Won the game, considering an annuity

[Car-Guy]

Also, you have $500,000 of FDIC insurance in joint accounts that are FDIC insured.

You can easily cover millions by using several different banks and account categories.

https://www.fdic.gov/resources/deposit-insurance/

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

 

[pb4uski]

As I recall, if a married couple each have $250k in CDs in a taxable account and an IRA in the same bank, they can cover off $1 million in one bank.

 

[Car-Guy]

As I recall, if a married couple each have $250k in CDs in a taxable account and an IRA in the same bank, they can cover off $1 million in one bank.

Some years ago, I went through all sorts of scenarios on FDIC coverage.... Yes you can get more than 250k coverage at any one bank by using account categories, if they apply in your case. I honestly don't remember them all "but for my case", just using different banks worked best (and/or made me feel the most comfortable . Some of the bank officers/managers didn't seem to understand the FDIC insurance rules as well as some folks on this board... Many did but some did not!

 

[big-papa]

Why?

52/62

One reason is because it's pretty difficult, maybe impossible, to purchase a SPIA these days with a COLA. Meaning the younger you are, the more time for inflation to eat away at the purchasing power of the income stream from the annuity.

 

[4nursebee]

Fair enough, but that doesn’t sound like a comment from someone who has “won the game”. So, you want the annuity because you’re looking for better returns in the lower risk part of your portfolio? In that case, I feel like you’re not assigning enough risk to the fact that you would be giving up your principal for a life which is of unknown duration. As was pointed out earlier, at 4% you have to live very long just to get your principal back, making that investment almost interest free for decades. At least with a CD, you will get the benefit of any changes to interest rates in years to come.

Take some time (which you’re doing) and really try to define your main goal here and see if the insurance product is really going to satisfy that goal.

Jerry, for comparison sake, take the amount of money you need or want to retire. Many people choose an amount that equals 25x ish their annual budget or needs. Picture this amount for you in your head. Now triple that amount. That is the equivalent of what we have in our life (actually we are nearing that amount). What I think to do, is take 1/3rd the amount, the original amount needed to retire, and purchase an annuity. Said annuity would pay out an amount each month sufficient to meet all needs for both of us, after taxes, without any other income sources.

 

[RunningBum]

How about TIPS for inflation protection? Inflation is probably your only exposure. Well, stocks too, if you aren't well diversified

 

[OldShooter]

Then you have your answer, because a joint life annuity is a low rate return vehicle that is not FDIC insured. ...

This. +1

 

[OldShooter]

How about TIPS for inflation protection? Inflation is probably your only exposure. ...

This was our conclusion re risk: Two digit inflation. Our solution was TIPS. Virtually all of our fixed income portion is in TIPS, which will inevitably yield significantly better than the quoted YTM numbers that you see, which assume zero inflation.

 

[finnski1]

Jerry, for comparison sake, take the amount of money you need or want to retire. Many people choose an amount that equals 25x ish their annual budget or needs. Picture this amount for you in your head. Now triple that amount. That is the equivalent of what we have in our life (actually we are nearing that amount). What I think to do, is take 1/3rd the amount, the original amount needed to retire, and purchase an annuity. Said annuity would pay out an amount each month sufficient to meet all needs for both of us, after taxes, without any other income sources.

Yes but you have already stated that you have all your living expenses and then some covered by the pension, ss and RE.
You keep coming round to that. If you want a belt and suspenders guarantee to cover your living expenses twice over and then still have 2x the amount needed left over then you should follow your emotions and not logic and mathematical analysis and get the annuity. All people are pointing out here is that you almost certainly don't need to and that there are alternatives.
Believe me I am not criticizing because I wrestle with these same scenarios in my own head all the time but so far have every time talked myself out of an annuity especially in these low interest rate environments.
As I said before, you have won the game and you have to go with what feels right to you.

 

[Jerry1]

Unless I’m missing something (entirely possible), that monthly amount would not be indexed to cover inflation. So, are your expenses going to decrease at the rate of inflation going forward? You said you’d rather leave it alone than take CD rates of return. I don’t think you’re getting any better real return from an annuity at this point but of course it’s all in the details of the contract.

 

[audreyh1]

Why?

52/62

Ages determines how much of a payout you get from a lifetime annuity.

Personally, if we decide to buy an annuity to cover part of our portfolio, we probably won't start until at least one of us is 75 so that we get a higher payout.

