Considering a "FIXED LIFETIME ANNUITY"

[merlin3942]

Hi everyone,
I may need to have you all talk me down off the ledge. In spite of everything I've read/heard/understood about annuities in general over the years, these unsettling times have really "spooked" me into considering something that I thought was unthinkable just a few months ago - annuitizing a portion of my assets to a "guaranteed fixed lifetime" income stream.

I turned 65 last fall (yay Medicare!), and have been FIRE'd for about 4 years. I worked for a non-profit research/educational institution for 40 years, had been maxing out retirement contributions, IRAs, etc, over all that time, and felt pretty confident about my "financial plan" (basically, save as much as you can for as long as you can). That was mostly through TIAA. In the past 4 years, I've really not had to touch any of the TIAA accounts (been living off of savings, and a "side gig" I have as a musician). Of course, now the side gig opportunities have pretty much dried up, so I'm going to have to start thinking about actually drawing down from the retirement account. Had a phone meeting with my TIAA advisor this week, and one of the options we discussed is to take at least the "TIAA-fixed" portion of those assets and convert to a "lifetime fixed annuity". Most of that money was invested in the 80's and 90's, when the guaranteed interest rates were fairly high, so I'm told that the guaranteed rate to annuitize now is 6.5% ... and of course, that sounds pretty good right now!

I'm not yet drawing Social Security (planning to wait until I'm at least 70 for that), and I think I'd sleep a LOT better at night if I had a regular, fixed, guaranteed income stream. I figure my base-line expenses are between $30K-35K per year, and so would like to have that much "guaranteed". I can achieve that by annuitizing just the TIAA-fixed portion - which is about 20% of my total retirement portfolio (the rest is invested in the "CREF" portion, which are variable stock index investments - and those have done very well over the past 40 years!). I also have an outside brokerage account that throws off about $6K/year in interest and dividends ... or has been, anyway.

My "break-even" point for the annuity (the point at which I'll get back the lump sum I annuitize) is about 15 years. There's a guarantee pay-out period of 10 years, so if I were to die before that, the rest of the payments up to 10 years goes to my estate (I'm not married, and have no dependents, so that's not much of a concern).

I always thought I could probably do much better than 6.5% on my own, and in "normal times", of course, that's been true. But these are no longer "normal times", and at my age, I'm thinking I'd like the stability of a base-line guaranteed income stream that covers my basic expenses (not including inflation, of course ...).

Anyway, I'm close to pulling the trigger on this, but am taking the next week or so to take a step back, breathe ... and get some outside advice that's not coming from inside my head, or the TIAA advisor.

What additional things should I be thinking about? What other information/questions do I need to have answered first? What other options to help me sleep better should I consider?

Thanks in advance for your input!

Stay safe ... and wash your hands!

 

[braumeister]

I'd like the stability of a base-line guaranteed income stream that covers my basic expenses (not including inflation, of course ...).

I'll let other more knowledgeable folks comment on your question, but the big thing that jumps out at me is the inflation issue.

With governments suddenly conjuring up trillions of dollars and economies taking huge hits from all sides, I can't help but think that the inflation rate will be going up a lot from now on. An annuity can't protect you from that, but managing your money yourself at least offers the possibility of dealing with it.

 

[mrfeh]

Hi everyone,
I may need to have you all talk me down off the ledge. In spite of everything I've read/heard/understood about annuities in general over the years, these unsettling times have really "spooked" me into considering something that I thought was unthinkable just a few months ago - annuitizing a portion of my assets to a "guaranteed fixed lifetime" income stream.

Bolded above indicates your emotions are in the driver's seat, which rarely leads to good decisions.

 

[pb4uski]

merlin,

You or your TIAA person... is confusing payout with return. From what you wrote, you are receiving a 6.5% payout rate.... the problem is that much of the payouts that you receive are just a return of your own principal and the rest is return on your principal.

