Annuitize or Not? I say not necessarily

[joedil]

Just wanted to share with readers my experience with a couple of my retirement accounts and the question of annuitizing and getting a guaranteed benefit.

I retired at age 58, am now 68 years old. I have several retirement accounts (Reg IRA $410K, Roth IRA$ 250K, a 457 B $288K, SEP IRA $10K, and a TIA-CREF Account $70K. I also get a state government pension.

On two of my accounts, the 457B and TIAA-CREF, it was suggested that I annuitize my benefit when I started dipping into these accounts in order to receive a guaranteed amount. I chose not to, and I am very glad I did.

On the 457B, when I "retired" at age 58, the account was valued at $233K. I started taking money out of it at age 60, but did not annuitize and kept the money invested, mostly in the stock market (though about 25% was "guaranteed" and more conservative. Over the last 8 years, I have taken out about $120,000, but thanks to the stock market, that $233K has grown to $288K despite my pulling $125K out of it. Had I annuitized, I would only have about $125K or so left.

Same thing with the TIAA-CREF account -- when I retired, it was worth $70K.
I have pulled out about $30K over the last few years, but I did not annuitize and kept it invested -- the account is still worth about $70K - last time I checked it was $72K.

Obviously, these accounts will plummet with the next stock market dip, but if you are faced with a similar decision, think twice about annuitizing your accounts.....it may cost you big time....

 

[friar1610]

Thanks for your insights. I’ve had a VA for a long time that appreciated very nicely (although if I could walk that dog back, I wouldn’t buy it again). I 1035’d it from VG it to a more conservative, fixed deferred annuity a couple of years ago. It’s now valued just south of $300K. (Basis is about $70K.) I/we don’t really need the income now but my wife may if I predecease her. I’ve always thought she could annuitize it in that case. But, at 75/74, respectively, it may be smarter for her to take annual withdrawals as needed. That might give her what she needs and still leave some for the kids. So thanks for giving me something to cogitate on.

 

[Out-to-Lunch]

Yes, retiring at the commencement of a record bull market does indeed favor investing in equities!

 

[pb4uski]

Exactly what I was thinking.

 

[DektolMan]

My wife and I each have a Vanguard (Transamerica) annuity and we are each taking systematic monthly withdrawals. We can increase the amount in years the investments do well or stop it in a down market. The income from these annuities along with our IRa's, Roth's, and Social Security makes for a well diverse income stream in retirement.

 

[Athermos4u]

Just wanted to share with readers my experience with a couple of my retirement accounts and the question of annuitizing and getting a guaranteed benefit.

I retired at age 58, am now 68 years old. I have several retirement accounts (Reg IRA $410K, Roth IRA$ 250K, a 457 B $288K, SEP IRA $10K, and a TIA-CREF Account $70K. I also get a state government pension.

On two of my accounts, the 457B and TIAA-CREF, it was suggested that I annuitize my benefit when I started dipping into these accounts in order to receive a guaranteed amount. I chose not to, and I am very glad I did.

On the 457B, when I "retired" at age 58, the account was valued at $233K. I started taking money out of it at age 60, but did not annuitize and kept the money invested, mostly in the stock market (though about 25% was "guaranteed" and more conservative. Over the last 8 years, I have taken out about $120,000, but thanks to the stock market, that $233K has grown to $288K despite my pulling $125K out of it. Had I annuitized, I would only have about $125K or so left.

Same thing with the TIAA-CREF account -- when I retired, it was worth $70K.
I have pulled out about $30K over the last few years, but I did not annuitize and kept it invested -- the account is still worth about $70K - last time I checked it was $72K.

Obviously, these accounts will plummet with the next stock market dip, but if you are faced with a similar decision, think twice about annuitizing your accounts.....it may cost you big time....

I'm not a fan of commercially offered annuities, the sales guys all seem to drive nicer cars than mine. Plus, I already have a no load, fixed rate annuity that guarantees an 8 percent return, and inflation indexing. It's my Social Security. I can determine the payout income stream by selecting the age at which I want to begin. I use my other, variable, no load investments to give me the income mix and risk profile I desire.

 

[VanWinkle]

I'm not a fan of commercially offered annuities, the sales guys all seem to drive nicer cars than mine. Plus, I already have a no load, fixed rate annuity that guarantees an 8 percent return, and inflation indexing. It's my Social Security. I can determine the payout income stream by selecting the age at which I want to begin. I use my other, variable, no load investments to give me the income mix and risk profile I desire.

