So you don't like annuities?

[HobbyDave]

Hopefully this hasn't been commented on already, I didn't notice anything yet.

I know that most people on the board are pretty anti-annuity, since they're very inefficient, etc. I just thought I'd point out this article:

http://finance.yahoo.com/focus-retirement/article/103759/Harvest-a-Rich-401k?mod=retirement-401k

It seems that 401ks are now starting to have annuity options included as well. I am glad however that this author said that you shouldn't allocate more than 20% towards the annuity, leaving the rest in stocks/bonds. However, I'm pretty sure your companies 401k partner won't be giving the same good advice.

 

[mickeyd]

If you want guaranteed income in retirement, you can buy an immediate fixed annuity when you stop working and get a check a month for life. Or with a new 401(k) option known as a fixed deferred annuity, you can put together that check bit by bit throughout your career.
With these options - recently introduced by insurers like MetLife and The Hartford - each of your 401(k) contributions buys a dollar amount of retirement income, which varies based on your age and interest rates when you invest.

Well, annuities have no place in a tax-deferred vehicle like a 401(k). Sure Met and Hartford can legally offer them but it is generally not a real good idea to make that selection in your retirement plan.

 

[MasterBlaster]

I haven't read the article, however the case for annuities is to provide you, along with social security, a baseline standard of living. So some recommend that the average Joe take maybe 20-30 percent (or so depending on individual circumstances) of their nest-egg and annuitize it. When you do that you have taken away the risk of having to eat dog-food in your later years. You can also then invest a bit more aggressively and use a wee bit higher withdrawal rate than a purely nest-egg driven retirement would allow.

There are downsides to the partial annuity strategy, however there are downsides to the SWR strategy also. It just may be then that the partial annuity strategy provides for a higher sustainable income, with better poverty protection than the fallback 4% SWR strategy.

I have read of studies that show that people with a guaranteed retirement income are happier than those that fund their own retirement. It must have to do with the uncertainty stress that comes with managing a variable and depleting nest-egg.

 

[W2R]

I have read of studies that show that people with a guaranteed retirement income are happier than those that fund their own retirement. It must have to do with the uncertainty stress that comes with managing a variable and depleting nest-egg.

I have read that too, and recognized myself in that. I don't need much money to be happy, but I am a worrier and want to be certain that my basic needs will be met.

So, I am considering a relatively small fixed (inflation protected) lifetime annuity to supplement my gruesomely small pension and social security. The TSP has a deal with MetLife to allow that upon retirement. The money isn't taxed initially, but monthly payments are taxed.

 

[ats5g]

Hey Dave,

IMO, it's certainly an interesting idea. I think this is the kind of retirement savings vehicle that Zvi Bodie's been advocating for years. Insurers, or other companies, stepping in where pension plans have failed. A poster recently asked a question about a similar scheme set up by The American Federation of Musicians years ago. It'd be even more interesting if instead of a fixed payment, the guarantee was for increasing, or CPI-U linked payments.


- Alec

 

[Khan]

I have read that too, and recognized myself in that. I don't need much money to be happy, but I am a worrier and want to be certain that my basic needs will be met.

So, I am considering a relatively small fixed (inflation protected) lifetime annuity to supplement my gruesomely small pension and social security. The TSP has a deal with MetLife to allow that upon retirement. The money isn't taxed initially, but monthly payments are taxed.

I go back and forth on taking part of the TSP as an annuity; haven't touched it yet. Guess I don't have to decide until I'm 70.

 

[cute fuzzy bunny]

Remembering the recent thread about which product and service prices outpaced inflation, insurance companies led the pack. Where did all that money come from?

Annuities are a fine idea for diversification, one just needs to decide how much safety they're willing to pay for, because pay they will.

I said something a while ago that I dont think anyone figured out. In fact, Ha thought I'd been drinking

I said "Dont be stupid, but also dont be stupid". What I meant, and I figured most would get it, is that its easy to be stupid and risk too much and screw up by losing your money to a downturn, but its also easy to be just as stupid and risk too little and screw up by giving someone else too much of your money in exchange for avoiding downturns...and running out. Too much short to intermediate term "safety" in your portfolio is every bit as dangerous as too much short to intermediate term risk.

Annuities seem like a swell idea to me, but they're priority number 7 or 8 on the list of things I'd like to do with my money and i'm only down to 4 so far. I'm of the mind that anyone who feels a fund like Wellesley or TR/Lifestrategy Income as being too scary and racy should get some counseling Geez louise, you can get the same or better returns than an annuity, avoid paying for the new burled walnut stateroom at Mutual of Foofaha, and you even get to keep all your principal should you need it for long term care or some disaster.

By the way, the studies that say that people who have annuities are happier than people who dont were probably funded by insurance companies. Show me one and I'll show you how the data was tortured. No charge.

