Is an Annuity a good way to get over a SWR of 5%?

[astromeria]

I split this topic into another thread, It may have been beat to death, But I missed the earlier rounds. - Cut-Throat




What kind of annuity--a short-term annuity to replace the Social Security you're postponing for a few years? an immediate annuity when you retire to provide income for the rest of your life? a variable annuity as a tax-shelter while working?

 

[Merlin]

Re: Jonathan Clements Article today - Contrary Advice

The October issue of Money magazine says that every $100,000 invested in an annuity with inflation protection would kick off $490 per month in income to start with annual inflation adjustments thereafter.

 

[Cut-Throat]

Re: Jonathan Clements Article today - Contrary Advice

The October issue of Money magazine says that every $100,000 invested in an annuity with inflation protection would kick off $490 per month in income to start with annual inflation adjustments thereafter.

If this was true a $1M annuity purchase would kick out $58,800 a year with inflation adjustment. Not too shabby a way to secure a Inflation Adjusted 5.88% SWR - Probably should read the fine print though.

Anybody familar with this want to give us the downsides of this? - Other, than if you croak early you would not have the $1 Million to pass on to your heirs.

 

[Ed_The_Gypsy]

Re: Jonathan Clements Article today - Contrary Advice

I suppose one could consider doing this with all or part of one's fixed income slice/dice/bucket/barrel/keg/demijohn.

AHA! The Three-Demijohn method! I need clarification on this, but I like it already.

 

[2B]

Re: Jonathan Clements Article today - Contrary Advice

If this was true a $1M annuity purchase would kick out $58,000 a year with inflation adjustment. Not too shabby a way to secure a 5.8% SWR - Probably should read the fine print though.

Anybody familar with this want to give us the downsides of this.

The return obviously will depend on your age and whether "significant other" coverage is at 0, 50 or 100%.

An immediate annuity is always a poor financial decision unless you know you will significantly outlive your actuarial longevity. The insurance companies assume "sick" people don't buy immediate annuities and pad their figures a bit. The "real" interest rate they use is just a tad over 3% to calculate the annuity payment. The rest is return of principal.

If you run FIRECalc using a 30 year plan for a 60 year old, you will get a much higher SWR with an immediate annuity than if you don't use one. The key issue is that most 60 year olds won't make it to 90. You can put in an inflation annuity and look even better but FIRECalc and most annuities don't calculate inflation the same way.

Most of us have an inflation adjusted annuity already. It's called social security. It's subject to all sorts of political attacks but it is probably safer than anything you might buy in the open market. Millions of old voters will see to that.

I've said all this before and I expect the same people to come in with the same responses.

 

[2B]

Re: Jonathan Clements Article today - Contrary Advice

- Other, than if you croak early you would not have the $1 Million to pass on to your heirs.

You edited while I was posting.

The key reason for having a decent pile of cash available at "end of life" is to address the added cost of assisted living and nursing care. I personally am not in love with any of the LTC plans I've seen and feel "self-funding" makes more sense.

My FIRECalc runs have a minimum/ending portfolio of $250K. I've decided that that would cover my needs so I wouldn't be a "burden." When I figure out what I'd have to pay for LTC, the premiums would easily amount to more than the $250K (if I make it into my 70's) that I think would be needed.

 

[Cut-Throat]

Re: Jonathan Clements Article today - Contrary Advice

An immediate annuity is always a poor financial decision unless you know you will significantly outlive your actuarial longevity.

No one ever knows! - That's the point!

If you die early, yes it was a poor financial decision. - But you're dead, so why should you care?

 

[Nords]

Re: Jonathan Clements Article today - Contrary Advice

Anybody familar with this want to give us the downsides of this? - Other, than if you croak early you would not have the $1 Million to pass on to your heirs.

The inflation rider is typically capped at 10%...

 

[Ed_The_Gypsy]

Re: Jonathan Clements Article today - Contrary Advice

2B quoth thusly:

Most of us have an inflation adjusted annuity already. It's called social security. It's subject to all sorts of political attacks but it is probably safer than anything you might buy in the open market. Millions of old voters will see to that.

Always worth repeating. This made me more comfortable with full investment of my stash.

 

[astromeria]

Re: Jonathan Clements Article today - Contrary Advice

The inflation rider is typically capped at 10%...

Per year or forever? If forever, that would likely get used up in just a few years, making it almost useless.

 

[Cut-Throat]

Re: Jonathan Clements Article today - Contrary Advice

Per year or forever? If forever, that would likely get used up in just a few years, making it almost useless.

I would doubt very much it would be forever, for the reason you stated.

