Annuity question

[SecretlyFI]

If one has 750k outside of retirement accounts, it seems rather ludicrous to decide not to go to work and spend that down on expenses to survive.

I do not understand this at all. This is the entire purpose of saving for retirement.

You have posted on many threads about how miserable you are that you’re still working and can’t do whatever you want every day. In fact, you expected & wanted to be able to do that after just a few short years of working after graduating. Now, you have $3 million dollars plus an upcoming pension and social security and you think it would be ludicrous to quit, live off your savings and enjoy life.

However, you’ve also posted many times about how you expected to be a billionaire and the absence of that eats you alive. So I guess I understand why you find spending down your nest egg as completely unacceptable.

I don’t know what to recommend to reconcile these two opposing viewpoints: hatred of work and refusal to spend savings.

 

[FloridaJim57]

I recently purchased an immediate annuity through Immediateannuities.com with some of the money in my traditional IRA and I am very pleased with my purchase. Suggest you visit their website to learn more. I did speak to other annuity brokers but they were the best IMO.

 

[ShokWaveRider]

I can understand how some folks are about spending DOWN their nest egg. I was like that till I reached 70. We still have over 50% of our stash in Taxable cash, but the interest is protected by the MYGA rules, our IRAs just sit in CDs. We keep about 17% in cash, yes cash in MM funds and are starting to spend it more freely.

 

[pb4uski]

I do not understand this at all. This is the entire purpose of saving for retirement.

You have posted on many threads about how miserable you are that you’re still working and can’t do whatever you want every day. In fact, you expected & wanted to be able to do that after just a few short years of working after graduating. Now, you have $3 million dollars plus an upcoming pension and social security and you think it would be ludicrous to quit, live off your savings and enjoy life.

However, you’ve also posted many times about how you expected to be a billionaire and the absence of that eats you alive. So I guess I understand why you find spending down your nest egg as completely unacceptable.

I don’t know what to recommend to reconcile these two opposing viewpoints: hatred of work and refusal to spend savings.

+1 especially on the first sentence. A wise use of some of that money might be counseling.

 

[dixonge]

I can see doing something like this in order to benefit someone else who might be irresponsible with money, or to fund someone that is somehow incapacitated. However, in those scenarios it should be inflation-adjusted. I'm guessing there might be better ways of achieving the same results, though I'm not familiar with what that might be.

 

[MarieIG]

I can see doing something like this in order to benefit someone else who might be irresponsible with money, or to fund someone that is somehow incapacitated. However, in those scenarios it should be inflation-adjusted. I'm guessing there might be better ways of achieving the same results, though I'm not familiar with what that might be.

I recall getting quotes on "inflation adjusted" annuities a few years ago. (At that point, there were options to pick 1-5% increases per year, and I inquired about the 3%.) The issue with that was that the initial payouts were minuscule. The annuity companies do their math.

 

[easysurfer]

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?

I have a SPIA annuity that starting around 16.5 years ago that payed out about $1000/month for life. Just so happens, I've had it for 200 months this month. If my memory is correct, I put in about $188K to create and as of this date, got about $200K back.

I don't have a lifetime pension, so when I started it that was kind of my get paid every month just to be alive set up. So was kind of a peace of mind thing.

I think of a SPIA annuity as an "I told you so" deal. When the stock market is going good, there's the "I told you so" about how bad getting one is. But when the market tanks, it is an "I told you so" that the SPIA doesn't look so bad then. Had I used that money to set up and invested wisely, could have had a better return. But I could have also invested foolishly with that chunk too.

 

[imjustawarrior]

The only 2 types of annuities I would consider are SPIA and MYGA. Because there are no inflation indexed SPIAs, I would not really consider one until my 70s. MYGAs don't fit my investing style because I hold equities and bonds with very little in a MMF for paying bills.

I think there is a place for SPIA and MYGA. These are insurance products that are invested very conservatively with low risk. I would only compare their payouts relative to things of similar risk. SPIAs are insured by the state up to a certain level. Keep an eye on that.

I think there are some recent laws enacted (last few years) that make annuities more attractive in retirement accounts on how they relate to RMDs. I don't recall the details because I don't currently plan on using annuities.

 

[RetiredHappy]

The only 2 types of annuities I would consider are SPIA and MYGA. Because there are no inflation indexed SPIAs, I would not really consider one until my 70s. MYGAs don't fit my investing style because I hold equities and bonds with very little in a MMF for paying bills.

I think there is a place for SPIA and MYGA. These are insurance products that are invested very conservatively with low risk. I would only compare their payouts relative to things of similar risk. SPIAs are insured by the state up to a certain level. Keep an eye on that.

I think there are some recent laws enacted (last few years) that make annuities more attractive in retirement accounts on how they relate to RMDs. I don't recall the details because I don't currently plan on using annuities.

