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Old 10-05-2017, 03:06 PM   #21
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I'm not keen on them.... you have to live pretty long to get a decent return and the buying power of the fixed annuity benefits decline.... I think one is better off with a diversified, balanced portfolio.

AgeNCash flowIRRBuying power (2.5% inflation)
500-175,000  
5110  
5220  
5330  
5440  
5550  
5660  
5770  
5880  
5990  
60100  
61110  
62120  
63130  
64140  
65150  
66160  
67170  
68180  
69190  
702030,000 18,308
712130,000 17,862
722230,000 17,426
732330,000-1.74%17,001
742430,000-0.70%16,586
752530,0000.13%16,182
762630,0000.80%15,787
772730,0001.36%15,402
782830,0001.83%15,026
792930,0002.23%14,660
803030,0002.58%14,302
813130,0002.89%13,953
823230,0003.16%13,613
833330,0003.39%13,281
843430,0003.60%12,957
853530,0003.79%12,641
863630,0003.96%12,333
873730,0004.11%12,032
883830,0004.25%11,739
893930,0004.37%11,452
904030,0004.48%11,173
914130,0004.59%10,900
924230,0004.68%10,635
934330,0004.76%10,375
944430,0004.84%10,122
954530,0004.91%9,875
964630,0004.98%9,634
974730,0005.04%9,399
984830,0005.09%9,170
994930,0005.14%8,946
1005030,0005.19%8,728
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Old 10-05-2017, 08:17 PM   #22
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Originally Posted by budmanatlanta View Post
My wife and I are 50 and hope to ER by 56. We have no pension or other guaranteed income but are on our way though 401k and other retirement savings.

A FA suggested that we get a deferred annuity, starting at age 70. Our joint social security is projected to be $5000 per month. A single deferred annuity generating an additional $2,500 per month would cost $175k to purchase.

The $7,500 per month is projected to cover my expenses starting at age 70, and would free me up the use most of my remaining savings between ages 56 to 70.

Does this sound a good strategy?


First, I wanted to thank everyone for your insights and different ways to consider this decision.

One key question was regarding how much of my portfolio the annuity cost represents.

My total portfolio is $1.4M, so the $175k is about 12.5%. My thought is that having a "safety net" at 70 with social security and an annuity can allow me to be somewhat more aggressive with the rest of my portfolio- potentially enabling better returns.

I have estimated $1,500 per month for health insurance premium from age 56-65... (I think this is a good estimate...)

Thanks again.
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Old 10-05-2017, 08:30 PM   #23
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Good points. I max out on 401k & IRAs. Next I do put a small amount of money (usually $1500/yr) into a Variable Deferred Annuity at Vanguard in hopes of deferring my current taxes. I plan to use this Annuity as my income stream 15 years from now.


Do you add $1,500 to the annuity each year? (To ensure that I understand). Thanks.
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Old 10-06-2017, 07:36 AM   #24
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Originally Posted by budmanatlanta View Post
...
My total portfolio is $1.4M, so the $175k is about 12.5%. My thought is that having a "safety net" at 70 with social security and an annuity can allow me to be somewhat more aggressive with the rest of my portfolio- potentially enabling better returns.

I have estimated $1,500 per month for health insurance premium from age 56-65... (I think this is a good estimate...)

Thanks again.
First, get your best estimate on your total expected expenses in retirement. Don't make assumptions based on current spending, things can change in retirement. Factor in an annualized cost of things like car replacements, roof, furnace, etc in addition to your health care estimate. A mortgage payment that will end in a few years?

I'd suggest entering those numbers in a calculator like FIRECalc. Just offhand, it looks like you anticipate $90,000 a year in spending (or was that inflation adjusted to age 70?), and expect $60,000 annual from SS, leaving $30,000 to be funded from your portfolio.

And $30,000 WD from a $1.4M portfolio is just 2.14%. But if you are spending $90,000/yr for 20 years before getting SS, you probably use up all your portfolio by then. It looks like you may not have enough saved to support that spending level on those savings. An annuity isn't 'magic', it can't make money where there is none, it can really only shift the risk around.

As mentioned, consider if a lone spouse can be comfortable on a single SS payout.

