Considering a "FIXED LIFETIME ANNUITY"

OldShooter said:
Like @braumeister, I think you're not considering the inflation issue.

The way I say it is: "There is no such thing as a fixed annuity." Your baseline expenses will increase with inflation while the annuity will not. Plug in your own numbers, but using 3.5% inflation/20 years the buying power of that "fixed" annuity will be halved. 3.11% is the 100 year US inflation rate IIRC. The 50 year rate, which picks up the late 70s and early 80s, is over 4%.

This also affects your "break even" calculation because each year you are getting nominal dollars back, dollars that are worth less than the ones you gave TIAA. So @pb4 is an optimist! Your 15 year return is under water by the amount of inflation experienced.

Our solution to this is TIPS. IMO that is as close to a guaranteed inflation hedge as we can get and we don't have to worry about the quality of the "insurance company." I say "as close" because of course we get federally taxed on the inflation dollars. As I have said here many times, I think TIPS are an underappreciated asset for retirees.
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+1.

TIPS and laddered CD's comprise the majority of our "fixed income"from our portfolio. Very boring, not sexy, but gets the job done. :popcorn:
 
If we have HYPER INFLATION like 1975-85, I'm not sure an every 6 month adjustment would keep up and if you had them in a taxable account taxes would eat away at the adjustments as well.

Building a TIPS ladder is not trivial. Typically people start at 30 years and work backward, some years they did not sale TIPS so you have to work around that issue also. I would get help from someone on building this type of ladder also remember TIPS are not tax efficient so you would want them in your tax deferred or non taxable account due to the tax drag if possible.

The current Treasury Yield for nominal bonds: 10 year is 0.73% and 20 year is 1.15% while 30 year is 1.35%. So rates are historically low and they have been for several years as the Fed targets low rates with 2% inflation rate. This new target of 2% has not been part of the Fed's goal until recently.

I would think of an SPIA annuity (Single Premium Income Annuity) as longevity insurance or similar to a bond ladder that matures every year for the rest of your life and that you spend for expenses once it matures providing XX dollars every year.

I don't think there is a right/wrong answer on purchasing a SPIA with a portion of your portfolio (20%) now if it helps you sleep well at night and keeps you invested per your chosen asset allocation in these and future down markets.

There are ways to mitigate for low interest rates and purchases of SPIA, perhaps purchase X% over the next X years, or purchase all now and if inflation is taking its toll purchase another later to make up the difference.
Remember this is a portion of your overall portfolio not ALL or even 1/2 of your portfolio.

I think the safety first (guarantee your basic expenses with pension/SS/anuity/bond ladders) type of retirement strategy is attractive.
 
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Red Badger said:
... our portfolio. Very boring, not sexy, but gets the job done.
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Nothing wrong with that. In the wrap-up at the end of my Adult-Ed investing course I tell the students this: "Investing is boring. If you're not bored, you're not doing it right."

capjak said:
...Building a TIPS ladder is not trivial. Typically people start at 30 years and work backward, some years they did not sale TIPS so you have to work around that issue also. I would get help from someone on building this type of ladder also remember TIPS are not tax efficient so you would want them in your tax deferred or non taxable account due to the tax drag if possible.
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I'm not even sure a ladder is necessary. The yield curve on Treasuries largely reflects the mystery of future inflation, something that TIPS make moot. Also, something not widely understood, the interest on TIPS is inflation-adjusted too. The coupon rate is not paid on the original face value of the security, it is paid on the current value. So for example, 20 years of 3.5% inflation will result in the nominal dollars value of the interest payments to double, which is what the TIPS principal value has done at the end. Said another way, the typical YTM calculation undervalues the TIPS yield to the extent that there is any inflation. I have not figured out how this wrinkle might affect a ladder strategy.

I would be interested to hear from anyone who has actually worked though a TIPS ladder strategy. We have not; we bought the 2s of '26 back in 2006 and have just been holding them. They are our inflation insurance policy, just like we have fire insurance on the house.
 
