Considering a "FIXED LIFETIME ANNUITY"

[merlin3942]

TIAA (Teachers Insurance and Annuity Association of America) isn't an insurance company?

The name is confusing. Here's a snippet about it from "Investopedia":

The Teachers, Insurance, and Annuity Association (TIAA) is a financial organization that provides investment and insurance services for those working in education, medicine, culture, and research. TIAA has a history that dates back to the late Andrew Carnegie, whose Carnegie Foundation for the Advancement of Teaching created the initial organization in order to service the pension needs of professors.

Up until 1997, TIAA operated as a tax-exempt non-profit organization. It is now organized as a non-profit organization that has taxable subsidiaries. All of TIAA's profits are disbursed to policyholders.

In 2010, TIAA shifted its model to become a for-profit financial services corporation offering retirement products, 529 College Savings Plans, managed investment accounts, checking and savings products, mortgage loans and other managed investment accounts.

 

[Bryan Barnfellow]

Congress created the 403(b) as a nonprofit version of the 401(k) legislation for those employed in nonprofits, like higher education. Typically university and other nonprofit employers would at minimum pay into a tax advantaged investment account owned by the employee. Many also offered matching amounts, like with the for profit 401(k)s. I remember getting a 12% match on my 8% contribution at my (private) university back in the old days!TIAA was at first just about the only game in town; but over time Vanguard and Fidelity made headway and are offered along with TIAA and others in the nonprofit world. TIAA offers (and this is a simplification) two main areas for investment: safer, interest bearing vehicles and real estate, and securities (stocks/bonds). The biggest risk is with the stocks/bonds offerings but also the greatest reward. Many new employees would just allocate 50% to the paper assets and 50% to the stocks/bonds. During my years as a contributor the general Stock/Bond fund (called "CREF" at that time) consisted of an indexed (S&P I think) core and a smaller actively managed piece).

I was employed in higher education almost all of my life and was covered by TIAA-CREF (now, called only TIAA) before I moved to Europe. TIAA and its products are very complex and require a lot of careful thinking before acting. For example, your final payout rate includes different rates on tranches of your TIAA investments over the years, each paying different interest rates on your contributions during those years...higher in the 80s and 90s of course). Plus, of course, mortality credits. As an investor client, you always can see very transparently which of your accumulations pay what interest rates. When you are ready to retire, you can request any number of models of different options available to you. TIAA, like anything that lasts more than a hundred years, has grown its offerings in helpful ways and offers a complexity as a by product.

You have several choices, OP. You can annuitize some or all of your TIAA accumulation for a lifetime annuity (with all the variations on single/two life, guaranteed period, etc.). You can also opt for an annuity with a built in inflation protector (some of the payout is held back and reinvested regularly for a higher future payout). You can opt for an interest only payout, where you do not annuitize but are simply paid the 3% (with potential plus amounts determined each year) interest. Then decide later if you want to annuitize. Finally, if your TIAA accumulation includes the TREA (TIAA Real Estate Account), your payout will take advantage of any growth (or loss) in that asset. So, a lot to consider.

IIRC, you mention that the TIAA traditional annuity accumulation is 20% of your total TIAA and CREF (stock). And, annuitizing that amount alone would cover your retirement needs. So, in some ways this acts as a bond allocation, at present. Just with a likely higher payout because your funds have variable interest rates based on those tranches I mentioned earlier.

Note: TIAA staff do the work advising and then creating the annuity for you. They do not earn commissions. They are salaried employees. That said, they don't always know what they are talking about on the phone, so be wary. Always confirm yourself what they tell you.

To be clear, you CAN withdraw your TIAA as a lump sum, but only over a ten year period (again, it's complex: technically ten, but in actuality nine). So, cashing out can be done but only in slow motion. Slow motion is what TIAA is all about. It moves slowly, and carefully. You cannot do things, as a client, that might negatively affect your fellow clients. So, the cash out is over a decade to blunt the effect on everyone else. It's a deliberate design to ensure stability of their payout capability.