Young ages and low interest rates usually mean a much lower payout.

 

[pb4uski]

.... What I think to do, is take 1/3rd the amount, the original amount needed to retire, and purchase an annuity. Said annuity would pay out an amount each month sufficient to meet all needs for both of us, after taxes, without any other income sources.

You could do the same thing with a CD ladder and an savings account. Take that 1/3 and put the first year of payments in a savings account and set up an automatic monthly withdrawal to move the monthly payments to your checking account... then use the rest of the money to buy, 1,2,3,4,5,6 et al CDs. As the CDs mature, an amount equal to a year of payments go into the savings account and the remainder goes into the longest duration CD. Rinse and repeat and you have effectively created a similar cash flow at a reasonable return.

But the big difference... if you want or need that money you can cash out the CDs or if you both die the next day the money is still there for your heirs and charities. With the joint life annuity, if you both die the next day the money is gone and if you want or need the money then you're out of luck.

Then with the money beyond 20 years you could start buying EE savings bonds... they are guaranteed to double in 20 years which is a 3.53% rate, then after 20 years you could cash in the EE bonds and use the proceeds to fund the annual payments.

 

[OldShooter]

4nursebee, you should understand that @pb4uski was formerly an insurance company executive and in the annuity business. Around here he is a bit of a guru on fixed income investments, particularly short-term. It is from this expertise that he is advising against your annuity idea.

 

[4nursebee]

Ages determines how much of a payout you get from a lifetime annuity.

Personally, if we decide to buy an annuity to cover part of our portfolio, we probably won't start until at least one of us is 75 so that we get a higher payout.

Young ages and low interest rates usually mean a much lower payout.

Yeah, we already calculated the payout on immediate annuities.com

 

[4nursebee]

It seems like the bulk of people here are against the idea.
It seems like nobody does this, hence others can't answer about regrets.
Thank you for sharing your thoughts.

A CD ladder would not provide the monthly "income".
I appreciate the perspective of those older and wiser, including insurance folks.
For our values, I don't see how alternatives suggested would offer peace of mind.
Not sure what we will do. Might just stick with equities.

 

[Out-to-Lunch]

I am a big fan of annuities (SPIA, anyway). They have a place. For example, I think it is crazy that essentially everyone needs to understand not only how to save, but how to manage their investments and then their spenddown. AND, I think it is crazy that essentially everyone needs to plan as if they will live a long life; I would prefer that everyone regularly contribute to something like a pension or annuity, so risk-pooling can mitigate the risk of extreme longevity.

However…

As mentioned above, their place is for people whose savings are marginal, that is, they may or may not have enough (depending on how long they live). For those cases, pooling risk makes sense. But you are not in that position. You can easily bear the risk yourself.

 

[youbet]

One reason is because it's pretty difficult, maybe impossible, to purchase a SPIA these days with a COLA. Meaning the younger you are, the more time for inflation to eat away at the purchasing power of the income stream from the annuity.

Agreed.

OP's age calls for 3 or more decades of inflation protection. Despite today's low interest and inflation rates, things could be very, very different decades down the road. Stashing too much into a non-cola'd annuity at a relatively young age is opening the door to inflation risk down the road.

 

[GravitySucks]

It seems like the bulk of people here are against the idea.
It seems like nobody does this, hence others can't answer about regrets.
Thank you for sharing your thoughts.

A CD ladder would not provide the monthly "income".
I appreciate the perspective of those older and wiser, including insurance folks.
For our values, I don't see how alternatives suggested would offer peace of mind.
Not sure what we will do. Might just stick with equities.

I put about 10% of my investables into a defered SPIA back a few years ago when the 10 year treasury was yielding 2.75%. At the time most were saying rates were too low to buy a SPIA.
It started paying on my 62nd birthday. My thought when I bought it was it, along with SS at 62, would cover my essential expenses.
I might have done better leaving it invested, but maybe not. I might not have stayed at a 80/20 and 70/30 AA as long as I did. I might have panic sold during one of the few bumps in the road.
Plans have changed and I'll be waiting to 70 to take SS. I'm no where near your 90x expenses, so YMMV.
I've enjoyed the little checks I've received over the last 3 month, so no regrets.

 

[Chuckanut]

Some quick thoughts:

It does not seem crazy also does not seem necessary, but can do for peace of mind.

One idea: instead of going on one fell swoop, maybe buy 20 percent of targeted annuity per year over 5 years. Likely would get better rates as they rise.