 

[W2R]

I go back and forth on taking part of the TSP as an annuity; haven't touched it yet. Guess I don't have to decide until I'm 70.

If you do wait until you are 70, your annuity rate will be nice and high. I just checked the calculator on the TSP site to see what the payout would be today, for a 70-year-old. At age 70 the inflation protected single lifetime annuity with no frills offered by TSP/MetLife would start out paying about 7.8%, and then increase from there with inflation.

I am still going back and forth on it, too, and might end up getting one sometime between age 62 and 70. I know that I could spare $100K for peace of mind, and then let the rest of my TSP vary with the ups and downs of C,S,& I (or else other investments once I withdraw it).

 

[unclemick]

First cup of coffee wisdom: there are and are not.

The Norwegian widow says pssst - current yield of your portfolio. If you can squeeze your 'core budget' under it's roof when storm clouds appear - you 'may' have as much reliability as the odds on an annuity staying in business.

If you get really jumpy - Pssst Wellesley!(love the chance to say that).

The second shakiest(after the fickle finger of fate aka history) is the US Govt. - my SS and my defined non cola pension.

There is nothing in my family tree - longevity wise that says it would be prudent for me to lay off additional bets.

To put another way - current yield(including Norwegian stocks) - 3% or 75% of my 4%. Will take 5% variable in good times(3%=60%).

Or pension plus early SS = 40% as an alternate position.

Don't need no stinking annuities!

Your mileage may vary.

heh heh heh - and now for my second cup of coffee.

 

[MasterBlaster]

Just so you know...

I wasn't advocating annuities, I was just putting forth their case.

Also some of the posts above make me wonder if they understood what the case was. So just to be clear we were talking about buying an immediate annuity with a portion of the nest-egg. Nobody was advocating variable annuities (or whole life ect.) with all their fees and downsides.

Like anything if you shop around you can find a seller (like Vanguard) that has pretty low fees and offers a pretty good immediate annuity product. Mutual funds are similar, you can buy low cost index funds or you can go to that friendly financial planner with the nice paneled office and be put into some "really good" funds with loads and expense ratios in the 3 percent range.

 

[hogwild]

I think the single premium immediate annuities are worth considering. I personnally don't like annuities during the accumulation phase. There are studies (TIAA-CREF for one) that show that immediate annuites can decrease the chances of exhausting your portfolio over a long retirement period.

However, if one is considering the purchase of an immediate annuity, I would recommend checking out the newly minted Vanguard managed payout funds. These funds have the potential to smooth out your income while allowing you control over your money. You can get out at anytime just as with any mutual fund.

 

[Khan]

If you do wait until you are 70, your annuity rate will be nice and high. I just checked the calculator on the TSP site to see what the payout would be today, for a 70-year-old. At age 70 the inflation protected single lifetime annuity with no frills offered by TSP/MetLife would start out paying about 7.8%, and then increase from there with inflation.

I am still going back and forth on it, too, and might end up getting one sometime between age 62 and 70. I know that I could spare $100K for peace of mind, and then let the rest of my TSP vary with the ups and downs of C,S,& I (or else other investments once I withdraw it).

My pension includes a 'SSA substitute' (because I took an early out). That will be dropped when I turn 62 (~5 years). Considering taking an immediate annuity at that time and delaying SS until 70.

But then, if I am living comfortably (at 62) on the reduced pension plus the payouts of the CD ladder, I can just let the TSP, IRA, HSA, SSA sit for a while.

 

[rs0460a]

Just so you know...

So just to be clear we were talking about buying an immediate annuity with a portion of the nest-egg. Nobody was advocating variable annuities (or whole life ect.) with all their fees and downsides.

Yes, I understand; I purchased one, and I'm pleased with the results of my my action. Of course I understand my decision (as it applies to my situation) may not be "acceptable" to others (that's why they make more than one flavor of ice-cream ). And I'm sure the circumstances that support my action are not what most folks on this board would consider "the norm"...

- Ron

 

[Dawg52]

Yes, I understand; I purchased one, and I'm pleased with the results of my my action. Of course I understand my decision (as it applies to my situation) may not be "acceptable" to others (that's why they make more than one flavor of ice-cream ). And I'm sure the circumstances that support my action are not what most folks on this board would consider "the norm"...

- Ron

You are the only one that has to pleased with your decision. What others think is irrelevant.

 

[clifp]

I was going to write a lengthy post about annuities. But I decided that that real difference between "good" annuities and bad annuities is very simple.

If somebody like Want2Retire goes to BUY an annuity odds are good they understand the risk and trade off associated with them. These are "good" annuities

However for everybody who voluntarily BUYs there are a lot of people who are SOLD an annuity by a salesman. These are almost always "bad" annuites.