 

[Nords]

Re: Jonathan Clements Article today - Contrary Advice

Per year or forever? If forever, that would likely get used up in just a few years, making it almost useless.

10% max per year. It wouldn't have done well in the late 1970s/early 80s.

 

[Gone4Good]

Re: Jonathan Clements Article today - Contrary Advice

No one ever knows! - That's the point!

If you die early, yes it was a poor financial decision. - But you're dead, so why should you care?

That is kind of the way I see it. Once I'm dead I could really care less whether my investment choices were optimal. My bigger concern is living with no income rather than dieing with money left on the table.

Recent studies have suggested that retirees with pensions are happier than those without. It seems logical that people expecting a check in the mail every month will feel more secure than those who aren't.

I understand they are not right for everyone, but I don't quite understand the hostility toward immediate annuities. Sure they likely provide a lower total return then an equivalent bond portfolio, but half of all people beat the actuarial averages - some folks by a lot. The law of large numbers means the insurance company doesn't care much about the tails on the mortality distribution curve but as a self insured individual you certainly do.

 

[donheff]

Re: Jonathan Clements Article today - Contrary Advice

It's Deja Vu all over again. Now I understand why some posters got mad and SHOUTED in the last annuity thread.

 

[2B]

Re: Jonathan Clements Article today - Contrary Advice

It's Deja Vu all over again. Now I understand why some posters got made and SHOUTED in the last annuity thread.

I am personally happy that people are rushing into immediate annuities. My index funds are full of financial companies that profit from selling them. My ethics demand I point out they are not likely to be good investments but I have come to realize that the people that like annuities think they will live forever (or nearly so).

 

[Cut-Throat]

Re: Jonathan Clements Article today - Contrary Advice

I am personally happy that people are rushing into immediate annuities. My index funds are full of financial companies that profit from selling them. My ethics demand I point out they are not likely to be good investments but I have come to realize that the people that like annuities think they will live forever (or nearly so).

I'm not sold on aunnuities, I'm just trying to learn something. If you are against annuities mostly because companies make a profit on the aggregate - why have any insurance at all?

On the other hand - we have many SWR discussions here that say that 4% is too risky maybe it shoud be 3% or ? - Seems to me like if some folks want to get over 5% SWR and die with nothing, an annuity might be the way to go. The real problem, as I see it, would be someone that struggles to make it on 3% SWR dies early with a pile of cash. - An annuity might just let them spend a little more than they would otherwise.

Now if you are trying to protect a Pile for your heirs, this would not apply. I think you are trying to make a case for annuites are all bad for everybody. I think you just have to look at what you are trying to accomplish. And for me, dying broke is the goal! - You obviously want to have a pile when you die!

 

[Gone4Good]

Re: Jonathan Clements Article today - Contrary Advice

My ethics demand I point out they are not likely to be good investments but I have come to realize that the people that like annuities think they will live forever (or nearly so).

Different strokes for different folks . . .

Cash is likely a worse investment then bonds which is likely a worse investment then stocks. Each, though, has a place in a portfolio. Some folks here like to swing for the fences and put 100% in stocks while others will have a higher concentration in bonds. That allocation decisions is a personal risk / reward trade off. Others may like the risk / reward trade off of having an insurance company provide a monthly check for as long as they live. This is not a mortal sin, or even necessarily a bad investment decision. Piece of mind is worth a ton in managing your personal portfolio.

Also, someone doesn't need to think they are going to live forever to justify buying an annuity. All they need to do is recognize that there is asymmetric longevity risk in retirement planning. I sure wouldn't build my retirement plan assuming actuarial life expectancy.

 

[mathjak107]

Re: Jonathan Clements Article today - Contrary Advice

That is kind of the way I see it. Once I'm dead I could really care less whether my investment choices were optimal. My bigger concern is living with no income rather than dieing with money left on the table.

Recent studies have suggested that retirees with pensions are happier than those without. It seems logical that people expecting a check in the mail every month will feel more secure than those who aren't.

I understand they are not right for everyone, but I don't quite understand the hostility toward immediate annuities. Sure they likely provide a lower total return then an equivalent bond portfolio, but half of all people beat the actuarial averages - some folks by a lot. The law of large numbers means the insurance company doesn't care much about the tails on the mortality distribution curve but as a self insured individual you certainly do.

Immeadiate annuties arent about total return or heirs , they are about the highest withdrawl rate possible, for life.

they are about not bouncing the check to the morgue

they pay a rate higher than most can do with a bond or cd ladder because they are funding it with something you dont have,, money from all the dead people.

its basically the opposit of life insurance,, with life insurance you are betting you will die , annuties are a bet you will live.