Good point Athermos4u!!!

 

[pb4uski]

... Plus, I already have a no load, fixed rate annuity that guarantees an 8 percent return, and inflation indexing. It's my Social Security. I can determine the payout income stream by selecting the age at which I want to begin. ...

Good point Athermos4u!!!

NO! Bad point!

An 8% return from Social Security is a popular misconception and urban myth. Many people believe that if you defer from FRA to age 70 that you get a guaranteed 8% return. Wrong.

What is true is that for each year that you defer after your FRA that you benefit increases by 8%... and the 8% is simple, not compounded. So if your FRA is 66 and you defer until you are 70 your age 70 benefit would be 132% of your PIA (FRA age benefit). If your FRA is 67 and you defer until you are 70 your age 70 benefit would be 124% of your PIA.

The return depends on how long you live and isn't positive until you pass the breakeven point... then the returns grow slowly and are pretty attractive if you live long. Below is a table that shows the "return" based on the internal rate of return of the differential cash flows assuming various attained ages.
Keep in mind that these are real returns since the benefits will increase each year due to inflation. So the nominal return could approach 8% if you live long, but if you don then the return might well be negative.

That said, I plan to defer until 70, not for the "return" but because deferring SS is an opportunity to buy a COLA-adjusted annuity... longevity insurance... on the cheap.

	FRA is 66					FRA is 67
Age	Claim at 66	Claim at 70	Diff	IRRs (real)		Claim at 67	Claim at 70	Diff	IRRs (real)
66	100		-100	N/A					N/A
67	100		-100	N/A		100		-100	N/A
68	100		-100	N/A		100		-100	N/A
69	100		-100	N/A		100		-100	N/A
70	100	132	32	N/A		100	124	24	N/A
71	100	132	32	N/A		100	124	24	N/A
72	100	132	32	N/A		100	124	24	N/A
73	100	132	32	N/A		100	124	24	N/A
74	100	132	32	N/A		100	124	24	N/A
75	100	132	32	N/A		100	124	24	N/A
76	100	132	32	-9.8%		100	124	24	-10.6%
77	100	132	32	-7.0%		100	124	24	-7.6%
78	100	132	32	-4.8%		100	124	24	-5.2%
79	100	132	32	-3.1%		100	124	24	-3.3%
80	100	132	32	-1.7%		100	124	24	-1.8%
81	100	132	32	-0.5%		100	124	24	-0.5%
82	100	132	32	0.5%		100	124	24	0.5%
83	100	132	32	1.3%		100	124	24	1.4%
84	100	132	32	2.0%		100	124	24	2.1%
85	100	132	32	2.6%		100	124	24	2.7%
86	100	132	32	3.1%		100	124	24	3.2%
87	100	132	32	3.5%		100	124	24	3.7%
88	100	132	32	3.9%		100	124	24	4.1%
89	100	132	32	4.2%		100	124	24	4.4%
90	100	132	32	4.5%		100	124	24	4.8%
91	100	132	32	4.8%		100	124	24	5.0%
92	100	132	32	5.0%		100	124	24	5.3%
93	100	132	32	5.2%		100	124	24	5.5%
94	100	132	32	5.4%		100	124	24	5.7%
95	100	132	32	5.6%		100	124	24	5.8%
96	100	132	32	5.7%		100	124	24	6.0%
97	100	132	32	5.8%		100	124	24	6.1%
98	100	132	32	6.0%		100	124	24	6.2%
99	100	132	32	6.1%		100	124	24	6.3%
100	100	132	32	6.2%		100	124	24	6.4%

 

[flintnational]

^^^pb4uski, excellent information as usual. I understand the point about the 8% not being compounded. Can you clarify my understanding of the cola and delaying benefits? I am unsure if you get the cola and the 8% per year or just the 8%. IOW, to get the real return, does the 8% need to be net of the cola you would have received had you taken the benefit at FRA?

Thanks

 

[pb4uski]

^^^pb4uski, excellent information as usual. I understand the point about the 8% not being compounded. Can you clarify my understanding of the cola and delaying benefits? I am unsure if you get the cola and the 8% per year or just the 8%. IOW, does the 8% need to be net of the cola you would have received had you taken the benefit at FRA?

