Won the game, considering an annuity

[4nursebee]

We are both retired. Assets continue to grow, we likely have three times what we need to maintain lifestyle, in other words we are approaching 90X.

I used to trade a lot, had early success. One of the pieces of advice I always respected was that during periods of success one should take money off the table and buy something, that way if failure or bad market conditions appear one has something to show for the success. I considered buying a Harley, never did. I really never bought anything, and did run into massive failure. I ended up with nothing to show for it.

Our main expenses are easily covered by SS, pension, and RE. We did a small annuity to tide us over until SS age @ 70. Assets have grown significantly since this was purchased, not once have we regretted the decision. When I retired a few months ago, we also pulled all expenses for 2021 out of the market (sold stock) calculating the amount using the VPW method. No regrets pulling this money out and missing gains either.

With such a large asset base, we are considering taking up to 1/3rd of it to purchase a joint life annuity. The payout rate without any inflation adjustments would be near 4%. I think we highly value the potential peace of mind this could bring. We could basically ignore the market the rest of our lives.

We have no kids. No legacy concerns. We would almost guaranteed be okay if we did not get the annuity.

Have any of you done this? Any regrets?
What are your thoughts?
Could peace of mind be better or otherwise obtained?

For this "problem" and your thoughts on the matter I am grateful!

 

[audreyh1]

Your ages?

 

[4nursebee]

Your ages?

Why?

52/62

 

[Car-Guy]

There are a number of "won the game threads" that you may want to read and get their perspectives, if you haven't already read them. I'm in the "won the game" boat too, and have thought about getting an IA but decided against it... I like keeping as much control over my money as I can.... I've basically set aside a couple of million in FDIC fixed assets and just don't worry about it. The rest is for investing, (speculation) hobbies and life in general.... Works for me but YMMV..

If you are in the 90X ballpark what are you concerned with? Hyperinflation, theft, temptation to spend, market crashes, etc?

 

[Montecfo]

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.

 

[4nursebee]

There are a number of "won the game threads" that you may want to read and get their perspectives, if you haven't already read them. I'm in the "won the game" boat too, and have thought about getting an IA but decided against it... I like keeping as much control over my money as I can.... I've basically set aside a couple of million in FDIC fixed assets and just don't worry about it. The rest is for investing, (speculation) hobbies and life in general.... Works for me but YMMV..

If you are in the 90X ballpark what are you concerned with? Hyperinflation, theft, temptation to spend, etc?

what is an FDIC fixed asset and what does it yield?

I'm not really concerned with anything! But, a guaranteed monthly check for the rest of our lives would improve our great peace of mind.

 

[Car-Guy]

FDIC = Federal Deposit Insurance Corporation


Basically for this discussion it's a bank CD's under 250k each at multiple banks for an example... Rates vary by bank and usually come close to keeping up with inflation... Sort of....

 

[4nursebee]

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.

We have a virtual meeting with Fidelity on 12/1. We've asked for similar meeting with Schwab to discuss this also.

 

[finnski1]

what is an FDIC fixed asset and what does it yield?

I'm not really concerned with anything! But, a guaranteed monthly check for the rest of our lives would improve our great peace of mind.

I'm sure you know this but a 4% payout rate is not the same as a return.
At 4% it will take 25 years just to get your original principal returned to you.
Probably why someone asked about your ages.
One of you will be 87 years old by the time you recoup your money, That is an iffy bet to me.
Also you said you already did a small annuity to tide you over to ss at age 70.

You have no legacy to worry about which does slightly justify an annuity a little bit more than those with a legacy to protect but still you have 90x living expenses and you are more than covered by everything else.
If all your expenses are easily covered, what would you be worried about?
Perhaps your asset allocation makes you feel anxious. Maybe you just need to analyze what allocation makes you comfortable and go with that?
Now having said all that, it seems you are in a no lose situation and if you perceive the "peace of mind" you would get with the annuity then go for it

 

[pb4uski]

The best annuity that you can buy is to defer social security and I see that is already in your plan.

Joint life annuites are to insure against longevity risk and at 90x spending, your longevity risk is negligible. I think a CD ladder or even a multi-year guaranteed annuity ladder (MYGA is the insurer version of a CD) would be a better value.

And as others have mentioned, there is a huge difference between payout rate and the implicit interest rate. For example, let's say a $100,000 10-year period certain annuity pays $850/month for 10 years. The payout rate is 10.2% [($850*12)/$100,000] but the internal rate of return in the cash flows is only 0.39% because $833 [$100.000/120 months) of each monthly benefit is just a return of your own money and only $17 is interest.

 

[njhowie]

Unfortunately, as a result of the current interest rate situation, you've picked a terrible time to consider starting an annuity. Interest rates are currently at all-time lows, and there's no reason to believe that they will go higher in the near term - they could stay at these levels for the next 5 years.

Your ages are important because if you were younger, you might have the luxury of waiting a few years before purchasing and committing to an annuity. Additionally, your ages will will factor into the equation of how much you receive monthly. The amount you receive will be a function of current interest rates and your ages - the higher current rates and your ages, the higher the monthly payout from the annuity.

You should also take a step back and consider potential alternatives. Certainly, having a monthly check for the rest of your life is enticing. However, understand that once you hand over the money for the annuity, that money is gone. If you do not live a long life, it doesn't matter, the insurance company keeps it all. You can purchase additional riders for a guaranteed minimum payout period, even if you should pass sooner rather than later, but that comes at a price, reducing the monthly distribution.

When evaluating annuities, be cognizant of the difference between "rate of return" and "distribution rate" as they are different. Distribution rate is calculated based on how much is being returned to you, which includes part of your own money and not returns generated. For any annuity, you should understand how much return (yield) is being guaranteed vs. how much is your own money being returned to you.