I bought fixed income term deferred annuities and they work for me. I bought 2 annuities at 53, deferred payment until 60 yo, pay monthly for 10 years, and 70 yo, pay monthly for 15 years. I have a nice bump at 70 yo with the 2nd annuity to account for inflation. I figure if I am still alive at 85, I will dip into other investments. They gave me peace of mind when I retired at 53.

The latter is called QLAC. You can start payment as late as 85 yo but there is a limit as to how much IRA you are allowed to use. Current limit is $210K, and that limit is raised periodically.

 

[ShokWaveRider]

You can find out the actual interest rate for these types of annuities by using the following web site. For Lifetime SPIAs the time variable is usually ~25 years for ages after 65. For Period certain simply do the math (Monthly x 12).

Annuity Rate of Return Calculator | Annuity Interest Rate Calculator

This annuity rate of return calculator solves the rate of return one might receive from an annuity. Said another way, it solves the interest rate earned from the annuity.

iqcalculators.com

 

[pb4uski]

I can see doing something like this in order to benefit someone else who might be irresponsible with money, or to fund someone that is somehow incapacitated. However, in those scenarios it should be inflation-adjusted. I'm guessing there might be better ways of achieving the same results, though I'm not familiar with what that might be.

You can roll by our own inflation adjusted annuity by combining a life contingent. SPIA as a base with a number of deferred payout annuities that provide added income every 2-5 years.

Or a TIPS ladder.

 

[rkser]

Some of the MYGA rates quoted by A++ rated Insurance companies are 5 +% , which could be competitive with the returns on Bond Funds.

 

[meleana]

Wouldn’t ever buy one. SS is enough of an annuity for me!

 

[Rieslingfan]

My M-I-L almost got talked into an annuity. Instead we steered her to a bond ladder that is throwing off more money and not sucking away the principal.

As an aside, I am trying to figure out how anyone can get by on $2000-$3000 per month, even while on Medicare.

 

[RetiredHappy]

My M-I-L almost got talked into an annuity. Instead we steered her to a bond ladder that is throwing off more money and not sucking away the principal.

As an aside, I am trying to figure out how anyone can get by on $2000-$3000 per month, even while on Medicare.

- Live in a LCOL area in a simple/small home without HOA fees.
- No expensive travel or hobbies.
- Eat all your meals in, cook or cheap ready to eat foods.

Can I do it? Sure. Do I want to do it? No.

 

[Rieslingfan]

- Live in a LCOL area in a simple/small home without HOA fees.
- No expensive travel or hobbies.
- Eat all your meals in, cook or cheap ready to eat foods.

Can I do it? Sure. Do I want to do it? No.

I am not sure there is a place in the USA I would want to live where that’s possible. Just amazed though.

 

[rayvt]

For the first X years you are just getting your own money back. Insurance companies are not stupid so they set X according to the mortality tables plus a profit.

I'd just buy a Treasury ladder, they pay around 4%-5% now. And if you die in 6 months your heirs get the money instead of an insurance company.

 

[ddk70]

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.

There are many types of annuities - some with a guaranteed death benefit to the spouse

 

[hotwired]

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?

I haven't read through ALL the replies, but I was surprised at many of the responses. Here's my two cents:

1. Annuities are an amazing tool if you need that particular tool. When you hear about fees and "byzantine language" that generally refers to variable annuities and FIA's (fixed index annuties). Often rebranded with company's own name. The annuities that are considered the "good guys" are: MYGAs (multi year guaranteed annuities, basically insurance company sponsored CDs that get a percentage point higher interest, but levie much more brutal surrender charges. You don't pay interest on earnings until you take it out and you can often take all the interest or a percentage of total out each year if you choose. DIA: deferred income annuities. You plunk down 192K but don't get payments for 10 years and get 1,900 per month instead of 1,000. Caveat, if you change your mind during the "holding period" you just get your 192K back. SPIA. This is the one you're probably talking about ... single premium immediate annuity. You plunk down 192K, get 1,000 per month for life. Now you're comparing the 6.72% to the stock market but that's about as apples to oranges as you can get. These are intended for the withdrawal stage of life. Compare your 6.72% to the SWR of 4%. So these are really designed to eliminate the possibility of running out of money on the particular pile of money you give the insruance company. Say you have 3 Million. 1 million will get you 62K for life at age 60 which happens to be your "core expense nut". Shoot. I wouldn't dare draw 62K a year out of 1M if that's all I had.

Now, nobody in their right mind would plunk down 192K knowing if they walk out of their house and get hit by a bus the next day, they'd lose all their money, so they have a feature called something like "x year certain" which means "you get this for life, but if you die before 10 years, whoever you name continues to get payments until the 10 year clock expires". So if you plunk 192K down, assuming it's joint between your wife and you, you die year 2, she dies year 4, your beneficiary continues to get your payments for 6 years. The payout difference between plain "life" and "life with 10 years certain" is insignificant, because insurance companies know that nobody's going to buy the "plain naked life" version. You can make it 20 year certain, but htat DEFINITELY makes a noticeable difference.

