Poll: Annuities and retirement

[chinaco]

I have been looking into different strategies for funding our retirement if DW and I ER @ 55.

I will have a small fixed annuity pension @ 55 (no cola). DW and I both will have Social Security. We will probably begin taking DW SS @ 62 and delay mine until 66.5 (to get full amount).

While these income streams will help support us, they are inadequate once one of us passes on. I was considering taking a portion of our assets and purchasing a fixed annuity (joint survivor) with a 3% adjustment (for inflation). This would ensure that no matter what, we would have a base income for the rest of our lives even if the protfolio ran out of money later in life.

Please post and comments.

 

[Robert the Red]

Based on various threads here and elsewhere, I intend to "wait and see". In early stages of retirement, we'll be drawing down our taxable accounts. We'll see how that goes for a while, and how the investments perform, and then maybe annuitize some of the TIAA-CREF holdings. Or maybe not. Depends on how we feel after 5-6 years in retirement.

 

[rs0460a]

Actually, DW/me will be "converting" 20% of our joint retirement portfolio to annuities (10% fixed, 10% variable immediate annuities) in a few months.

Analysis of our cash flow (using Fidelity's Retirement Income Planner <e.g. "RIP" >) shows that this will increase our "estate gross worth" (and ensure our ongoing income) while removing the "flux" that we see (both positive and negative) within the market place.

As a "checkpoint" (against the 4% withdraw target), our withdrawal at age 67 (first full year of our SS, that we will be getting, even if we are retiring at age 59) shows a rate of .23% (yes, that is less than one quarter of 1%; we will not be at the 4% rate till age 88).

Are annuities for everybody? Of course not. Each must "measure" what impact they will have to their plan (disclaimer on our plan is that we have no "subsequent generation" to fund - our residual estate will go to charity).

- Ron

 

[cute fuzzy bunny]

Wow, so the people who sell you annuities have a planning tool that says that buying them is a good idea.

What are the odds?

 

[rs0460a]

Wow, so the people who sell you annuities have a planning tool that says that buying them is a good idea.

What are the odds?

Can't bait me that easily...

 

[cute fuzzy bunny]

Says who?

 

[crazy connie]

Perhaps the options should have include NO WAY IN HELL for those of us who feel they are only meant to fleece us and enrich the saleperson and insurance company

 

[Cut-Throat]

Perhaps the options should have include NO WAY IN HELL for those of us who feel they are only meant to fleece us and enrich the saleperson and insurance company

I take it you don't buy any of that Health Insurance, Auto Insurance, Home Owners Insurance and Life Insurance crap for the same reason either?

 

[Khan]

I am considering taking a certain amount of my TSP as an immediate annuity when I hit 60.

 

[unclemick]

Hmmm - I think I have mine via a small non cola pension and early SS. Now if things get chewy due to inflation in out years or it starts to look like I may not croak on time at 84.6 - may consider annuitizing some in my old age.

heh heh heh

 

[crazy connie]

I take it you don't buy any of that Health Insurance, Auto Insurance, Home Owners Insurance and Life Insurance crap for the same reason either?

I do buy those lines because I understand the benefit and value. Annuities are just far too biased in my opinion for the enrichment of the sales team and ins company. When you buy other lines you get rated on how good or bad a risk you are but all of the info I have seen on annuities are rose colored scenarios of living to 95 to see a positive return on the investment. I do believe in the protection of insurance coverage, just not annuities which are very expensive and limited in returns for the vast majority of the purchasers.

 

[jdw_fire]

I do buy those lines because I understand the benefit and value.

The benefit of Home owners insurance is you get paid if your house burns down or you are covered if someone has an accident on your property that you are liable for. If these things don't happen you are just paying money for a comfortable feeling. This "investment" only pays off if something bad happens to you. (Don't get me wrong you need this type of insurance.)

