immeadiate annuities

[mathjak107]

so heres the investment deal..you give me all your money and ill give you your own money back over the next 12 or 13 years inetrest free ...if you live longer than that ill give you some of the income i earned with your money over the next few years.....oh and if you die ,i keep it all.
sounds like this baby should sell..
welcome to the immeadiate annuity........
but giving it some thought im thinking about it not for myself as i made sure i planned well,but for my ex-wife......
her lack of planning left her less than in good shape.....following the 4% withdrawl rule of thumb the income she can draw for a life time either from laddered bonds or a 50/50 just wont cut it...as much as i hate them it seems the only way she can almost double her withdrawl rate for life without fear of out living her income. is an immeadiate annuity with half her assets....

 

[brewer12345]

Immediate annuity = fixed income with lengevity insurance rolled in. The biggest problem is that most are fixed payout, so you get killed by inflation over time. If she has enough to get a sizable payout from an inflation-indexed annuity, she probably has more than enough to cut it with a 4% SWR on a diversified portfolio.

TANSTAAFL, unfortunately. If she doesn't have enough to retire in safety and style, an annuity will not magically make it so.

 

[Rich_by_the_Bay]

Immediate annuity = fixed income with lengevity insurance rolled in. The biggest problem is that most are fixed payout, so you get killed by inflation over time. If she has enough to get a sizable payout from an inflation-indexed annuity, she probably has more than enough to cut it with a 4% SWR on a diversified portfolio.

TANSTAAFL, unfortunately. If she doesn't have enough to retire in safety and style, an annuity will not magically make it so.

True enough; you can always buy smaller supplemental immediate annuities to keep up with inflation, though. Your $ buys more income as you get older, of course. A disadvantage is that every penny sunk into an annuity is a penny which is taken off the table for your heirs. If that is not a big concern, it seems a reasonable way to assure a decent income stream without volatility or longevity risk.

I would not rely too heavily on immediate annuities in my retirement, but may consider using them in small doses as a way to assure bare-bones cash flow, thus allowing me to invest my other assets a bit more patiently and aggressively than I would do otherwise.

There have been fairly recent topics on this, mathjak - may want to do a quick search.

 

[jug]

Immediate annuities, not bad if what you collect is adequate for your time here, perhaps 30 years or so.

However, dont put all the eggs there, you may want a big ticky item such as car, or the roof leaks.

As for me, with interest rates at 4.5%, will lock up most eggs from house proceeds there to shoot off adequate income for me.

Collect pension in about 18 months, 30K, so another 20 or so from investment.

Will keep a few mut funds, but most in CDS if the rates stay where they are.

If after a few years, market goes up nice, means I may have lost some gains.  If market craps out, goes to 8000-9000, throw some of the CD eggs there.  

Really dont know, cant worry about it.

However, if you can guarrantee me 4-6% for the next 10 or so years, then SS kicks in to take care of inflation effect.

Always like to have the cash around if I want to buy car if there is major crapout, or I meet a nice oriental chick who can turn my eyeballs inside out.

Ahh, too much micromanaging, need some refreshments from S. Bucks, lots of beaver at beaver and broad streets, NYC.

Chicken Ranch, here I comes

jug

 

[mathjak107]

unless im missing somthing even laddering cd's or bonds at 5% or so will only allow a 1 or 2 % withdrawl rate over inflation in order to last a lifetime ....at least the annuities will pay her close to 8% for ever which is more important for her than leaving something to heirs

 

[brewer12345]

unless im missing somthing even laddering cd's or bonds at 5% or so will only allow a 1 or 2 % withdrawl rate over inflation in order to last a lifetime ....at least the annuities  will pay her close to 8% for ever which is more important for her than leaving something to heirs

The problem with buying immediate annuities is the same as a 100% FI portfolio: inflation WILL eat you alive over the long term. Now with TIPS paying 2.5% real, you might get 2.5% W/D plus whatever principal you are willing to spend, but even then you have longevity risk.

Why not have her price one of the iflation indexed annuities Vanguard sells?

 

[2B]

The best interest rates I've seen on annuities is about 3 - 3.5%.  Those are things like 10 year fixed annuities so you can bridge a gap before SS or a pension.  I can only assume that the "income for life" annuities are at this level or lower.  Insurance companies have got lots of smart actuaries that figure out how long people might live.  They throw in a little safety factor, figure in their fees and then apply their low target interest rates.

So it's really a modified life insurance product.

Also, the payment amount does not keep pace with inflation.  

I know it sounds good to have an income for life but that income in real purchasing power drops around 3 to 5% every year.

You can get a more cost effective solution with laddered bonds or CD's that will mature annually off into the future.  You live off the maturing bonds and the interest payments of the future bonds.  I would not recommend more than about 10 years worth because of the loss of purchasing power.