I have been a client since 1984 and have been very happy. They manage hundreds of billions of dollars in assets for some 5 million clients in higher ed, secondary school, hospitals, and other nonprofits. The four credit-rating agencies all give TIAA-CREF their highest possible ratings: A++ from A.M. Best, AAA from Fitch, Aaa from Moody's, and AAA from Standard & Poor's. They were founded 102 years ago by the Andrew Carnegie Foundation as a nonprofit in order to ensure that professors could have comfortable retirements (which were lacking in 1918). They grew in popularity and in AUM over the next 80 years. In 1998 they were forced out of their nontaxable status because for profit investment firms didn't like their untaxed competition and lobbied the federal government. So, in return they asked to be allowed to create a for profit subsidiary to sell mutual funds and immediate annuities retail. That is a completely separate business.

When I retired five years ago I annuitized my TIAA/CREF accounts to provide one reliable income stream (about 25% of my total invested assets). While a fixed annuity mostly, it nonetheless has increased by 1 or 2% in 3 of the 5 years. Also, the TREA portion has added some growth as well. This year might be a loss, however. In any case, my TREA component is only about 10% of the total accumulation that I annuitized.

I am happy to have this backstop and I treat it like a bond asset in my allocation model. This allows me to take on more risk in my after tax stock portfolio. It allows me to sleep at night when the markets are in full volatility mode.

Wow, a long treatise here; but I cannot emphasize more...do your homework and due diligence before acting. The annuity in its various flavors might work for you; the interest only payouts for now, or something else. Study up online...there are a ton of resources online and some good ones from TIAA itself. Most important, I trust the core group of people at MorningStar's community forum on "TIAA". Join up and pose your questions, they will help you out. Some are retired fellow economists, finance professors, etc. and know what they are about. You can trust their advice.

Hope this helps...

-BB

 

[Independent]

Thanks. I actually do have a separate LTC policy. I chose one from Genworth that, at the time, was offering a policy starting at $5500/month, with 5% annual compounding, UNLIMITED payout period, that qualifies under the Indiana Long Term Care Program for Medicaid Asset Protection. I opted for the 10-year premium option, meaning I pay premiums for 10 years, and then I'm done with the payments ... and the yearly payment I make this year (next month, actually), will be my 10th and final payment. They raised my annual premium one time over the past 10 years, so this will be their "last chance" to try and squeeze a bit more out of me! But I'm within the 45 day window they have to notify me of a premium increase, so I think I'm going to escape this final premium payment year without another increase in premium.

Congratulations. It looks like you are golden. I didn't know anyone was offering unlimited payout + 10 year premium, even 10 years ago.

 

[merlin3942]

Wow, a long treatise here; but I cannot emphasize more...do your homework and due diligence before acting. The annuity in its various flavors might work for you; the interest only payouts for now, or something else. Study up online...there are a ton of resources online and some good ones from TIAA itself. Most important, I trust the core group of people at MorningStar's community forum on "TIAA". Join up and pose your questions, they will help you out. Some are retired fellow economists, finance professors, etc. and know what they are about. You can trust their advice.

Hope this helps...

-BB

Wow, thanks so much! Nice to hear from someone so familiar with how TIAA works. As you, I worked for in a non-profit (university affiliated) research organization my entire working life. The "employer match" was extremely generous, at least by today's standards. I started with a 50/50 allocation between TIAA (fixed) and CREF (stocks), but at some point later in my career, realized that for the long haul, the stock part of the account was appreciating notably faster, and changed it to more like 20/80. I never really paid much attention to it after that ... until now. I've been "officially retired for just over 5 years. I was doing some part-time "consulting" work for the same office during that time, and also supplementing income as a part-time musician. Both the consulting and music gigs have pretty much ended (at least for now), so all of a sudden I had a need to start thinking about how to start drawing income from the TIAA/CREF accounts.

I didn't know I might be able to start drawing off just the interest from the TIAA fixed portion - that might be the best way for me to start, so I'm going to explore that some more. I'll definitely check out the Morningstar forum as well - I'd not heard about that before starting this thread.

Thanks to all!

 

[merlin3942]

Congratulations. It looks like you are golden. I didn't know anyone was offering unlimited payout + 10 year premium, even 10 years ago.

I found out just a few months after I signed up for it that Genworth quit offering it. There were some stories in the news a few years after questioning whether Genworth could remain "solvent" because of the LTC policy business, and might sell it off, etc, that were pretty unsettling. I do have the "guarantee" of the State of Indiana, for what that is worth. And in recent years, Genworth seems to have "righted the ship". They did raise my premium once a couple of years ago, but as I said, after this year, I'm paid up for life, so I feel good about that.