So, again, these absolutely shouldn't be looked at as investments. You're buying an insurance product which, if you stick to the DIA, SPIA and MYGA, are dead simple, fee-free (company pays the broker, no fees that I'm aware of on consumer end. that's reserved for the murky world of variable annuities which gave annuities a bad name).

My wife and I have 150% of what we need and we're STILL going to plunk maybe 25% of our wealth into immediate annuities.

Check out "STan the Annuity Man" which is SUCH a cheesy name I don't know how anyone trusts him. But he's the real deal. He himself recommends NOT using DIA's because of the "change your mind" caveat. Use MYGAs for the portion you know you're going to annuitize, then use a 1035 exchange (like a 1031 but for annuities...many FAs and CPAs have never heard of this) and slide it into an SPIA when it matures.

 

[ShokWaveRider]

One can also "Roll" a MYGA that matures into another MYGA without a tax consequence, you do not have to annuitize it.

"When a fixed annuity (Multi-Year Guaranteed Annuity, or MYGA) has reached the end of its guaranteed investment term, it doesn’t mean that a check will automatically be mailed to you. In fact, unless you act, your annuity will continue and you may earn a lower renewal rate going forward. And, depending on your contract, if no action is taken before the renewal date, the new rate may be locked in for a period of time with potentially additional surrender charges for withdrawals or surrenders.

In general, at the end of the guaranteed interest rate term, you can do any of the following:

• Rollover your funds into a new fixed annuity
• Annuitize your policy
• Do nothing and let your policy auto-renew
• Cash out your funds

The best option for you will depend on your age and your goals for the proceeds of your fixed annuity. Here’s why someone would choose each of these options:"

 

[pb4uski]

I haven't read through ALL the replies, but I was surprised at many of the responses. Here's my two cents:

1. Annuities are an amazing tool if you need that particular tool. When you hear about fees and "byzantine language" that generally refers to variable annuities and FIA's (fixed index annuties). Often rebranded with company's own name. The annuities that are considered the "good guys" are: MYGAs (multi year guaranteed annuities, basically insurance company sponsored CDs that get a percentage point higher interest, but levie much more brutal surrender charges. You don't pay interest on earnings until you take it out and you can often take all the interest or a percentage of total out each year if you choose. DIA: deferred income annuities. You plunk down 192K but don't get payments for 10 years and get 1,900 per month instead of 1,000. Caveat, if you change your mind during the "holding period" you just get your 192K back. SPIA. This is the one you're probably talking about ... single premium immediate annuity. You plunk down 192K, get 1,000 per month for life. Now you're comparing the 6.72% to the stock market but that's about as apples to oranges as you can get. These are intended for the withdrawal stage of life. Compare your 6.72% to the SWR of 4%. So these are really designed to eliminate the possibility of running out of money on the particular pile of money you give the insruance company. Say you have 3 Million. 1 million will get you 62K for life at age 60 which happens to be your "core expense nut". Shoot. I wouldn't dare draw 62K a year out of 1M if that's all I had.

Now, nobody in their right mind would plunk down 192K knowing if they walk out of their house and get hit by a bus the next day, they'd lose all their money, so they have a feature called something like "x year certain" which means "you get this for life, but if you die before 10 years, whoever you name continues to get payments until the 10 year clock expires". So if you plunk 192K down, assuming it's joint between your wife and you, you die year 2, she dies year 4, your beneficiary continues to get your payments for 6 years. The payout difference between plain "life" and "life with 10 years certain" is insignificant, because insurance companies know that nobody's going to buy the "plain naked life" version. You can make it 20 year certain, but htat DEFINITELY makes a noticeable difference.

So, again, these absolutely shouldn't be looked at as investments. You're buying an insurance product which, if you stick to the DIA, SPIA and MYGA, are dead simple, fee-free (company pays the broker, no fees that I'm aware of on consumer end. that's reserved for the murky world of variable annuities which gave annuities a bad name).

My wife and I have 150% of what we need and we're STILL going to plunk maybe 25% of our wealth into immediate annuities.

Check out "STan the Annuity Man" which is SUCH a cheesy name I don't know how anyone trusts him. But he's the real deal. He himself recommends NOT using DIA's because of the "change your mind" caveat. Use MYGAs for the portion you know you're going to annuitize, then use a 1035 exchange (like a 1031 but for annuities...many FAs and CPAs have never heard of this) and slide it into an SPIA when it matures.

Great post. One nit I would pick is that your can't really compare a 6.2% SPIA payout with a 4% SWR because the "withdrawals" of 6.2% are fixed and the SWR withdrawals are inflation adjusted.