In normal years sell enough of your stocks to buy the amount of bonds that you think you'll need out at the end of your ladder.  You would factor in inflation but also deduct the interest you expect to be getting from later bonds.  If the market soars, you might want to buy a few extra years when you rebalance.  In lean years you may let a year or two go by without replacing matured bonds.  You get inflation protection with your stock allocation, have a stable source of cash in the maturing bonds and you preserve your asset base.

Also, think about the credit quality of who is selling you the annuity.  There isn't FDIC insurance or government backing of any annuity.

 

[Peter]

The best interest rates I've seen on annuities is about 3 - 3.5%.

Well, for a 59 year old male in California, you can get nearly 7% payout for life. Previous comments about inflation, heirs, etc., all apply, but 3.5% is a bit pessimistic.

See http://www.immediateannuities.com/

I think annuities get more attractive as you get older. First of all, the monthly payout is greater, and concerns about running out of money before you run out of life become more pressing. Also inflation is going to have a shorter time to eat away at the value of the monthly check.

Peter

 

[laurence]

But you lose the principle when you die. 

7% a year starting at 59, average lifespan for a male is 72, a million dollars thrown at them will average total payout of 910,000.  So they win more than 50% of the time, plus the interest and devaluing of that money due to inflation is lots of gravy!


EDIT: O.K., smell test went off as soon as I hit post, life expectancy, if you make it to 59, is upped to 78 and change. So they pay out $1,330,000 over the lifetime of the annuity. If they make 3% on the investment they end up with ~$1.7 mil, or 400k in their pocket, if they make 6% they end up with $2.85 mil, or $1.5 mil in their pocket!

 

[samclem]

But you lose the principle when you die.

This happens with every investment. "Ya can't take it with ya" after all.

 

[laurence]

But you could get alot more for your money when you are alive! Saying, "I'm getting 7% on my money" is not the whole story, it's what the annuity company wants you to believe. If you bought some long term bonds at 7% coupon, at the end of the term you have your mil in principle, with an annuity, you have squat! You give them a crapload of money, and the give you back part of it over a long period of time, sounds like a great deal, for them!

 

[veritasophia]

if you make it to 59, is upped to 78 and change. So they pay out $1,330,000 over the lifetime of the annuity. If they make 3% on the investment they end up with ~$1.7 mil, or 400k in their pocket, if they make 6% they end up with $2.85 mil, or $1.5 mil in their pocket!

Thanks for the explanaition Laurence. What a rip-off! They're pretty much taking your money and doling it out to you in little chunks, with maybe a little extra. Meanwhile they're pocketing any gains on the principal and you get eaten alive by inflation.

Yet another reason to take charge of your own finances with a properly allocated portfolio and a reasonable SWR.

 

[mathjak107]

Well, for a 59 year old male in California, you can get nearly 7% payout for life. Previous comments about inflation, heirs, etc., all apply, but 3.5% is a bit pessimistic.

See http://www.immediateannuities.com/

I think annuities get more attractive as you get older. First of all, the monthly payout is greater, and concerns about running out of money before you run out of life become more pressing. Also inflation is going to have a shorter time to eat away at the value of the monthly check.

Peter

this is what i was figuring..no way could she ever get this level of income for 25 years off her own savings.
it looked to me like she could have almost 2x the withdrawl rate with the annuities...i saw them at 6.78 last time i called but they are higher now

 

[2B]

Well, for a 59 year old male in California, you can get nearly 7% payout for life. Previous comments about inflation, heirs, etc., all apply, but 3.5% is a bit pessimistic.

You've confused the payout with the true interest rate.  That's why I initially referenced a fixed 10 year payout.  If you don't have access to all of their actuarial calculations you can't figure out what interest rate they are annuitizing you with.

Annual payment does not equal interest rate.  They know you will die.  Then the remaining principal is theirs.

I ran some quick calcs.  If the same 59 year old California male lived for 30 years (to 89 which is about 10 years beyond normal longevity) that $70,000 payout on $1MM would represent a 5.75% rate of return.  If he only made it to 79, it's a whopping 3.56% rate of return.  In all cases, the money is gone at death.  Rates drop considerably if you throw a spouse into the mix.

Unless you're Conner MacCleod (sp?), you won't get much to brag about.

Finally, the annuity is only a "promise to pay" by a private company.  There is no federal guarantee in place.  If they invest poorly, you've got nothing.

 

[mathjak107]

yes an 8% payout is not an 8% return for sure...but the question is what other option does someone have who dosnt have a sizable nest egg that will give them more than 4% a year withdrawl rate for as long as they live? i dont see many or any options...looks like the only risk is death,.,,,,you die early you loose....