What else is this FA doing for you? If he is 'managing' your money at 1% fees (and maybe using expensive products), that could be your largest expense ($14,000 + per year, and provide you no benefit. Many of us here simply place our portfolio in 2 to 4 broad based index funds and call it a day. Very low expenses on those funds, and no babysitting required, just let it roll. Some rebalance occasionally, but studies say that really isn't needed either.

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Old 10-06-2017, 07:54 AM   #25
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try fidelity, schwab or Vanguard.

One must remember this is a low interest rate environment. Insurance companies will be using this to price products.
I would add immediate annuities.com and "Stan the Annuity Man". Stan is Brutally Honest. Watch one of his youtube quite entertaining
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Old 10-06-2017, 08:09 AM   #26
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In regards to the OP, SPIA or deferred SPIA are IMO reasonable products with lower costs to solve for certain risks. A FIA is not an investment vehicle it is there to compete/compare to CD rates not Market Rates and can be appropriate for a small percentage willing to accept lower returns for non market correlated insurance. It is for your low risk $$. I am not a financial planner just a DIY so may not be best advice for your situation. I think using an annuity paired with Systematic Withdrawal strategy has been seen as a reasonable strategy by some retirement researchers https://www.kitces.com/blog/income-f...wal-rates-swr/

From the blog:
"Which means an annuity is really an alternative floor approach to safe withdrawal rates Ė one that provides a stronger guarantee while producing a similar amount of income, but results in a dramatic loss of liquidity, upside, and legacy. Does the common client preference towards safe withdrawal rates and away from annuities indicate that in the end, most clients just donít find the guarantee trade-off worthwhile for the certainty it provides?"
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Old 10-06-2017, 08:20 AM   #27
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The point was made but deserves reinforcement - are any of these annuity numbers inflation adjusted?

That $2,500 per month in today's $ will buy far less 20 years from now when you are 70. And with one of you very possibly living to 90, another 20 years of inflation will eat that annuity payment.

https://personal.vanguard.com/us/ins...etirement-tool

A 42% that one of a 50 YO couple will reach 90. And 5% that one will reach 100.

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Old 10-06-2017, 09:04 AM   #28
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A useful way to think about this, IMO, is in terms of risk:

You are facing a risk of outliving your money. You can pay someone to assume that risk for you or you can have an investment strategy that reduces the risk to near zero.

What will you have to pay someone to take the risk vs how aggressive would the investment strategy have to be to handle it yourself? If an investment yield of 2% is enough to mitigate the risk, it's a no-brainer: Just buy government bonds. As the needed yield rises, a hard look at what you are paying someone else becomes more necessary. But, in the end, paying someone else always involves more costs than accepting the risk yourself. I heard a really nice synopsis one time: "Do you want to eat well or do you want to sleep well?"

Also, don't forget that your annuity only works if the issuing company is around to pay its obligations. The near-death of AIG during the last excitement ought to be a cautionary lesson for us all. So there is still risk for you; minimal maybe, or maybe not.
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Old 10-06-2017, 09:48 AM   #29
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https://phys.org/news/2016-03-death-...annuities.html

IMO it's mortality salience that shies retirees away from annuities

"Thinking about death isn't doing the annuity industry any favors, but it could be the missing piece of a puzzle that has vexed economists for decades. That's according to a new study by two Boston College marketing professors who say "mortality salience" is one reason why consumers shy away from buying annuities."
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Old 10-06-2017, 09:48 AM   #30
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A useful way to think about this, IMO, is in terms of risk:

You are facing a risk of outliving your money. You can pay someone to assume that risk for you or you can have an investment strategy that reduces the risk to near zero.

What will you have to pay someone to take the risk vs how aggressive would the investment strategy have to be to handle it yourself? If an investment yield of 2% is enough to mitigate the risk, it's a no-brainer: Just buy government bonds. As the needed yield rises, a hard look at what you are paying someone else becomes more necessary. But, in the end, paying someone else always involves more costs than accepting the risk yourself. I heard a really nice synopsis one time: "Do you want to eat well or do you want to sleep well?"

