Annuitize or Not? I say not necessarily

[pb4uski]

Can you attach a link where the 5.7% comes from? It sounds plausible depending on how it is defined.

 

[lem1955]

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%).

pb4uski - I used your formula and compared to my most recent SS report from the government. According to the report my PIA at FRA 66 & 2months = $2,793. My estimate at 70 is $3,650. At 2% COLA and 130.7% delay benefit, the estimated monthly benefit at 70 would be $3,937.83. With no COLA it would be $3,650. So it looks like SSA does not estimate COLA, which probably makes sense because Medicare cost increases too and likely wipes out COLA. Right?

 

[MrLoco]

I see a few issues with annuitizing these accounts.

First, while it does reduce your taxable estate upon your and your wife's death; the money is permanently removed and will not be part of any legacy plan you might have. This might not be a concern for you or you may have set aside other funds to leave to heirs. Again, if this is even a concern.

Second, why not set up your own annuity? What I mean is say you have a TAx Managed Balanced Fund in a taxable account. 50% Munis / 50% LArge Cap stocks. You withdraw what you determine is a SWR....say 3-4% a year.
Since the money is not invested 100% in stocks, you should be able to ride out market drops. And I believe there is a very good chance there will be money left over for heirs/ charities whatever. MAybe even more than when you started this process. You are just paying yourself with a stable withdrawal rate over the next 20 years or so.
And not pay high fees to some insurance company.
What I would at least consider.

 

[TheWizard]

Language can be fun.

I put $10,000 into a stock index fund several months ago and as of yesterday, it was up to $11,000 with dividends reinvested. That's a 10% total RETURN on my investment over that time period. (Before taxes!)

But Social Security is not an investment and does not have RETURNS. Instead:

For planning purposes, your Social Security benefit INCREASES by 2/3 of 1% of your PIA for each month beyond your FRA that you delay claiming it, up to age 70.

Now wasn't that simple?

 

[TheWizard]

...And not pay high fees to some insurance company.

How about if you're paying LOW fees to some insurance company?
Single Premium Immediate Annuities are not generally thought of as a high profit financial product...

 

[pb4uski]

pb4uski - I used your formula and compared to my most recent SS report from the government. According to the report my PIA at FRA 66 & 2months = $2,793. My estimate at 70 is $3,650. At 2% COLA and 130.7% delay benefit, the estimated monthly benefit at 70 would be $3,937.83. With no COLA it would be $3,650. So it looks like SSA does not estimate COLA, which probably makes sense because Medicare cost increases too and likely wipes out COLA. Right?

Right, they do not include COLA... or alternatively they assume that COLA will be zero... but you will get COLA.

$2,793*(1+8%*(70-66.167))~$3,650

 

[pb4uski]

Language can be fun.

I put $10,000 into a stock index fund several months ago and as of yesterday, it was up to $11,000 with dividends reinvested. That's a 10% total RETURN on my investment over that time period. (Before taxes!)

But Social Security is not an investment and does not have RETURNS. Instead:

For planning purposes, your Social Security benefit INCREASES by 2/3 of 1% of your PIA for each month beyond your FRA that you delay claiming it, up to age 70.

Now wasn't that simple?

One would think so but when you see so many people state that deferring social security provides an 8% return then it is apparent that it isn't that simple for many people... and make that many people that should know better.

 

[pb4uski]

I see a few issues with annuitizing these accounts.

First, while it does reduce your taxable estate upon your and your wife's death; the money is permanently removed and will not be part of any legacy plan you might have. This might not be a concern for you or you may have set aside other funds to leave to heirs. Again, if this is even a concern.

Second, why not set up your own annuity? What I mean is say you have a TAx Managed Balanced Fund in a taxable account. 50% Munis / 50% LArge Cap stocks. You withdraw what you determine is a SWR....say 3-4% a year.
Since the money is not invested 100% in stocks, you should be able to ride out market drops. And I believe there is a very good chance there will be money left over for heirs/ charities whatever. MAybe even more than when you started this process. You are just paying yourself with a stable withdrawal rate over the next 20 years or so.
And not pay high fees to some insurance company.
What I would at least consider.

