At what rate would you annuitize (SPIA)

[MattInAustin]

First, it has been a long long time since I have posted here under a different username and even then I didn't do much. So hello again And apologies in advance for coming in with an incendiary topic.

I used to be against getting a lifetime SPIA given the 4% rule seemed solid and you get to keep your money in hand for whatever comes up and enjoy a possible big upside down the road. Couldn't really see the sense of annuitizing. Plus I have always felt too young to get the longevity insurance aspect of it.

Now I am not so sure. Many of the retirement "experts" seem to feel 4% is a little risky (I am 53 yo). When I retired back in 2015 I somewhat arbitrarily decided 3.5% fixed would be 95%+ safe. I still feel that way and usually take out that much or less every year. That said, there is always something in the back of my head that says "the future could be very different than the past".

So I look at SPIA quotes and see rates are going up. I can get over 3.5% with a 4% "inflation" increase every year from an A+ insurer. Higher than average CPI, but inflation, as you all know, has been much higher for extended periods. CPI has averaged around 3.3% since 1914. From 1968-1991 CPI averaged around 6%. That was a pretty bad time to retire as well.

Now I am wondering if there might be an annual return where it makes sense to annuitize up to 25% of my portfolio to act as all or part of my fixed income? Or maybe enough to cover my base living expenses. Then, with a nice floor I could increase risk on the equity and "other assets" side which would help with the over 4% inflation risk.

At 5% with a 4% guaranteed adjustment I think I would do it.
At 4% I would be very tempted.
At 3.5% I am ambivalent.

I am curious at what SPIA return rate (if any, I know there are big downsides) folks would consider annuitizing a portion of their portfolio?

One other piece of information that is critical for me, I believe there is around a 10% chance we could have interventions in the next 20 years that would extend our healthspan and lifespan another 5-10+ years. To me that is a significant risk to drawing down a liability matching portfolio. I follow this science relatively closely and the progress in understanding and ameliorating the effects of aging are astonishing.

 

[cyber888]

I'm getting 6.51% - 6.61% from Tiaa at 61 - 62 yrs .. I'll be getting it.
I tried to run the number to see what $1000+/mo look like at 62.
This is a lifetime payment to me and my DW, and has a 10 year guaranteed period in case we both pass away and need to give it to our chosen beneficiaries.

 

[Midpack]

It’s not an abstract yes/no question IMO.

It’s an older article but still holds true to me. Calculating your annuitizarion hurdle is a good way of gauging whether or not to annuitize. Since I retired in 2011, when I update our net worth statement, I calculate and plot our annuitization hurdle along with our net worth. I’m not planning on annuitizing at all, but once a quarter I get a sense of whether we should consider it. FWIW

https://www.financialplanningassoci...w Strategy for Managing Retirement Income.pdf

Otar did an exhaustive quantitative study on how to determine one’s need to annuitize as well http://retirementoptimizer.com/

 

[REWahoo]

First, it has been a long long time since I have posted here under a different user name….

Curious why you thought you needed to change?

 

[SnowballCamper]

It's really a personal decision that gets back to, can you sleep at night with how much of your money in the stock market?

With Secure Income (govt cola pension) covering current living expenses, I wouldn't annuitize any of the nest egg at any realistic SPIA return rate. But I effectively already have annuitized at the CPI rate.

 

[aja8888]

I'm getting 6.51% - 6.61% from Tiaa at 61 - 62 yrs .. I'll be getting it.
I tried to run the number to see what $1000+/mo look like at 62.
This is a lifetime payment to me and my DW, and has a 10 year guaranteed period in case we both pass away and need to give it to our chosen beneficiaries.

Is this something we could all sign on to! Is the post related to what the OP is asking about?

 

[ShokWaveRider]

This is hard to answer. A SPIA Paying 6.5% is NOT the return, it is the rate in percent that your initial amount is returning TO YOU. They typically do not disclose the actual percentage return of your investment.

If you invested the money with NON QUALIFIED funds you could figure it out at tax time as the interest would be the only portion that is taxable.

Currently a $250k SPIA 15 year certain is only paying 1.37% interest on your money. Note that this type only pays for 15 years then your cash is gone.

I would think a life would be paying less.

 

[cyber888]

Is this something we could all sign on to! Is the post related to what the OP is asking about?

His question was at what rate people would consider annuitizing, and so my answer to his question is about 6.5%. This is Tiaa.org, which a couple of people here have an account.

