At what rate would you annuitize (SPIA)

[aja8888]

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.

Bill, will you please explain why at 80? And tax deferred accounts, are you meaning IRA/401K accounts?

Thanks, aja

 

[mrfeh]

OP - the 4% "rule" does not apply to somebody who retires at 45 (unless they plan on dying at 75).

 

[VanWinkle]

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

"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?"

I think it answered this question posed by the OP!

Maybe read the original post again.

VW

 

[MattInAustin]

OP - the 4% "rule" does not apply to somebody who retires at 45 (unless they plan on dying at 75).

Agreed. That is why I do a 3.5% (usually less) fixed withdraw with a healthy dose of ongoing analysis of what my situation is. I think I am probably too conservative due to the fact that I started at 45yo. Now that I am closer to 55 I am exploring other ways to go.

 

[mrfeh]

Agreed. That is why I do a 3.5% (usually less) fixed withdraw with a healthy dose of ongoing analysis of what my situation is. I think I am probably too conservative due to the fact that I started at 45yo. Now that I am closer to 55 I am exploring other ways to go.

Given the potential of 50 years of retirement, I wouldn't be comfortable with 3.5% either.

 

[pb4uski]

Given the potential of 50 years of retirement, I wouldn't be comfortable with 3.5% either.

FIRECalc is comfortable with 3.5% WR for 50 years... and that excludes any possible SS.

FIRECalc looked at the 102 possible 50 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 102 cycles. The lowest and highest portfolio balance at the end of your retirement was $-876,749 to $19,364,609, with an average at the end of $4,644,990. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 5 cycles failed, for a success rate of 95.1%.

 

[MichaelB]

Over a 50 year period the greater risk to portfolio survival won’t be the withdrawal rate, it will be how one reacts to any number of unforeseen events that are highly likely. Natural catastrophe, war, pandemic, resource scarcity, financial crisis.

There is no 50 year period in modern history free from multiple occurrences of these, they have powerful impact on global asset prices, and how we react in the face of these threats will be the determining factor for most portfolios.

 

[corn18]

I would gladly take a 15 year period certain SPIA @ 3% annual return with a CPI-W COLA. I guess that would be around 11.9% right now. Let me know if you find one.

 

[ShokWaveRider]

I would gladly take a 15 year period certain SPIA @ 3% annual return with a CPI-W COLA. I guess that would be around 11.9% right now. Let me know if you find one.

I think finding one is wishful thinking. The best I can see is 4.34% return for 15 years certain (Cash gone after 15 years), no COLA.

 

[ncbill]

Bill, will you please explain why at 80? And tax deferred accounts, are you meaning IRA/401K accounts?

Thanks, aja

The retirement planner seeks to maximize lifetime income.

My guess is that mortality credits finally make it worth annuitizing everything that's left in my tax-deferred accounts around that age.

Yes, traditional IRA/401(k) tax-deferred (i.e. not Roth) accounts.

 

[ncbill]

Over a 50 year period the greater risk to portfolio survival won’t be the withdrawal rate, it will be how one reacts to any number of unforeseen events that are highly likely. Natural catastrophe, war, pandemic, resource scarcity, financial crisis.

There is no 50 year period in modern history free from multiple occurrences of these, they have powerful impact on global asset prices, and how we react in the face of these threats will be the determining factor for most portfolios.

Yep, the best laid schemes o' Mice an' Men, / Gang aft agley:

"A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years.

Thus, any estimate of long-term financial success greater than about 80% is meaningless."

The Retirement Calculator from Hell, part III

 

[MattInAustin]

Taxes and annuities

Does anybody know how the payout from a lifetime SPIA is taxed if funded with qualified funds from a tIRA/401K? Since the annuity doesn't offer a positive rate of return for several years, the pay out is essentially return of principle which needs to be taxed as regular income and after the principle is returned it is still all taxed as regular income. Seems pretty straightforward if I have it right.

With non-qualified funds it looks like there is some exclusion ratio so you would pay taxes on some amount of the payout as if it was paying interest and principal back. I can't seem to find any way of calculating that exclusion ratio. Based on what I found, once principal is returned, the entire payout is taxed as regular income. Seems like a bit of double taxation going on? Also seems like a disadvantage of annuitizing with non-qualified funds.

Any thoughts or pointers to better info?

 

[cyber888]

It will be if you are.

Nope, I will live forever

 

[RunningBum]

Does anybody know how the payout from a lifetime SPIA is taxed if funded with qualified funds from a tIRA/401K? Since the annuity doesn't offer a positive rate of return for several years, the pay out is essentially return of principle which needs to be taxed as regular income and after the principle is returned it is still all taxed as regular income. Seems pretty straightforward if I have it right.

With non-qualified funds it looks like there is some exclusion ratio so you would pay taxes on some amount of the payout as if it was paying interest and principal back. I can't seem to find any way of calculating that exclusion ratio. Based on what I found, once principal is returned, the entire payout is taxed as regular income. Seems like a bit of double taxation going on? Also seems like a disadvantage of annuitizing with non-qualified funds.

