Annuity question

[MrBojangles]

From the internet, an annuity of $192,000 should create an income of $1000 a month.

So, is it how annuities work, I write a check for $192,000, I’m guaranteed $1000 for life? If I only live 6 months, the company keeps the $192,000. If I live for 40 yrs, the company pays me out $480,000.

But, $12000 on 192k is 6.25%. The market historically does better than that, on average.

So is an annuity just for those who find the risk of a severe downturn that significant such that they would rather just fork over 192k to get that $1000 a month guaranteed?

 

[marko]

That's pretty much how it works but I believe that annuities are unpopular on this forum.

As you note, one can pretty easily get at least 6.25% in the market and still keep your principal flexible without it disappearing after your death.

What bothers me is that you're locked in at $1000 a month....what will inflation do to that amount in 5, 10 or 20 years?

Inflation is the silent killer of retirement dreams! But a well constructed portfolio can stay ahead of inflation over time.

There's also heavy fees and some very byzantine verbiage designed to confuse most people.

I would guess that a veteran investor wouldn't fear a "severe downturn" as much as see it as a rare opportunity. But that's why there's a market for annuities, CDs and other vehicles for those who'd be fearful.

 

[MrBojangles]

I picked that number just to keep it simple.

It seems like annuities are a BAD, BAD idea unless I’m missing something. Hence, this thread.

I was trying to see if there was a special annuity so I don’t have to pay down principal from when I intend to retire, age 57, until my first lifeline, age 59 1/2, when I can tap my retirement plan. (Not quite true, I can tap this IRA when I retire at age 57). But everything seems to involve spending money without an income until I get the IRA at age 59 1/2 and a pension of around $2400 a month at age 60.

I could also have income from dividends as well.

Ideally, I would have income coming in and never spend down principal.

I can live quite cheaply.

In other threads, retirees talk of spending 10k a month. What exactly are you guys doing to spend that much?

My take home pay is about 3/4 of that and I still have ample amounts to invest (after maxing out my TSP) meaning I’m spending nowhere near 90k a year, let alone 120k.

 

[COcheesehead]

People that want guaranteed income, no matter the risk and cost (commissions, liquidity, inflation). Some annuities will have options to address some of these risks, but it’s basically a belt with suspenders solution for those that buy them.

 

[brett]

There are many types of annuities with different options. As an example, you can buy an annuity with a guaranteed payout term. Often ten years.

My DB pension is essentially an annuity.

A good time to look at annuities is when you are in your low/mid seventies and in excellent health.

As an alternative, you can always take an annuity and complement it with a term life policy.

 

[COcheesehead]

But, $12000 on 192k is 6.25%.

If you live to an “average” age, some of that return is your own money being paid back to you. The annuity is worth $0 at your end of life.
So many better options that maintain your capital.

 

[Luvtoride]

I can live quite cheaply.

In other threads, retirees talk of spending 10k a month. What exactly are you guys doing to spend that much?

My take home pay is about 3/4 of that and I still have ample amounts to invest (after maxing out my TSP) meaning I’m spending nowhere near 90k a year, let alone 120k.

Good for you! What does how much we spend have to do with the pros and cons of annuities? We all have different spending patterns and amounts influenced by many things like where we live, how we live, families, etc. The challenge is having sufficient income sources to cover those expenses. Annuities MIGHT be one source of income for some folks to meet those expenses. Others of us have pensions, social security, earnings from businesses or consulting in retirement, etc.

 

[Chuckanut]

Think in terms of loaves of bread. How many loaves can you buy with $1000 today. If you live 40 more years inflation at only 2% will reduce the real value of that $1000 by over half. That’s a lot fewer loaves.

The 6.5% is not all earnings, some of it is return of your own money. Right? Why not set up a ladder of TIPS bonds instead? At least you keep control of your money that way.

 

[rk911]

...My DB pension is essentially an annuity...

Yup. I have two govt DB pensions, my wife has one DB govt pension. All three have an annual bump of 3% on the original payment amount. Better than nothing. Ond of mine has a correction of sort..a 13th payment in July. This 13th paymemt is not the same amount...always less.. as the other 12 but is computed using a complex formula.

 

[COcheesehead]

In my mind, feeble as it is, I would not say a pension and an annuity are the same.