Thanks

My understanding is that you get both. So for example, if your PIA was $100 at FRA of 66 and COLA was 2% each year and you delay to 70 then your base would be ~$108.24 [$100*(1+2%)^(70-66)] and then you would get 132% of that so you age 70 benefit would be ~$142.88 [$108.44*132%).

 

[flintnational]

^^^Thank you.

 

[Athermos4u]

NO! Bad point!

An 8% return from Social Security is a popular misconception and urban myth. Many people believe that if you defer from FRA to age 70 that you get a guaranteed 8% return. Wrong.

What is true is that for each year that you defer after your FRA that you benefit increases by 8%... and the 8% is simple, not compounded. So if your FRA is 66 and you defer until you are 70 your age 70 benefit would be 132% of your PIA (FRA age benefit). If your FRA is 67 and you defer until you are 70 your age 70 benefit would be 124% of your PIA.

The return depends on how long you live and isn't positive until you pass the breakeven point... then the returns grow slowly and are pretty attractive if you live long. Below is a table that shows the "return" based on the internal rate of return of the differential cash flows assuming various attained ages.
Keep in mind that these are real returns since the benefits will increase each year due to inflation. So the nominal return could approach 8% if you live long, but if you don then the return might well be negative.

That said, I plan to defer until 70, not for the "return" but because deferring SS is an opportunity to buy a COLA-adjusted annuity... longevity insurance... on the cheap.

	FRA is 66					FRA is 67
Age	Claim at 66	Claim at 70	Diff	IRRs (real)		Claim at 67	Claim at 70	Diff	IRRs (real)
66	100		-100	N/A					N/A
67	100		-100	N/A		100		-100	N/A
68	100		-100	N/A		100		-100	N/A
69	100		-100	N/A		100		-100	N/A
70	100	132	32	N/A		100	124	24	N/A
71	100	132	32	N/A		100	124	24	N/A
72	100	132	32	N/A		100	124	24	N/A
73	100	132	32	N/A		100	124	24	N/A
74	100	132	32	N/A		100	124	24	N/A
75	100	132	32	N/A		100	124	24	N/A
76	100	132	32	-9.8%		100	124	24	-10.6%
77	100	132	32	-7.0%		100	124	24	-7.6%
78	100	132	32	-4.8%		100	124	24	-5.2%
79	100	132	32	-3.1%		100	124	24	-3.3%
80	100	132	32	-1.7%		100	124	24	-1.8%
81	100	132	32	-0.5%		100	124	24	-0.5%
82	100	132	32	0.5%		100	124	24	0.5%
83	100	132	32	1.3%		100	124	24	1.4%
84	100	132	32	2.0%		100	124	24	2.1%
85	100	132	32	2.6%		100	124	24	2.7%
86	100	132	32	3.1%		100	124	24	3.2%
87	100	132	32	3.5%		100	124	24	3.7%
88	100	132	32	3.9%		100	124	24	4.1%
89	100	132	32	4.2%		100	124	24	4.4%
90	100	132	32	4.5%		100	124	24	4.8%
91	100	132	32	4.8%		100	124	24	5.0%
92	100	132	32	5.0%		100	124	24	5.3%
93	100	132	32	5.2%		100	124	24	5.5%
94	100	132	32	5.4%		100	124	24	5.7%
95	100	132	32	5.6%		100	124	24	5.8%
96	100	132	32	5.7%		100	124	24	6.0%
97	100	132	32	5.8%		100	124	24	6.1%
98	100	132	32	6.0%		100	124	24	6.2%
99	100	132	32	6.1%		100	124	24	6.3%
100	100	132	32	6.2%		100	124	24	6.4%

Thank you for fact checking my math. Here was my point, "That said, (removed) SS is an opportunity to buy a COLA-adjusted annuity... longevity insurance... on the cheap."

 

[TheWizard]

I annuitized a PORTION of my TIAA-CREF accumulation at start of retirement in 2013, age 63.
Rather than have too much income "guaranteed", the majority of my annuity income is based on commercial real estate (TREA) along with some based on the broad stock market (CREF Stock).

So my monthly income the past eight years has gone up nicely, outpacing inflation.

I started SS 12 months ago at age 70 and am now in the pleasant situation where my monthly income from SS and my payout phase annuities exceeds my expenditures by a few thousand dollars per month.
Now some of that excess is because of recreational travel being disallowed for the past year.