+1 - I have a small fund in TIAA Traditional annuity from an employer 20 years ago.
I happened to meet with that adviser in early March before the pandemic .
I have not yet decided what or when to withdraw....but will look back to this forum for information. Thanks for suggestions on BH and M*
 
merlin3942 said:
Thank you all SO MUCH, (especially pb4uski), for taking the time to help me understand this. I think I'm back in the camp of thinking this sort of annuity is not for me, at least not at this time.

I don't really understand how to go about building a "CD ladder", with or without TIPS, so my next step is to do some research into that. (I'm open to any references about how to go about that anyone would care to share).

It all comes down to trying to figure out the best way to start generating a "stream of income" from the retirement account. I was attracted to the idea of money just "magically appearing" in my checking account automatically every month for the rest of my life ... until you all pointed out the real impact of what would be considered an average rate of inflation.

Back to the drawing board!
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Annuities are ALWAYS a good deal for the provider - or they wouldn't sell them in the first place. Annuities offer a poor return in exchange for predictable income. Unless you realistically expect to live longer than the average annuitant, it's not a good bet.
 
Midpack said:
Annuities are ALWAYS a good deal for the provider - or they wouldn't sell them in the first place. Annuities offer a poor return in exchange for predictable income. ...
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Well, in an economic sense, any transaction that a seller will execute must be good for the seller. From BMWs to Big Macs. All the same.

I think the problem with annuities is that they are so complex that the buyer is at a huge information disadvantage, thus tempting the seller(s) to take advantage. With the recent entry of some "white hats" into the business, it seems that things are improving, but you still see plenty of lawsuits against insurance companies for putting customers into inappropriate investments.

I tell my Adult-Ed students to avoid any product that they do not understand. Categorically, no exceptions. That rule probably causes us to miss a good deal once in a while but how many frogs do I want to kiss, looking for a prince, when each kiss costs me time and money. My personal answer is: none.
 
Out-to-Lunch said:
FWIW, Wade Pfau's "Safety First Retirement Planning" is available on Kindle for only $10. It presents a clear-eyed comparison of the benefits and trade-offs between annuitizing some of your stash or managing all of the risk yourself.

https://www.amazon.com/Safety-First-Retirement-Planning-Integrated-Worry-Free-ebook/dp/B07X2TW623
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I read it and it does a decent job at going through the "safety first" retirement philosophy.

From the book;

" Safety-first advocates support a more bifurcated approach to building retirement income plans that integrates investments with insurance, providing lifetime income protections. Probability-based advocates generally view annuities and life insurance as unnecessary in retirement. They see the stock market as a straightforward way to obtain superior retirement outcomes. Safety-first advocates disagree. We walk through this thought process and logic in steps, investigating three basic ways to fund a retirement spending goal: with a bond ladder, with a diversified investment portfolio, and with annuities and life insurance. We consider the potential role for different types of annuities including simple income annuities and their various flavors, variable annuities, and fixed index annuities. When we properly consider the range of risks introduced after retirement, I conclude that the integrated strategies preferred by safety-first advocates, which combine investments and insurance, support more efficient retirement outcomes that better support spending and legacy."
 
OldShooter said:
..... I'm not even sure a ladder is necessary. The yield curve on Treasuries largely reflects the mystery of future inflation, something that TIPS make moot. Also, something not widely understood, the interest on TIPS is inflation-adjusted too. The coupon rate is not paid on the original face value of the security, it is paid on the current value. So for example, 20 years of 3.5% inflation will result in the nominal dollars value of the interest payments to double, which is what the TIPS principal value has done at the end. Said another way, the typical YTM calculation undervalues the TIPS yield to the extent that there is any inflation. I have not figured out how this wrinkle might affect a ladder strategy. ...
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OldShooter.... do the prices of TIPs vary much? I don't really follow them so I don't know. But if prices don't vary much then I can see no need for a ladder... just invest long and sell some as needed to fund spending.
 