 

[aja8888]

His question was at what rate people would consider annuitizing, and so my answer to his question is about 6.5%. This is Tiaa.org, which a couple of people here have an account.

Sorry, I was not sure what TIAA was all about. Now I see it's only for teachers.

 

[TheWizard]

This is hard to answer. A SPIA Paying 6.5% is NOT the return, it is the rate in percent that your initial amount is returning TO YOU....

Checko, that's a Payout Rate.
Unclear if folks are confused about this, but maybe some are...

 

[TheWizard]

Sorry, I was not sure what TIAA was all about. Now I see it's only for teachers.

Not exactly.
I was an engineer for a nonprofit company spun off from a university and I had TIAA for forty years...

 

[MattInAustin]

Curious why you thought you needed to change?

I let my rational level headed self win when it comes to retirement income planning, but then my fraidy cat self pops up every now and then along with my market timer self. SPIA rates are going up for me. I believe a portion of that is the rising federal reserve rate the rest is getting older.

This is the first time since I retired that I have looked at online quotes and the payout rate is higher than 2%. It's kind of like a sparkly shiny object in the corner of my eye.

I am having a conversation with my rational self about it and at what rate I would jump in. The conversation seems a little one sided so I posted here to get other opinions.

I was also curious about the tax consequences of having an annuity in a tIRA compared to doing Roth conversions. And is it a better way of doing RMD's? I have no idea if the question is even relevant? I feel like I need to explore that question though.

 

[MattInAustin]

This is hard to answer. A SPIA Paying 6.5% is NOT the return, it is the rate in percent that your initial amount is returning TO YOU. They typically do not disclose the actual percentage return of your investment.

If you invested the money with NON QUALIFIED funds you could figure it out at tax time as the interest would be the only portion that is taxable.

Currently a $250k SPIA 15 year certain is only paying 1.37% interest on your money. Note that this type only pays for 15 years then your cash is gone.

I would think a life would be paying less.

Thanks for that clarification. I haven't calculated a rate of return for a given life expectancy, so not sure? I should have said payout rate I guess.

If I did a lifetime SPIA I would most likely use qualified funds from my retirement account. It's not clear to me how those are taxed, I just assumed it was 100% earned income? I imagine if the payouts stay in your IRA/401K the question of RMD's and tax free growth would come into play?

 

[MattInAustin]

It’s not an abstract yes/no question IMO.

It’s an older article but still holds true to me. Calculating your annuitizarion hurdle is a good way of gauging whether or not to annuitize. Since I retired in 2011, when I update our net worth statement, I calculate and plot our annuitization hurdle along with our net worth. I’m not planning on annuitizing at all, but once a quarter I get a sense of whether we should consider it. FWIW

https://www.financialplanningassoci...w Strategy for Managing Retirement Income.pdf

Otar did an exhaustive quantitative study on how to determine one’s need to annuitize as well otar retirement calculator

Thank you for sharing this! I will work my way through the article. I also have a copy of Otar's original book in PDF on an old computer somewhere. It was a long time ago and I remember there being a Green, Yellow, Red zone which addressed when to annuitize. It was dense and I never really digested it. Sounds like you have done the research and figured out when annuitizing makes sense for you.

I am curious, if you are open to answering, does your calculation take into account the payout rate and any inflation adjustment to payments? And predicted lifespan? Or is it primarily focused on the state of your current investments?

 

[pb4uski]

I'm getting 6.51% - 6.61% from Tiaa at 61 - 62 yrs .. I'll be getting it.
I tried to run the number to see what $1000+/mo look like at 62.
This is a lifetime payment to me and my DW, and has a 10 year guaranteed period in case we both pass away and need to give it to our chosen beneficiaries.

cyber, the 6.51-6.61% that you are referring to is a payout rate and is not the rate of return. If you die after 10 years then you'll have received 65.1%-66.1% of what you paid in... would you be happy with that?

Because you don't know when you will die, you need an analysis to understand the financial return. If you live to 85, you will have received a 4.2% return on your money... IOW, if at 61 you put $100,000 in an account that earned 4.2% a year and then you withdrew $547/month (a 6.56% payout rate) then at 85 the money would be gone.