Well an an immediate annuity is longevity insurance not an investment. It is different from the other types of insurance mentioned as it starts paying immediately. Now granted it doesn't become a good "investment" until you live past your life expectancy, however it can allow you to spend more money every year after you buy it than you would if you were self annuitizing at a SWR.

Annuities are just far too biased in my opinion for the enrichment of the sales team and ins company.

More than the other types of insurance? Have you checked the low fee companies like Vanguard?

all of the info I have seen on annuities are rose colored scenarios of living to 95 to see a positive return on the investment.

First, remember that annuities ARE insurance and the rate of return on this insurance is better than a lot on other insurance unless you are unlucky enough to need them (or since we are talking about returns would it be lucky enough to need them).

Second, what data do you have that you have to be "95 to see a positive return on the investment"?

I do believe in the protection of insurance coverage, just not annuities which are very expensive and limited in returns for the vast majority of the purchasers.

What data do you have that annuities are "expensive and limited in returns for the vast majority of the purchasers"? How do you define expensive? What do you mean by limited in returns?

It sounds like you or someone you know has been burned by an annuity salesman and now at the very word annuity you flinch. Despite what a lot of posters on this board say immediate annuities do make sense for some (maybe even a lot) of retirees, especially the ones who retire without a pension. When I made this post http://early-retirement.org/forums/index.php?topic=7503.msg136091#msg136091 I used the FIRST situation (a 60yo couple) that came to mind and when I tried it it showed the value of the annuity. I didn't need to do alot of trial and error to find a situation that worked out reasonably well. All I am saying is check them out for yourself, get the data, do the math, and see how it works for you. If they don't work for you now remember they work better the older you are so look again later. And remember that annuities are longevity insurance, if you buy one you are insuring your income for life.

 

[chinaco]

Perhaps the options should have include NO WAY IN HELL for those of us who feel they are only meant to fleece us and enrich the saleperson and insurance company

This is a complex subject and the decision depends on your specific needs.

I have a simple goal that requires some complex manuvering. We have accumulated a nest egg. When we ER, how can I maximize my spending in the early (young) years of retirement and not go broke. We are not planning to leave a large inheritance to anyone. For our situation... We would be better-off dying with a Zero balance and enjoying the money (i.e., spend it). If I have accumulated this money by dilligently saving over 30 years, I want to enjoy it. I cannot enjoy it if I cannot spend it and sleep at night.

I am trying to figure out is how can I ensure that we have a basic income stream (minimum amount) to support our needs for the rest of our lives and feel free to spend most of the rest in the age range from (55-75)... Carpe Deim.

This topic is aside from Health Insurance and LTC needs... I think we have those covered already.

I could try to construct my own annuity with a Bond ladder using TIPS, but we might out live the assets. An annuity from an insurance company ensures that the income stream will survive if we live to an old age.

You are correct, if we decide to buy an annuity... we will pay for it and an agent will probably get a commission.

To meet our needs, I was thinking of an annuity to supplement SS and my pension. An annuity for about $25k with a Cola of 3%. I have not checked thoroughly, but the cost of a SPIA Joint life annuity for that amount appears to be about 400k if it begins @ 55. Obviously it is less if we waited till 65 to purchase the annuity. Late expenses of the last surviving spouse could be handle using the house as an asset... I am talking late in the game (80 - 95 age range).

Any other ideas on how to deal with this issue other than SWR and continuing to hold a large portfolio at death?

 

[Mysto]

How about "self-annuity"? I have created a 10 year CD ladder for the first 10 years of retirement. It acts the same as a purchased annuity except it has my calculated step up and the return is better than any annuity I investigated.

It does create a better chance of portfolio survival according to my figures on firecalc and it helps me to withstand the downs in the market so I can sleep at night. And unlike insurance it is FDIC insured.

 

[chinaco]

How about "self-annuity"? I have created a 10 year CD ladder for the first 10 years of retirement. It acts the same as a purchased annuity except it has my calculated step up and the return is better than any annuity I investigated.