 

[LRDave]

Congress created the 403(b) as a nonprofit version of the 401(k) legislation for those employed in nonprofits, like higher education. Typically university and other nonprofit employers would at minimum pay into a tax advantaged investment account owned by the employee. Many also offered matching amounts, like with the for profit 401(k)s. I remember getting a 12% match on my 8% contribution at my (private) university back in the old days!TIAA was at first just about the only game in town; but over time Vanguard and Fidelity made headway and are offered along with TIAA and others in the nonprofit world. TIAA offers (and this is a simplification) two main areas for investment: safer, interest bearing vehicles and real estate, and securities (stocks/bonds). The biggest risk is with the stocks/bonds offerings but also the greatest reward. Many new employees would just allocate 50% to the paper assets and 50% to the stocks/bonds. During my years as a contributor the general Stock/Bond fund (called "CREF" at that time) consisted of an indexed (S&P I think) core and a smaller actively managed piece).

I was employed in higher education almost all of my life and was covered by TIAA-CREF (now, called only TIAA) before I moved to Europe. TIAA and its products are very complex and require a lot of careful thinking before acting. For example, your final payout rate includes different rates on tranches of your TIAA investments over the years, each paying different interest rates on your contributions during those years...higher in the 80s and 90s of course). Plus, of course, mortality credits. As an investor client, you always can see very transparently which of your accumulations pay what interest rates. When you are ready to retire, you can request any number of models of different options available to you. TIAA, like anything that lasts more than a hundred years, has grown its offerings in helpful ways and offers a complexity as a by product.

You have several choices, OP. You can annuitize some or all of your TIAA accumulation for a lifetime annuity (with all the variations on single/two life, guaranteed period, etc.). You can also opt for an annuity with a built in inflation protector (some of the payout is held back and reinvested regularly for a higher future payout). You can opt for an interest only payout, where you do not annuitize but are simply paid the 3% (with potential plus amounts determined each year) interest. Then decide later if you want to annuitize. Finally, if your TIAA accumulation includes the TREA (TIAA Real Estate Account), your payout will take advantage of any growth (or loss) in that asset. So, a lot to consider.

IIRC, you mention that the TIAA traditional annuity accumulation is 20% of your total TIAA and CREF (stock). And, annuitizing that amount alone would cover your retirement needs. So, in some ways this acts as a bond allocation, at present. Just with a likely higher payout because your funds have variable interest rates based on those tranches I mentioned earlier.

Note: TIAA staff do the work advising and then creating the annuity for you. They do not earn commissions. They are salaried employees. That said, they don't always know what they are talking about on the phone, so be wary. Always confirm yourself what they tell you.

To be clear, you CAN withdraw your TIAA as a lump sum, but only over a ten year period (again, it's complex: technically ten, but in actuality nine). So, cashing out can be done but only in slow motion. Slow motion is what TIAA is all about. It moves slowly, and carefully. You cannot do things, as a client, that might negatively affect your fellow clients. So, the cash out is over a decade to blunt the effect on everyone else. It's a deliberate design to ensure stability of their payout capability.

I have been a client since 1984 and have been very happy. They manage hundreds of billions of dollars in assets for some 5 million clients in higher ed, secondary school, hospitals, and other nonprofits. The four credit-rating agencies all give TIAA-CREF their highest possible ratings: A++ from A.M. Best, AAA from Fitch, Aaa from Moody's, and AAA from Standard & Poor's. They were founded 102 years ago by the Andrew Carnegie Foundation as a nonprofit in order to ensure that professors could have comfortable retirements (which were lacking in 1918). They grew in popularity and in AUM over the next 80 years. In 1998 they were forced out of their nontaxable status because for profit investment firms didn't like their untaxed competition and lobbied the federal government. So, in return they asked to be allowed to create a for profit subsidiary to sell mutual funds and immediate annuities retail. That is a completely separate business.

