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Old 04-17-2020, 04:20 PM   #61
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[QUOTE=finnski1;2409283]
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Originally Posted by pb4uski View Post
merlin,

You or your TIAA person... is confusing payout with return. From what you wrote, you are receiving a 6.5% payout rate.... the problem is that much of the payouts that you receive are just a return of your own principal and the rest is return on your principal.


I agree and think your being too kind to the TIAA person.
They know perfectly well how that works but want to make customers look like they are getting that 6.5% return.
They can make upwards of 6-8% commissions on annuities and I'm sure love to "assist you with your purchase of said item"
The commonly accepted SWR from a balanced mix of stocks & bonds is generally considered to be 4%, but that is also based on potentially drawing down your principal or even running out of money completely in a few situations. I don't have any annuities, but the 6.5% annuity doesn't seem like such a bad deal if you want to be almost sure of not running out of money.
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Old 04-17-2020, 04:46 PM   #62
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I took one 3 1/2 yrs ago at 55, over a cash balance plan lump sum.
$280k = $1520 per month for life. 50% to spouse if I kick the bucket.
Just part of the home made 4 legged stool retirement plan.
So far so good. Paying tax on a smaller amount of $$ over a longer period of time is another bonus.
If I live a long time, I win. If I don't, they win. Thats about it.
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Old 04-17-2020, 04:52 PM   #63
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[QUOTE=Gearhead Jim;2413209]
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Originally Posted by finnski1 View Post

The commonly accepted SWR from a balanced mix of stocks & bonds is generally considered to be 4%, but that is also based on potentially drawing down your principal or even running out of money completely in a few situations. I don't have any annuities, but the 6.5% annuity doesn't seem like such a bad deal if you want to be almost sure of not running out of money.
First you have to understand the most basic thing about these insurance products, such as annuities. The return the insurance company is quoting you today is based on current interest rates of about 2%.

They are also not inflation-protected as pointed out by others which could be huge over 15-20 years.

It sounds to me like you have plenty of money and don't really need to waste it, but if you do want a guaranteed income the only annuity I would purchase is an immediate annuity or a deferred annuity from someplace like immediateannuities.com. Low comminssions and fees mean more of your money working for you.

Anything that an agent is trying to sell you is just a waste of your hard earned money.
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Old 04-17-2020, 04:56 PM   #64
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I guess it depends on the rate the insurance company is using the credit the account. Most are about 3.3%, so you'll be cutting into your principal and the 6.5% that is being removed each year, the full 6500, if you deposit 100000, will be really dipping into your principal. One thing you said that concerns me, is you said, you'll take soc sec at AT LEAST 70! Do not wait until after 70! you'll lose those payments from 70 to the age you decide to invoke soc sec, and it doesn't grow at 8% after 70, like it does from ages 62 to 70.
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annuities -- some thoughts
Old 04-17-2020, 04:58 PM   #65
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annuities -- some thoughts

I too like the idea of being paid a fixed sum (indexed to inflation) each month that beats the market rate of interest on my portfolio but here are a few negatives:
1. Annuities are basically insurance products, and despite the claims, insurance companies often go bankrupt. For example, executive life had a bunch of annuities that actually paid only about 60% on the dollar due to bankruptcy. AIG was unable to pay claim until the fed bailed them out in 2008. There are many other examples. Why? Because the insurance company is betting, against you, that they will earn more money on your money to both pay the monthly until you die, and cover costs. That doesn't always happen, no matte how big the insurance company.
2. In an annuity, you are betting against the house.The insurance company figures the odds, and then puts overhead and profit into the mix, and then gives you back your own money. If you die early, they win big.
3. Interest rates are going to go up-- and when they do, your annuity will seem like it is under-performing. Even ones indexed for inflation.
4. Typically annuity payments are taxed at ordinary income rates, while other investments might earn capital gains or lower rates. Even if the underlying investment is capital gains, distributions are ordinary income.
5. Annuities have sales charges-- even the best do. And we all know what happens when you don't invest 100 cents of every dollar-- you are totally behind the curve from that point out. Same argument we use for no-load funds or ETF's versus the old "managed funds" -- i.e. the managed fund typically doesn't beat the market but you have a whole lot less to invest because of commissions.

