Deferred Fixed Annuities

[medved]

I am mid-50s, planning to ER in a couple of years. My youngest kid is going off to college next year. That is paid for already, in 529. From a financial perspective, we could retire now. But I want to work another couple of years. I have accumulated pretty substantial savings, with an investment allocation around 55/45, but no pension. I am, by nature, a somewhat anxious guy, so the absence of a pension makes me a bit nervous, even though I could live very nicely on a 2% w/d rate, or less.

I am thinking about buying some fixed annuities. My idea is to buy this in something like four annual installments. The first would be bought now and start paying in 4 years, the next one bought next year and start paying in 3 years, etc. The last one would not be deferred, but instead SPIA. That's the plan, anyway.

The reason I would buy in 4 installments, and with four different (very highly rated) companies, is to blend interest rates, and to diversify against issuer insolvency risk (including to keep each purchase below the applicable state guaranty limit).

I would probably use, in total, less than 10% of my total investment assets to buy these annuities.

I would not buy a COLA feature because right now the pricing does not seem attractive. But I would buy the "return of premium" feature, because that pricing does seem attractive. Of course, I could revisit either of those for each of the annuity purchases after the first one.

I am doing this not because I think it is some brilliant investment decision but instead because i think it will make me feel better to know that, "no matter what" i will always have at least $X per year in income. The same reason why people take comfort in pensions or SS.

The annuity income will be significantly less than I would like to spend each year in retirement. But it would be an amount that I could live on, if I needed to -- certainly more than most people live on.

I am interested in any thoughts you might have about this plan. Maybe something I have not thought of? Any place you like to buy annuities from? Vanguard seems OK, based on a first look.

Thanks.

 

[njhowie]

My guess is that if you run the numbers, you'll find that you could probably do better on your own with less risk - even just buying long term CDs and Treasury securities.

 

[ERD50]

10% hardly seems worth doing. You say you could live on that, but is that true in 20 years (after inflation)?

Do you get SS?

-ERD50

 

[MarieIG]

It seems fine. You are limiting to 10%, laddering, choosing different insurers to diversify risk and understand that this is not the most profitable deployment of money.

Also, check the amount/ value which your state will guarantee.

But, it will allow you to sleep better at night.

And that's worth a lot.

Vanguard tells you how much you are paying so you can use that as a guideline to compare costs. And yes, when I looked into it the return of premium was very cheap, and the COLA resulted in a significant cost/ reduction of initial payments.

 

[gauss]

My guess is that if you run the numbers, you'll find that you could probably do better on your own with less risk - even just buying long term CDs and Treasury securities.

I don't think your strategy will address the longevity risk that OP is likely trying to hedge against.

He/She is not trying to maximize income/estate size, etc but rather to have secure income streams available that he will not have to worry about:

I am doing this not because I think it is some brilliant investment decision but instead because i think it will make me feel better to know that, "no matter what" i will always have at least $X per year in income. The same reason why people take comfort in pensions or SS.

OP - I totally get it. I also have a significant portfolio, but knowing that I only need to draw ~ 1% initially or so, with our other streams of income available, lets me sleep quite well at night. I guess this could be framed as "paying" for peace of mind.

Also, OP, you may benefit from delaying SS draw until age 70. That is our current plan.

-gauss

 

[Texas Proud]

Annuities are not a good financial decision, so I will normally say no...


But, you have a psychological reason in your post... that it will make you feel much better and be able to sleep easier at night... to me that is worth spending some money...


What I would do though it quantify that cost.... it might be hard, but it could be a much higher cost than you think...

 

[Montecfo]

I like the way you are thinking. Good to know yourself.

i expect annuity prospects will improve as rates rise. maybe wait s year before stsrting?

 

[ERD50]

....

Also, OP, you may benefit from delaying SS draw until age 70. That is our current plan.

-gauss

A BIG +1.

SS is COLA'd, this is very probably the best longevity insurance and diversification you can get. Do this first.