Below is a analysis for a $100,000 premium with a 6.5% payout rate and the return if you live to various ages. Since the guaranteed payout period is 10 years, the rows for 1-9 don't apply and the minimum return from the contract is negative if you die within the first 10 years.... or thought of another way the minimum guaranteed payout of 10 years is only 65% of the premium paid. Also, as you note, during the first 15 years they are just paying you back your money so your return is zero! After that, the return turns positive and climbs gradually and approaches 6.0% if you live really long. The average age is probably 82 or so... so the expected return would be 1-2%.

I think you would be better off just creating a CD ladder to replicate the annuity benefits or since inflation is a concern, perhaps a TIPS ladder. You'll likely get better returns and have more control over your money.

A CD ladder would be 1,2,3-year and so forth CDs that would pay $6,500 each at maturity... but for example, a 10 year CD that pays $6,500 10 years from today and pays 1.5% interest would only cost $5,600 today.

Lump Sum		100,000
Monthly benefit		542
Payout rate		6.50%
Age	n	IRR
65	0
66	1	-98.1%
67	2	-79.5%
68	3	-58.6%
69	4	-42.9%
70	5	-31.9%
71	6	-23.9%
72	7	-18.1%
73	8	-13.7%
74	9	-10.3%
75	10	-7.7%
76	11	-5.6%
77	12	-3.9%
78	13	-2.5%
79	14	-1.3%
80	15	-0.3%
81	16	0.5%
82	17	1.2%
83	18	1.8%
84	19	2.3%
85	20	2.8%
86	21	3.2%
87	22	3.5%
88	23	3.8%
89	24	4.1%
90	25	4.3%
91	26	4.5%
92	27	4.7%
93	28	4.9%
94	29	5.1%
95	30	5.2%
96	31	5.3%
97	32	5.4%
98	33	5.5%
99	34	5.6%
100	35	5.7%
101	36	5.8%
102	37	5.9%
103	38	5.9%
104	39	6.0%
105	40	6.0%

 

[jim584672]

I would be worried about solvency of the insurance company. Does your state have a reinsurance guarantee on annuities? My state has a guarantee fund for annuities and insurance policies.

 

[OldShooter]

... I figure my base-line expenses are between $30K-35K per year, and so would like to have that much "guaranteed". ... My "break-even" point for the annuity (the point at which I'll get back the lump sum I annuitize) is about 15 years. ...

Like @braumeister, I think you're not considering the inflation issue.

The way I say it is: "There is no such thing as a fixed annuity." Your baseline expenses will increase with inflation while the annuity will not. Plug in your own numbers, but using 3.5% inflation/20 years the buying power of that "fixed" annuity will be halved. 3.11% is the 100 year US inflation rate IIRC. The 50 year rate, which picks up the late 70s and early 80s, is over 4%.

This also affects your "break even" calculation because each year you are getting nominal dollars back, dollars that are worth less than the ones you gave TIAA. So @pb4 is an optimist! Your 15 year return is under water by the amount of inflation experienced.

Our solution to this is TIPS. IMO that is as close to a guaranteed inflation hedge as we can get and we don't have to worry about the quality of the "insurance company." I say "as close" because of course we get federally taxed on the inflation dollars. As I have said here many times, I think TIPS are an underappreciated asset for retirees.

 

[pb4uski]

I would be worried about solvency of the insurance company. Does your state have a reinsurance guarantee on annuities? My state has a guarantee fund for annuities and insurance policies.

Most states have guaranty funds... but i wouldn't be too worried about TIAA's financial strength and ability to pay its claims. Insurance companies are well regulated and since reforms put into place in the 1990s in response to a few insolvencies that made headlines there have not been any significant insolvencies of insurance companies.

 

[gauss]

I have never purchased a commercial annuity on the open market, but I can see the appeal.

What I have done is the following:

1) Decided that DW and I will both wait until age 70 to draw SS (about 15 years out from now)

2) Took DW pension as a life annuity and not a lump sum option. We also plan to take mine also as life annuity when I turn 65 when it is no longer age-reduced. Neither of the pensions are inflation adjusted.