An annuity is a bond and life insurance combination. For some portion of your portfolio, that may be ok. Whole/universal life may be a better product (although the sales commission is usually very steep) or you can simply create your own annuity by doing a level pay out of your investment (with interest) over time and not look at the remaining principle after each payment. Anyway, good luck.
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Old 04-17-2020, 05:00 PM   #66
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Quote:
Originally Posted by Gearhead Jim View Post
... The commonly accepted SWR from a balanced mix of stocks & bonds is generally considered to be 4%, but that is also based on potentially drawing down your principal or even running out of money completely in a few situations. I don't have any annuities, but the 6.5% annuity doesn't seem like such a bad deal if you want to be almost sure of not running out of money.
Apples and oranges, I think. IIRC the 4% scenario has you starting at 4% of your savings, then inflation-adjusting it each year following. That is exactly what the annuity does not do.
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Old 04-17-2020, 05:44 PM   #67
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The only inflation-adjusting ones, are pretty much based on income from taxes. Co's have figured out long ago it is not sustainable to offer this feature. As people are living 30-40+yrs into retirement. No other form of investment can offer this "feature".
Thats why so many are in the stock market. Brokers convince clients inflation will eat away at anything else.
And its the only way to go.

This might help. Plug in the % you like. At 4% mine peters out in 23 yrs. And the current plan is to live beyond 78. https://www.bankrate.com/calculators...ator-tool.aspx
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Old 04-17-2020, 05:56 PM   #68
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Apples and oranges, I think. IIRC the 4% scenario has you starting at 4% of your savings, then inflation-adjusting it each year following. That is exactly what the annuity does not do.
Good point.
With inflation nearly 0 for a decade, we haven't done annual increase in our withdrawals. Some day that may well change.
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Old 04-17-2020, 08:32 PM   #69
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..... 1. Annuities are basically insurance products, and despite the claims, insurance companies often go bankrupt. For example, executive life had a bunch of annuities that actually paid only about 60% on the dollar due to bankruptcy. AIG was unable to pay claim until the fed bailed them out in 2008. ....
You have no idea what you are talking about.

First, AIG was NEVER unable to pay claims... that is just totally and utterly false. Secondly, insurance companies do NOT often go bankrupt... in those rare cases where they get into trouble they are taken over by their state regulators in a process called receivership. In most cases, they are sold off in whole or in pieces to other healthy insurers and in other cases the state insurance departments take over management as they run off.

In fact, AIG's insurance companies weathered the Great Recession very well and the sale of those insurers to Met Life and other buyers provided money for AIG to repay the US government what it owed for the bailout of AIG's financial products division which was an unregulated, non-insurance operation of AIG that made numerous bad decisions selling credit default swaps that brought AIG to it knees.

After Executive Life and Mutual Benefit Life failed in the 1990s the NAIC enacted major reforms regarding how companies are surveiled and monitored and there has not been a significant life insurer insolvency since.

Unfortunately, Executive Life policyholders did end up getting the shaft, but the policyholder losses were due to poor management of Executive Life after it was seized by the California insurance department.
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Old 04-18-2020, 05:31 AM   #70
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I remain open minded the value of immediate/deferred annuities. I'm a ways from needing make that decision, so I find threads like these incredibly valuable.

I do find it interesting that we have parallel threads running in the forum right now:

This one, where there is strong sentiment that CDs + stock market is the way to go.

Other(s), where the current situation is reminding us that the market dropped 90% during the depression and we could see very long term under-performance in equities...which could require liquidating CDs for income rather than just skimming off the interest.

I continue to be intrigued by the "do it yourself pension" characteristics of income annuities as a portion of a retirement plan that provides an income foundation for exigent circumstances. Like all insurance, statistically its a bad deal. But that also applies to my house and car insurance.

Keep the discussion going! I'm learning a lot.
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Old 04-18-2020, 06:11 AM   #71
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[QUOTE=FinancialDave;2413241]
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Originally Posted by Gearhead Jim View Post

First you have to understand the most basic thing about these insurance products, such as annuities. The return the insurance company is quoting you today is based on current interest rates of about 2%.

They are also not inflation-protected as pointed out by others which could be huge over 15-20 years.

It sounds to me like you have plenty of money and don't really need to waste it, but if you do want a guaranteed income the only annuity I would purchase is an immediate annuity or a deferred annuity from someplace like immediateannuities.com. Low comminssions and fees mean more of your money working for you.

Anything that an agent is trying to sell you is just a waste of your hard earned money.

Your post quotes me for a statement that didn't come from me.

