fixed annuity with Fidelity, how do I evaluate?

[Mikedb]

I will be 62 in April 09. I will collect Social Security about $1000/month.
I have assets I may move to Fidelity.

Based on my needs the guy there is recommending I get a fixed annuity that would cost me $120,000. I have the cash. I would get annuity of $800/month for life.

Let's assume that $800/month plus SS would work well for me. My question is about the annuity itself:

A little simple math: 120,000/800=150months
150 months/12=12.5 years
That means that if I kept the $120,000 with no interest and pulled out $800 every month, I would use it up in 12.5 years..I'd be 74.
So I guess the annuity is a good deal if I live past 74. Yes? No? Why?

Am I looking at these numbers the right way?
How does this compare with other fixed annuities?

[Dawg52]

You can run some numbers through this site and compare.

Immediate Annuities - Instant Annuity Quote Calculator.

[haha]

Hey Dawg, it's bedtime down there.

Ha

[Dawg52]

Quote:

Originally Posted by haha Hey Dawg, it's bedtime down there. Ha

I tried.

[freebird5825]

re: How does this compare with other fixed annuities?

I'll outline some details of my fixed annuity to use as your "points to ponder" for this decision. I am not espousing fixed annuities. it was what worked for me so i could FIRE.

FWIW, older data from July 2007, and a special situtation for me thru a contract with OPM (federal employee HR agency):

- TSP converted to fixed annuity with MetLife, pays 5.25% annually FIXED
- full lifetime (vs 5, 10, 15 yr limitations)
- enforced by contract with OPM
- not surrenderable
- no inflation adjustments
- single annuitant (no survivor benefit)
- unpaid balance goes to my estate if i start pushing daisies
- i started it at age 48 and i am female. age at purchase AND life expectancy by gender are HUGE factors in their calculations of the monthly payment. if i were older, monthly payment would have been a lot higher.
- after federal taxes, monthly check is almost $1800 net on a initial investment of $300K +
- my state does not tax this type of annuity because it was part of a defined retirement plan (FERS). i do pay fed taxes, but at a much lower tax bracket than when i was w*rking.

Biggest catch is if MetLife starts pushing up daisies, i'm toast. be very careful who you insure with. pay extra careful attention to the survivor rules. Ask and GET written answers about the fees : maintenance and surrender fees. you won't like the numbers. what hefty commission will the selling agent get from you?

many folks here may see the data and think, why didn't she roll it over or take a lump sum and put that into the market?
i needed the monthly annuity check in order to FIRE.
there were limited options for the TSP conversion under IRS 72(t) SEPP regs. if i took a lump sum, my age would have entitled me to a 10% (or was it 20% ?) penalty for being under age 59 1/2.

hope this got you thinking...

[brewer12345]

I will assume that you ave decided you want a fixed annuity (more typically called a SPIA - Single Premium Immediate Annuity - by the industry). I will not repeat the debate here, but you should be comfy with the fact that most of these products are not inflation adjusted and plan accordingly.

With a straight SPIA, you will be offered different payment amounts from different companies, with the difference bewen the lowest and the highest usually being 5% of ths monthly amount or so. The temptation is to go with the highest payout for a given sum of money. If the SPIA will represent a substantial chunk of your nest egg, I would strongly suggest you skip the highest payout approach. Instead, choose the companies you wish to deal with first, then pick among rates. You want to be very, very particular about who you buy one of these from because they have to remain solvent and in good shape for the rest of your life. If it were me, I would not even look at one of these from a provider rated less than AA-/Aa3, and my idea of the ideal issuer is a big mutual life insurer rated as highly as possible.

If you like, I would be willing to opine on the creditworthiness of any particular company you ae thinking about.

[Mikedb]

Quote:

Originally Posted by Dawg54 You can run some numbers through this site and compare. Immediate Annuities - Instant Annuity Quote Calculator.

Using this calculator, for single male 62, $800/month for life for $120,000 looks to be a bit better than the examples quoted. They all land around $750 for that amount.

OK so again lets assume that I have figured that the $800/month works well for me.
Since this annuity is offered thru Fidelity, isn't it relatively safe? From what I read here and elsewhere Fidelity is very reliable. Any specific questions I should ask?