We have a 7 figure investment portfolio between retirement accounts and after-after tax.

The pensions nearly cover today's spending and though they are not inflation-adjusted, SS which is inflation adjusted, will, hopefull kick in in the future.

The financial assets are mostly just there for robustness/piece of mind.

I saw no additional advantage of have more assets (ie lump sums for the pensions) invested in financial markets.

I do value the piece of mind that comes in with the regular pension payments.

Note that we do not have any kids that we need to plan inheritances for so maximizing end value of investments is not a consideration.


If you have no traditional DB pension, it can often be a rational decision to annuitize a portion of your nest egg - if you can get a competitively priced SPIA annuity.

Have you looked at any of the books by Moshe Milevsky?

I have grown to understand that this is a personal decision and what might be right for you may not be for someone else with a different personality and situation.

Good luck in your quest.

-gauss

----

I would be worried about solvency of the insurance company. Does your state have a reinsurance guarantee on annuities? My state has a guarantee fund for annuities and insurance policies.

The key point here is not if the state has a re-insurance fund, but the maximum $ per policy that is backed up. No sense buying a 1M annuity if the state maximum is only 250K.

 

[mystang52]

merlin,

You or your TIAA person... is confusing payout with return. From what you wrote, you are receiving a 6.5% payout rate.... the problem is that much of the payouts that you receive are just a return of your own principal and the rest is return on your principal....

Sincere kudos to pb4uski for this thorough analysis. It sure does put a great perspective on the supposed benefit of an annuity. I suspect all annuities have similar actual rate of return.

 

[Chuckanut]

Keep in mind that by delaying SS until you are 70, you are in effect buying an annuity. And, it is a very good annuity since it has a yearly cost of living increase built into it.

Do you need more than one annuity? I don't know. Being able to sleep at night is a valuable asset. An annuity helps with that (assuming inflation does not get much above 2%.) I would think you can also sleep well with taking SS at 70 and PB4's CD ladder.

FWIW an inflation rate of 3% reduces the buying power of that fixed annuity check by 1/2 in 24 years. 4% reduces it by 1/2 in 18 years.

 

[copyright1997reloaded]

A couple of people have already discussed this, so my post is just adding on. MY biggest fear isn't the stock market collapsing. The federal government (Treasury) and Federal Reserve have already shown that they will do EVERYTHING necessary to keep that from happening, including Thursdays announcement where the Federal Reserve will be buying ET's and effectively junk bonds. My biggest fear is that my accumulated wealth's buying power will be severely damaged from inflation.

A mistake that people (including me) is to assume that a situation will be attacked each time it happens. For example, after the crash of 29 in the severe economic downturn (aka depression), prices actually declined 21% from 1929 to the end of the depression. This is partially as a result of the tight monetary policy. Between January and July 1928 the Fed raised the discount rate from 3.5% to 5%. They did ease immediately after the Oct 29 crash (to help with liquidity), but went back to a tight policy after the liquidity crisis lessened. This is in part because many voting members of the Fed felt that there were speculative excesses in the economy.

So, the federal reserve of today has seen that lesson from the past and will not repeat it. They've seen their ability to prop up financial assets in the 2008/9 recession - and if some stimulus is good then a bunch must be much better. (And so they might overshoot and cause a different problem.)

To each their own in terms of investments - but from my perspective I am looking more and more at trying to hedge for down the road inflation. I already own a decent slug of TIPS and IBonds, but have recently started looking at adding to precious metals.

I do have a pension (non-COLA'd) which makes things easier currently, but in the longer run might be of quickly declining value.

