Deferred annuity strategy

[budmanatlanta]

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?

 

[DrRoy]

I personally do not like annuities due to the high fees. I also do not like the thought that you would use up nearly all your savings otherwise. You then would only have partial protection from inflation in the SS, which is not financially sound in the long term.

 

[Another Reader]

High fees. low interest rates, no way to predict the effect of inflation. If one of you dies early, the survivor only gets the higher of the two SS checks. Have you planned for that possibility?

There is not enough information here to have an opinion of the best course of action. Have you tracked your spending to know how much you will need? How much have you saved in total? How much are you saving now? Is your house paid off? How have you planned to pay for the skyrocketing cost of healthcare between 56 and 65? Without a complete picture, it's impossible to say what we would do in your shoes.

 

[bclover]

High fees. low interest rates, no way to predict the effect of inflation. If one of you dies early, the survivor only gets the higher of the two SS checks. Have you planned for that possibility?

There is not enough information here to have an opinion of the best course of action. Have you tracked your spending to know how much you will need? How much have you saved in total? How much are you saving now? Is your house paid off? How have you planned to pay for the skyrocketing cost of healthcare between 56 and 65? Without a complete picture, it's impossible to say what we would do in your shoes.

So this was our situation but I kinda like my annuity.

Anyhoo,
My lovely old guy passed a way at 55 a few years a back and I inherited an annuity that he (we) purchased.

It did have high fees but it was only a very small % (15%) of our portfolio. anyway it has a guarantee 5% interest, a death benefit and every year on the anniversary the account value resets but will never fall below the initial investment.

Now as others have said, you need to look at the complete picture. In my situation my husband made waaay more than I so my plan is to tap his social security, letting mine grow until age 70 then reevaluate and see which of the two will be higher.

like "Another reader" my main concern would be health care. I'm lucky in that I get retiree healthcare from my mega corporation, while it is expensive IMO (lol but I've heard worse) it will tide me over for the next 8 years until I hit 65.

So would I purchase one if it ate up a lot of my savings?? probably not. but as I said it was a small % so when I turn it on, that plus ss plus my pension means I pretty much do not have to touch my 401K savings.

 

[athena53]

I'd be concerned about inflation. Even if it's only 3% per year, $7,500 a month 20 years from now will buy what $4,152 will buy now. It would get worse as you got older, of course- when you're 85 it will buy what $2,665 buys now. The COLA built into SS provides only a little protection against inflation. They use a "core inflation rate" which excludes medical cost inflation, for one thing. The annuity is fixed so its purchasing power will decrease every year.

I'm an actuary and I've researched the idea of buying a deferred annuity and I always end up deciding that I don't want to fork over a chunk of my savings for a product that has high expenses and, in some cases, has so many bells and whistles that even with my background I can't figure out if it's a good deal. My FA once said, "If you want an annuity I can sell you one". That was the last discussion we had on it- I think it was 10 years ago.

 

[Z3Dreamer]

Budman - Most on this site HATE annuities and will give you lots of excellent reasons why. I believe that there are some situations where one may consider them, but never with a big chunk of your portfolio and only after understanding the fees and all the other options. I must admit that I have 5% of my portfolio in an annuity that was purchased over 20 years ago. I had maxed out on all other tax deferral options and didn't want to go the low turnover index fund route. In your case, it appears that the investment would be a big chunk of your portfolio.

 

[bingybear]

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.

I've thought SS was pretty close to a guaranteed income as these things go. That is all we have as income streams. The thing to be careful with on SS, is when one passes, the SS income may be cut back. The same is true with an annuity unless it is joint life in which case you are getting less.

I agree they are expensive. But if you decide on them, shop around Check Fidelity, Schwab and Vanguard. Be careful when you are looking at an income stream that will start 20 years down the road. It may look like enough in todays dollars. Will it be enough in 20 inflated dollars?

 

[Big_Hitter]

like others have said, we don't have enough information about your situation to form an educated opinion

buying the deferred annuity may be a good/great idea, but it depends....

 

[Big_Hitter]

I'm an actuary and I've researched the idea of buying a deferred annuity and I always end up deciding that I don't want to fork over a chunk of my savings for a product that has high expenses and, in some cases, has so many bells and whistles that even with my background I can't figure out if it's a good deal. My FA once said, "If you want an annuity I can sell you one". That was the last discussion we had on it- I think it was 10 years ago.

Same boat - last time I was offered one it was $500K to get a $40K annual deferred annuity (I forgot how many years of deferral). FA said "hey that's an 8% payout rate" I popped open my laptop and in about 30 seconds figured the annuity was being calculated using a 2% interest rate. "Bro, you know what I do for a living, right?"

However, if I didn't have a decent pension from my prior mega I'd think long and hard about annuitizing a chunk of my stash.

 

[Danmar]

Annuities are great retirement products that are usually poorly priced, often overly complicated, and frequently sold through dubious channels.

 

[Crewer]

I get everyone's dislike of annuities with the fees and unknowns about inflation etc. but my (and DH's) megacorp got rid of pensions long, long ago (went to defined contribution) so DH and I chose to purchase deferred annuities using the amounts in the defined contribution "pension" funds. We got ones that include stipulation about double payout in case of not meeting 2 of the 6 functions of daily living since we do not have LTC insurance. The annuities are not a major fraction of our portfolio. I'm not sorry we purchased them and DH is glad we did. We'll have to see what we think when we start to draw on them.