 

[2B]

Re: Jonathan Clements Article today - Contrary Advice

Also, someone doesn't need to think they are going to live forever to justify buying an annuity. All they need to do is recognize that there is asymmetric longevity risk in retirement planning. I sure wouldn't build my retirement plan assuming actuarial life expectancy.

You have one of the best annuities in the world available to you -- social security. You can enhance your return by deferring your withdrawl date until age 70. The cost is whatever your earlier benefit was for a few years. Your payment for life goes up about 8.5% for every year you wait -- plus it's inflation protected. That's probably a better return for your money than you'll get from any annuity but I haven't run the numbers.

The last time I ran the numbers someone would have to live about 12 years beyond their actuarial longevity to break even. Don't let me discourage you from buying one. It is one of the most profitable aspects of the financial services industry and I'm heavily invested in that segment.

 

[mathjak107]

for people with little assets even waiting until 70 to take ss may not do the trick for them. for them an annuity would be good.

 

[2B]

for people with little assets even waiting until 70 to take ss may not do the trick for them. for them an annuity would be good.

If they have so few assets, the amount of an annuity they could buy would be irrelevant. The longer anyone can wait the higher to payout will be.

I still assert that everyone should plan on holding about $250,000 for "end of life" care -- inflation adjusted -- unless they are looking forward to Medicaid or assuming their children will be happy to pay for it.

 

[Cut-Throat]

Re: Jonathan Clements Article today - Contrary Advice

You have one of the best annuities in the world available to you -- social security. You can enhance your return by deferring your withdrawl date until age 70. The cost is whatever your earlier benefit was for a few years. Your payment for life goes up about 8.5% for every year you wait -- plus it's inflation protected. That's probably a better return for your money than you'll get from any annuity but I haven't run the numbers.

I'd like to see those numbers. IOW - The cost of the wait vs. the monthly payout. To me it is not relevant if you don't live long enough to collect it. When I'm dead, I am going to stop worrying about money - I promise!

I'd would be nice to see the numbers expressed somehow as SWR - IOW - Amount you are giving up (by spending your portfoilo down) vs. The extra Money payout as a % of the money spent to wait. - The decision would be a little easier then.

 

[2B]

Re: Jonathan Clements Article today - Contrary Advice

I'd like to see those numbers. IOW - The cost of the wait vs. the monthly payout. To me it is not relevant if you don't live long enough to collect it. When I'm dead, I am going to stop worrying about money - I promise!

I'd would be nice to see the numbers expressed somehow as SWR - IOW - Amount you are giving up (by spending your portfoilo down) vs. The extra Money payout as a % of the money spent to wait. - The decision would be a little easier then.

Deferring SS all comes down to how long you plan on living. If you live off your assets you can grow your SS withdrawl. The SS Administration states that they design it to be equivalent based on life expectancies. That's better than the insurance companies that discount the actuarial tables by assuming only healthy people buy immediate annuities.

I don't have time or inclination to run the detailed numbers. The concept is the same as the logic behind an immediate annuity. In my case, I can take $1542/month at 62. I can wait until 70 and get $2720/month. That means (ignoring inflation increases) I can pay $148,032 over those 8 years and get an extra $14,136 annually (a 9.55% payout -- gasp ). I would break even around age 80 but don't forget my spouse is entitled to my payment on my death instead of only half until then. Questions abound about the proper interest rate to create a NPV for the annual deferrals and the future income streams. Inflation adjustments would also be on the higher amount creating an even larger delta -- making it more favorable. I will say that FIRECalc favors taking the money at 62 based on my runs. Scott Burns advocates waiting until 70 if you have the cash to defer.

 

[Cut-Throat]

Well, this has been a real eye-opener to myself! - I did take an hour or so and create a basic spreadsheet and my numbers agree with yours! It seems that delaying SS for myself is like buying an annuity for about $150K that has a payout of over 9.5%!

My Social security numbers are very close to yours! And I never looked at it this way before. I used to think in terms of living long enough to recoup the difference. But if you look at it in the 'Insurance Way' - It really does not matter how long you live.

- For someone that has assets and wants to die broke this is almost a no-brainer! - Almost a 10% SWR on about $150K for delaying to age 70! -

Everytime I think I understand this stuff, something like this comes along and totally changes my mind.

 

[Cut-Throat]

Then there is also the question of what to do with the Spouse S.S. - Since you can only collect one in the event of a death. I have heard that it may be wise to delay 1 S.S. and take the other early?

This is where it can get a little tricky.