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What % of savings should go to annuity?
04-07-2013, 08:02 AM
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#1
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Dryer sheet wannabe
Join Date: Apr 2011
Posts: 13
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What % of savings should go to annuity?
Due to the fact that I have the midas touch in reverse when it comes to investing, my wife and I decided that we should purchase a fixed immediate annuity when I retire. Is there a rule of thumb (like the 4% drawdown theory) as to what percentage of your 401K savings can safely be converted to an annuity? One advisor told me not to do it that way, but to simply see how much of a monthly deficet I am running (income vs. monthly expenditure) and get an annuity that can fill that gap. Seems reasonable to me. Any thoughts or advice? Thank you for sharing your time and expertise.
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04-07-2013, 08:27 AM
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#2
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Full time employment: Posting here.
Join Date: Jul 2011
Posts: 723
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No, there's not really a rule of thumb. I think the decision should be based on how much of your expenses you want covered by guaranteed, fixed income. You should also consider interest rates when you buy. For example, you won't get much now (relatively speaking) as compared to when interest rates are much higher. You could look at buying fixed annuities in smaller pieces, assuming an annuity makes sense for you at all. Just my thoughts.
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04-07-2013, 08:41 AM
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#3
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Thinks s/he gets paid by the post
Join Date: Feb 2011
Posts: 1,797
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I would be VERY careful in shopping for annuities as there is a HUGE difference in costs. This tends to be a high profit margin business for many firms. Make sure you understand the details of any you might consider (e.g. sales charges, early withdrawal penalties, survivor benefits, etc.). And remember any annuity is NOT like an FDIC-insured bank acct. This is a complex area & I would invest my time before investing my $$.
Annuities
http://ezinearticles.com/?Pros-and-C...ies&id=2510758
NOT endorsing any specific product, but this site calculator gives some idea of current payouts for some common types of annuities:
Immediate Annuities -- Income Annuity Quote Calculator.
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04-07-2013, 08:43 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,305
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Quote:
Originally Posted by panacea
No, there's not really a rule of thumb. I think the decision should be based on how much of your expenses you want covered by guaranteed, fixed income. You should also consider interest rates when you buy. For example, you won't get much now (relatively speaking) as compared to when interest rates are much higher. You could look at buying fixed annuities in smaller pieces, assuming an annuity makes sense for you at all. Just my thoughts.
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+1. Good answer on both points IMO. - How much floor income do you need (projected essential spending/mo - SS/mo - pension/mo = desired annuity income/mo) and
- interest rates make this a bad time to purchase annuities, though it may be years before they're a better deal.
As usual, no universal answer.
I'm not a fan of annuities as part of our plan A, especially at these interest rates, but a SPIA later in life (75 +/- years old?) is an option for our plan B.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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04-07-2013, 09:04 AM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Location: Northern IL
Posts: 26,899
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Quote:
Originally Posted by ERhoosier
I would be VERY careful in shopping for annuities as there is a HUGE difference in costs. This tends to be a high profit margin business for many firms. Make sure you understand the details of any you might consider (e.g. sales charges, early withdrawal penalties, survivor benefits, etc.). And remember any annuity is NOT like an FDIC-insured bank acct. This is a complex area & I would invest my time before investing my $$. ...
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+1000
Quote:
Originally Posted by Dino1
Due to the fact that I have the midas touch in reverse when it comes to investing, my wife and I decided that we should purchase a fixed immediate annuity when I retire. ....
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Isn't purchasing an annuity an 'investment'? And it seems to be one of the most complex and least flexible, often with large surrender charges that lock you in after you might decide it isn't right for you.
I'd say your fear of investments is taking you from the frying pan to the fire. Beware!
-ERD50
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04-07-2013, 09:06 AM
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#6
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Thinks s/he gets paid by the post
Join Date: Nov 2012
Location: Madeira Beach Fl
Posts: 1,403
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Since you say you do not have a good investing sense, before handing your dough over to a company that promises a stream of lifetime payments best to make sure of their financial strength. This is not difficult to do - look before you leap!
__________________
_______________________________________________
"A man is a success if he gets up in the morning and goes to bed at night and in between does what he wants to do" --Bob Dylan.
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04-07-2013, 09:23 AM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2010
Posts: 5,915
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I am not certain that now is the time to be purchasing an annuity. They are more expensive when the interest rates are low.
You may want to shop around and gain an understanding of the market and the offerings.
When interest rates rise, the price of your annuity contract will decrease accordingly.
I recently read a book....'Pensionize Your Nest Egg' by Milevesky. I found it to be a very good book-especially for those without a defined benefit pension.
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04-07-2013, 09:31 AM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 17,266
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I doubt if you will find much enthusiasm here for buying an annuity at this time. The low interest rates being a good reason to wait, or to buy a ladder of annuities over a 5-10 year period.
Personally, I was not an annuity fan, but I must admit that after having read Dr. Pfau's comparison of stocks/bonds versus stocks/SPIAs, there is a very small possibility I might buy one in the future - say a 10% chance.
