Are you happy with your annuity?

[Jerry1]

I really appreciate threads like these. I have a lump sum pension. When I retire, I can take the lump sum or I can take an annuity. I have a very small annuity and the person who sold it to me has his eye on my pension when I retire. The problem is that apparently, the annuity that I can get from my corporation is significantly better than he can do. Basically, to get the same return (monthly payout), I would have to leave the money with him and not draw anything for ten years. While I don't fully understand annuities, that tells me that my corporation is providing a much better deal. Only problem is (beyond being an annuity) that I have to trust that the company will live up to it's obligation. While I think the risk is small, I think it's greater than if I went outside (Allianz).

Question to the group, I understand that a fixed annuity gets ate up by inflation, but I'm curious how you think that balances out with the natural tendency to spend less as we get older. Outside of aggressive inflation, I'm thinking my spending will probably reduce at least similar to inflation.

Note: I realize the cost of an annuity, but I like the thought of that third leg (fixed income) given that I do not have a defined benefit pension. For me, like many, it's savings+401k/IRA+SS. I like the idea of SS+annuity=minimum living standard. Savings+401K/IRA=better living and discretionary spending.

 

[street]

What % of your portfolio is invested in an annuity?

 

[Jerry1]

What % of your portfolio is invested in an annuity?

Not sure who you're asking, but if me, my existing annuity is very small. I put an old IRA with this guy and it is only 2% of my portfolio. You want to learn, you put some money in play. No regrets. It will be beer money so at least I got that covered.

If I convert my pension when I retire, that's a lot more. It would be 20%. I would not have the ability to take some as a lump sum and some as an annuity. All or nothing.

 

[Independent]

My wife and I have Flexible Premium Retirement Annuities that we bought 36 years ago when I didn't have any workplace savings available. We made deposits for one or two years then moved on to something else.

They pay 4.5% interest and have no surrender charge.

I'm happy with them.

 

[Independent]

Question to the group, I understand that a fixed annuity gets ate up by inflation, but I'm curious how you think that balances out with the natural tendency to spend less as we get older.

Depends on a lot of variables. I think we spend less on fun stuff and more on have-to-do stuff. Medicare premiums, Medicare supplement premiums, Medicare Part D premiums, dental work, hearing aids, help with lawn mowing and snow removal. Eventually, in-home part time aid or assisted living facility.

I have a co-worker who says retirement spending is U-shaped as we go through three phases - Active, Passive, Dependent.

But, some individuals never have a lot of spending during the Active phase, they enjoy cheap hobbies and volunteer work. Others don't last long in the dependent phase because they go from good health to the grave very quickly.

 

[friar1610]

I was "sold" on a Fidelity VA years ago. If I had been a Boglehead back then I would not have done it. After a few years I did a 1035 transfer to a VG VA which I still own. It is now worth more than 3x the original investment.

It now fits into my planning as income for my wife if/when I predecease her (as the actuaries seem to think I will). As the beneficiary she will become the owner and can annuitize it to replace the part of my pension which the survivor benefit won't. If she predeceases me I will use some of it for charitable donations and spend the rest on wine, women and song.

Depending on the OP's marital situation I would encourage considering a joint life annuity to take care of the surviving spouse.

 

[MRG]

What % of your portfolio is invested in an annuity?

I dont have one but.... When fido was pitching it was 30-35%? to me. The sales guy suggested no more than 40%?.

I wouldn't ever go near that number, of course right now it's 0.

 

[GalaxyBoy]

I inherited an annuity from DF earlier this year. Even though he was 90 years old, he hadn't annuitized it yet.

This left me with the choice of whether to take the money out in a lump sum, take it out within five years, or annuitize it myself. The choice of investments, being with a full-service broker, stunk with high expense ratios. At this point in my life, newly retired and pre-SS, I'm trying to limit my income on my 1040 in order to maximize Roth conversions in the lower tax brackets. This darn annuity really messes with that. Bless his heart, but I wish dear old Dad had just left the money in his taxable account. I'm taking it within five years. It's also taken out gains-first, principal second, so I'm planning to take the taxable gains in five equal installments, plus all the (already-taxed) principal at the end.

Anyway, another perspective on annuities, FWIW.

 

[street]

I inherited an annuity from DF earlier this year. Even though he was 90 years old, he hadn't annuitized it yet.

This left me with the choice of whether to take the money out in a lump sum, take it out within five years, or annuitize it myself. The choice of investments, being with a full-service broker, stunk with high expense ratios. At this point in my life, newly retired and pre-SS, I'm trying to limit my income on my 1040 in order to maximize Roth conversions in the lower tax brackets. This darn annuity really messes with that. Bless his heart, but I wish dear old Dad had just left the money in his taxable account. I'm taking it within five years. It's also taken out gains-first, principal second, so I'm planning to take the taxable gains in five equal installments, plus all the (already-taxed) principal at the end.

Anyway, another perspective on annuities, FWIW.