I believe it came from Gearhead Jim.
Just to be accurate
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Not Just Math
Old 04-18-2020, 06:11 AM   #72
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Not Just Math

I donít believe ďthe mathĒ should necessarily be the deciding factor for purchase of an immediate annuity, although (obviously) it is a consideration. Many smarter than I (Pfau, Moleskey, Swindroe, etc) have laid out strong cases for annuities, or TIPs ladders, etc and many others have laid out other just as strong cases for other approaches. My take away is that ultimately it comes down to the ability to sleep at night. If you are comfortable with more risky assets and the probable higher return - no worries. If you like the idea of a guaranteed (to the extent any such thing is..) income stream, - no worries there either. Ultimately it is a personal decision based on weighing the risks. The ones pointed out in the replies by others are spot on. Iíd add a couple more, that I think are just as important. The risk of cognitive decline - itís much less impactful if one doesnít need to make decisions on what/when to sell, or refill an investment later, etc. the check in the mailbox each month is a way to do that. Similarly, if one person in a household relies on another person in the household to oversee the financial decisions such as this (what/when/how) and then the financially savvy person either passes away or can no longer mentally do such things, it adds significant stress and risk to the no-financially savvy person. Again, a guaranteed check offsets that risk, and also the risk of the 2nd person being scammed by someone offering to help.
Just my two cents on this.....
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Old 04-18-2020, 06:16 AM   #73
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I donít believe ďthe mathĒ should necessarily be the deciding factor for purchase of an immediate annuity, although (obviously) it is a consideration. Many smarter than I (Pfau, Moleskey, Swindroe, etc) have laid out strong cases for annuities, or TIPs ladders, etc and many others have laid out other just as strong cases for other approaches. My take away is that ultimately it comes down to the ability to sleep at night. If you are comfortable with more risky assets and the probable higher return - no worries. If you like the idea of a guaranteed (to the extent any such thing is..) income stream, - no worries there either. Ultimately it is a personal decision based on weighing the risks. The ones pointed out in the replies by others are spot on. Iíd add a couple more, that I think are just as important. The risk of cognitive decline - itís much less impactful if one doesnít need to make decisions on what/when to sell, or refill an investment later, etc. the check in the mailbox each month is a way to do that. Similarly, if one person in a household relies on another person in the household to oversee the financial decisions such as this (what/when/how) and then the financially savvy person either passes away or can no longer mentally do such things, it adds significant stress and risk to the no-financially savvy person. Again, a guaranteed check offsets that risk, and also the risk of the 2nd person being scammed by someone offering to help.
Just my two cents on this.....

Very good points.


I do everything of financial concerns in the household.
My wife has no interest nor aptitude for such things.
I go to immediateannutities.com frequently just to get a metric on cash flow for a certain percentage of our assets and if I keel over what would be the impact formy wife.
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Old 04-18-2020, 06:22 AM   #74
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I’m the same...and would note that I am purposely delaying social security to 70 not based on the math either, but from the longevity insurance perspective. The “break even point” of when to claim SS to me is not relevant, but the ability to have a larger income longer if needed by either both of us, or (especially) for her if I pass. As someone separately pointed out, SS is the best availabile annuity out there — backed by the US and inflation adjusted to boot...
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Old 04-18-2020, 02:22 PM   #75
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There are many arguments that get presented to NOT buy a SPIA but here are a few that I have heard/read counter to them for purchasing a SPIA....

Some say earlier retirees and people in their 70s are best suited for SPIAs


1. If I die too soon, I didn't get my money's worth

You got what you paid for a guaranteed income stream for the rest of your life (or you and your spouse if joint or if cash refund your beneficiary got all your money back in exchange for your lower monthly payment).

2. It's a bet against the insurance company?

Insurance company relies on very large numbers (law of large numbers) and knowing mortality rates. It knows people that purchase annuities tend to live longer as people that have longevity in their family and feel healthy are more likely to purchase. It also doesn't care if you live longer because it knows per the law of large numbers that someone else that it insured will come to untimely death to make up for your long life.

3. What if everyone lives to be 125, won't the insurance companies all go out of business?

Well on one hand they will payout more on the annuity but they hedge the other side by having life insurance and they will reduce payouts for life insurance.