Watch the charges and fees. Check out Vanguard for an idea of the price of a low cost annuity.
__________________
Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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04-07-2013, 09:38 AM
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#9
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gone traveling
Join Date: Mar 2007
Posts: 559
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Quote:
Originally Posted by Dino1
Due to the fact that I have the midas touch in reverse when it comes to investing, my wife and I decided that we should purchase a fixed immediate annuity when I retire. Is there a rule of thumb (like the 4% drawdown theory) as to what percentage of your 401K savings can safely be converted to an annuity? One advisor told me not to do it that way, but to simply see how much of a monthly deficet I am running (income vs. monthly expenditure) and get an annuity that can fill that gap. Seems reasonable to me. Any thoughts or advice? Thank you for sharing your time and expertise.
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have you taken social security. although i took at 62 if my choice was strictly between buying an annuity or taking social security at 70-i would take SS at 70 and use that as my annuity.
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04-07-2013, 12:22 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2003
Location: Hooverville
Posts: 22,983
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You really don't need a Midas touch for ordinary investing. Just follow a few very simple allocation rules and you'll do as well as the market, less a tiny drag from costs. Where your personal skill or luck might come into play is if you should deviate from this plan, to make active decisions.
The whole philosophy of passive investing (be it right or wrong) is that you get the average return. You won't do significantly better, but you also will not do significantly worse.
Ha
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"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
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04-07-2013, 03:08 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,376
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With respect to your question, for me - zero. Psst....... Wellesley.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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04-07-2013, 04:08 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2002
Location: Texas: No Country for Old Men
Posts: 50,022
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Quote:
Originally Posted by pb4uski
With respect to your question, for me - zero. Psst....... Wellesley.
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Yep. When it comes to annuites, psst on 'em - other than the govt one known as SS, that is.
__________________
Numbers is hard
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04-07-2013, 04:18 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
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Another vote from me against an annuity. Diversify, rebabalance, and take a bit each year. It's easy to do. You can always decide later to go with an annuity (hopefully once they start yielding something closer to their historic rates, they are very low now). But you can't go the other way--once you give that money to the helpful annuity salesman you can't get it back. (But he'll be very grateful you did it.)
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04-07-2013, 04:37 PM
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#14
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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If you want the income from an SPIA I'd use it to replace part of your bond allocation, don't eat into your equity allocation. I'd also think about laddering or just keep the first SPIA short duration as interest rates can only go up. FYI I've had an annuity with TIAA for 25 years and its minimum annual return was 3% and the max was around 7%.. I'll be keeping it when I ER as part of my fixed income allocation.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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04-07-2013, 04:43 PM
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#15
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Actually the more I think about it the more I like my TIAA-CREf Traditional.....guaranteed min of 3% return and also an option to get at the principal by systematic withdrawals over 10 years without penalties.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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04-07-2013, 04:46 PM
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#16
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Moderator Emeritus
Join Date: May 2007
Posts: 12,901
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Otar provided some guideline as to how much of your portfolio to annuitize in his book "unveiling the retirement myth". I'm too young to consider annuities at this point, but I will probably annuitize enough of my nest egg to cover basic expenses beyond SS once I reach my 60s or 70s.
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04-07-2013, 05:18 PM
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#17
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Moderator Emeritus
Join Date: Jan 2007
Location: New Orleans
Posts: 47,501
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I would not suggest buying an SPIA with more than 25%-30% of your portfolio, maximum, no matter what the interest rate environment. (Right now, the latter is terrible which is one reason why so many are against buying one right now.)
Inflation can be a huge problem over time, especially with fixed payment annuities. Inflation adjusted annuities are harder to find, and expensive. If you only have 10-15 years to live, inflation may not be so devastating but if you can expect 25-30 years to live, it can be disastrous. For these reasons, I plan to wait until I am 80-85 before buying a small SPIA.
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Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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04-07-2013, 07:37 PM
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#18
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Recycles dryer sheets
Join Date: Oct 2010
Posts: 113
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For what it's worth, Fidelity suggests 10%. I like the idea of holding off till 8 as mentioned above so inflation is not as big a factor. You could also look at inflation adjusted SPIAs, you can get quotes through the Vanguard site, don't know if you have to a have an account though. There are a couple other places that sell them but you'd have to dig to find them.
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04-07-2013, 08:19 PM
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#19
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Full time employment: Posting here.
Join Date: Aug 2006
Location: athens
Posts: 802
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I took out an annunity 2.5 years ago that has a 6% earnings rate. I have the option to get the contract value back after three years (6 months from now). I think it may have been a good buy. Don't know yet. It was a little less than 10% of my net worth. I can reclaim the contract value in February which is a little more than what I invested. We'll see...
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Can't you see yourself in the nursing home saying, " Darn! Wish I'd spent more time at the office instead of wasting time with family and friends."
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04-08-2013, 05:47 AM
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#20
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Dryer sheet wannabe
Join Date: Apr 2011
Posts: 13
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Thank you all
I appreciate your time and expertise. Thanks again. I will share with my wife.
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