-ERD50

 

[Marc]

I plan on doing something similar; but all with immediate annuities. I am planning on four annuities each with $250,000 from my retirement account starting when I am 61, 63, 65, and 67. Together with SS which I will start when I turn 70, these will form the "backstop" for my retirement and protect my wife should I go first. Until then, I am 60/40 with all my bond funds in FTBFX. I will use the $250K in 2019, 2021, 2023, and 2025 to "rebalance" my funds with goal to remain at 60% stocks of remainder not spent on these annuities. In nine years when I turn 70 I anticipate an income of around $12K per month (most of it not COLA'd) that will take care of us in our old age. The remaining funds are fun money for travel or whatever else we may want to do.

Marc

 

[TwoByFour]

I am doing this not because I think it is some brilliant investment decision but instead because i think it will make me feel better to know that, "no matter what" i will always have at least $X per year in income. The same reason why people take comfort in pensions or SS.

But buying a non-COLA annuity obviates your purpose. You will have no idea what the real value is of your payments since you have no idea what inflation will be. In this way it is very different from a pension or SS.

 

[travelover]

I think it helps to keep your question in context. From your intro two years ago:

I have done a pretty good job of saving. I have a bit more than $10 million in taxable accounts and around $2.5 million in tax deferred. I have no debt and a house that is paid for and probably worth around $1.2mm When I retire, I will get around $1 million paid out over a few years, but beyond that no pension or retiree medical.

Hopefully you are in even better shape now with the run up since then, but in any case it probably doesn't matter. I'd say if it makes you feel better to get a regular "paycheck" go for it.

 

[capjak]

Sounds like a decent plan I have a couple things to consider (I am not a FA so take it with a grain of salt) when purchasing:

1. Purchase some sort of premium return, 10 year, 5 year, full cash refund because if your private jet happens to crash in the mountain before the deferred payment starts your entire premium will go to your heirs. This is not usually the case if you purchase life only

2. You may want to consider a TIPS pool of say 5 years and use that money in 5 years to purchase a SPIA, that way you may mitigate some inflation risk. (e.g. purchase a 5 year TIPS to use to buy an annuity upon maturity, next year buy another 5 year TIPS and so on...or some variation...)

 

[medved]

Thanks for the thoughts. I do realize that without a COLA, I cannot know, now, what the future buying power of my annuity payment will be. But it will be something -- and I figure I have some other ways to deal with inflation risk, such as TIPS and my equity investments. I am inclined, as some here have suggested, to defer taking SS until age 70, though I am years away from having to make that decision.

 

[pb4uski]

You may also want to look at SPDAs, aka MYGAs... essentially similiar to a CD issued by an insurer with a contractual option to annuitize.. convert all or part of the balance to a lifetime payout annuity. With these you can see how things go but have the peace of mind that you have the contratual right to annuitize at stated rates if you decide that you want to..

 

[Ready]

I think I would be more inclined to go for a 5 year 4% CD, and use the interest on the CD to cover living expenses. I generate enough income from interest, dividends and capital gains to cover my expenses so I should theoretically never need to sell my equities.

 

[Texas Proud]

I think I would be more inclined to go for a 5 year 4% CD, and use the interest on the CD to cover living expenses. I generate enough income from interest, dividends and capital gains to cover my expenses so I should theoretically never need to sell my equities.

That is not the same amount of cash as an annuity... the annuity has some return of principal and can be paying out 7% or more...


IMO OP would be better of putting the money in a bond fund and requesting them to send a fixed amount of money every month... I doubt he would ever run out of money even though the balance would be declining..


From the little I read here the OP has plenty of money and will be looking for ways to spend money in the future... one of my sisters and her DH both have pension... he is about to start SS, not sure when she will start... but, they say it is hard to spend all they make... she just bought a new car just to spend some... OP will be doing the same...

 

[gauss]

That is not the same amount of cash as an annuity... the annuity has some return of principal and can be paying out 7% or more...

There may also be implicit "mortality credits" baked into the annuity that would not be available with more direct investments.

Said differently, if someone purchases the annuity who plans to live to 100+ and actually accomplish this, then the other folks who purchased the annuity and died first/early will be subsidizing you.

-gauss

 

[joeea]

I am doing this not because I think it is some brilliant investment decision but instead because i think it will make me feel better to know that, "no matter what" i will always have at least $X per year in income.