 

[Markola]

OP, I recommend you take the time to listen to this recent series of podcast episodes by Roger Whitney, which go into depth to explain annuities (as best as their obtuse documentation allows a human to understand), protections you should look for before you invest, and weighing their pros and cons and exit clauses for a retiree and whom they are right for and wrong for. It’s good. https://www.rogerwhitney.com/blog/280-is-an-annuity-right-for-retirement-annuity-basics

 

[merlin3942]

Thank you all SO MUCH, (especially pb4uski), for taking the time to help me understand this. I think I'm back in the camp of thinking this sort of annuity is not for me, at least not at this time.

I don't really understand how to go about building a "CD ladder", with or without TIPS, so my next step is to do some research into that. (I'm open to any references about how to go about that anyone would care to share).

It all comes down to trying to figure out the best way to start generating a "stream of income" from the retirement account. I was attracted to the idea of money just "magically appearing" in my checking account automatically every month for the rest of my life ... until you all pointed out the real impact of what would be considered an average rate of inflation.

Back to the drawing board!

 

[finnski1]

merlin,

You or your TIAA person... is confusing payout with return. From what you wrote, you are receiving a 6.5% payout rate.... the problem is that much of the payouts that you receive are just a return of your own principal and the rest is return on your principal.


I agree and think your being too kind to the TIAA person.
They know perfectly well how that works but want to make customers look like they are getting that 6.5% return.
They can make upwards of 6-8% commissions on annuities and I'm sure love to "assist you with your purchase of said item"

 

[harley]

I don't really understand how to go about building a "CD ladder", with or without TIPS, so my next step is to do some research into that. (I'm open to any references about how to go about that anyone would care to share).

I'm not sure about the TIPS ladder, although it's probably basically the same thing. But a CD ladder is easy. Say you have $100K. Buy a 1 year CD for $10K, a 2 year CD for $10K, a 3 year CD for $10K, etc on out to 10 years. Or do $20K/year for 5 years. That's actually easier, since it's harder to find 6,7,8, and 9 year CDs.

Then, every year as one CD matures, take the interest for your spending money, and use the principal to buy a new CD for the longest term you want. Ie. if your ladder is 5 years, buy a new 5 year CD for $20K. That way you have a CD maturing every year, you have the income from the CD available to use, and your $100K principal stays intact for your lifetime. It's a safe way to create a dependable cash flow.

 

[RobbieB]

Annuities are a better buy when interest rates are high. I don't see that happening anytime soon.

 

[pb4uski]

.... I don't really understand how to go about building a "CD ladder", with or without TIPS, so my next step is to do some research into that. (I'm open to any references about how to go about that anyone would care to share). ...

A CD ladder is pretty easy. For now, to make it simple, let's assume that you are 70 rather than 65 and are collecting SS and you spend $35k a year and your SS is $25k a year so your "gap" what you need from your investments is $10k a year.

You could go out and put $10,000 into CDs with annual maturities... so $10k in a 1-year CD, $10k in a 2 year CD, $10k in a 3 year CD, etc. At the end of each year you would receive your $10k plus interest (currently generally 1-2%). In theory, the interest would be approximately what you need for inflation assuming that inflation is roughly the interest rate on the CD. YMMV.

There may also be better options. Some IRA CDs allow limited annual withdrawals without any early withdrawal penalties if you are of certain age so you get the benefit of a longer term rate with some restriction on annual withdrawals. Another option is online savings accounts... Discover Bank is paying 1.5%... more than many 5-year CDs so a simple soultion would be to put a bunch of money in an online bank account and arrange for a monthly withdrawal for your "annuity" payment. (Keep in mind that you would not get the longevity protection that an annuity provides).

 

[LRDave]

If annuitizing some of your stash is in your playbook, TIAA is a better choice than almost all others. If you do the lifetime annuity, the starting bid from TIAA is better than you are going to get from a quote from immediateannuities. Plus, for a TIAA Traditional lifetime (only lifetime, not a TPA (Transfer Payout Annuity)) annuity, year payouts can go up and in fact have something like 16 out of the last 25 years.

