across insurance companies and to not be punished by a few years of low interest rates.

Good point. Another aspect is will the retiree be mentally able to 'run his money' at an advanced age.
Even if a person does a simple asset allocation and rebalanced once a year, will age issues screw things up. Those with children might turn the finances over to them.
UncleMick's one fund psst Wellesly - is looking attractive.

 

[Emeritus]

Just a note that many states have annuity guarantee funds up to a certain level. some by income some by capital value. We bought an annuity for my step-MIL as required by my FIL's will and research both the guarantee fund and the pricing structure (she was 84) Bought it from Genworth

 

[chinaco]

+1 on the rates today.

I am considering a SPIA at some point in the future.

IMO - Annunites are helpful to mitigate longevity risk mainly. Most should consider the SS deferral option as part of such a strategy. If one needs more guaranteed income to establish a base income and they want more longevity risk mitigation, a SPIA might be a good idea.

Do careful analysis and take time to think about it. As with most things... there is an upside and down side. Plus all risk does not go away... there is still inflation risk.


Ultimately... there is no free lunch!

 

[Major Tom]

Good point. Another aspect is will the retiree be mentally able to 'run his money' at an advanced age.
Even if a person does a simple asset allocation and rebalanced once a year, will age issues screw things up.

This is something that has been on my mind recently. My mother had dementia and my father is in an advanced state of dementia right now. My brothers who live close to home took care of everything for our parents. I however, am not married and have no kids. I'm currently in my late 40's but do want to start coming up with some kind of a game plan for what to do should I lose the mental ability to look after my affairs, as my parents did.

Perhaps I'll just start giving my stuff away while I'm relatively young, bequeath my money to a good charity, and leave my own care to chance.

Hmmm.....

 

[Midpack]

One flaw in the analysis is the changing cost of an annuity. Sure they get cheaper as we get older, but their prices may also be subject to interest rates and political risk. In other words it's probably at least as difficult to predict annuity prices as it is to predict market returns.

A final nagging issue would be the implementation. Instead of pushing the annuity button when the Xbox says "Game over!", it would probably make more sense to start annuitizing income over a 5-10 year period to ensure diversification across insurance companies and to not be punished by a few years of low interest rates.

Good points. To the first, I would get updated annuity prices at least annually as it won't be a smooth curve at all.

To the second, I agree with your approach and that's why I said "I want to be conscious well in advance if I approach the "annuitization hurdle" point of no return." There is no way to anticipate the "game over" point, odds are we'd miss it. However, your first point tells me you realize that depending on interest rates and political risk at the time, it's possible that one might actually recover from missing game over - but I would not count on it or make it part of a strategy at all.

My point to the OP was, being conscious of your net worth vs the price of a desired annuity at any given time is prudent for any retiree IMO. Arbitrarily buying long before you need to just because it sounds like a good idea is probably a mistake, especially in today's interest/return environment. Thanks...