4. Interest rates are low so it's a bad time to buy?

True interest rates and payouts are correlated but mortality credits are mostly unaffected by interest rate swing so the payouts are competive in low or high interest rate environments. Maybe ladder the purchase over several years to try to capture increasing interest rates (that did not work so well over the last several decades as rates continued to go lower and than edge up for a short period before going to almost Zero again).

5. I can do a bond ladder and have access to my cash for flexibility

True but how long are you going to live? How many years are you going to have a bond ladder? How much money are you going to have in bonds when you pass? To be safe should you plan to live to 90? 100? 105? How much spending am I going to have to forgo so that I have $$ until I die? if I buy the annuity I will know what I will get paid annually and my return will be calculated after I pass by someone else.

6. What about inflation an annuity can't solve for that?

True but most investments can't solve for runaway inflation. Of course since you are not annualizing everything you can keep more in an inflation hedge.

7. I am conservative investor?

IF you have guarenteed income maybe you have more ability to be in higher risk premium like stocks. Maybe you don't sale at a low and buy at the high anymore and just let it sit after all the annuity is paying for most of your expenses.

8. I want to leave a legacy?

You may be able to leave more as you can be less conservative and your investment behavior may improve.

9. Yea but i can do the 4% rule and get more than from an annuity?

4% of initial balance plus inflation is based on history of stock/bond returns and assume moving forward will average the same and for 30 years. 4% is a conservative withdrawal and some FAs have suggested moving forward you may want to use a lower % and you may live longer than 30 years so better hold some back just in case...... You can still do 4% with the large portion you do not pay for a SPIA (most insurance company will not let you put more than 50% of liquid investment into an annuity and I would think that 25% maybe a better limit.)


and there are many more....
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Old 04-19-2020, 04:35 AM   #76
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As i said above, this topic interests me...

Question:

What is the tax treatment of money coming off an immediate income annuity if its purchased in an after-tax account?

Is all of it ordinary income?
Or is none of it income because its considered an insurance payment?
Something in-between?
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Old 04-19-2020, 07:18 AM   #77
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A portion is not taxed because it is return of principal and the remainder is ordinary income.

It can get complicated but you calculate an exclusion ratio based on your investment in the contract in relation to the expected return and that ratio is not taxable, any excess is.

So for example, let's say that you are 65 yo male and pay $100,000 for a SPIA that has a monthly benefit of $500 for life. Your expected return multiple would be 20 years (from Table V) so your expected return would $120,000 and the exclusion ratio would be 0.833. So for the first 20 years of benefits $416.67 of each $500 benefit would be excluded and $83.33 would be taxed. After 20 years of payments are received, any additional payments would be 100% taxable.

Also see https://www.irs.gov/pub/irs-pdf/p939.pdf
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Old 04-19-2020, 08:34 AM   #78
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A portion is not taxed because it is return of principal and the remainder is ordinary income.

It can get complicated but you calculate an exclusion ratio based on your investment in the contract in relation to the expected return and that ratio is not taxable, any excess is.

So for example, let's say that you are 65 yo male and pay $100,000 for a SPIA that has a monthly benefit of $500 for life. Your expected return multiple would be 20 years (from Table V) so your expected return would $120,000 and the exclusion ratio would be 0.833. So for the first 20 years of benefits $416.67 of each $500 benefit would be excluded and $83.33 would be taxed. After 20 years of payments are received, any additional payments would be 100% taxable.

Also see https://www.irs.gov/pub/irs-pdf/p939.pdf
Makes sense. Thanks!
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Old 04-20-2020, 09:55 AM   #79
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IIRC, Pfau's latest article flogs equity-linked annuities, not SPIAs.

Equity-linked are generally considered to be some of the worst types of annuities sold.

IMHO even SPIAs really aren't worth it before age 80...until then the lack of mortality credits makes them a very expensive way to transfer risk.

And it doesn't take hyperinflation to ruin the returns of a SPIA especially for someone buying them while in their 60s...IIRC there's no COLA SPIAs currently available.
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Old 04-20-2020, 10:18 AM   #80
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I want to point out again that the OP was asking about TIAA Traditional Lifetime annuity and the annual monthly payments to the annuitants have gone up 16 of the last 25 years. This not COLAd, but it can get bigger and won't get smaller. Also I have looked many, many times at the quote from the TIAA site compared to immediateannuities.com and the TIAA initial quote (for us) is always higher.

While we can annuitize through TIAA, I am not saying we will for sure do so. As others have pointed out in this thread, SS is the best annuity out there and it is not clear we need two.
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