Op is not proposing to purchase an annuity from an insurance company. She has been placing part of her paycheck with TIAA for the past 40 years. She can probably have her TIAA traditional paid out in a "Transfer Payout Annuity" for some period of 10 years or longer, but typically those of us in TIAA cannot just cash out the portion of our TIAA assets that are in the "Traditional" annuity. This allows TIAA to invest for the long term and allows the OP to get a guaranteed return of 3% per annum, and a little more than that at present.
pb4ulaski's post showed that if the alternative were a CD ladder, she would need to live to age 83 for the return to exceed that of a CD ladder at current CD rates. However, as she can get nearly 3.5% just by leaving it set this is not the realistic alternative to annuitizing this accumulation.
Since TIAA is very safe, it would make sense for the OP to use other lower yielding fixed assets for income now (e.g.. a bond fund, or any CDs yielding less than 3%). Then,
when she is 70 or 75 she can choose a 10 yr payout, (still with the 3% or higher interest) or an annuity with a much higher payout rate than 6.5% because of her reduced life expectancy at that time.
 
pb4uski said:
OldShooter.... do the prices of TIPs vary much? I don't really follow them so I don't know. But if prices don't vary much then I can see no need for a ladder... just invest long and sell some as needed to fund spending.
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That's basically what we are doing. We bought one issue in 2006, the 2s of 2026. But as I have said before those were inflation insurance, so we bought the longest and lowest coupon that was then available. Then we basically forgot about them. We did sell 10-20% of the position in 2112, rationalizing that we had a shorter time horizon but deep inside it was also probably because they had appreciated to about 150% of what we had paid. :LOL: Now with our fixed income AA tranche starting to look a lot like a bucket, I anticipate that we will begin selling off the TIPS in a couple of years depending on the shape of the recovery.

IIRC the whole TIPS yield curve is within 50 basis points or less, top to bottom. & actually I don't know why there would be any curve at all. Maybe it is driven by the "coupon rate" rising with inflation.

The only trap for the naive is near the January/July dates when the principal adusts. The adjustment amount is known ahead of time, so the YTM numbers start to look very goofy as traders bid anticipating the adjustment.

I really would like to see a thorough analysis that answers your question, but I am too lazy to do it.
 
Midpack said:
Annuities are ALWAYS a good deal for the provider - or they wouldn't sell them in the first place.
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That doesn't mean that it is a BAD deal for the buyer. In essentially every transaction you ever make, both sides think it is a good deal, or you wouldn't make it.

I am not planning to purchase an annuity, but that is because I will have a pension. Otherwise, I may well choose to "buy" a modest income floor to mitigate longevity concerns. Of course, one (the?) alternative is to w*rk longer to get a more conservative (bigger) stash...
 
MikeTN said:
Op is not proposing to purchase an annuity from an insurance company. She has been placing part of her paycheck with TIAA for the past 40 years. She can probably have her TIAA traditional paid out in a "Transfer Payout Annuity" for some period of 10 years or longer, but typically those of us in TIAA cannot just cash out the portion of our TIAA assets that are in the "Traditional" annuity. This allows TIAA to invest for the long term and allows the OP to get a guaranteed return of 3% per annum, and a little more than that at present.
pb4ulaski's post showed that if the alternative were a CD ladder, she would need to live to age 83 for the return to exceed that of a CD ladder at current CD rates. However, as she can get nearly 3.5% just by leaving it set this is not the realistic alternative to annuitizing this accumulation.
Since TIAA is very safe, it would make sense for the OP to use other lower yielding fixed assets for income now (e.g.. a bond fund, or any CDs yielding less than 3%). Then,
when she is 70 or 75 she can choose a 10 yr payout, (still with the 3% or higher interest) or an annuity with a much higher payout rate than 6.5% because of her reduced life expectancy at that time.
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Not sure who "she" is Mike... the OP is a he... :facepalm:

The reality is that the OP has not provided enough details for us to know. The main point of my earlier post was that 6.5% was not a "return" but was a payout rate so it is prudent to be careful in what you think "return" is when looking at SPIAs. And if your agent suggest that you are getting a 6.5% return then either they don't know what they are doing or they are deliberately misleading you.... there's not much room for anything else.