Any thoughts or pointers to better info?

Any kind of withdrawal of funds from a tIRA are taxed as regular income (unless it's one of those where you have some post-tax contributions). An SPIA is no different. The tIRA is like a black box. You put money in tax-deferred, and whatever comes out is taxed as regular income. It doesn't matter if it is from interest or cap gains or dividends or return of principal (except for the noted exclusion), it's still taxed the same. I don't see any double taxation going on. The principal was tax-deferred going in so of course it will be taxed coming out, just like if you've invested a lump sum of your tIRA in a money market and withdraw that principal and interest over time.

An advantage of having the SPIA in a tIRA is that you can set the payments up to satisfy your RMDs. I don't know the details so verify for yourself.

 

[TheWizard]

...An advantage of having the SPIA in a tIRA is that you can set the payments up to satisfy your RMDs. I don't know the details so verify for yourself.

Umm, no you can't.
If you annuitize $300k from tax-deferred, the lifetime monthly/annual payouts only satisfy the would-be RMD for that $300k.
Your remaining $700k (or whatever) in tax-deferred is still subject to normal RMDs...

 

[zippy2020]

... 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 annuity 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.

I agree with you, that is a serious concern! One reason we went with a CFP firm is that I handle the investments and taxes. DH has zip, nada, no interest at all in the details. We talk regularly about various scenarios so he is aware how his lifestyle will/can change, but that does not mean he has any interest in altering the asset allocations or realizing the tax consequences of changes. He needs a reliable, neutral sounding board that can also give professional recommendations.

Our using a CFP is a double back-up: not just for DH but when we both pass on or become non compos mentis, our beneficiary is a relative: honest as the day is long but has NO familiarity with handling large sums of money or dealing with eldercare issues. She, too, will need advice but wouldn't know where to look for it, otherwise.

I can't help with your annuitizing difficulties, but I can totally sympathize with your need to give your DH a source of regular monthly income as a worry-free financial base.

When people are overwhelmed by grief it's almost impossible to properly grasp an unfamiliar and complex subject like financial investing, especially if they have poor instincts (which, sadly, is most people) about market ups and downs.

The easier you can make it for your DH to have some financial security that he won't have to worry about - no matter how you decide to do so - will be something he'll be grateful for, if the worst happens.

Good luck to you, and congrats for the courage in considering a 'worst case' scenario.

 

[Huston55]

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

+1

Decisions regarding annuitizing should be made based on analysis of portfolio survivability, not whether you get a particular rate of return. The best two tools I’ve seen are: (1) Fullmer’s annuitization hurdle and, (2) Otar’s zone concept. Both are relatively simple to use.

 

[TheWizard]

+1

Decisions regarding annuitizing should be made based on analysis of portfolio survivability, not whether you get a particular rate of return. The best two tools I’ve seen are: (1) Fullmer’s annuitization hurdle and, (2) Otar’s zone concept. Both are relatively simple to use.

Maybe.
I'm familiar with Otar's color coded zones, but not the other.

In my case, I was definitely in the Otar green zone but annuitized a decent amount anyway to have a hefty retirement income.
I now have a negative withdrawal rate and don't expect that to change. So the longer I live, (fill in the blank).

Your mileage may vary...

 

[Huston55]

Maybe.

I'm familiar with Otar's color coded zones, but not the other.



In my case, I was definitely in the Otar green zone but annuitized a decent amount anyway to have a hefty retirement income.

I now have a negative withdrawal rate and don't expect that to change. So the longer I live, (fill in the blank).



Your mileage may vary...

Correct. YMMV. But, IIRC you’re “annuitization” is via TIAA/CREF (preferential rates not available to most folks) and, you have more than enough assets to cover all expenses at a very safe WR. Congrats!

Neither of these are true for most people. So, using the tools referenced above is applicable to most folks pondering this question. Although, I’ll admit that the psychological aspects can dominate for some retirees, in which case almost no analysis is persuasive.

 

[badatmath]

I guess to use OTAR I should have read the directions.

 

[SecondAttempt]

This is an interesting question to me. I have no kids so no need to leave an inheritance. I can look at this pretty cleanly. I have a model of my spending needs and I can provide for that without an annuity. I like the 4% rule. I have a huge spreadsheet telling me I am fine. FIREcalc says I am 100% fine. And Quicken's model agrees.

But as we enter a period of high interest rates to tamp down inflation I have had the same thought. Is there a point where annuity rates might get high enough that I would drop 20-25% of my portfolio with a high rated insurer?

I understand the difference between payout rate and return. This is fundamentally a math problem and that is my strong suit.