When I retired five years ago I annuitized my TIAA/CREF accounts to provide one reliable income stream (about 25% of my total invested assets). While a fixed annuity mostly, it nonetheless has increased by 1 or 2% in 3 of the 5 years. Also, the TREA portion has added some growth as well. This year might be a loss, however. In any case, my TREA component is only about 10% of the total accumulation that I annuitized.

I am happy to have this backstop and I treat it like a bond asset in my allocation model. This allows me to take on more risk in my after tax stock portfolio. It allows me to sleep at night when the markets are in full volatility mode.

Wow, a long treatise here; but I cannot emphasize more...do your homework and due diligence before acting. The annuity in its various flavors might work for you; the interest only payouts for now, or something else. Study up online...there are a ton of resources online and some good ones from TIAA itself. Most important, I trust the core group of people at MorningStar's community forum on "TIAA". Join up and pose your questions, they will help you out. Some are retired fellow economists, finance professors, etc. and know what they are about. You can trust their advice.

Hope this helps...

-BB

Excellent info for the OP. Thanks for taking the time to write that up.

I will add that recent tranches of TIAA Traditional can be sold once. They do not earn as much as the older vintages.

TREA is a bit of a darling over on BHs, as it appears to actually provide some real estate diversification without having to be landlord (not correlated to stocks or bonds). It is a complicated product and would not meet Old Shooter's criteria of understandability by a long shot. It also has liquidity issues for the holder (when/how much you can but/sell) and a pretty low limit on how much you can hold.

Most REITs end up highly correlated to equities.

 

[capjak]

Congratulations. It looks like you are golden. I didn't know anyone was offering unlimited payout + 10 year premium, even 10 years ago.

A year ago when I purchased mine there were only 2 with unlimited payouts.
One America offers unlimited payout in the form of a rider to whole life with 10 year pay, 20 year pay or lifetime pay the premium never goes up.
National Guardian has a traditional LTC that is also unlimited payout.

 

[ychuck46]

I would do it myself

Don't get sucked into a fixed rate of return (which, as others have already pointed out, is likely much less than the 6.5% payout rate you are being quoted). Keep control of your money, save yourself the ridiculous commission and fees, and put your own annuity in place by:

1. Putting a % of money into an index fund (e.g. S&P500, Total Mkt)
2. Put the remainder of the monies into a ladder of CDs.

By doing this you have likely replicated what the annuity provider will be doing anyways, without having them skim off a lot of your money for themselves.

 

[Emerson11]

credit risk

If you are 65, and relying on "guaranteed income" don't forget credit risk. During 30 years, a lot will change for insurance companies. If an insurer fails, in a political/monetary environment that favors debtors over creditors, annuity holders with other assets may be significantly disadvantaged. Generally, I think credit risk is under appreciated for younger retirees.

 

[mcdave]

I have my funds in TIAA as that was the vehicle the college where I worked used. the funds in the "guaranteed" portion OP mentions are locked in where they can't be taken out unless you follow one of very specific ways.either as an annuity, or a drawdown spread out over either 7 or 10 years or annual accumulated interest only. our plan allowed for a onetime lump withdrawal within 2 years of retirement and charged i think 2% fee to do so. once you pass that threshold your only choice for getting your money is one of the ways i mentioned. it makes for some complicated planning and that is why they push the annuity option so strongly. i am 64 living on SS and the interest portion which is set at a minimum 3% "guaranteed" rate plus an extra percentage based on when the money entered the account.this i will do until i decide on one of the other available options. TIAA also offers other options with more flexibility but those have to be chosen when the money enters the account an if you chose the guaranteed portion it is forever locked into that option.i'd be interested in others that have used TIAA what their experiences are and what worked for you.

 

[Gearhead Jim]

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"

The commonly accepted SWR from a balanced mix of stocks & bonds is generally considered to be 4%, but that is also based on potentially drawing down your principal or even running out of money completely in a few situations. I don't have any annuities, but the 6.5% annuity doesn't seem like such a bad deal if you want to be almost sure of not running out of money.

 

[almost there]

I took one 3 1/2 yrs ago at 55, over a cash balance plan lump sum.
$280k = $1520 per month for life. 50% to spouse if I kick the bucket.
Just part of the home made 4 legged stool retirement plan.
So far so good. Paying tax on a smaller amount of $$ over a longer period of time is another bonus.
If I live a long time, I win. If I don't, they win. Thats about it.