You might want to talk to an advisor. I wonder if individual annuities might be cheaper with your age differences. Also, could explore strategies to make sure you can mitigate risk of early death resulting in a complete loss of investment.

Taking some off the table is always good.

I agree with buying separate smaller annuities. Rates of return may go up.

You might consider making one of those annuities a COLA'd annuity offered by Uncle Sam. IOW, since it sounds like you don't need to take SS at full retirement age or earlier, take it at 70. You get an increase over full retirement age and a COLA.

 

[copyright1997reloaded]

When I look at my own situation (which is somewhat like the OP's), I find that:
1) With mega-corp non-inflation-indexed pension plus social security (indexed), I have my normal spending needs met (house over my head, food, transportation, ...)
2) My portfolio is about 55% equities/43% fixed/ 2% other. On the fixed side, about 20% of it is inflation adjusted and 80% CD's. The 2% is in precious metals. So, between pension, social security and cash I am good to go for my expected lifetime.

Looking at this, my biggest exposure is inflation, not loss of $ in equities. All of the equity could be wiped out without requiring me to eat rice and beans (or worse) for the remaining days...but hyperinflation? That's another story as my pension (annuity) would quickly lose its purchasing power.

That's why I believe if one has exceeding winning the FI game, they still need to keep a decent slug in equities. It is also why I've been slowly but steadily working on the 2% (precious metals) as a potential doomsday inflation hedge.

So that puts me in the crowd of saying if you are going to go the annuity route, $ cost average into them over a decent chunk of time (e.g. 10 years). Or, up the cash equivalent portion to cover more spending years - but then look at your other holdings with an eye to how well they might do if cash were NOT king (e.g. falling fiat currency scenarios).

 

[OldShooter]

... For our values, I don't see how alternatives suggested would offer peace of mind. Not sure what we will do. Might just stick with equities.

With respect, I can't figure out what you are saying here. If you're looking for increased peace of mind, how does "sticking with equities" help with that? Usually people looking for more peace of mind, aka better sleeping, reduce equity holdings.

 

[LXEX55]

I respect this guy's opinion very much

 

[Trooper]

Our main expenses are easily covered by SS, pension, and RE.

A CD ladder would not provide the monthly "income".

In your initial post you stated your income needs were covered; that's why you received suggestions for CDs.

IMO the big downsides to an annuity don't apply to you:
- loss of principal due to an earlier than expected death thus leaving less for your heirs
- loss of control of your money by handing it over to an insurance company - which ironically makes it uninsured.

Why not the best of both worlds - purchase a variable annuity invested in equities? That gives you an equity position to cover inflation, and the ability to annuitize down the road when rates are (maybe) better. They're higher cost but doesn't seem like that would impact you.

PS I'm not by any means a variable annuity proponent, but VAs are the only way I know to get an annuity invested in equities.

 

[capjak]

A couple thoughts as I did not read all the responses:

1. Nothing wrong with taking a percentage and putting it in an Single Premium Annuity, maybe allow you to feel free to spend more (as you have 90x expenses)
2. Buying several over a few years rather than all at once might work
3. With the market at what some people believe is high (PE ratios etc..) it might be a good time to buy....interest rates have less impact than life expectancy on annuities (having someone 10 years younger impacts the joint payout quite bit). Maybe buy one for the 62 year old with cash refund upon death or installment refund upon death.

4. Don't use Fidelity or schwa for the annuity go to stan the annuity man or immediate annuities better rates

 

[pb4uski]

I respect this guy's opinion very much ...

Interesting point that it takes you a long time to "make" money... if the payout rate is 4% then for the first 25 years the insurer is just returning your premium to you... it isn't until the 26th year that you are collecting any interest... so that would be 81 for a 55 year old.

That reminds me... my BIL's mom had a VOYA deferred annuity that was earning next to nothing. We ended up surrendering it crossing tax years... a surrender for 1/2 the gain in Dec and then the other 1/2 of the gain and basis in Jan... that spread the gain over two tax years so she didn't have to pay taxes on the gain in her situation.

We put the proceeds into Wellesley and set up an automatic monthly redemption with the proceeds going to her checking account. She was happy as a clam.

Years later, she had to go into a nursing home and I found out that there was a bit of confusion because she and her daughter were referring to it as her Vanguard "annuity" even though it wasn't really an annuity... but it worked very well for her.