[Animorph]

Fidelity may just be selling annuities from some other company, like Vanguard does.

At least give yourself some interest when calculating the crossover age. As if you put the $120k into a CD ladder or something similar. It will last a lot longer then.

[Mikedb]

Quote:

Originally Posted by Animorph Fidelity may just be selling annuities from some other company, like Vanguard does. At least give yourself some interest when calculating the crossover age. As if you put the $120k into a CD ladder or something similar. It will last a lot longer then.

I guess I need to ask Fidelity about the annuity itself, who is it with, how reliable are they, Does Fidelity stand behind them, etc?

other considerations?

Yes I am considering the interest 120K could gain vs. the annuity. Still have not decided.

Thanks for this

[OAG]

Quote:

Originally Posted by Animorph Fidelity may just be selling annuities from some other company, like Vanguard does. At least give yourself some interest when calculating the crossover age. As if you put the $120k into a CD ladder or something similar. It will last a lot longer then.

You could buy a 5.5% APY CD today that will pay that rate for 10 years. Capital One has one and I believe PENFED has one at 5.4% for 5 and 7 Years. FDIC Insured. And the Principal is yours to pass on or whatever, not the Annuity Issuer.

[Mikedb]

Quote:

Originally Posted by Independent If you postpone your SS benefit to age 66, it will be $1,333 per month, inflation adjusted. Consider using $48,000 of your $120,000 to replace SS for the intervening 4 years. Use the remaining $72,000 to buy an SPIA that will pay $480 a month. Your SPIA payment will be lower by a non-inflation-adjusted $320 per month, but your SS will go up by an inflation adjusted $333 per month. That looks like a much better deal to me. If that makes sense, consider deferring SS to age 70. Of course, all the calcs above assume you are single. If you are married, the comparisons are trickier.

Well I hadn't thought of things this way and I will have to investigate.

I don't think your math considers that I would be getting Social and the Annuity at 62, Total $1800 a month. So if I don't take the Annuity and the Social and I keep the 120K, I'd still need to draw $1800/month from it. 4 years=48 months. 48 months@1800/month= $86,400. So I would only have $33,600 left of the 120K, not $72,000. right?I'm also a bit concerned that with the wave of us boomers they may change the rules on how Social Security works...so my thought was to grab it at 62.

[brewer12345]

Quote:

Originally Posted by Mikedb I guess I need to ask Fidelity about the annuity itself, who is it with, how reliable are they, Does Fidelity stand behind them, etc?

Fido's site very clearly says that they are selling stuff issued by other companies, so they would not be standing behind the product.

[Independent]

Quote:

Originally Posted by Mikedb Well I hadn't thought of things this way and I will have to investigate. I don't think your math considers that I would be getting Social and the Annuity at 62, Total $1800 a month. So if I don't take the Annuity and the Social and I keep the 120K, I'd still need to draw $1800/month from it. 4 years=48 months. 48 months@1800/month= $86,400. So I would only have $33,600 left of the 120K, not $72,000. right?I'm also a bit concerned that with the wave of us boomers they may change the rules on how Social Security works...so my thought was to grab it at 62.

You are correct on my math error. I thought of that shortly after I posted, so I deleted the post. You must have picked it up in that window. Sorry for the confusion.

Now I think that you are going a little too far in the other direction. You don't really need to carve out the whole $86,400 to cover your $1,800 a month, because you are still buying an annuity - the $33,600 seems like it would pay $224 per month.

But even when I make that adjustment, if I assume that inflation is zero, buying this SPIA is still a better deal than deferring SS.

I was operating on a rule of the thumb that deferring SS amounts to "buying an inflation adjusted SPIA from the gov't". The cost is usually favorable vs. inflation adjusted SPIAs available from private insurers. However, this fixed SPIA has an unusually attractive rate. If you put very little value on the inflation protection in SS (maybe because you think the gov't will take it away in the future), then the numbers work out to favor the private option.

(Following up on Brewer's comments -- I thought I would get a quote on an inflation adjusted SPIA today. The only online source I know is Vanguard, so I went to their site. Their SPIA quote system isn't working today. I assume the reason is that the insurance company Vanguard uses for annuities is AIG. Brewer was cautioning people about this some time ago.)