 

[FinancialDave]

The commonly accepted SWR from a balanced mix of stocks & bonds is generally considered to be 4%, but that is also based on potentially drawing down your principal or even running out of money completely in a few situations. I don't have any annuities, but the 6.5% annuity doesn't seem like such a bad deal if you want to be almost sure of not running out of money.

First you have to understand the most basic thing about these insurance products, such as annuities. The return the insurance company is quoting you today is based on current interest rates of about 2%.

They are also not inflation-protected as pointed out by others which could be huge over 15-20 years.

It sounds to me like you have plenty of money and don't really need to waste it, but if you do want a guaranteed income the only annuity I would purchase is an immediate annuity or a deferred annuity from someplace like immediateannuities.com. Low comminssions and fees mean more of your money working for you.

Anything that an agent is trying to sell you is just a waste of your hard earned money.

 

[2retireearly]

I guess it depends on the rate the insurance company is using the credit the account. Most are about 3.3%, so you'll be cutting into your principal and the 6.5% that is being removed each year, the full 6500, if you deposit 100000, will be really dipping into your principal. One thing you said that concerns me, is you said, you'll take soc sec at AT LEAST 70! Do not wait until after 70! you'll lose those payments from 70 to the age you decide to invoke soc sec, and it doesn't grow at 8% after 70, like it does from ages 62 to 70.

 

[thierman]

annuities -- some thoughts

I too like the idea of being paid a fixed sum (indexed to inflation) each month that beats the market rate of interest on my portfolio but here are a few negatives:
1. Annuities are basically insurance products, and despite the claims, insurance companies often go bankrupt. For example, executive life had a bunch of annuities that actually paid only about 60% on the dollar due to bankruptcy. AIG was unable to pay claim until the fed bailed them out in 2008. There are many other examples. Why? Because the insurance company is betting, against you, that they will earn more money on your money to both pay the monthly until you die, and cover costs. That doesn't always happen, no matte how big the insurance company.
2. In an annuity, you are betting against the house.The insurance company figures the odds, and then puts overhead and profit into the mix, and then gives you back your own money. If you die early, they win big.
3. Interest rates are going to go up-- and when they do, your annuity will seem like it is under-performing. Even ones indexed for inflation.
4. Typically annuity payments are taxed at ordinary income rates, while other investments might earn capital gains or lower rates. Even if the underlying investment is capital gains, distributions are ordinary income.
5. Annuities have sales charges-- even the best do. And we all know what happens when you don't invest 100 cents of every dollar-- you are totally behind the curve from that point out. Same argument we use for no-load funds or ETF's versus the old "managed funds" -- i.e. the managed fund typically doesn't beat the market but you have a whole lot less to invest because of commissions.

An annuity is a bond and life insurance combination. For some portion of your portfolio, that may be ok. Whole/universal life may be a better product (although the sales commission is usually very steep) or you can simply create your own annuity by doing a level pay out of your investment (with interest) over time and not look at the remaining principle after each payment. Anyway, good luck.

 

[OldShooter]

... The commonly accepted SWR from a balanced mix of stocks & bonds is generally considered to be 4%, but that is also based on potentially drawing down your principal or even running out of money completely in a few situations. I don't have any annuities, but the 6.5% annuity doesn't seem like such a bad deal if you want to be almost sure of not running out of money.

Apples and oranges, I think. IIRC the 4% scenario has you starting at 4% of your savings, then inflation-adjusting it each year following. That is exactly what the annuity does not do.

 

[almost there]

The only inflation-adjusting ones, are pretty much based on income from taxes. Co's have figured out long ago it is not sustainable to offer this feature. As people are living 30-40+yrs into retirement. No other form of investment can offer this "feature".
Thats why so many are in the stock market. Brokers convince clients inflation will eat away at anything else.
And its the only way to go.

This might help. Plug in the % you like. At 4% mine peters out in 23 yrs. And the current plan is to live beyond 78. https://www.bankrate.com/calculators/savings/savings-withdrawal-calculator-tool.aspx

 

[Gearhead Jim]

Apples and oranges, I think. IIRC the 4% scenario has you starting at 4% of your savings, then inflation-adjusting it each year following. That is exactly what the annuity does not do.