 

[engineernerd]

In other threads, retirees talk of spending 10k a month. What exactly are you guys doing to spend that much?

My take home pay is about 3/4 of that and I still have ample amounts to invest (after maxing out my TSP) meaning I’m spending nowhere near 90k a year, let alone 120k.

We spend $1,100 a month each just for our ACA health plan premiums. High deductible plans so actual medical costs are on top.

 

[engineernerd]

Regarding annuities...to me the strongest case for them is that they are dementia-resistant and gullibility-resistant. A scammer who talks you into giving them access has to wait very patiently for a gradual payoff instead of being able to "take" you for your life savings all at once. Scammers typically don't want to milk people slowly, partly because of the risk of their being discovered and prosecuted while that process goes on.

ADD: you can be considered to be buying resilience at the expense of efficiency.

 

[rk911]

In other threads, retirees talk of spending 10k a month. What exactly are you guys doing to spend that much?

Our net income between SS and pensions are ~ $14,000 per month. Our routine monthly expenses (Medicare supplement, Part D plans, food, utilities, entertainment) ~ $2000-$3000 p/m depending on this, that and the other. We reinvest all dividends, our required IRA withdrawls go to charity instead of into our pockets. We fund our great-nephew's college plan, donate heavily to charity via our DAF, continue to build our emergency fund. We live quite comfortably

 

[Al18]

You might want to look into a MYGA. Fidelity is offering a 10 year MYGA paying 5.25%, 100K minimum. You could withdraw the 5.25% interest earned every year and at the end of 10 years they give your initial deposit back to you.

 

[GrayHare]

An annuity is a way to spread risk. When you buy an annuity, you are paying someone to assume some of your risk. That's not something that person would ordinarily do for free, hence annuities have a cost. Annuity contracts tend to be very complex, making them difficult to evaluate. Consequently, annuities have a "buying a pig in a poke" element.

 

[MrBojangles]

I’m coming to the conclusion that an annuity is not my best option. I have about $3 million in securities, except that 3/4 of that is in retirement plans, all but 55k is with an employer I left at age 53, I’m looking at health insurance and a pension of about $2400 a month in 5 1/2 years when I turn 60, social security of $2640 a month at age 62 and $4969 at age 70.

I’m at the point where I don’t want to spend down principle but I really don’t feel like doing a damn thing at work and I’m too young to retire. I was hoping some sort of annuity might bridge this gap, but it’s better I assume the risk, limit spending until some lifelines if I retire soon.

There’s a reason why the CSRS retirement age was 55.

 

[brett]

I have looked at annuities twice. Once in my mid 60's, again in my early 70's. They did not fit into our finanical profile. I looked at single annuities, joint with my spouse, guarantee pay for 10 years, etc, etc. So many options that impact the monthly payout per $100K of investment. Many of the same options/decisions that were part of my DB pension decision vs taking the commuted value.

I believe that the choice of an annuity is very personal. Depends on your finanical situation, your health/longevity, etc. Many other factors...particularly for those who many not have a DB pension.

I do not believe the answer is no, or yes for that matter, in all cases or that this is a one size fits all decision. I really do think that it would be foolish to dismiss them or to jump into one without fully understanding them/doing the research.

Keep in mind that people who sell these annuities receive substantial sales commissions for their efforts.

 

[RetiredHappy]

I did turn all my IRA into 2 term deferred annuities when I retired at 53. They would start benefits when I turned 60 (10 year term) and 70 (15 year term). They are guaranteed payments, even if I die before benefits are fully paid out to me. My beneficiaries will either get the premiums back if benefits have not started, or continue to be paid for the rest of the term.

Studies have shown that people with steady income like a pension are happier than those without. I bought them to provide peace of mind with an additional source of income. The deferred fixed income annuities that I bought are easy to understand. The one-time commission was paid to the broker, my FA back then, when I bought the annuities. The effective returns on those annuities are in the 5.25 to 5.5 percent range, i.e. not including the principal amount. It was back when we were in the 0% interest rate environment.

The rest of my investments are in taxable and are invested in 100% equities. The annuities form the fixed income portion of my investments.

My spouse has the bulk of his savings in his IRA and between his RMD, dividends from my brokerage account, my annuity, 2 social security, they are almost enough to cover our expenses. We do live on $240K to $300K a year, including taxes.