Also, don't forget that your annuity only works if the issuing company is around to pay its obligations. The near-death of AIG during the last excitement ought to be a cautionary lesson for us all. So there is still risk for you; minimal maybe, or maybe not.
This is a misinformation on AIG, any annuity would be covered by a state's guarantee program and the assets that AIG held for the annuities are not touchable in a bankruptcy. While there may have been some issue with AIG had they gone under the risk of loss on annuities was not that high.
It is far more common for 80 and 90 year olds to be scammed out of all their money than an insurance company to cease paying on annuities.

Myself I would never purchase a deferral annuity in the present situation because of the present low interest rates you are basically locking in a 50 year term at a historic low, but the payout of 3.5% to 4.5% is not that bad when you consider the guarantees and the fact US 30 year treasuries are under 3% interest and many foreign governments have under 2% interest for the long term --- insurance companies are given great responsibilities for having money available and very low interest rates right now.

10-15 % of a portfolio to an annuity as a replacement of fixed income is not that bad of an investment at the present time if it replaces fixed income that is paying 2-3 percent. On the other hand if you are 100% stocks and stocks go up 7-10 percent forever then it is not a relatively wise investment in comparison.
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Old 10-06-2017, 09:50 AM   #31
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This is a misinformation on AIG, any annuity would be covered by a state's guarantee program and the assets that AIG held for the annuities are not touchable in a bankruptcy. While there may have been some issue with AIG had they gone under the risk of loss on annuities was not that high.
It is far more common for 80 and 90 year olds to be scammed out of all their money than an insurance company to cease paying on annuities.

.
great points
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Old 10-06-2017, 01:24 PM   #32
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... the risk of loss on annuities was not that high. ...
Agreed; my point was that it is not zero. People tend not to remember that they are simply buying a product from a business.

But as long as we're making the discussion more complex, a state agency covering the obligations of a failed insurance company will not happen instantly as it takes time for the wheels of bureaucracy to turn. Also, depending on the situation, the coverage may not be 100%. I went through this with a GIC quite a few years ago and IIRC it took a couple of years to get paid and the payment (no interest on the 2 years of course) was only partial.
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Old 10-06-2017, 03:58 PM   #33
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This is a misinformation on AIG, any annuity would be covered by a state's guarantee program and the assets that AIG held for the annuities are not touchable in a bankruptcy. While there may have been some issue with AIG had they gone under the risk of loss on annuities was not that high. ....
Actually the comment on AIG was worse than misinformation... it ignores the cause of AIG's financial woes. AIG's financial woes had absolutely, positively nothing to do with AIG's insurance operations... it had to do with a bunch of wing-nuts at AIG corporate in NYC who thought that they were the smartest guys in the room and were writing credit default swaps that they didn't understand the true risks of like they were candy.... that never would have happened if idiot Elliot Spitzer hadn't railroaded Hank Greenberg out of AIG. The insurance companies were all well funded and were ultimately AIG's salvation... AIG ultimately sold a number of them for big bucks and used the proceeds to pay off the feds in full.
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Old 10-06-2017, 04:28 PM   #34
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Actually the comment on AIG was worse than misinformation... it ignores the cause of AIG's financial woes. AIG's financial woes had absolutely, positively nothing to do with AIG's insurance operations... it had to do with a bunch of wing-nuts at AIG corporate in NYC who thought that they were the smartest guys in the room and were writing credit default swaps that they didn't understand the true risks of like they were candy.... that never would have happened if idiot Elliot Spitzer hadn't railroaded Hank Greenberg out of AIG. The insurance companies were all well funded and were ultimately AIG's salvation... AIG ultimately sold a number of them for big bucks and used the proceeds to pay off the feds in full.
Wow. I certainly did not intend to divert this thread so far OT. Apologies to the OP. I used AIG as a convenient example because of its well-known brush with death. The cause of its near-death is maybe a little less dramatic and a bit more complex than @pb4uski's rhetoric but, more importantly, a failed company is a failed company regardless of cause. Pick some other example if you like or, if you believe it, argue that no annuity payments will ever be jeopardized, delayed, or reduced by a vendor failure. I really don't care.

The main point of my post was to observe that buying an annuity is basically a way of paying someone else to assume a risk that the purchaser doesn't want to retain. So just evaluate the cost of laying off the risk versus the cost of retaining it, just like any other insurance.
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Old 10-07-2017, 03:19 AM   #35
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Wow. I certainly did not intend to divert this thread so far OT. Apologies to the OP. I used AIG as a convenient example because of its well-known brush with death. The cause of its near-death is maybe a little less dramatic and a bit more complex than @pb4uski's rhetoric but, more importantly, a failed company is a failed company regardless of cause. Pick some other example if you like or, if you believe it, argue that no annuity payments will ever be jeopardized, delayed, or reduced by a vendor failure. I really don't care.