The "at least have $X per year in income" is pretty much the same argument sales folks use to try to convince folks to purchase their annuities. It seems to be a more effective argument in financially turbulent times.

It's hard to see how spending 10% of your assets could give you the comfort that the other 90% of your assets doesn't. But we all get to decide to spend our money on things that will make us feel better. Hopefully the comfort you receive is commensurate with the cost.

It's not the way I want to use my assets, but I'm not the nervous type.

 

[ShokWaveRider]

You may also want to look at SPDAs, aka MYGAs... essentially similiar to a CD issued by an insurer with a contractual option to annuitize.. convert all or part of the balance to a lifetime payout annuity. With these you can see how things go but have the peace of mind that you have the contratual right to annuitize at stated rates if you decide that you want to..

This does depend on the final objective. If you are trying to limit income to maximize ACA subsidies, MYGAs are a good tool to defer income. If not, a FDIC Insured CD is probably preferred.

 

[51togo]

I have a question on annuity. With some of my finds in Penfed CD already at 3.5 percent 5 years term. My Chase bank adviser suggested on my prefer CD at Chase expiring soon to change to a 5 years annuity at 3.3 verse a CD at 3.1 percent. He suggest that the annuity is tax deferred, interest compounded daily, and insured up to $1M. Not familiar with the annuity so any input is appreciated!

 

[REWahoo]

Not familiar with the annuity so any input is appreciated!

Did you get a copy of the annuity contract to review? If not, that is crucial to understand the features, benefits, fees and limitations of the agreement.

 

[brewer12345]

I have a question on annuity. With some of my finds in Penfed CD already at 3.5 percent 5 years term. My Chase bank adviser suggested on my prefer CD at Chase expiring soon to change to a 5 years annuity at 3.3 verse a CD at 3.1 percent. He suggest that the annuity is tax deferred, interest compounded daily, and insured up to $1M. Not familiar with the annuity so any input is appreciated!

Run. These are not insured. There is no FDIC equivalent for insurance companies. The advisor is at best misleading you. If you do your research independently and decide a DFA is for you, buy it through an independent agent, not someone tied to your bank.

 

[pb4uski]

I have a question on annuity. With some of my finds in Penfed CD already at 3.5 percent 5 years term. My Chase bank adviser suggested on my prefer CD at Chase expiring soon to change to a 5 years annuity at 3.3 verse a CD at 3.1 percent. He suggest that the annuity is tax deferred, interest compounded daily, and insured up to $1M. Not familiar with the annuity so any input is appreciated!

He is most likely pitching a MYGA... multiple year guaranteed annuity. One question would be how long the 3.3% is guaranteed for... is it the entire 5 year term like the CD?

Is this in a taxable account or a tax-deferred account like an IRA? If the latter, then tax-deferral aspect of the annuity is worth nothing.

Ask him if you put $100 into the annuity and then want you money back a year later or two years later, how much you get back. Same questions with the CD.

Also, ask him who the issuer is. For most annuity issuers, credit risk is negligible... but for CDs it is none as long as you stay within the FDIC coverage limits. Also, ask who provides the $1m of insurance... that is a bit unusual.

 

[pb4uski]

Run. These are not insured. There is no FDIC equivalent for insurance companies. The advisor is at best misleading you. If you do your research independently and decide a DFA is for you, buy it through an independent agent, not someone tied to your bank.

WADR brewer, your post is a huge over-reaction. While it is true that they are not FDIC insured, the credit risk is likely negligible given the insurance company regulatory framework and to our knowledge the FA did not claim that the annuity was FDIC insured and it might well be that the brokerage has some wrapper insurance of some sort.

 

[brewer12345]

WADR brewer, your post is a huge over-reaction. While it is true that they are not FDIC insured, the credit risk is likely negligible given the insurance company regulatory framework and to our knowledge the FA did not claim that the annuity was FDIC insured and it might well be that the brokerage has some wrapper insurance of some sort.

The mere fact that the advisor claimed the annuity was insured means that this is all problematic. All the rest does not matter.