Having money in TIAA Traditional is not simple. Before you do anything rash, you need to do some research on how it works. What are the vintages of your contributions in TIAA Traditional? What are the contract types? (GRA vs. GSRA for instance). I suggest you do your own research - don't rely only on TIAA guidance. There are some TIAA experts over on BHs and also M*.

Depending on your contract, you may be in for an annuity no matter what. Some contracts require that you extract you funds via a TPA (over nine years and 1 day) if you don't do a lifetime annuity. New vintages don't earn as much but can transferred to other investments or converted to cash at any time.

Right now, if you can deal with the liquidity issues, it is hard to beat the return of TIAA Traditional for the safe part of your nest egg. About 18% of our investable assets are in TIAA Traditional and all vintages together are averaging about 3.5% return with no risk of lost principal. I am happy with that as opposed to chasing around CD deals.

 

[finnski1]

I'm not sure about the TIPS ladder, although it's probably basically the same thing. But a CD ladder is easy. Say you have $100K. Buy a 1 year CD for $10K, a 2 year CD for $10K, a 3 year CD for $10K, etc on out to 10 years. Or do $20K/year for 5 years. That's actually easier, since it's harder to find 6,7,8, and 9 year CDs.

Then, every year as one CD matures, take the interest for your spending money, and use the principal to buy a new CD for the longest term you want. Ie. if your ladder is 5 years, buy a new 5 year CD for $20K. That way you have a CD maturing every year, you have the income from the CD available to use, and your $100K principal stays intact for your lifetime. It's a safe way to create a dependable cash flow.

Right now 1year CD's are paying around 1.85% max and 5 years are only getting to 1.9%.
So you've tied up your 100k principal for those 5 years and each year (if split into 20k tranches) you are only receiving $370 in interest to spend rather than the $6500 from the annuity.

Not advocating for the annuity at all and I realize you still have your principal with the CD's but with the very low CD rates and very little differences in the return from 1 to 5 years maybe it would be better to put the whole 100k into 1 year terms and keep rolling them over until interest rates improve. At least he would receive $1850 per year instead of $370

 

[BGH1]

In early January I took a portion of our funds and moved to a cola annuity, thus dropping our risk profile. Right now I’m happy we did. Just another means to decrease risk for us, looking to retire in 2 years and 4 months.

 

[RetiredAt55.5]

Not advocating for the annuity at all and I realize you still have your principal with the CD's but with the very low CD rates and very little differences in the return from 1 to 5 years maybe it would be better to put the whole 100k into 1 year terms and keep rolling them over until interest rates improve. At least he would receive $1850 per year instead of $370

FWIW, Ally's CD's give you the option to deposit the interest monthly into a separate account, so it's like getting a monthly check.

Regardless of the CD lengths, I like to break the CD's into separate CD's (e.g., several 1 year, several 2 year, etc.), so that if I need some money unexpectedly, I don't have to redeem 1 big CD early. CD rates could go lower from here.

 

[pb4uski]

.... Regardless of the CD lengths, I like to break the CD's into separate CD's (e.g., several 1 year, several 2 year, etc.), so that if I need some money unexpectedly, I don't have to redeem 1 big CD early. CD rates could go lower from here.

Most, but not all, bank CD's allow partial withdrawals so breaking CDs into separate pieces is unnecessary... the EWP is based only on the amount withdrawn.

 

[merlin3942]

... I suggest you do your own research - don't rely only on TIAA guidance. There are some TIAA experts over on BHs and also M*.
.

Sorry to be so dense ... but what is "M*"? I do know about Bogleheads.

Thanks!

 

[pb4uski]

M* = Morningstar

 

[audreyh1]

Most, but not all, bank CD's allow partial withdrawals so breaking CDs into separate pieces is unnecessary... the EWP is based only on the amount withdrawn.

The only bank/CU I do business with that allows partial withdrawals from a CD is Andrews FCU. I’m sure Ally does not. I’m pretty sure Synchrony does not.