ShokWaveRider
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Also current return rates for annuities are not good. You can basically create your own.
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.
Nothing wrong with that. In the wrap-up at the end of my Adult-Ed investing course I tell the students this: "Investing is boring. If you're not bored, you're not doing it right."... our portfolio. Very boring, not sexy, but gets the job done.
I'm not even sure a ladder is necessary. The yield curve on Treasuries largely reflects the mystery of future inflation, something that TIPS make moot. Also, something not widely understood, the interest on TIPS is inflation-adjusted too. The coupon rate is not paid on the original face value of the security, it is paid on the current value. So for example, 20 years of 3.5% inflation will result in the nominal dollars value of the interest payments to double, which is what the TIPS principal value has done at the end. Said another way, the typical YTM calculation undervalues the TIPS yield to the extent that there is any inflation. I have not figured out how this wrinkle might affect a ladder strategy....Building a TIPS ladder is not trivial. Typically people start at 30 years and work backward, some years they did not sale TIPS so you have to work around that issue also. I would get help from someone on building this type of ladder also remember TIPS are not tax efficient so you would want them in your tax deferred or non taxable account due to the tax drag if possible.
Annuities are ALWAYS a good deal for the provider - or they wouldn't sell them in the first place. Annuities offer a poor return in exchange for predictable income. Unless you realistically expect to live longer than the average annuitant, it's not a good bet.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!
Well, in an economic sense, any transaction that a seller will execute must be good for the seller. From BMWs to Big Macs. All the same.Annuities are ALWAYS a good deal for the provider - or they wouldn't sell them in the first place. Annuities offer a poor return in exchange for predictable income. ...
FWIW, Wade Pfau's "Safety First Retirement Planning" is available on Kindle for only $10. It presents a clear-eyed comparison of the benefits and trade-offs between annuitizing some of your stash or managing all of the risk yourself.
https://www.amazon.com/Safety-First-Retirement-Planning-Integrated-Worry-Free-ebook/dp/B07X2TW623
..... I'm not even sure a ladder is necessary. The yield curve on Treasuries largely reflects the mystery of future inflation, something that TIPS make moot. Also, something not widely understood, the interest on TIPS is inflation-adjusted too. The coupon rate is not paid on the original face value of the security, it is paid on the current value. So for example, 20 years of 3.5% inflation will result in the nominal dollars value of the interest payments to double, which is what the TIPS principal value has done at the end. Said another way, the typical YTM calculation undervalues the TIPS yield to the extent that there is any inflation. I have not figured out how this wrinkle might affect a ladder strategy. ...
That's basically what we are doing. We bought one issue in 2006, the 2s of 2026. But as I have said before those were inflation insurance, so we bought the longest and lowest coupon that was then available. Then we basically forgot about them. We did sell 10-20% of the position in 2112, rationalizing that we had a shorter time horizon but deep inside it was also probably because they had appreciated to about 150% of what we had paid. Now with our fixed income AA tranche starting to look a lot like a bucket, I anticipate that we will begin selling off the TIPS in a couple of years depending on the shape of the recovery.OldShooter.... do the prices of TIPs vary much? I don't really follow them so I don't know. But if prices don't vary much then I can see no need for a ladder... just invest long and sell some as needed to fund spending.
Annuities are ALWAYS a good deal for the provider - or they wouldn't sell them in the first place.
Op is not proposing to purchase an annuity from an insurance company. She has been placing part of her paycheck with TIAA for the past 40 years. She can probably have her TIAA traditional paid out in a "Transfer Payout Annuity" for some period of 10 years or longer, but typically those of us in TIAA cannot just cash out the portion of our TIAA assets that are in the "Traditional" annuity. This allows TIAA to invest for the long term and allows the OP to get a guaranteed return of 3% per annum, and a little more than that at present.
pb4ulaski's post showed that if the alternative were a CD ladder, she would need to live to age 83 for the return to exceed that of a CD ladder at current CD rates. However, as she can get nearly 3.5% just by leaving it set this is not the realistic alternative to annuitizing this accumulation.
Since TIAA is very safe, it would make sense for the OP to use other lower yielding fixed assets for income now (e.g.. a bond fund, or any CDs yielding less than 3%). Then,
when she is 70 or 75 she can choose a 10 yr payout, (still with the 3% or higher interest) or an annuity with a much higher payout rate than 6.5% because of her reduced life expectancy at that time.
Thanks. It will take me a while to figure out that spreadsheet. They are always intuitive to the person that built them.Here is an excellent resource if one wishes to build a TIPS ladder:
Bob Hinkley Downloads
In particular:
TIPS Ladder Builder
I think post #31 was a hijack, throwing confusion into the discussion.Not sure who "she" is Mike... the OP is a he... .......
I think post #31 was a hijack, throwing confusion into the discussion.
Op is not proposing to purchase an annuity from an insurance company. She has been placing part of her paycheck with TIAA for the past 40 years.
That said, if the OP is a male in Indiana as profile indicates, then 6.5% payout with 10 years guaranteed is a pretty good payout rate....
OP needs to provide more details for more specific advice, but the main point is that the 6.5% is not a "return" because it includes both return of capital and return on capital.
The OP seems to think that they can withdraw their balance whereas you think they can't... it could be that he has a different TIAA product than you do or the OP doesn't know he can't take it out.
Thanks. It will take me a while to figure out that spreadsheet. They are always intuitive to the person that built them.
I agree with the above comments. This is not "fixed" in terms of purchasing power. It decreases at the rate of inflation, and I'm concerned about that inflation rate.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,
You haven't said anything about your Long Term Care plan. Some people want to keep assets to cover LTC. As a single person, you might figure you've got enough just by using your house (if you own one) and the stocks. I don't know, just think about that.
I interpreted that Mike meant that the person would be annuitizing their existing deferred annuity balance rather than purchasing an annuity from another insurer... but I might be wrong about what he meant.