Annuities versus money market and ST bonds

[Rich_by_the_Bay]

I have always avoided variable annuities for lots of reasons described everywhere. However, I wonder if there isn't a place for immediate annuites in my plan. I welcome your comments on any aspect of this:

My strategy is to sock away about 5-6 yrs of anticipated income needs as liquid, cash-like investments. The remainder of my nest egg will be in 60/40 or 65/35 stocks and bonds, well spread out. The 5-year income "escrow" fund will be replenished periodically from either stocks or bonds, mostly from whichever does better that year.

When everything is down, I will just drill deeper into my income escrow where I can wait it out for that 5 years if necessary. Nothing new here - it's a widely written-about strategy (e.g. DeMuth/Stein) which feels right to me.

Now, instead of a cash escrow (money market, treasuries, STB funds) growing at 3% per year (in order to remain rock solid), I wondered about buying an immediate annuity with a 5 year payout. It pays about 5.2% a year at age 60-65. True the money is gone after 5 years, but it would be with the cash escrow plan, too. The return is greater, it is solid, and after 5 years i would buy another 5 year annuity from my investment returns. Like with all plans, the actual payouts may very depending on a quadrillion factors, but it seems to make sense to me.

Any advice? Anyone doing a plan like this (with or without annuities)?

 

[astromeria]

I'm not one of the investment gurus around here, but have you considered a high-yield CD instead of the annuity? Last time I checked, PenFed (Pentagon Federal Credit Union) was offering 3- and 4-year CDs at 5.5%, 5-year at 5.75%, and 7-year at 6%. You not only get your principle back at the end of the term, but in my opinion you can feel more secure about the investment than you can with an annuity.

 

[mickeyd]

Rich,

Have you considered the cost to you of such a plan? It seems to me that the insurance company fees, and any agent commission, will have to be paid to them before you get any kind of payout. VA plans are gererally heavy with fees/commissions that you will pay from your deposited funds. What fees will you have to pay?

It pays about 5.2% a year at age 60-65.

Not sure what this means. If you invest in a VA, there are usually many kinds of sub-accounts to select (stock, bond, MMF).   What sub-account would generate this return? No one knows for sure how much return they will receive on any investment. It seems like you are implying that this is some kind of a guarantee that the insurance company will pay you.

 

[Rich_by_the_Bay]

Mickeyd,

I agree - variable annuities have never made any sense to me. I was referring to immediate annuities: you pay, and you get a known amount every month for the duration of the annuity (in this case, 5 years). That worked out to about 5.2% at age 60.

Still, based on replies, it looks like I can do even better with a well-selected CD ladder. I didn't realize how much variation there was in CD rates - my local banks were in the 4% range while Pen Fed was in the high 5s.

 

[DW]

Thought about I-bonds? There's no penalty for redemption after 5 years. Right now, they're earning something like 6.7%, but that changes every six months depending upon inflation. You are not going to lose money to inflation, however.

 

[cute fuzzy bunny]

You arent going to lose money to CPI.

Inflation may be another matter.

Playing not to lose may not be your best strategy. You might lose anyway.