 

[2B]

this is what i was figuring..no way could she ever get this level of income for 25 years off her own savings.
it looked to me like she could have almost 2x the withdrawl rate with the annuities...i saw them at 6.78 last time i called but they are higher now

Also, remember annuities are not inflation indexed like the 4% SWR.  That $1MM annuity paying out $70K per year sounds great now.  At 79 that California male had better like living on $40K and that's if we only average a 3% inflation rate.

If you want to go for the gusto, use the Guyton model.  There you can withdrawl up to 6.2% inflation adjusted although there are some rules that would reduce spending in a prolonged down market or hyper inflation.

 

[mathjak107]

in reality with an annuitie you are buying a pension....from what i can see the insurance company is willing to pay you alot more than you can pay yourself because they are betting statistically you will die...it looks like since you have to plan and live like you will live forever the annuity lets you draw money at double the normal rate giving you alot more to live on...of course we know based on a large group most will die before they pay out alot more but what if you arent the looser...ha ha ha

 

[2B]

in reality with an annuitie you are buying a pension....from what i can see the insurance company is willing to pay you alot more than you can pay yourself because they are betting statistically you will die...it looks like since you have to plan and live like you will live forever the annuity lets you draw money at double the normal rate giving you alot more to live on...of course we know based on a large group most will die before they pay out alot more but what if you arent the looser...ha ha ha

But they aren't. Since it's not inflation adjusted it just starts higher. In 20 years, you'll be living on about half of the true value of the initial payment. The "true" rate of return is not good at all.

I do agree it is like a pension. Only the governmental bodies shower their retirees with COLA pensions. That's one of the reasons pensions aren't all their cracked up to be. They're fine if you die in a couple of years but after a few years it starts looking pretty meager.

 

[free4now]

My back of the envelope comparison:

Most people withdraw 4% SWR inflation-adjusted, so to compare with a fixed annuity you need to add inflation.  Historical inflation is 3-4%, so a 4% SWR actually takes 7-8% out per year on average.

You would compare 7-8% from the conventional SWR approach versus 8% from the annuities.  The annuity suddenly doesn't look so hot.

 

[unclemick]

Hmmm

The Brit's at work (70's and 80's) were always talking up Swiss immediate annuities - because of er ah 'fiat money' worldwide.

Different era. Right?

heh heh heh heh

 

[mathjak107]

while the conventional swr does need 7-8% in total.only 4% of the return is avail for withdrawl..now while the convential swr is inflation adjusted and allows you to increase your withdrawl every year by 3% eventually giving you 8% to live on after 20 years the annuity is giving you that amount for a full 18 years prior.i think this is tough to figure out... 4% withdrawl increasing the withdrawl by 3% every year or a flat 8% right out of the box..preservation of principal wouldnt be a factor in this case as its strictly about generating the most amount forever to live on....maybe the annuity is the best deal if you only live another 20 years from the day you start withdrawing? after that the conventional would spin off more and you would have all your principal to boot

 

[scrinch]

So for an individual to feel comfortable the SWR is 4-5% (because we want to be 80-90% sure). But an insurance company (or casino), because of the volume, can operate at an 8% SWR (anything above 50% success) and still expect to make money. Is that why the insuance company can take your money and offer you an 8% annual payment?

 

[veritasophia]

Create your own "annuity":

Continuing on the 59 year old living to 79 example. Using Firecalc, if you have 1M to start (60/40 allocation), withdrawing $70000/yr over 20 years, NOT adjusted for inflation: 96.2% success rate, avg ending balance $1,436,856.

Insurance companies aren't stupid, and they're obviously exceptional sales people.

 

[mathjak107]

So for an individual to feel comfortable the SWR is 4-5% (because we want to be 80-90% sure).  But an insurance company (or casino), because of the volume, can operate at an 8% SWR (anything above 50% success) and still expect to make money.  Is that why the insuance company can take your money and offer you an 8% annual payment?

thats what im thinking...a 8% allowable withdrawl dosnt happen until 20 years later indexed for inflation at 3% a year increase...that means on the annuity at least early on a person has almost 2x the money to live on........thinking about this stuff makes my hair hurt..........

there is no question that 20 yrs later on a million dollars having an 80,000 a year withdrawl and your almost 2 million principal at this point is the clear winner.but from a lifestyle issue where there is no heirs im not so sure the annuity is such a bad deal....

 

[Rich_by_the_Bay]

Why not have her price one of the iflation indexed annuities Vanguard sells?

Check the price -- very much more than standard. I'd rather invest the balance and buy a small add'l annuity as needed to keep up with inflation, plus you get more money back since you are older when you buy.