That said, if the OP is a male in Indiana as profile indicates, then 6.5% payout with 10 years guaranteed is a pretty good payout rate.... immediateannuities.com suggests that an insurer policy payout rate would only be about 5.9%.

OP needs to provide more details for more specific advice, but the main point is that the 6.5% is not a "return" because it includes both return of capital and return on capital.

The OP seems to think that they can withdraw their balance whereas you think they can't... it could be that he has a different TIAA product than you do or the OP doesn't know he can't take it out.
 
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MikeTN said:
Op is not proposing to purchase an annuity from an insurance company. She has been placing part of her paycheck with TIAA for the past 40 years.
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TIAA (Teachers Insurance and Annuity Association of America) isn't an insurance company?
 
I interpreted that Mike meant that the person would be annuitizing their existing deferred annuity balance rather than purchasing an annuity from another insurer... but I might be wrong about what he meant.
 
pb4uski said:
That said, if the OP is a male in Indiana as profile indicates, then 6.5% payout with 10 years guaranteed is a pretty good payout rate....

OP needs to provide more details for more specific advice, but the main point is that the 6.5% is not a "return" because it includes both return of capital and return on capital.

The OP seems to think that they can withdraw their balance whereas you think they can't... it could be that he has a different TIAA product than you do or the OP doesn't know he can't take it out.
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Thanks for clearing up the identity issue! ;-) I actually have both kinds of TIAA Traditional in my account - one that can be drawn out at 10%/year for 10 years (which has been growing at a higher interest rate), and the other is "liquid", and can be withdrawn as a lump sum at any time (and is currently growing at a much lower interest rate). I believe the proposed annuity was going to tap BOTH of those accounts. I turn it ALL back over to TIAA, and they in turn start sending me monthly checks.

I'm happy to provide more details if you can tell me specifically what I need to find out?

Again, thanks to all for taking the time to help me work through this.
 
merlin3942 said:
My "break-even" point for the annuity (the point at which I'll get back the lump sum I annuitize) is about 15 years. There's a guarantee pay-out period of 10 years, so if I were to die before that, the rest of the payments up to 10 years goes to my estate (I'm not married, and have no dependents, so that's not much of a concern).

I always thought I could probably do much better than 6.5% on my own,
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I agree with the above comments. This is not "fixed" in terms of purchasing power. It decreases at the rate of inflation, and I'm concerned about that inflation rate.

It is not a 6.5% "return", as shown above.

OTOH, the bold is important. An SPIA lets you spend money that other people want to keep for their spouses or kids.

You haven't said anything about your Long Term Care plan. Some people want to keep assets to cover LTC. As a single person, you might figure you've got enough just by using your house (if you own one) and the stocks. I don't know, just think about that.

You're doing the right thing by deferring SS. In terms of "buying lifetime income", I'd always defer SS first, then think about the SPIA.

When SS starts, the SPIA plus SS may be more income than you "want".
 
Independent said:
You haven't said anything about your Long Term Care plan. Some people want to keep assets to cover LTC. As a single person, you might figure you've got enough just by using your house (if you own one) and the stocks. I don't know, just think about that.
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Thanks. I actually do have a separate LTC policy. I chose one from Genworth that, at the time, was offering a policy starting at $5500/month, with 5% annual compounding, UNLIMITED payout period, that qualifies under the Indiana Long Term Care Program for Medicaid Asset Protection. I opted for the 10-year premium option, meaning I pay premiums for 10 years, and then I'm done with the payments ... and the yearly payment I make this year (next month, actually), will be my 10th and final payment. They raised my annual premium one time over the past 10 years, so this will be their "last chance" to try and squeeze a bit more out of me! But I'm within the 45 day window they have to notify me of a premium increase, so I think I'm going to escape this final premium payment year without another increase in premium.
 
pb4uski said:
I interpreted that Mike meant that the person would be annuitizing their existing deferred annuity balance rather than purchasing an annuity from another insurer... but I might be wrong about what he meant.
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This is correct - I was considering annuitizing my existing deferred annuity with TIAA.
 
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