Good point.
With inflation nearly 0 for a decade, we haven't done annual increase in our withdrawals. Some day that may well change.

 

[pb4uski]

..... 1. Annuities are basically insurance products, and despite the claims, insurance companies often go bankrupt. For example, executive life had a bunch of annuities that actually paid only about 60% on the dollar due to bankruptcy. AIG was unable to pay claim until the fed bailed them out in 2008. ....

You have no idea what you are talking about.

First, AIG was NEVER unable to pay claims... that is just totally and utterly false. Secondly, insurance companies do NOT often go bankrupt... in those rare cases where they get into trouble they are taken over by their state regulators in a process called receivership. In most cases, they are sold off in whole or in pieces to other healthy insurers and in other cases the state insurance departments take over management as they run off.

In fact, AIG's insurance companies weathered the Great Recession very well and the sale of those insurers to Met Life and other buyers provided money for AIG to repay the US government what it owed for the bailout of AIG's financial products division which was an unregulated, non-insurance operation of AIG that made numerous bad decisions selling credit default swaps that brought AIG to it knees.

After Executive Life and Mutual Benefit Life failed in the 1990s the NAIC enacted major reforms regarding how companies are surveiled and monitored and there has not been a significant life insurer insolvency since.

Unfortunately, Executive Life policyholders did end up getting the shaft, but the policyholder losses were due to poor management of Executive Life after it was seized by the California insurance department.

 

[Closet_Gamer]

I remain open minded the value of immediate/deferred annuities. I'm a ways from needing make that decision, so I find threads like these incredibly valuable.

I do find it interesting that we have parallel threads running in the forum right now:

This one, where there is strong sentiment that CDs + stock market is the way to go.

Other(s), where the current situation is reminding us that the market dropped 90% during the depression and we could see very long term under-performance in equities...which could require liquidating CDs for income rather than just skimming off the interest.

I continue to be intrigued by the "do it yourself pension" characteristics of income annuities as a portion of a retirement plan that provides an income foundation for exigent circumstances. Like all insurance, statistically its a bad deal. But that also applies to my house and car insurance.

Keep the discussion going! I'm learning a lot.

 

[finnski1]

First you have to understand the most basic thing about these insurance products, such as annuities. The return the insurance company is quoting you today is based on current interest rates of about 2%.

They are also not inflation-protected as pointed out by others which could be huge over 15-20 years.

It sounds to me like you have plenty of money and don't really need to waste it, but if you do want a guaranteed income the only annuity I would purchase is an immediate annuity or a deferred annuity from someplace like immediateannuities.com. Low comminssions and fees mean more of your money working for you.

Anything that an agent is trying to sell you is just a waste of your hard earned money.

Your post quotes me for a statement that didn't come from me.

I believe it came from Gearhead Jim.
Just to be accurate

 

[mvoo]

Not Just Math

I don’t believe “the math” should necessarily be the deciding factor for purchase of an immediate annuity, although (obviously) it is a consideration. Many smarter than I (Pfau, Moleskey, Swindroe, etc) have laid out strong cases for annuities, or TIPs ladders, etc and many others have laid out other just as strong cases for other approaches. My take away is that ultimately it comes down to the ability to sleep at night. If you are comfortable with more risky assets and the probable higher return - no worries. If you like the idea of a guaranteed (to the extent any such thing is..) income stream, - no worries there either. Ultimately it is a personal decision based on weighing the risks. The ones pointed out in the replies by others are spot on. I’d add a couple more, that I think are just as important. The risk of cognitive decline - it’s much less impactful if one doesn’t need to make decisions on what/when to sell, or refill an investment later, etc. the check in the mailbox each month is a way to do that. Similarly, if one person in a household relies on another person in the household to oversee the financial decisions such as this (what/when/how) and then the financially savvy person either passes away or can no longer mentally do such things, it adds significant stress and risk to the no-financially savvy person. Again, a guaranteed check offsets that risk, and also the risk of the 2nd person being scammed by someone offering to help.
Just my two cents on this.....