My is 4% of my portfolio good or bad I'm not sure. I have done every well at 7% plus return on an average per year. So I really can't complain.

So if mu annuity isn't used between my wife or me my son would inherit the annuity. So do you know if it is a federal law that an heir would have to take out in full with in 5 years. I have heard of this just wondering if it is law.

 

[Nature Lover]

I have a couple of pensions, which as noted above by others, are basically annuities. There was no lump sum option for them - and I knew that in advance. In large part, because I knew I'd have pension income, my finances in ER is based on a "floor with upside" approach, with the intention that my pensions provide for my non-discretionary and basic recurring expenses and my portfolio provide for any extras/larger discretionary ones. Valued as annuities, the pensions make up ~35% of my NW, and, at the moment, cover more than my current basic recurring expenses.

I don't think I would have purchased this income as annuities if I'd simply had the money in a 401k or IRA (because of my prior bias against annuity fees and terms); however, I am very happy to have them and they help me sleep well at night.

NL

 

[travelover]

............I don't think I would have purchased this income as annuities if I'd simply had the money in a 401k or IRA (because of my prior bias against annuity fees and terms); however, I am very happy to have them and they help me sleep well at night.

NL

I think the key is the underlying cost of the annuity. Pensions are often structured so the payout is better than any annuity you could buy for yourself.

When I was offered a lump sum in exchange for the pension I was already receiving, I certainly couldn't duplicate the pension payout using the lump sum to buy an annuity.

 

[gerntz]

Totally. Don't have one.

 

[capjak]

Annuities are not investments, they are insurance.
I am looking at them as well in addition to the pension I already have (which I am very thankful that I have one non COLA, however).
In regards to interest rates, my crystal ball is not working, I cannot predict the future so maybe better to ladder them over next several years as you age the cost is better and if rates increase the cost will improve as well. The vanguard portal to Hueler immediate annuities is a good one but not always the best payout, I am also looking at immediate annuity.com and Stan the Annuity Man.

 

[savory]

I guess I have an annuity. I get a monthly pension check from Mega and a few years ago they offered me a lump sum, which I refused. I'm happy with it, but it is not COLA-ed, so I am starting to feel my buying power slip away after a decade. Fortunately, I also have a 60/40 portfolio to compensate for inflation when I reach the point where the pension does not cover my expenses.

I am in a similar position. I took annuity vs lump sum. But I am very happy with the choice. I like that with my annuity and SS, I can have a decent life for several more years. Toss in portfolio and my ER should exceed expectations.

 

[Nature Lover]

I think the key is the underlying cost of the annuity. Pensions are often structured so the payout is better than any annuity you could buy for yourself.

When I was offered a lump sum in exchange for the pension I was already receiving, I certainly couldn't duplicate the pension payout using the lump sum to buy an annuity.

Agreed.

 

[Chuckanut]

Being able to sleep at night is certainly worth something.

And, if an annuity keeps somebody from panicking and selling out cheap in the next market correction, then I think it has value for that person.

Not everybody has what it takes to be in the stock market.

 

[sengsational]

I have a variable annuity from Vanguard that has done it's job...it reduced non-retirement asset balance while the kids were in school. It's tracking the underlying funds just fine, and I have not annuitized, nor do I plan to. When I turn 59.5, this will be covering my expenses through withdrawals. I need to use this exclusively (over 401k and IRAs) to uncover the tax free basis. Then I'll have a wad of cash to blow on something!

 

[MrLoco]

Question: All this talk of annuities.....fixed or variable....If one has the appropriate AA for one's age and risk tolerance ......and one takes what they consider to be a SWR (3,3.5,4.0%)......have we not in effect created our own annuity with our portfolio? Realizing that the amount may not be the same year in and year out but would this not be preferable to the fees associated with annuities?

Running simulations of the above thru FIRECALC with a 98+% success rate over 30 years makes me question why many invest in an annuity. Is it the psychological comfort of "knowing" exactly what that monthly payment will be?

EDIT: DW and I both have pensions so I could see more of a reason to have an annuity if one does not have a pension. The annuity becomes their pension.

 

[Danmar]

Question: All this talk of annuities.....fixed or variable....If one has the appropriate AA for one's age and risk tolerance ......and one takes what they consider to be a SWR (3,3.5,4.0%)......have we not in effect created our own annuity with our portfolio? Realizing that the amount may not be the same year in and year out but would this not be preferable to the fees associated with annuities?

Running simulations of the above thru FIRECALC with a 98+% success rate over 30 years makes me question why many invest in an annuity. Is it the psychological comfort of "knowing" exactly what that monthly payment will be?

EDIT: DW and I both have pensions so I could see more of a reason to have an annuity if one does not have a pension. The annuity becomes their pension.

I think you have made a reasonable point. But annuities generally pay quite a bit more. If you bought an annuity at age 70 (male) it would pay around 7% every year guaranteed for your life. Tax treatment may be better than cap gains/divs too. A 7% withdrawal rate might not be safe even at age 70?