It does create a better chance of portfolio survival according to my figures on firecalc and it helps me to withstand the downs in the market so I can sleep at night. And unlike insurance it is FDIC insured.

Could you provide a little more detail? Are you spending down the CDs as they mature or are you just spending the interest?

 

[Cut-Throat]

How about "self-annuity"? I have created a 10 year CD ladder for the first 10 years of retirement. It acts the same as a purchased annuity except it has my calculated step up and the return is better than any annuity I investigated.

It does create a better chance of portfolio survival according to my figures on firecalc and it helps me to withstand the downs in the market so I can sleep at night. And unlike insurance it is FDIC insured.

I doubt it! - And here is why. An immediate annuity from Vanguard has about 5.35% SWR (edit - Purchased at age 70) with Cola Adjustment. If you could do that with CDs, I would never invest with the Stock Market. And what does the first 10 years of retirement have to do with an Immediate annuity where you are more concerned with the last 10 years of retirement?

Let's see your detail.

 

[cute fuzzy bunny]

An immediate annuity from Vanguard has about 5.35% SWR with Cola Adjustment.

Hmmm, I was pretty sure the vanguard product gave one about a 3.5% swr with cola adjustment, but I tend to struggle a bit with these complex math problems. After all, if it actually gave you 5.35% with a cola adjustment, not only would everyone on this board be talking about buying the product, I'd be fully behind it as well.

Any other ideas on how to deal with this issue other than SWR and continuing to hold a large portfolio at death?

The thing most people dont get when they throw out the woeful notion of dying without spending it all is that if you look at the detailed firecalc runs, in many of the instances you dang near run out of money at the end or sometime during the cycle.

The cockamamie ideas to avoid this usually include 3 or more assumptions, of which 2 or more will probably fail on you or not become relevant.

The ideal choice is to make the desirable side of the equation as liberal as possible to account for all the holes in it, and make the undesirable side as conservative as possible, making it..quite literally..a 'no brainer'.

Its that financially conservative to financially liberal backflip in mid analysis to support the emotional decision that always fills me with admiration.

 

[chinaco]

The cockamamie ideas to avoid this usually include 3 or more assumptions, of which 2 or more will probably fail on you or not become relevant.

The ideal choice is to make the desirable side of the equation as liberal as possible to account for all the holes in it, and make the undesirable side as conservative as possible, making it..quite literally..a 'no brainer'.

Its that financially conservative to financially liberal backflip in mid analysis to support the emotional decision that always fills me with admiration.

Can you elaborate on the 3 assumptions?

 

[donheff]

Hmmm, I was pretty sure the vanguard product gave one about a 3.5% swr with cola adjustment, but I tend to struggle a bit with these complex math problems. After all, if it actually gave you 5.35% with a cola adjustment, not only would everyone on this board be talking about buying the product, I'd be fully behind it as well.

I haven't gone and run the numbers recently, but after one of the earlier battles about this I ran the Vanguard COLAd numbers and they were well over 4% with age late 50s. Like several posters here I continue to toy with the idea of putting about 20% in an SPIA and I already have a Federal pension! It is all about ensuring a particular income stream. I don't see it as an investment. By way of comparison with other insurance, DW and I both carried $1.5M in term insurance for years. We never expected to see a penny of return and didn't. So that is insurance with a hoped for and expected 100% loss - but well worth it for piece of mind.

If Brewer could find me an insurance company "guaranteed" to deliver on an inflation protected SPIA, I would be even more inclined to go for it.

 

[W2R]

I am considering taking a certain amount of my TSP as an immediate annuity when I hit 60.

I'm thinking of taking part (maybe 25%?) of my TSP as an immediate fixed lifetime annuity, maybe with inflation protection. The Metlife annuity offered to civilian TSP participants by the govt seems like a very good deal, though I'm not sure you can get it at any other time than when you retire and make your first withdrawal.