Lump Sum		100,000
Monthly benefit		547
Payout rate		6.56%
Age	n	IRR
61	0
62	1	-98.1%
63	2	-79.4%
64	3	-58.4%
65	4	-42.7%
66	5	-31.7%
67	6	-23.7%
68	7	-17.9%
69	8	-13.6%
70	9	-10.2%
71	10	-7.6%
72	11	-5.4%
73	12	-3.7%
74	13	-2.3%
75	14	-1.2%
76	15	-0.2%
77	16	0.6%
78	17	1.3%
79	18	1.9%
80	19	2.4%
81	20	2.9%
82	21	3.3%
83	22	3.6%
84	23	3.9%
85	24	4.2%
86	25	4.4%
87	26	4.6%
88	27	4.8%
89	28	5.0%
90	29	5.1%
91	30	5.3%
92	31	5.4%
93	32	5.5%
94	33	5.6%
95	34	5.7%
96	35	5.8%
97	36	5.9%
98	37	5.9%
99	38	6.0%
100	39	6.1%
101	40	6.1%
102	41	6.2%
103	42	6.2%
104	43	6.2%
105	44	6.3%

 

[pb4uski]

....I used to be against getting a lifetime SPIA given the 4% rule seemed solid and you get to keep your money in hand for whatever comes up and enjoy a possible big upside down the road. Couldn't really see the sense of annuitizing. Plus I have always felt too young to get the longevity insurance aspect of it. ...

Matt, you're comparing apples and oranges. A SPIA's benefits are fixed... you get $x/month now and in 20 years you will still get $x per month, but with inflation at 2% annually that $x/month in 20 years is only worth 67% of what it was able to buy in year 1.

With the 4% rule, the withdrawals are adjusted for inflation so the buying power of the withdrawalfor year 20 is 100% of the buying power in year one... not 67%.

Huge difference.

 

[cyber888]

Not exactly.
I was an engineer for a nonprofit company spun off from a university and I had TIAA for forty years...

The Wizard is correct. TIAA is available to people working for non-profit, hospitals, museums, government employees (federal, state, local), and the military. They cover more than teachers.

https://www.tiaa.org/public/pdf/e/eligibility_flyer_external.pdf

 

[cyber888]

Yes, I'm very very happy about that, because I won't need the money after death. The money will last my lifetime even if I hit 120 years old - it's a lifetime annuity. It won't be gone by 85. I already talked to them, and it will be for as long as I live. We don't have kids - so nobody really to leave it to except distant relatives if any.

cyber, the 6.51-6.61% that you are referring to is a payout rate and is not the rate of return. If you die after 10 years then you'll have received 65.1%-66.1% of what you paid in... would you be happy with that?

Because you don't know when you will die, you need an analysis to understand the financial return. If you live to 85, you will have received a 4.2% return on your money... IOW, if at 61 you put $100,000 in an account that earned 4.2% a year and then you withdrew $547/month (a 6.56% payout rate) then at 85 the money would be gone.

Lump Sum		100,000
Monthly benefit		547
Payout rate		6.56%
Age	n	IRR
61	0
62	1	-98.1%
63	2	-79.4%
64	3	-58.4%
65	4	-42.7%
66	5	-31.7%
67	6	-23.7%
68	7	-17.9%
69	8	-13.6%
70	9	-10.2%
71	10	-7.6%
72	11	-5.4%
73	12	-3.7%
74	13	-2.3%
75	14	-1.2%
76	15	-0.2%
77	16	0.6%
78	17	1.3%
79	18	1.9%
80	19	2.4%
81	20	2.9%
82	21	3.3%
83	22	3.6%
84	23	3.9%
85	24	4.2%
86	25	4.4%
87	26	4.6%
88	27	4.8%
89	28	5.0%
90	29	5.1%
91	30	5.3%
92	31	5.4%
93	32	5.5%
94	33	5.6%
95	34	5.7%
96	35	5.8%
97	36	5.9%
98	37	5.9%
99	38	6.0%
100	39	6.1%
101	40	6.1%
102	41	6.2%
103	42	6.2%
104	43	6.2%
105	44	6.3%

 

[pb4uski]

...It won't be gone by 85. ...

It will be if you are.

 

[MattInAustin]

Matt, you're comparing apples and oranges. A SPIA's benefits are fixed... you get $x/month now and in 20 years you will still get $x per month, but with inflation at 2% annually that $x/month in 20 years is only worth 67% of what it was able to buy in year 1.

With the 4% rule, the withdrawals are adjusted for inflation so the buying power of the withdrawalfor year 20 is 100% of the buying power in year one... not 67%.

Huge difference.

Thanks pb4uski. I appreciate you have a wealth of knowledge on this subject as I have poked around and see your comments bringing reason to these discussions. I do understand and realize the 4% rule takes CPI-U into account. I guess my question is if and when does annuitizing a portion of that portfolio improve upon the 4% rule assuming you do not worry about passing on a financial legacy. For example, if you live to be 120 and average inflation is below 3.5% and there is at least one depression/70's stagflation type event maybe you can have a higher SWR with an annuity. (I know I need to do the math).