I expect, and the markets seem to agree that inflation will settle back down to 2.0-2.5%-ish fairly soon. I can calculate what an annuity would pay over my expected lifetime and back out of that the expected return assumed by the annuity comany acturaies. If it got much above 4% I might jump on an SPIA even though I am not yet retired...but I am close. While acturaries are experts and I don't think I can outsmart them, they are generally bound by current data and history and the current situation is so far from the historical norm that this may be a rare opportunity.

 

[ShokWaveRider]

But as we enter a period of high interest rates to tamp down inflation I have had the same thought. Is there a point where annuity rates might get high enough that I would drop 20-25% of my portfolio with a high rated insurer?

I understand the difference between payout rate and return. This is fundamentally a math problem and that is my strong suit.

Same boat here, no heirs just a DW to look out for after I kark it. I am still on the fence as buying MYGAs and then taking a withdrawal every year does the same ..... sort of anyway. Another option would be a 10 Year certain (When rates top 5%), while everything is gone after 10 years, if there is no one to leave it to, does that really matter, and is it that different that taking an annual stipend from one's savings. Decisions, Decisions.

 

[Huston55]

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?

This is an interesting question to me. I have no kids so no need to leave an inheritance. I can look at this pretty cleanly. I have a model of my spending needs and I can provide for that without an annuity. I like the 4% rule. I have a huge spreadsheet telling me I am fine. FIREcalc says I am 100% fine. And Quicken's model agrees.

But as we enter a period of high interest rates to tamp down inflation I have had the same thought. Is there a point where annuity rates might get high enough that I would drop 20-25% of my portfolio with a high rated insurer?

I understand the difference between payout rate and return. This is fundamentally a math problem and that is my strong suit.

I expect, and the markets seem to agree that inflation will settle back down to 2.0-2.5%-ish fairly soon. I can calculate what an annuity would pay over my expected lifetime and back out of that the expected return assumed by the annuity comany acturaies. If it got much above 4% I might jump on an SPIA even though I am not yet retired...but I am close. While acturaries are experts and I don't think I can outsmart them, they are generally bound by current data and history and the current situation is so far from the historical norm that this may be a rare opportunity.

Same boat here, no heirs just a DW to look out for after I kark it. I am still on the fence as buying MYGAs and then taking a withdrawal every year does the same ..... sort of anyway. Another option would be a 10 Year certain (When rates top 5%), while everything is gone after 10 years, if there is no one to leave it to, does that really matter, and is it that different that taking an annual stipend from one's savings. Decisions, Decisions.

I'm trying to understand what risk the OP (and others) are trying to manage by annuitizing. Since most (all?) of you seem to be in relatively good shape using a SWR approach, what's the logic in locking in the value of a significant chunk of your NW and guaranteeing that it will lose value when inflation is just slightly higher than its historic average, when we know it has routinely been in the 10-20% range for extended periods in US history just in the last ~100yrs?

Reading between the lines in the posts, your approach seems to include trying to "time the market" by chasing a high(er) interest rate period and "hoping" that inflation doesn't get higher for the next 30-50 yrs of your life. WADR, that seems like an unnecessary risk. Am I missing something?

 

[Dawg52]

I'm trying to understand what risk the OP (and others) are trying to manage by annuitizing. Since most (all?) of you seem to be in relatively good shape using a SWR approach, what's the logic in locking in the value of a significant chunk of your NW and guaranteeing that it will lose value when inflation is just slightly higher than its historic average, when we know it has routinely been in the 10-20% range for extended periods in US history just in the last ~100yrs?

Reading between the lines in the posts, your approach seems to include trying to "time the market" by chasing a high(er) interest rate period and "hoping" that inflation doesn't get higher for the next 30-50 yrs of your life. WADR, that seems like an unnecessary risk. Am I missing something?

For me it would be a way to simplify things a bit as I age. Who knows how well I will be able to handle my finances 10 to 20 years from now. I'm 68 and single. Still not sure if I will buy one but I do have three MYGA's maturing over the next couple of years and rolling a portion of those funds into a spia is a possibility. Overall it won't be a significant chunk of my NW.

 

[SnowballCamper]

I think annuitizing is an option to manage primarily two risks. Number one is longevity, the probability of outliving your assets by living a long time. Number two is market risk, by which I mean the likelihood that the individual must sell securities at depressed prices in order to fund current living expenses.

Of course there are tradeoffs. In order to avoid longevity and market risk the cost is certainty that inflation will degrade spending power. Inflation in the US has much less volatility than the price of securities, and so might be more appealing to those who want to avoid volatility.

For someone who has essentially "won the game" by accumulating enough assets to know that they will live comfortably for the rest of their life on a purchased annuity, and can do so by virtually eliminating market risk to their assets, it can certainly be appealing, and simplify their financial life.

Then there is the question of when to annuitize? It might be closed minded to ignore market conditions and rates when making this decision. As it is generally a decision that isn't undone, there is no problem of when to get back in the market, only when to leave the market, and of course there are better times than others to do that. One can't know it's the best time (security prices could go up more), but one can know it's a better time (current prices are higher than they have been).