Should annuity purchase change AA?

[cashflo2u2]

I have a portfolio of 60/40 equity/fixed and am considering taking about 15% of the portfolio to purchase a SPIA (not inflation adjusted) to cover some of my annual shortfall. Any opines on whether I should liquidate the 15% prorata and maintain the same AA or take it all out of the fixed and not rebalance? Thereby treating the PV of the annuity as part of the fixed allocation? Any place this may have been discussed before that I can be steered to? TIA.

 

[FinanceDude]

The SPIA in effect becomes a fixed income portion of the equation. Some on here will differ, but I believe the only hedge against inflation is a healthy dose of equities over time. If you are comfortable with 60/40, then look at the SPIA as part of the 40, and adjust accordingly.......

If you liquidate pro-rata, are we talking taxable or qualified monies??

 

[cashflo2u2]

The bulk, if not all, of the money would be from qualified funds. Thanks.

 

[clifp]

I am with Finance dude. If you are comfortable with a 60/40 asset allocation than I treat your 15% allocation as a long term bond holding. I am not sure how you'd value the SPIA going forward, but one simple approach would be to change your future mix to 70/30% (i..e 60%/85% +15% SPIA) which gets you close to the Efficient frontier mix of 75/25%

 

[Hillbilly]

This may help with some thoughts and has some good links within:

http://www.early-retirement.org/forums/f28/treating-cola-d-pension-bond-allocation-30975.html

Hope it helps.

Hillbilly

 

[W2R]

One reason to buy a fixed immediate annuity is to free up a greater percentage of your funds for equity investments. So YES - - you will probably feel comfortable doing that.

Just don't forget that your AA should reflect what you feel comfortable with, not somebody else's theoretical idea of what your AA should be. So whether you compute it with or without the annuity, and call it 60:40 or 70:30 or whatever, is (in a sense) irrelevant. The sleep-at-night level is where it's at, and the recent market has been a wonderful test for determining exactly where that level is, for you.

 

[2B]

I'd suggest you don't get the annuity. We have historically low interest rates so your payout for a new immediate annuity has nowhere to go but up if you'll just wait a while longer. Also, waiting another 5 years will dramatically increase your payment even if interest rates remain flat.

I have wrestled with how to put my fixed pension (identical to an immediate annuity) into my asset allocation. From a classical sense you could assign it an effective interest rate and determine its pseudo value as part of your fixed income portfolio. I've seen numbers from 10% to 5% suggested. Scott Burns did an article and suggested 7% for non-COLA pensions/annuities and 4% for COLA pensions/SS/annuities.

For example, getting $7,000 per year in a fixed immediate annuity is like having $100,000 in "bonds." Your $20,000 per year in SS is like having $500,000.

Going past that, it comes down to what makes you comfortable. I have personally decided to ignore my small pension and my SS and stick with the 60/40 split.

 

[ziggy29]

I'm almost never a fan of annuities except for a few well-designed annuities that don't carry punitive fees for a few individuals with specific situations, but if you do it, yes, treating it (and perhaps present value of pensions) as part of your bond allocation seems most appropriate.

 

[chinaco]

I would look at the annuity like fixed assets and adjust my portfolio accordingly. But I am not taking a very scientific approach. Essentially at a minimum, I want to have 10 years of income in fixed and (pension, ss, etc).

I could consider the annuity as a virtual riskless income stream (except for inflation). The same goes for other income streams (pension and SS).

My portfolio can be a bit more risky (in terms of the amount of equity) since I can tolerate the fluctuations a bit more.

As we age... I will step down the equity holdings to reflect the possible need to spend the assets... possibly for health reasons. But we will always hold some equity.

 

[cashflo2u2]

Thanks for the thoughtful responses. The link was especially helpful as it steered me to some morningstar discussions which specifically addresses my issue. The question now is how much faith can I put in AIG (the insurance co. VG uses for annuities)?

 

[jIMOh]

The biggest issue if a 60-40 no annuity portfolio is changed to 85-15 or 75-25 with the annuity is that if stocks slide, you have less to rebalance with.

Meaning what is 75-25 portfolio becomes a 50-50 portfolio because market crashed, you really don't have more bonds, you just have less equities. To rebalance might require some pain on bond side.

I would not consider 100% of annuity to be same as 100% bond.

Maybe if annuity is valued at $100k, consider that to be a $50,000 bond allocation.

So you have enough money to rebalance with if needed.

 

[cashflo2u2]

That is a very good point. I suppose that could be especially risky if one was still taking significant withdrawals after the annuity purchase. Also, would the relative state of the equity market be a factor, i.e., do it at a historically low point in the averages? Of course it can always go lower.

 

[RockOn]

Say you were 55, can someone swag me an idea on what the payout rate would be for a single life on $100k. Just wondering.

 

[Notmuchlonger]

Say you were 55, can someone swag me an idea on what the payout rate would be for a single life on $100k. Just wondering.

Vanguard has an annuity calculator.

 

[cashflo2u2]

Just go to the VG website and find the retirement page and immediate life time annuities and you can get free quotes all day long.

 

[RockOn]

Vanguard has an annuity calculator.