I wish they still had a CPI-U rider, but the best they have now is a 4% per year add on. That is what I put in for the quote. I didn't do the math to see if it is better to just do the inflation adjustment yourself by investing the delta in a balanced fund or something like that? Given the idea is to have the annuity there as part of the fixed income portion of the portfolio, the rest is likely in riskier/higher growth assets. But, that starts to take away the thing the annuity is giving me. So I think it is best to have the insurer pay the 4% rider? Especially if one of the risks being addressed is living well beyond what the tables predict.

For example, currently from Blueprint for a 54 year old with $1M given to the insurer (AIG), the payout is ~$36K per year with a 4% increase every year. without the 4% it is $63K per year.

So I look at SPIA quotes and see rates are going up. I can get over 3.5% with a 4% "inflation" increase every year from an A+ insurer. Higher than average CPI, but inflation, as you all know, has been much higher for extended periods. CPI has averaged around 3.3% since 1914. From 1968-1991 CPI averaged around 6%. That was a pretty bad time to retire as well.

 

[pb4uski]

That AIG product is very interesting... never heard of a 4% annual increase. I guess it depends on how lucky you feel. This is what I get for "returns" at various ages.... another way to think of it is the annual return that you would have to get on $1 million to make those 4%-annual increased payouts.

Age	Cashflow	IRR
54	-1,000,000.00
55	36,000.00
56	37,440.00
57	38,937.60
58	40,495.10
59	42,114.91
60	43,799.50
61	45,551.48
62	47,373.54
63	49,268.49	-15.34%
64	51,239.23	-12.38%
65	53,288.79	-9.95%
66	55,420.35	-7.93%
67	57,637.16	-6.23%
68	59,942.65	-4.79%
69	62,340.35	-3.55%
70	64,833.97	-2.48%
71	67,427.32	-1.56%
72	70,124.42	-0.75%
73	72,929.39	-0.03%
74	75,846.57	0.60%
75	78,880.43	1.16%
76	82,035.65	1.66%
77	85,317.08	2.11%
78	88,729.76	2.51%
79	92,278.95	2.87%
80	95,970.11	3.20%
81	99,808.91	3.50%
82	103,801.27	3.78%
83	107,953.32	4.03%
84	112,271.45	4.26%
85	116,762.31	4.46%
86	121,432.80	4.66%
87	126,290.11	4.84%
88	131,341.72	5.00%
89	136,595.39	5.15%
90	142,059.20	5.29%
91	147,741.57	5.42%
92	153,651.23	5.54%
93	159,797.28	5.66%
94	166,189.18	5.76%
95	172,836.74	5.86%
96	179,750.21	5.95%
97	186,940.22	6.04%
98	194,417.83	6.12%
99	202,194.54	6.19%
100	210,282.32	6.26%
101	218,693.62	6.33%
102	227,441.36	6.39%
103	236,539.02	6.45%
104	246,000.58	6.50%
105	255,840.60	6.56%

 

[SecondCor521]

@MattInAustin, is that a 4% increase every year, or an "up to 4%" increase every year?

 

[MattInAustin]

@MattInAustin, is that a 4% increase every year, or an "up to 4%" increase every year?

According to the Blueprint Income website it is fixed every year, but I haven't seen an actual policy.

 

[MarieIG]

It's been a while, but I saw step-ups on the SPIAs between 1 and 5%. At the time, I got a 3% quote from Vanguard (back when the had annuities). What I recall was that the initial payment was very low.

I love the security aspect of the monthly payout, but for now am forcing myself to sit on my hands, concentrate on Roth conversions, and delaying SS. Depending on rates, I will circle around back to exploring these in a few years.

My concern is DH after I'm gone. His extent of managing the money is howling for me to sell when the markets drop (I don't, and gently talk him off the ledge) and withdrawing money to spend. He will be a soft target for the kiddos and the overseas relatives when I'm not around to provide defense, so I want him to have a large, reliable monthly income. I am considering an annunity with a step up for DH (whose family lives forever) so he gets a larger amount which can go towards in-home care to the extent he needs it, dental, hearing aides, etc.

 

[ncbill]

IMHO it's not rate but age.

My retirement planners have me waiting until I'm around 80 then annualizing what's left in my tax-deferred accounts.