 

[FREE866]

Before you purchase an annuity find out exactly what all the fees are:

Annual fees including sub account fees, M&E expenses, any riders. Also ask of there are surrender penalties

My mom had one and we found out the annual fees were over 4%..absolutely criminal...

 

[wmc1000]

In what would be viewed by the majority here as a Definitely Don't do move over 20 years ago I rolled a former 401K account into a Variable Life Insurance account. At that time we needed the additional Life Insurance coverage having younger children in the house, (yes term would have been much cheaper in hindsight), and liked the backstop of a 6% guaranteed growth, (on the annuity value side), in case markets crashed and didn't recover. Yes I was much less knowledgeable then. When the cash value subsequently plummeted by 50% I slept much better.

Last year in meeting with my agent I found out that with my contract I can pull out $24K per year without annuitizing the contract, (but lessening the contract value), and each year it recoups that amount in guaranteed growth so it maintains the "death" value to DW whereas annuitizing it would limit it her to a 10 year certain period if I was to die. The 6% growth guarantee terminates at age 70 so at that point it depends more on the market returns less expenses whether it makes more sense to annutize or continue withdrawing money as long as the cash value remains positive. Additionally since every year I wait shortens my life expectancy on their table the annual annuity payment when annuitized becomes larger so it is a bit like having a cola'd annuity until the time it starts.

Never having worked a job that came with a pension this cash stream was looked at like 1 leg of my stool!
Knowing what I have learned on this site over the past few years I would have done things differently but I also don't regret the choice I made.

 

[kcowan]

I think you have made a reasonable point. But annuities generally pay quite a bit more. If you bought an annuity at age 70 (male) it would pay around 7% every year guaranteed for your life. Tax treatment may be better than cap gains/divs too. A 7% withdrawal rate might not be safe even at age 70?

I would have to compare the 7% to complete depletion of the amount invested in the annuity at your date with the grim reaper. It is well known that you can beat the insurance company by living longer than your statistical expiry date, minus overhead charges.

IOW it is a bet. There is a slightly less than 50% chance that you will win.

 

[Huston55]

When I retire next year I was thinking of purchasing a fixed immediate annuity from Vanguard. I know all the drawbacks. I like the idea of not having to worry about the stock market and having a fixed amount for life. If you purchased an annuity are you happy with it or do you regret the purchase? Any thoughts? Thanks for your time.

OP-

My suggestion is to consider using an ‘annuity hurdle’ concept to make this decision. I know of two methods (see links) you can use to help.

1. Fullmer Annuitization Hurdle- http://www.schulmerichandassoc.com/Modern_Portfolio_Decumulation.pdf

2. Otar’s ‘Zone’ Concept- http://retirementoptimizer.com/articles/Article105.pdf

Also, here’s an old thread (there are many here) discussing the annuity question and it may be helpful to you.

http://www.early-retirement.org/forums/f28/another-wade-pfau-spia-article-67868.html

 

[sengsational]

Question: All this talk of annuities.....fixed or variable....If one has the appropriate AA for one's age and risk tolerance ......and one takes what they consider to be a SWR (3,3.5,4.0%)......have we not in effect created our own annuity with our portfolio?

As an aside, what is a bit unfortunate, IMHO, is that a "variable annuity" that is never annuitized really has nothing to do with an annuity, yet it's still got "annuity" in it's name. It's simply that an insurance company is holding your mutual fund, and the funds there are deemed "retirement assets" and can't be taken out before 59.5 without penalty.

But to answer your question, the difference is who is taking on the market and longevity risks. In the annuity case, the insurance company takes that risk, and because they have many customers, it's not a big deal. In the DIY case, that risk is all you, bay-bay!

 

[MarieIG]

Not all annuities are created equal. After my DF passed, I had been using the bank next to my office for an estate account and for medallion guarantees that I needed for transfers. Well, wouldn't you know it they had one of their alleged "financial advisers" track me down. I was curious, and in any event, it was next door to my office so I did go in and meet with him. He was selling an annuity. Shuffled his papers around so fast he looked like a card shark.

He showed me payouts for a seven figure annuity. I put on my stupidest face (yep, it's a talent) and pointed at the papers and asked him to please show me the print-out with his commission on it. More shuffling. Another stupid look from me. Does NY State guarantee the entire amount if the insurance company goes bankrupt? (I knew they didn't). There was some tap dancing about the rating of the company. He managed to tick me off.

"Well, you know, I'd really like some life insurance to protect my family, do you sell that?" Amazingly he did. Out came the forms. I looked at them, very slowly of course, and commented, "oh, they want to know if I've had cancer in the last five years, I have it now, is that a problem?" Him, "you look very healthy!" Me, eyes wide, tears steam down cheeks. (Very easy to do with losing a parent followed by a cancer diagnosis.) I explain I hadn't started treatment yet. Him, "I'll look into it and get back to you."

I never did hear back from him.