For OP, since you already have pension and social security, I don't see a need to have annuities.

 

[MrBojangles]

I did turn all my IRA into 2 term deferred annuities when I retired at 53. They would start benefits when I turned 60 (10 year term) and 70 (15 year term). They are guaranteed payments, even if I die before benefits are fully paid out to me. My beneficiaries will either get the premiums back if benefits have not started, or continue to be paid for the rest of the term.

Studies have shown that people with steady income like a pension are happier than those without. I bought them to provide peace of mind with an additional source of income. The deferred fixed income annuities that I bought are easy to understand. The one-time commission was paid to the broker, my FA back then, when I bought the annuities. The effective returns on those annuities are in the 5.25 to 5.5 percent range, i.e. not including the principal amount. It was back when we were in the 0% interest rate environment.

The rest of my investments are in taxable and are invested in 100% equities. The annuities form the fixed income portion of my investments.

My spouse has the bulk of his savings in his IRA and between his RMD, dividends from my brokerage account, my annuity, 2 social security, they are almost enough to cover our expenses. We do live on $240K to $300K a year, including taxes.

For OP, since you already have pension and social security, I don't see a need to have annuities.

What did you do for income from age 53 to 60?

 

[ShokWaveRider]

You might want to look into a MYGA. Fidelity is offering a 10 year MYGA paying 5.25%, 100K minimum. You could withdraw the 5.25% interest earned every year and at the end of 10 years they give your initial deposit back to you.

We have 4 - 5 Year MYGAs. Laddered paying ~5.85% combined. I take enough out of the lowest paying one annually to pay our taxes as a one time withdrawal. SS and 2 very small Pensions cover all our annual expenses, and then some. Our IRAs are in CDs. All discretionary expenses come from our Brokerage account that is Taxable invested in fixed income. No equities.

 

[pb4uski]

In my mind, feeble as it is, I would not say a pension and an annuity are the same.

Why? If the annuity is a life payout annuity then the are the same. They both provide fixed benefit payments for your life or for a joint life depending on the option chosen.

If you're referring to deposit annuities then I agree.

 

[SecretlyFI]

I’m coming to the conclusion that an annuity is not my best option. I have about $3 million in securities, except that 3/4 of that is in retirement plans, all but 55k is with an employer I left at age 53, I’m looking at health insurance and a pension of about $2400 a month in 5 1/2 years when I turn 60, social security of $2640 a month at age 62 and $4969 at age 70.

I’m at the point where I don’t want to spend down principle but I really don’t feel like doing a damn thing at work and I’m too young to retire. I was hoping some sort of annuity might bridge this gap, but it’s better I assume the risk, limit spending until some lifelines if I retire soon.

There’s a reason why the CSRS retirement age was 55.

I’m wondering about your statement that you’re too young to retire. From your numbers, it seems like you could retire anytime. Sounds like you have $750,000 outside of retirement accounts, which you could live off for the 7 years from now until age 62. By age 62, your pension and SS provide $60,000 a year in income. You say you spend nowhere near 90k, so the rest of your $3 million portfolio sounds like way more than enough to support you.

 

[COcheesehead]

You might want to look into a MYGA. Fidelity is offering a 10 year MYGA paying 5.25%, 100K minimum. You could withdraw the 5.25% interest earned every year and at the end of 10 years they give your initial deposit back to you.

Why? If the annuity is a life payout annuity then the are the same. They both provide fixed benefit payments for your life or for a joint life depending on the option chosen.

If you're referring to deposit annuities then I agree.

Annuitized payouts, yes. But not in how they are acquired .

 

[big-papa]

Annuities, specifically SPIAs, can make sense for some. When they do make sense, it's usually in the latter part of retirement when you have mortality credits built up and the cost of purchase is about as low as it's ever going to get. It's longevity insurance against running out of funds before running out of life.

We basically have the potential of purchasing a SPIA later in life as a contingency, but that really depends on a number of factors at the time, most specifically the state of our health and the state of our portfolio and other income streams.

Cheers.

 

[RetiredHappy]

What did you do for income from age 53 to 60?

We did/do have alot of taxable funds and earmarked $1M to fund the 7 years. It turned out that we blew through that in 5 years.