 

[golfnut]

Just wondering if there is a good / reputable source to purchase annuities with relatively low fees. It would be great if there was a listing somewhere.

Or are annuities with low fees non-existent?

 

[joeea]

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?

You might consider hiring a fee-only financial planner to check this out, rather than relying on the advice of the salesman.

Are you purchasing two annuities (one for you, one for your wife)?

When you reach 70, you will have consumed most of your remaining savings. And your $2500 per month would be equivalent to less than $1400 per month today, assuming an inflation rate of 3%. Will that still be enough?

Do you know how much your FA will make in commissions right off the top of your annuity purchase?

For me, it wouldn't be an effective strategy. But get a double-check with a fee-only financial planner. It won't cost much and could be money well spent.

 

[Big_Hitter]

We got ones that include stipulation about double payout in case of not meeting 2 of the 6 functions of daily living since we do not have LTC insurance.

that's the route we are going to take - LTCI is tough to get nowadays

 

[bingybear]

Just wondering if there is a good / reputable source to purchase annuities with relatively low fees. It would be great if there was a listing somewhere.

Or are annuities with low fees non-existent?

try fidelity, schwab or Vanguard.

One must remember this is a low interest rate environment. Insurance companies will be using this to price products.

 

[Sunset]

OP - have you run firecalc to see if it's feasible for you to retire at 56 ?

 

[Z3Dreamer]

OP, what you are describing is a fixed annuity. I did a spreadsheet computing $175k invested today at age 50, then begin pulling out $30k a year at age 70. If you live to about 85 which I think is close to someone's life expectancy, it will be a 3.75% return. If you live to 95 it will be a 4.75% return. Is that good or bad?

I went to immediateannuities.com put in your information and it gave me a payout of $1,795 for a joint annuity. $2,380 for a single annuity. And you do say "single" in your post. DW might divorce me if I bought a single annuity. Or maybe she would make sure I ate right and exercised regularly. I don't know.

I have a variable annuity (again with 5% of my portfolio). In other words, I assumed the investment risk and rewards. I put this money in when DW was 39. Now she is 62. It has earned around 8% after fees. It is worth about 6 times my original investment. If you were to put this $175k in a variable annuity or index fund outside of an annuity and earn 6% based on some reasonable AA, you could begin taking $43,000 out of the investment at age 70 instead of the $30,000 they will give you. But again, you have the investment risk.

 

[retired1]

I'm an actuary and I've researched the idea of buying a deferred annuity and I always end up deciding that I don't want to fork over a chunk of my savings for a product that has high expenses and, in some cases, has so many bells and whistles that even with my background I can't figure out if it's a good deal. My FA once said, "If you want an annuity I can sell you one". That was the last discussion we had on it- I think it was 10 years ago.

Thank you for posting. This really helps. I have DA at Vanguard & Fidelity that I throw "extra" money ($250 usually which is minimum) once in a while. I'll watch my DAs closely.

 

[retired1]

Budman - Most on this site HATE annuities and will give you lots of excellent reasons why. I believe that there are some situations where one may consider them, but never with a big chunk of your portfolio and only after understanding the fees and all the other options. I must admit that I have 5% of my portfolio in an annuity that was purchased over 20 years ago. I had maxed out on all other tax deferral options and didn't want to go the low turnover index fund route. In your case, it appears that the investment would be a big chunk of your portfolio.

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.

 

[bw5972]

I personally do not like annuities due to the high fees. I also do not like the thought that you would use up nearly all your savings otherwise. You then would only have partial protection from inflation in the SS, which is not financially sound in the long term.

+1 on all of the above.

 

[pb4uski]

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.

Age	N	Cash flow	IRR	Buying power (2.5% inflation)
50	0	-175,000
51	1	0
52	2	0
53	3	0
54	4	0
55	5	0
56	6	0
57	7	0
58	8	0
59	9	0
60	10	0
61	11	0
62	12	0
63	13	0
64	14	0
65	15	0
66	16	0
67	17	0
68	18	0
69	19	0
70	20	30,000		18,308
71	21	30,000		17,862
72	22	30,000		17,426
73	23	30,000	-1.74%	17,001
74	24	30,000	-0.70%	16,586
75	25	30,000	0.13%	16,182
76	26	30,000	0.80%	15,787
77	27	30,000	1.36%	15,402
78	28	30,000	1.83%	15,026
79	29	30,000	2.23%	14,660
80	30	30,000	2.58%	14,302
81	31	30,000	2.89%	13,953
82	32	30,000	3.16%	13,613
83	33	30,000	3.39%	13,281
84	34	30,000	3.60%	12,957
85	35	30,000	3.79%	12,641
86	36	30,000	3.96%	12,333
87	37	30,000	4.11%	12,032
88	38	30,000	4.25%	11,739
89	39	30,000	4.37%	11,452
90	40	30,000	4.48%	11,173
91	41	30,000	4.59%	10,900
92	42	30,000	4.68%	10,635
93	43	30,000	4.76%	10,375
94	44	30,000	4.84%	10,122
95	45	30,000	4.91%	9,875
96	46	30,000	4.98%	9,634
97	47	30,000	5.04%	9,399
98	48	30,000	5.09%	9,170
99	49	30,000	5.14%	8,946
100	50	30,000	5.19%	8,728

 

[budmanatlanta]

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.

 

[budmanatlanta]

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.

 

[ERD50]

...
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.

-ERD50

 

[capjak]

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