Annuities - Thoughts?

[nun]

Quote:

Originally Posted by mathjak107 but he isn't using 9.80%as an annuity amount . he is illustrating the mortality credit effect and why you can never duplicate that on your own . . what he is saying is if you took 25 people and they all bought bonds , that at the time were paying 3% no one would do better than 3% . but if you pooled the money and bought the 3% bonds and gave 1 to each of 25 people who each died one year apart , the pooling effect would have the last person getting a 9.86% return on their 1k investment which started life as the same 3% bond 25 people were used because drawing that amount of money from the bonds the money would be depleted in 25 years and hit zero including interest and principal . . it was only an example of how risk pooling money and mortality credits give you more than the subsequent value of each investment on its own . in this case the 3% bonds multiplied themselves to the survivor so the survivor got much much more than a 3% bond would allow . it only demonstrates a process not a policy , it is only a hypothetical example of what mortality credits bring to the party and why buying bonds or cd's can not equal that effect no matter what the rates are . . . .

We are in total agreement, the article outlines the principles of pooling risk and mortality credits. But let's assume we understand how an annuity works and deal with the products you can actually buy from an insurance company; those will pay 6% for a 65 year old male. They don't give you nearly the advantages of the example given in the article, but they will be for a lifetime. If the payout was 7% the annuity might make sense, but at 6% they are hard to justify.

[mathjak107]

6% is 30% more than i can safely draw . that cash would allow me to sustain from selling equity's for more years than cash and bonds would . you would likely be refilling sooner without the spia . .

it would take a decade or more for inflation to catch up while allowing equity's to grow longer up front .

[pb4uski]

Wow... in that case you should dump the whole load into a SPIA. Go big or go home.

[mathjak107]

the spia only replaces bonds and cash , it does not provide growth or eventual inflation protection . i need both equity's and an income source .

but if inflation wasn't an issue you are right . keep an emergency fund , get some life insurance for legacy money and the spia's for income and you would likely do very well and never worry about markets or sequencing but inflation is the wild card .

in fact that is what ed slott recommends , spia's with cola's and life insurance plus cash for emergency's . pfau took it a step further in his study and found the integrated combo of spia's /equity's/life insurance outperformed buy term and invest the rest 67% of the time in over 10,000 different scenario's run .

the tax freeness of the life insurance made a huge difference .

it gave you a bigger pay check 100% of the time because of little sequence risk and 67% of the time a bigger balance at the end .

i think more and more we are going to find that if we need our portfolio's to live off of , unconventional times are going to call for unconventional strategy's

[nun]

Quote:

Originally Posted by mathjak107 6% is 30% more than i can safely draw . that cash would allow me to sustain from selling equity's for more years than cash and bonds would . you would likely be refilling sooner without the spia . . it would take a decade or more for inflation to catch up while allowing equity's to grow longer up front .

You can safely withdraw a flat 6% from a 60/40 portfolio. If you don't index for inflation the 60/40 portfolio has a 98% probability of producing at least 6% for 30 years. I'm not arguing with your reasoning...or the analysis of Pfau which I think is very useful....but today's rates are 0.5% to 1% less than used in the original papers and that pushes the SPIA into pretty dubious territory for the majority of people.

If you are really worried about sequence of returns issues I'd put 5 years worth of cash into a 5 year CD ladder keeping your flexibility and the chance to buy an annuity later on if the rates are better.

I'm lucky in that I use my defined benefit pension in my portfolio to do what your SPIA is doing. I just think SPIAs are expensive today for what they offer.

[mathjak107]

we are to young yet for starting spia's . but when we do i would ladder in to them . between age , mortality credits and hopefully higher rates they will work fine .

i am 64 and that is to young for the sweet spot .

[RobbieB]

I plan to convert half of my IRA to Roth over time and use the IRA half to buy an annuity.

Then I'll have equities, muni bonds, a Roth and SS & annuity income. Stability.

[nun]

Quote:

Originally Posted by mathjak107 we are to young yet for starting spia's . but when we do i would ladder in to them . between age , mortality credits and hopefully higher rates they will work fine . i am 64 and that is to young for the sweet spot .

OK. that's important information.

I took 20% of my portfolio and transferred it from my employer's DC pension plan into the DB plan at age 54 when I had the one time chance. I'm now 55 and got my first pension payment this month. The payout is 7% and it has a 3% COLA so it was a no brainer.

[Floridatennisplayer]

Isn't part of the thought process behind an annuity the protection from the market taking a 30% drop etc?