The main point of my post was to observe that buying an annuity is basically a way of paying someone else to assume a risk that the purchaser doesn't want to retain. So just evaluate the cost of laying off the risk versus the cost of retaining it, just like any other insurance.
Not to belabor this but as far as I know no annuity company has ever missed a payment, even in 2008. Maybe I'm wrong but I can't find one. If you're worried spread the money around to 3-4 different companies. If they all go bust then I'm sure the stock market is also bust.

Also the trope that annuities are expensive with hidden fees etc doesn't apply to the kind of annuity that the OP is talking about assuming it's a deferred version of an immediate annuity.The deferred annuity is merely a longevity version of a SPIA. Fees are simple in that at Vanguard for example there's a 1-2% load and that's it. After that you know what the payout is and can judge it very simply. There are no hidden fees or weird payouts or strange calculations.

The big problem with the longevity SPIAs is that they are not inflation adjusted either in the years up to the start date or thereafter. But again you know that in advance and can assign a probable inflation rate. Not perfect by any means but not useless.

If you're someone that is trying to build a floor of guaranteed income then either the immediate or deferred versions are useful. If you don't think you need the floor then not so much.
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Old 10-07-2017, 06:05 AM   #36
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I had a small deferred annuity with MetLife but cashed it out recently. Two things I didn't like:

1. The annuity contract was impossible to understand. Not just difficult. Impossible.

2. MetLife customer service was basically non-existent. It was an enormous chore just to get the right person on the phone, let alone get them to do what you wanted. Really horrible.

I believe MetLife's annuity arm has changed it's name to Brighthouse. I say beware.
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Old 10-07-2017, 06:41 AM   #37
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Not to belabor this but as far as I know no annuity company has ever missed a payment, even in 2008. Maybe I'm wrong but I can't find one. If you're worried spread the money around to 3-4 different companies. If they all go bust then I'm sure the stock market is also bust.

Also the trope that annuities are expensive with hidden fees etc doesn't apply to the kind of annuity that the OP is talking about assuming it's a deferred version of an immediate annuity.The deferred annuity is merely a longevity version of a SPIA. Fees are simple in that at Vanguard for example there's a 1-2% load and that's it. After that you know what the payout is and can judge it very simply. There are no hidden fees or weird payouts or strange calculations.

The big problem with the longevity SPIAs is that they are not inflation adjusted either in the years up to the start date or thereafter. But again you know that in advance and can assign a probable inflation rate. Not perfect by any means but not useless.

If you're someone that is trying to build a floor of guaranteed income then either the immediate or deferred versions are useful. If you don't think you need the floor then not so much.
+1 The worst cases that I am aware of are some separate account contracts with the Mutual Benefit Life insolvency where contractholders did not receive the interest rate promised in the contract... however, the contract interest rate was much higher than market and the contractholders did receive interest on the low end of market... other than that I am not aware of any insolvency where the outcome was less than the contractual terms... but in many cases contractholders did have to wait to get their money.

On the last part to me the question is how much of a floor do you need? 100%, 75%, 50%?
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Old 10-07-2017, 03:23 PM   #38
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+1 .

On the last part to me the question is how much of a floor do you need? 100%, 75%, 50%?
Personally my preferred floor would be enough to cover all necessary expenses. No discretionary. That would be covered by risk assets like stocks.

I could envision a portfolio with necessities covered by SS and a SPIA, and discretionary covered by an 80/20 stocks/bonds, or even 100/0
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Old 10-08-2017, 03:17 PM   #39
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Because of several sweet pensions, as well as SS maxed out, an annuity does not work for us as we have enough retirement investments/cash to carry us 100+ years. I realize that they look attractive to some folks, but if they are encouraged by a FA...beware.
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Old 10-08-2017, 03:19 PM   #40
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I believe MetLife's annuity arm has changed it's name to Brighthouse. I say beware.


Seems like I recall that Brighthouse was for sale.
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