Bottom line, you may do (possibly much) better over the long term going with CDs, Treasuries, or other high quality fixed income vehicles compared to the annuity...or at least for a few years and then purchasing the annuity later when interest rates rise some. You could also purchase a smaller annuity right now, and then ladder them - purchasing additional smaller annuities annually going forward looking to take advantage of higher interest rates in the future. Though you may get an immediate feeling of comfort taking a big wad of money, buying the annuity, and be happy with that monthly check, you may be short-changing yourself in the long run.

There isn't a simple answer, and you should consider the alternatives seriously. It is a big financial decision you are making.

 

[DektolMan]

We considered it. Besides our Ira/Roth's at Vanguard we have an annuity. I was going to annuitize them when we turned 65 but it talking with Vanguard they said most people take systematic monthly withdrawals and let their annuity continue to grow. So we are both doing that now and still have control over our annuity investment.

 

[finnski1]

The best annuity that you can buy is to defer social security and I see that is already in your plan.

Joint life annuites are to insure against longevity risk and at 90x spending, your longevity risk is negligible. I think a CD ladder or even a multi-year guaranteed annuity ladder (MYGA is the insurer version of a CD) would be a better value.

+1 to both of your statements

 

[finnski1]

Unfortunately, as a result of the current interest rate situation, you've picked a terrible time to consider starting an annuity. Interest rates are currently at all-time lows, and there's no reason to believe that they will go higher in the near term - they could stay at these levels for the next 5 years.

It is frustrating. I think the 10 year was over 3% just a few years ago. Right now it is less than 0.9%

 

[NoiseBoy]

A quick Google search for FDIC insurance for couples returned this:
Married couples will have another option for maximizing their FDIC insurance coverage. You and your spouse each can open individual accounts at a single bank, resulting in each of you having up to $250,000 FDIC-insured. You can then also open a joint account and each have $250,000 insured in that account. Between those three accounts, you could have up to $1 million FDIC insured at one bank.

With the above limits, you could easily build a ladder of 5 year CDs that would eventually put $5 million of your portfolio under government protection. Growth would be low, but you've won the game so that's not important. This option is not very tax efficient either. If you want some diversification, take €500,000 and purchase a home in Portugal. For that price you can join their Golden Visa program and get residency status

 

[Jerry1]

The best annuity that you can buy is to defer social security and I see that is already in your plan.

Joint life annuites are to insure against longevity risk and at 90x spending, your longevity risk is negligible. I think a CD ladder or even a multi-year guaranteed annuity ladder (MYGA is the insurer version of a CD) would be a better value.

+1 to both of your statements

I also agree with both statements. Personally, I’d go the FDIC insured CD route as Car-Guy mentioned. You won’t get a good return in today’s interest market, but you’ll get the protection that seems to be your greatest concern. Buy some short to mid range CD’s and see how you feel in a few years. Rinse and repeat as desired or change strategies later, something you won’t be able to do with the annuity you proposed.

 

[4nursebee]

I would rather leave money in current investments than in FDIC low rate return vehicles.

 

[njhowie]

I would rather leave money in current investments than in FDIC low rate return vehicles.

Whatever you're comfortable with. (My) Point being, if you opt for the annuity now, you lock in to those payouts today, based on the state of the finance world today and that's not particularly good for an annuity product.

 

[ziggy29]

In the general case, annuities are usually horrible BUT for some people in the right situation and right interest rate environment, a SPIA might be a decent thing. Unfortunately, right now interest rates are terrible (unless you are a borrower!) as the War On Savers continues to be waged with the full force of the government, so the monthly payouts are terrible right now relative to the investment amounts.

I'd look for other ways to generate income and then, later on if interest rates increase considerably, look into a SPIA. But not now.

 

[finnski1]

I would rather leave money in current investments than in FDIC low rate return vehicles.

Well then it sounds like you have answered your own question,
I would do nothing right now.
You have no reason to rush this decision.

 

[kevink]

You've already received lots of great advice. I just wanted to share one of Jonathan Clements' latest columns because at 57 he's right between you and your spouse's ages and has been mulling over the same issues:

https://humbledollar.com/2020/06/farewell-yield/

Not stated in that particular column but mentioned in another recent one was his decision to start buying immediate annuities at age 60 with a portion of his fixed income position and then to add to it over the years. An "annuity ladder" if you will. Echoing the suggestions of others in this thread, it sure seems to me like that approach, whether with CD's, Treasuries or annuities - or some combination - is prudent given the current unprecedented interest rate environment.

 

[JRon]

While annuities are a safe investment vehicle, they are only as safe as the company that you purchase the annuity from. If New York Life goes belly-up so does all their annuities.

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

 

[pb4uski]

I would rather leave money in current investments than in FDIC low rate return vehicles.

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

Out of curiosity, what is the money that would have been used to buy the joint life annuity currently invested in?

 

[pb4uski]

While annuities are a safe investment vehicle, they are only as safe as the company that you purchase the annuity from. If New York Life goes belly-up so does all their annuities.

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

That's a particularly poor example. NYL is one of the strongest companies in the industry and has the highest possible ratings from S&P, Moody's, Fitch and A.M.Best... essentially all AAA. IMO negligibly different from FDIC insured.

And even if it was a less strong insurer you are ignoring state guaranty fund coverage that is functionally similar to FDIC coverage but with lower coverage limits.

https://www.newyorklife.com/newsroom/2019/new-york-life-top-financial-strength-ratings-2019

 

[Jerry1]

I would rather leave money in current investments than in FDIC low rate return vehicles.

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.