Thanks I didn't know it was there.

 

[rs0460a]

My situation...

I currently have a SPIA
- and VA disability monthly income.

along with future..
- SS for me
- SS for DW
- 2 small pensions for wife

None of these current/future income streams affect my/DW's combined AA of 60/40.

What the current/future income streams do is reduce the amount of withdraws against that 60/40 retirement portfolio mix. It has nothing to do with changing what the mix "represents".

Anyway, that's how I do it in my life...

- Ron

 

[cashflo2u2]

None of these current/future income streams affect my/DW's combined AA of 60/40.

What the current/future income streams do is reduce the amount of withdraws against that 60/40 retirement portfolio mix. It has nothing to do with changing what the mix "represents".

Anyway, that's how I do it in my life...

- Ron[/quote]

I see Ron, but maybe you started out that way. I am 5 years into retirement and want to buy a SPIA and said purchase will change my AA depending on how I do it.

 

[cashflo2u2]

The biggest issue if a 60-40 no annuity portfolio is changed to 85-15 or 75-25 with the annuity is that if stocks slide, you have less to rebalance with.

Meaning what is 75-25 portfolio becomes a 50-50 portfolio because market crashed, you really don't have more bonds, you just have less equities. To rebalance might require some pain on bond side.

I would not consider 100% of annuity to be same as 100% bond.

Maybe if annuity is valued at $100k, consider that to be a $50,000 bond allocation.

So you have enough money to rebalance with if needed.

I should be rebalancing now, but don't have the cajones. What makes me think I would do it then. I wonder people who preach rebalance are finding it hard to do right now.

 

[RockOn]

I'm almost never a fan of annuities except for a few well-designed annuities that don't carry punitive fees for a few individuals with specific situations, but if you do it, yes, treating it (and perhaps present value of pensions) as part of your bond allocation seems most appropriate.

What if spouse is money ignorant? Would this be a good planning option if I should die first, rather than pay for trusts costs (not cheap from what I see) or take a chance on someone cleaning out the accounts?

 

[rs0460a]

I see Ron, but maybe you started out that way. I am 5 years into retirement and want to buy a SPIA and said purchase will change my AA depending on how I do it.

In that case (and I would do this if/when I purchase additional SPIA's in the future) would to pro-rate withdrawls from my 60/40 mix, resulting in no change to my/DW's retirement portfolio.

- Ron

 

[cashflo2u2]

In that case (and I would do this if/when I purchase additional SPIA's in the future) would to pro-rate withdrawls from my 60/40 mix, resulting in no change to my/DW's retirement portfolio.

- Ron

Yes, that was my original question, and most replies said to take it out of the fixed income portion and leave a larger equity allocation due to treating the annuity as a bond holding (which would gradually reduce over the years). However, your reply has me thinking the other way now. I never met a fence that I didn't want to straddle!!

 

[rs0460a]

most replies said to take it out of the fixed income portion and leave a larger equity allocation due to treating the annuity as a bond holding

Well, the "others" can give their opinions (and are certainly entitled to them!). What I offer is a fact and detail of a "real life situation".

I don't consider any form of retirement income in my AA. By the time me/DW turn 70, 90-100% of our income will be coming from our formerly named income sources. If that income is considered to be coming from the "bond portion" of our portfolio, it would turn out that our actual "remaining" portfolio would be almost 100% equities. Now, do you believe anybody at age 70 (or older) should have a 100% equity stake? Maybe you do, but I don't.

I'm looking for "survivorability" of that portfolio till I/DW pass, and I'm not really interested in how the "guaranteed" income (SS, etc.) is viewed. That's why my target will remain 60/40 (at least in early retirement, where I am now).

That's why we don't consider any income (SS, SPIA, pension, etc.) as part of our AA.

- Ron

 

[cashflo2u2]

I'm looking for "survivorability" of that portfolio till I/DW pass, and I'm not really interested in how the "guaranteed" income (SS, etc.) is viewed. That's why my target will remain 60/40 (at least in early retirement, where I am now).

That's why we don't consider any income (SS, SPIA, pension, etc.) as part of our AA.

- Ron

One thing I noted was that the survivability of my portfolio actually increased with the purchase of a SPIA with about 15% of the portfolio. That is according to firecalc- of course that assumed keeping the same ration as you suggested. I assume that is because the SPIA creates and income stream of over 9% while I am dis-accumulating at the rate of a little over 3%. The annuity guy at VG told me that if I live with a 3% dist. rate on my current portfolio I probably don't need an annuity. That's the beauty of dealing with a non commission seller.

 

[rs0460a]

One thing I noted was that the survivability of my portfolio actually increased with the purchase of a SPIA with about 15% of the portfolio. That's the beauty of dealing with a non commission seller.

You are correct on the survivability issue. I use FIRECalc (along with VG's F.E. and Fido's R.I.P.) and all show an "enhanced estate value" ...

BTW, I did not go with VG on the SPIA (don't want to get into an argument on the "supplier"). All I can say is shop around (if you are serious on investment in an SPIA). There are more than one "provider" that can give you a "good deal"...

- Ron