Nonetheless, my investment portfolio as a single person is nicely over $1M at present and with that additional money going into stock index funds each month, significant growth is possible in coming years.

Note: I do plan to withdraw $40k from my portfolio in a year or two for a new car.

So, yeah, I'm wholeheartedly content with my retirement income situation...

 

[VanWinkle]

NO! Bad point!

An 8% return from Social Security is a popular misconception and urban myth. Many people believe that if you defer from FRA to age 70 that you get a guaranteed 8% return. Wrong.

What is true is that for each year that you defer after your FRA that you benefit increases by 8%... and the 8% is simple, not compounded. So if your FRA is 66 and you defer until you are 70 your age 70 benefit would be 132% of your PIA (FRA age benefit). If your FRA is 67 and you defer until you are 70 your age 70 benefit would be 124% of your PIA.

The return depends on how long you live and isn't positive until you pass the breakeven point... then the returns grow slowly and are pretty attractive if you live long. Below is a table that shows the "return" based on the internal rate of return of the differential cash flows assuming various attained ages.
Keep in mind that these are real returns since the benefits will increase each year due to inflation. So the nominal return could approach 8% if you live long, but if you don then the return might well be negative.

That said, I plan to defer until 70, not for the "return" but because deferring SS is an opportunity to buy a COLA-adjusted annuity... longevity insurance... on the cheap.

	FRA is 66					FRA is 67
Age	Claim at 66	Claim at 70	Diff	IRRs (real)		Claim at 67	Claim at 70	Diff	IRRs (real)
66	100		-100	N/A					N/A
67	100		-100	N/A		100		-100	N/A
68	100		-100	N/A		100		-100	N/A
69	100		-100	N/A		100		-100	N/A
70	100	132	32	N/A		100	124	24	N/A
71	100	132	32	N/A		100	124	24	N/A
72	100	132	32	N/A		100	124	24	N/A
73	100	132	32	N/A		100	124	24	N/A
74	100	132	32	N/A		100	124	24	N/A
75	100	132	32	N/A		100	124	24	N/A
76	100	132	32	-9.8%		100	124	24	-10.6%
77	100	132	32	-7.0%		100	124	24	-7.6%
78	100	132	32	-4.8%		100	124	24	-5.2%
79	100	132	32	-3.1%		100	124	24	-3.3%
80	100	132	32	-1.7%		100	124	24	-1.8%
81	100	132	32	-0.5%		100	124	24	-0.5%
82	100	132	32	0.5%		100	124	24	0.5%
83	100	132	32	1.3%		100	124	24	1.4%
84	100	132	32	2.0%		100	124	24	2.1%
85	100	132	32	2.6%		100	124	24	2.7%
86	100	132	32	3.1%		100	124	24	3.2%
87	100	132	32	3.5%		100	124	24	3.7%
88	100	132	32	3.9%		100	124	24	4.1%
89	100	132	32	4.2%		100	124	24	4.4%
90	100	132	32	4.5%		100	124	24	4.8%
91	100	132	32	4.8%		100	124	24	5.0%
92	100	132	32	5.0%		100	124	24	5.3%
93	100	132	32	5.2%		100	124	24	5.5%
94	100	132	32	5.4%		100	124	24	5.7%
95	100	132	32	5.6%		100	124	24	5.8%
96	100	132	32	5.7%		100	124	24	6.0%
97	100	132	32	5.8%		100	124	24	6.1%
98	100	132	32	6.0%		100	124	24	6.2%
99	100	132	32	6.1%		100	124	24	6.3%
100	100	132	32	6.2%		100	124	24	6.4%

I am fully aware of the 8% not being compounded, it is closer to 6% until
after full retirement age, and it is inflation protected. That doesn't change the
fact that it is better than any annuity I have ever seen on the private market.
His point was that it would be smart to reap the full benefit of increased credits with Social Security than to take it early and invest in annuities. I'm not sure why it is a "bad point" as you describe.

 

[TheWizard]

I am fully aware of the 8% not being compounded, it is closer to 6% until
after full retirement age, and it is inflation protected. That doesn't change the
fact that it is better than any annuity I have ever seen on the private market.
His point was that it would be smart to reap the full benefit of increased credits with Social Security than to take it early and invest in annuities. I'm not sure why it is a "bad point" as you describe.

Right.
That 8% annual increase is independent from the rather low prevailing interest rate environment.