Another thing, you can combine a joint life contingent SPIA (with 10 years certain) and a series of DIAs can create a set of cash flows that increase x% every so years to provide additional cash flows for inflation. These won't match inflation exactly.. just provide additional cash flows.

If you want to match inflation exactly then a TIPS ladder is the best choice, preferably in a tax deferred account. However, a TIPS ladder won't provide benefits for life you live long like annuities can.

 

[Closet_Gamer]

I do not have any sort of annuity and am more inclined to go with @pb4uski ’s TIPS ladder supplemented with other types of investments.

That said, I’ve heard many times that by putting in a guaranteed income floor two things happen:

1 - Peace of mind. Many people are simply happier knowing they have income that is well protected, particularly as they age and lose some of the will/ability to manage this stuff.

2 - Conversely Guaranteed income allows you to be more aggressive investing the balance of the portfolio because volatility within that portfolio isn’t as impactful. You don’t have to withdraw so much from it in down markets and therefore it can grow more over the long term.

My plan is to buy TIPS on a rolling 10 year period that covers 100% of our essential expenses and 50% of discretionary. My plan doesn’t account for SS, but I suspect in the real world it will find the other part of discretionary.

I should be able to let the rest just roll along. Net, this should put me in a position where my AA is somewhere between 40/60 and 60/40.

When I am older, I may do a SPIA to protect against declining ability to manage this stuff and protect DW if I punch out first.

 

[sdawson]

As one considering a QLAC this fall as I head into early retirement (Age 62, so not super early, but still earlier than some), here is a bit of the reasoning.

Am considering a QLAC purchase this September. Is joint (for my spouse and I) and has a 2% COLA. So both of those options reduce the monthly payment, but so be it. Payout starts at 78 for me (75 for my wife). If both pass before original amount is paid back, then that whatever is left from the original payment - payments to date is returned to beneficiary.


Reason 1:
I am big on diversification, and the QLAC represents about 12% of retirement savings at age 62, leaving the other 88% for other retirement purposes. And as noted above by another, this allows one to consider more aggressive invetment options with the savings not in the QLAC.

Reason 2:
This is longevity insurance, and as our planning for self funded long term care expenses requires guaranteed income streams later in life, this is part of that plan. While not covering all of LTC, it will cover a portion of it (the remainder coming from other savings)

Reason 3:
I want multiple income streams in retirement, especially for my spouse when I pass. While I'm alive we have streams from

A) small pension
B) my SS
C) spouse SS
D) our retirement savings.

When I pass, B) will disappear. While C) will increase, there will still be a missing gap of income. The QLAC, starting when my spouse is 75 fills in stream B).

Reason 4:
Helps reduce our pre-tax savings. This is a goal of mine, especially between the ages of 62 and 75 when RMD's start. But this is a bit of a red herring, as the QLAC especially starting early at age 78 is just another method of meeting the RMDs.

Reason 5:
Simplification for my spouse in later years. She would just like to have income without doing worrying about investments and withdrawals


Yes, I could likely invest that QLAC annuity into some other vehicle and achieve a higher payout for those funds. But Reason 1 still prevails. Markets crash. Having income streams allowing one to not have sell during a a crash allows those other investments to recover.


As an aside:

12% of retirement savings at age 62 moved to QLAC.
16% of retirement savings at age 62 is reserved for retiring 5 years early. This wll be spent down between the ages of 62 and 67 before starting SS (health insurance is costly).

 

[jazz4cash]

I am not sure there is a place in the USA I would want to live where that’s possible. Just amazed though.

I am amazed you are amazed. From a Washington Post article
“In 2022, the median income for seniors was roughly $30,000, according to federal data,”

I can’t really tell if this is for individuals or household/couple.

But there's this from google,
“The average monthly Social Security benefit for retirees in 2024 was approximately $1,909.01”,
which is for an individual and it seems reasonable that many seniors are single and we frequently hear of seniors who don’t have income other than SS.

I have a family member renting a senior apt in a VHCOL area and she is fine. Her SS check is way below average but she gets some help from her children too.

 

[pb4uski]

... My plan is to buy TIPS on a rolling 10 year period that covers 100% of our essential expenses and 50% of discretionary. My plan doesn’t account for SS, but I suspect in the real world it will find the other part of discretionary.

I should be able to let the rest just roll along. Net, this should put me in a position where my AA is somewhere between 40/60 and 60/40.

When I am older, I may do a SPIA to protect against declining ability to manage this stuff and protect DW if I punch out first.

It would be best if the TIPS are in a tax-deferred or tax-free account. TIPSn a taxable account result in phantom income which many people dislike.

Also, if you have that 10-year rolling TIPS ladder in a tax-deferred account it doesn't mean that you have to use the maturity proceeds for spending... you can always use other funds available to you but know that you have other investments that are growing with inflation.