 

[finnski1]

I don’t believe “the math” should necessarily be the deciding factor for purchase of an immediate annuity, although (obviously) it is a consideration. Many smarter than I (Pfau, Moleskey, Swindroe, etc) have laid out strong cases for annuities, or TIPs ladders, etc and many others have laid out other just as strong cases for other approaches. My take away is that ultimately it comes down to the ability to sleep at night. If you are comfortable with more risky assets and the probable higher return - no worries. If you like the idea of a guaranteed (to the extent any such thing is..) income stream, - no worries there either. Ultimately it is a personal decision based on weighing the risks. The ones pointed out in the replies by others are spot on. I’d add a couple more, that I think are just as important. The risk of cognitive decline - it’s much less impactful if one doesn’t need to make decisions on what/when to sell, or refill an investment later, etc. the check in the mailbox each month is a way to do that. Similarly, if one person in a household relies on another person in the household to oversee the financial decisions such as this (what/when/how) and then the financially savvy person either passes away or can no longer mentally do such things, it adds significant stress and risk to the no-financially savvy person. Again, a guaranteed check offsets that risk, and also the risk of the 2nd person being scammed by someone offering to help.
Just my two cents on this.....

Very good points.


I do everything of financial concerns in the household.
My wife has no interest nor aptitude for such things.
I go to immediateannutities.com frequently just to get a metric on cash flow for a certain percentage of our assets and if I keel over what would be the impact formy wife.

 

[mvoo]

I’m the same...and would note that I am purposely delaying social security to 70 not based on the math either, but from the longevity insurance perspective. The “break even point” of when to claim SS to me is not relevant, but the ability to have a larger income longer if needed by either both of us, or (especially) for her if I pass. As someone separately pointed out, SS is the best availabile annuity out there — backed by the US and inflation adjusted to boot...

 

[capjak]

There are many arguments that get presented to NOT buy a SPIA but here are a few that I have heard/read counter to them for purchasing a SPIA....

Some say earlier retirees and people in their 70s are best suited for SPIAs


1. If I die too soon, I didn't get my money's worth

You got what you paid for a guaranteed income stream for the rest of your life (or you and your spouse if joint or if cash refund your beneficiary got all your money back in exchange for your lower monthly payment).

2. It's a bet against the insurance company?

Insurance company relies on very large numbers (law of large numbers) and knowing mortality rates. It knows people that purchase annuities tend to live longer as people that have longevity in their family and feel healthy are more likely to purchase. It also doesn't care if you live longer because it knows per the law of large numbers that someone else that it insured will come to untimely death to make up for your long life.

3. What if everyone lives to be 125, won't the insurance companies all go out of business?

Well on one hand they will payout more on the annuity but they hedge the other side by having life insurance and they will reduce payouts for life insurance.

4. Interest rates are low so it's a bad time to buy?

True interest rates and payouts are correlated but mortality credits are mostly unaffected by interest rate swing so the payouts are competive in low or high interest rate environments. Maybe ladder the purchase over several years to try to capture increasing interest rates (that did not work so well over the last several decades as rates continued to go lower and than edge up for a short period before going to almost Zero again).

5. I can do a bond ladder and have access to my cash for flexibility

True but how long are you going to live? How many years are you going to have a bond ladder? How much money are you going to have in bonds when you pass? To be safe should you plan to live to 90? 100? 105? How much spending am I going to have to forgo so that I have $$ until I die? if I buy the annuity I will know what I will get paid annually and my return will be calculated after I pass by someone else.

6. What about inflation an annuity can't solve for that?

True but most investments can't solve for runaway inflation. Of course since you are not annualizing everything you can keep more in an inflation hedge.

7. I am conservative investor?

IF you have guarenteed income maybe you have more ability to be in higher risk premium like stocks. Maybe you don't sale at a low and buy at the high anymore and just let it sit after all the annuity is paying for most of your expenses.

8. I want to leave a legacy?

You may be able to leave more as you can be less conservative and your investment behavior may improve.

9. Yea but i can do the 4% rule and get more than from an annuity?

4% of initial balance plus inflation is based on history of stock/bond returns and assume moving forward will average the same and for 30 years. 4% is a conservative withdrawal and some FAs have suggested moving forward you may want to use a lower % and you may live longer than 30 years so better hold some back just in case...... You can still do 4% with the large portion you do not pay for a SPIA (most insurance company will not let you put more than 50% of liquid investment into an annuity and I would think that 25% maybe a better limit.)


and there are many more....