[RobbieB]

Yeah, that's why I'm going to buy one.

[Floridatennisplayer]

One of my friends who is 66 put over half of his savings in one and is a happy guy. Said he knows the market is going to take a massive dump and he can't bear the thought of watching years of gains go down the drain. Said he would never out live the huge losses. And it would take years off of his withdrawals. Said he sleeps well at night.

I'm feeling the same way.

[COcheesehead]

The typical market recovery cycle is usually less than 3 years and more likely less than 2 years. You're going to forever "give" your money to an insurance company for 2-3 years of feeling good? Not this guy.

[Dawg52]

Quote:

Originally Posted by RobbieB I plan to convert half of my IRA to Roth over time and use the IRA half to buy an annuity. Then I'll have equities, muni bonds, a Roth and SS & annuity income. Stability.

Agree. I have no plans to dump a ton in an annuity, but enough to balance out my income(cash flow) needs. I'm 62 so no plans to buy one anytime soon.

[bmcgonig]

Quote:

Originally Posted by nun You can safely withdraw a flat 6% from a 60/40 portfolio. If you don't index for inflation the 60/40 portfolio has a 98% probability of producing at least 6% for 30 years.

That's a risky way of looking at it cos it's not true. In the past you could have taken a flat 6%. But who knows what the bond and market will be like for the next 30 yrs. Some folks here act as if Firecalc has a guarantee with it. It predicts nothing. And that uncertainty is why people use the SPIAs.


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[pb4uski]

Quote:

Originally Posted by Floridatennisplayer One of my friends who is 66 put over half of his savings in one and is a happy guy. Said he knows the market is going to take a massive dump and he can't bear the thought of watching years of gains go down the drain. Said he would never out live the huge losses. And it would take years off of his withdrawals. Said he sleeps well at night. I'm feeling the same way.

Well... since your friend KNOWS the market is going to take a massive dump then he would simply buy a load of at-the-money puts and become rich. No disrespect but he doesn't KNOW anything... the so-called experts don't either.

That is the beauty of a well diversified portfolio... it will weather all storms... and I sleep well at night too.

Quote:

Although certain to happen again, crashes are rare. The 2008 type scenarios, are extremely rare. Only 3 times since 1825 did the market finish a calendar year down 30% or worse. That’s about once every 63 years. People tend to overestimate the probability of a market crash when one recently occurred. The storm clouds of 2008 are in the rear view mirror, but they are still visible, and the effects of the storm still evident.

You and your friend are suffering from recency bias.

[harley]

Are we still talking about this? Isn't there a way to roll this into an endless loop with all the other annuity threads so people don't have to waste their time typing the same thing over and over and over...

[bmcgonig]

Quote:

Originally Posted by harley Are we still talking about this? Isn't there a way to roll this into an endless loop with all the other annuity threads so people don't have to waste their time typing the same thing over and over and over...

Well apparently you have nothing better to do 😄


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[harley]

Sad, isn't it?

[nun]

Quote:

Originally Posted by bmcgonig That's a risky way of looking at it cos it's not true. In the past you could have taken a flat 6%. But who knows what the bond and market will be like for the next 30 yrs. Some folks here act as if Firecalc has a guarantee with it. It predicts nothing. And that uncertainty is why people use the SPIAs. Sent from my iPad using Early Retirement Forum

Well that 98% success rate does include all the worst years of the stock and bond markets. Obviously the high probability of low returns from bonds over the next 10 years needs to be considered. There is no guarantee when you are dealing with equities and bonds, so you have to go with the mathematics tempered by your ideas about the future.

[nun]

Quote:

Originally Posted by Floridatennisplayer One of my friends who is 66 put over half of his savings in one and is a happy guy. Said he knows the market is going to take a massive dump and he can't bear the thought of watching years of gains go down the drain. Said he would never out live the huge losses. And it would take years off of his withdrawals. Said he sleeps well at night. I'm feeling the same way.

I understand the impulse to take money "off the table" having done it myself, but at a far better rate than and SPIA. If you have made a plan and have enough to live off with the annuity and some sensible returns from the rest of the portfolio then it's as good a plan as any. However, these decisions are best made with some rigorous analysis, not dubious precognition of market down turns. Most (60%) of 65 year old men will be better off with a 5 year CD ladder paying 2% a year than an SPIA as it will provide a flat 6% income for 20 years. The SPIA is good for longevity insurance so if you plan to live longer than average there is an argument to be made for one even at today's rates.