Would be interesting to see what immediate annuities dot com pays out for $100,000 at each of ages 67, 68, 69, and 70, starting this month...

 

[pb4uski]

.... I'm not sure why it is a "bad point" as you describe.

My "bad point" was in response to Athermos4u's post that SS (or I think more properly deferring SS even though the Athermos4u wasn't specific about it) provided a guaranteed 8% return and your endorsement of that fallacy as a "good point".

I never said that it is foolish to defer starting SS... I'm deferring because I think deferring is like buying a COLA-adjusted joint life annuity for much less than its fair value... but I'm under no illusion that I'm getting an 8% return.

I'm not a fan of commercially offered annuities, the sales guys all seem to drive nicer cars than mine. Plus, I already have a no load, fixed rate annuity that guarantees an 8 percent return, and inflation indexing. It's my Social Security. I can determine the payout income stream by selecting the age at which I want to begin. I use my other, variable, no load investments to give me the income mix and risk profile I desire.

Good point Athermos4u!!!

 

[VanWinkle]

My "bad point" was in response to Athermos4u's post that SS (or I think more properly deferring SS even though the Athermos4u wasn't specific about it) provided a guaranteed 8% return and your endorsement of that fallacy as a "good point".

I never said that it is foolish to defer starting SS... I'm deferring because I think deferring is like buying a COLA-adjusted joint life annuity for much less than its fair value... but I'm under no illusion that I'm getting an 8% return.

You made your point, bluntly. The SS increase is 8% and I agree that the wording "return" is poor wording. You might use a feather instead of a hammer next time........

 

[pb4uski]

Fair point... but when I see people claim that deferring is an 8% return so often where it is clearly not if they would give it just a few seconds of thought it gets annoying after a while.

 

[pb4uski]

... Would be interesting to see what immediate annuities dot com pays out for $100,000 at each of ages 67, 68, 69, and 70, starting this month...

I'm not sure it will be much different.... the monthly payment for a $100k premium, 20 year annuity certain at 0.5% is $438/month and the same at 1.5% is $483/month.

 

[TheWizard]

I'm not sure it will be much different.... the monthly payment for a $100k premium, 20 year annuity certain at 0.5% is $438/month and the same at 1.5% is $483/month.

I'm not sure what those 0.5% and 1.5% numbers mean.
And a 20 year guarantee period is too long, imo, and lessens the mortality credit effect.

If I wasn't so lazy, I'd do my own research on this, but I've got other stuff to do...

 

[bada bing]

Commercial annuity payout rates are based on the "segment rates". We are just off of historically low interest rates. That makes this a historically very disadvantageous time to annuitize. The relative return between equities and bonds is artificial skewed to the extreme. If deferral terms are good, that's what I would do (and I am doing.) My last remaining pension has good terms for deferral (guaranteed 5%). I hope that interest rates will creep up over the next 8 years and I can get a better payout as well as some mortality credits for living those years. Otherwise, I (or my heirs) will lump sum out rather than annuitize at age 72.

Besides the low interest rates, the conventional thinking is that starting an annuity before age ~70 isn't optimal anyway.

 

[TheWizard]

Besides the low interest rates, the conventional thinking is that starting an annuity before age ~70 isn't optimal anyway.

Conventional, checko.
The reason for that is a fixed monthly amount from a "conventional" annuity could be ravaged by inflation over a 30 or 40 year timeframe.

So be unconventional, as I was, and annuitize with TIAA with a mix of commercial real estate and broad stock market funds to outpace inflation.
*shurg*

 

[pb4uski]

... If I wasn't so lazy, I'd do my own research on this, but I've got other stuff to do...

Works for me.

 

[Montecfo]

Fair point... but when I see people claim that deferring is an 8% return so often where it is clearly not if they would give it just a few seconds of thought it gets annoying after a while.

I will use a very light touch and just say that PB4 is highlighting one of the most often repeated false statements commonly made by financial pundits who really should know better.

It is no wonder that some people are misled by it.

 

[Athermos4u]

I will use a very light touch and just say that PB4 is highlighting one of the most often repeated false statements commonly made by financial pundits who really should know better.

It is no wonder that some people are misled by it.

Go back and read my post. I did not mention deferment of benefits, nor did I intend to. My point is that SS is an annuity we already have, that people forget about and don't take into account. Based on my additional research, the average rate of return is 5.7%, not 8% as I stated. I clearly touched a nerve. Unintentionally.