The problem is that there are some scenarios where a build your own annuity might run out of money before you die if you live long. According to immediateannuity.com a 60 yo male living in TX who buys a $100,000 SPIA would receive $432/mo.

With both FICalc and FIRECalc if you put in a $100k portfolio with $5,184 annual withdrawals that are not inflation adjusted backed by a 50/50 portfolio and a 40 year time horizon there is a ~95% success rate... but that means that 5% of the time that you would run out of money... which would not happen with the SPIA.

That said, I wouldn't recomment the SPIA but it is important to recognize that with any DIY there is some small possibility that it may fail.

 

[jazz4cash]

I see a few issues with annuitizing these accounts.



First, while it does reduce your taxable estate upon your and your wife's death; the money is permanently removed and will not be part of any legacy plan you might have. This might not be a concern for you or you may have set aside other funds to leave to heirs. Again, if this is even a concern.



Second, why not set up your own annuity? What I mean is say you have a TAx Managed Balanced Fund in a taxable account. 50% Munis / 50% LArge Cap stocks. You withdraw what you determine is a SWR....say 3-4% a year.

Mr Loco
What are the expected returns on the 50% muni allocation? Are these funds, individual bonds, or something else?

I’m not finding too many attractive munis these days and it’s taking more and more time effort looking for deals.

3% SWR does seem reasonable. I think SP500 dividend is ~1.8% so the muni allocation only needs ~ 1.2% which easy even without any tax benefit.

 

[TheWizard]

I would prefer that people not use the term "annuity" out of context.
I'm talking payout phase annuities here.
True annuities pool the money from thousands of annuitants such that longer living annuitants get money from the pool that shorter lived annuitants are no longer drawing from.
This actuarial concept is called Mortality Credit.

It's fine to set up a Retirement Income scheme based on total return, or on dividends, or on Closed End Funds.
But it can't be an annuity with a pool size of one...

 

[MrLoco]

Mr Loco
What are the expected returns on the 50% muni allocation? Are these funds, individual bonds, or something else?

I’m not finding too many attractive munis these days and it’s taking more and more time effort looking for deals.

3% SWR does seem reasonable. I think SP500 dividend is ~1.8% so the muni allocation only needs ~ 1.2% which easy even without any tax benefit.

The TAx Managed Balanced Fund I use is with the Large Brokerage House that starts with the letter "V". Annual returns since inception (1994) have averaged 8%. Expenses are only 9 basis points (0.09%). Not bad considering two huge market corrections in 2000 and 2008.

So even with a SWR rate of 3% and accounting for taxes ( Muni bond income is Federally tax exempt and Qualified Div on LArge Cap stocks taxed at 15%); and accounting for inflation.....one could expect to do better than break even over the long term. Delay SS to age 70 relying on max SS as your "annuity" and I believe this would work. Plus keeps assets in one's estate for future heirs.

 

[jazz4cash]

^Thanks, MrLoco. VTMFX looks interesting.

 

[gayl]

I could have cashed out my retirement & added it to my 457b at separation of service but didn't because it has a 4% COLA and Healthcare (currently at 1c)

 

[Out of Steam]

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

At the simplest level, someone delaying Social Security by one year is collecting it for 3.5 to [EDITED:5%] fewer years, assuming a typical life expectancy for a middle-class American at age 65.

I agree with the other posters here who note that delaying Social Security still provides an inflation-adjusted longevity annuity at a below-market price.

 

[Kimo]

About 5 years ago I bought 300,000 in a Vanguard annuity. It is now paying over 17,000 yearly. I "turned on" the GLWB the day after I opened it. So for over5 years I have been taking money out monthly, paying any fees and today it is worth over 400,000. It is in the Wellington clone, called Balanced in their lingo. I know it is not a great return but for what it does I would do it again in a heartbeat. And remember, I could take the 400,000 out tomorrow if I wanted (never would)