If we have runaway inflation for a while, the value of our pension, social security, and lifetime annuities could drop to half what they are worth now since all of them have a cola cap. So, I'm also trying to save extra to put into mutual funds which might grow enough to combat severe inflationary pressures. Still working out all the kinks in this part of the plan.

How about "self-annuity"? I have created a 10 year CD ladder for the first 10 years of retirement. It acts the same as a purchased annuity except it has my calculated step up and the return is better than any annuity I investigated.

It does create a better chance of portfolio survival according to my figures on firecalc and it helps me to withstand the downs in the market so I can sleep at night. And unlike insurance it is FDIC insured.

Now, if only I could create a lifetime length CD ladder at a better rate than the Metlife annuity....

 

[Cut-Throat]

Hmmm, I was pretty sure the vanguard product gave one about a 3.5% swr with cola adjustment, but I tend to struggle a bit with these complex math problems. After all, if it actually gave you 5.35% with a cola adjustment, not only would everyone on this board be talking about buying the product, I'd be fully behind it as well.

Well, we have common ground here. I agree, If you could only get 3.5% I would not be interested at all. Keep In mind, I am talking about someone that is 70 years of age. I would not buy one until I reached age 70. At this age the SWR is over 5.3% - Which would be more attractive than watching the Stock Market and wondering when it might bounch back after a down turn.

 

[donheff]

CFB's right. I ran it again and at 58 (DW 54) with inflation protection and 100% survivor it is a bit over 3.5%. My earlier calculations were based on speculation about buy one at age 65.

 

[cute fuzzy bunny]

Can you elaborate on the 3 assumptions?

A couple from memory, and my coffee hasnt set in yet:

- I will live to be 100 or 120
- Inflation will affect me exactly in time with the CPI
- I will leave a brazillion dollars to nobody if I maintain a 4% SWR
- The insurance company wont go broke or default on the annuity during the course of 40/50/60 years
- Annuities for 40+ year payout periods are "almost risk free" or "practically guaranteed"
- I wont want/need/enjoy money when i'm 80+
- I wont want/need/enjoy special care, long term care or have some other need for the principal that I'm surrendering

I could go on for quite a while.

To be sure, an income stream, even a small one, can affect ones SWR dramatically...even if the income stream isnt due until decades in the future.

However, using a bad investment to produce the income stream and assigning it attributes that it doesn't really have isnt my idea of a good solution.

THAT having been said, theres a balancing act between quality of life and safety that everyone has to make for themselves and live with. If an annuity makes you feel better about improving your quality of life (or perceptions thereof), whether its effective or not in its implied benefits...you're gonna do it no matter what the data says.

But dont BS me with overinflated return rates, fallacious assumptions and loaded scenarios.

As far as not buying the annuity until you're 70...gosh, might have been helpful to include that in the original statement...my bet is that an ER that makes it to 70 on their own investing merits and has enough of a portfolio to consider the option isnt going to be too interested at that point in an annuity.

But let us know how that works out.

 

[cute fuzzy bunny]

CFB's right. I ran it again and at 58 (DW 54) with inflation protection and 100% survivor it is a bit over 3.5%. My earlier calculations were based on speculation about buy one at age 65.

There ya go.

So put your 'income allocation' in wellesley or target retirement income, take your 4-4.5% yield, enjoy the (historic) additional 4+% aggregate capital gains that will offset average inflation, have your principal to fall back on if you meet a dire need, and if you get to 70 and want a 5.5%+ return, start taking an extra 2% from your principal.

A lot of upside, not really much downside.

 

[chinaco]

But dont BS me with overinflated return rates, fallacious assumptions and loaded scenarios.

...

Not sure if you shifted your response from me to another poster

I am in the early stages of trying to figure it out. My basic goal is to maximize my spending in early ER years and still have a reasonably high level of confidence that we can maintain an acceptable lifestyle in later years 75+.


This seems like a reasonable goal and I suspect that a good solution exists. I know from observing my parents and relatives (plus reading)... Most of us spend less when we get older (excluding chronic or catastrophic health care costs).