Wellesley vs Annuity

[JohnEyles]

... the immediate annuity could increase the amount that one could "safely" withdraw out of a retirement portfolio. Or on the flip side, the immediate annuity could increase the portfolio survivability for a given withdrawal rate.

This is all true. There are three downsides:

1. The company may go belly up, leaving you with nothing.
2. Your heirs get nothing.
3. You lose access to the money.

All three of these suggest not putting more than half, but many say
1/4th, or one's egg into SPIA; and diversifying risk by putting that
amount with more than one company.

So far, I've SPIA'ed about 7% of my egg (it was the amount sitting
in an after-tax annuity that I didn't like). I also annuitized part of a
TIAA-CREF retirement account (also about 6-7% of egg) because that
made me qualify for life-time free health insurance (hard to argue
with that one).

There was also an interesting paper FPA Journal paper recently
cited, that outlined a strategy of annuitizing WHEN a person's egg
got small enough to just barely afford a SPIA that would cover their
income requirements - "Modern Portfolio Decumulation: A New
Strategy for Managing Retirement Income". Hoping of course
that that never comes to pass !

 

[Dawg52]

Maybe I am missing something (very likely), but does Fidelity have a Wellesley fund counterpart?

Not that I know of but what you can do is buy the dividend etf DVY yielding 3.5% and buy the total bond market etf BND yielding 4.80% and you have a similar mix as Wellesley. Put 40% in DVY, 60% in BND and you get a combined yield of 4.28%. Basically the same thing without any capital gains distributions.

 

[ats5g]

This is all true. There are three downsides:

1. The company may go belly up, leaving you with nothing.
2. Your heirs get nothing.
3. You lose access to the money.

All three of these suggest not putting more than half, but many say
1/4th, or one's egg into SPIA; and diversifying risk by putting that
amount with more than one company.

So far, I've SPIA'ed about 7% of my egg (it was the amount sitting
in an after-tax annuity that I didn't like). I also annuitized part of a
TIAA-CREF retirement account (also about 6-7% of egg) because that
made me qualify for life-time free health insurance (hard to argue
with that one).

There was also an interesting paper FPA Journal paper recently
cited, that outlined a strategy of annuitizing WHEN a person's egg
got small enough to just barely afford a SPIA that would cover their
income requirements - "Modern Portfolio Decumulation: A New
Strategy for Managing Retirement Income". Hoping of course
that that never comes to pass !

Thanks John that was an interesting article. The "don't annuitize until you absolutely have to" part is interesting. I suppose an application of this would be that if you start retirement with not very much savings, you'll have to annuitize virtually everything up front. Does that sound right?

Another approach, which people may or may not be more comfortable with [I personally would], is outlined in David Babbel's Investing Your lump Sum at Retirement, which is basically to "Begin by annuitizing enough of your assets so that you can provide for 100% of your minimum acceptable level of retirement income."

- Alec

 

[cute fuzzy bunny]

It all sounds good for a regular retiree. Still uncertain as to how well it flies over a really long period of time.

I was chatting with someone the other day who mentioned an interesting item. The last civil war widow passed away a few years ago. Seems it sometimes happened that a very young lady would marry one of the elder veterans, provided them with care in their final years, then collected their war pension.

She was still collecting the $50 a month confederate veterans pension from Alabama that must have been quite a princely sum back in the late 1920's...

 

[Sandy]

Not that I know of but what you can do is buy the dividend etf DVY yielding 3.5% and buy the total bond market etf BND yielding 4.80% and you have a similar mix as Wellesley. Put 40% in DVY, 60% in BND and you get a combined yield of 4.28%. Basically the same thing without any capital gains distributions.

Dawg52, Thanks. I had never found anything that looked similar, thought maybe I was just not searching well enough - and thanks for the "formula"

 

[W2R]

OK, now here are some REAL numbers comparing Wellesley with a couple of annuities I have been thinking about.

Looking at the distributions from Wellesley for the past year, it looks like the yield is about 4.2% if you just take the dividends and let the rest grow to balance inflation.

The TSP offers MetLife immediate fixed lifetime annuities, both with and without inflation adjustment. For a single person, age 62, and in the present interest rate environment (which affects the amount of payout agreed upon but not after the annuity is begun), here are the monthly yields on each $100K before taxes:

(1) $682/month: annuity, no inflation protection
(2) $494/month: annuity, inflation protected
(3) $353/month: Wellesley, with assumed 4.2% dividends

Or, looking at it another way, I could get the same income from (3) as from (2) by investing 1.4 times as much money. The % dividends for Wellesley could change but apparently (hopefully) they are pretty stable. (1) is really not comparable since it does not include increase with inflation.

Given my new (still hypothetical) circumstances with the inheritance, which is supposed to add a few hundred thou (but not millions) to my ER plan, I think I can afford to just use Wellesley for the needed enhancement to my fixed income portion. If I am only withdrawing the dividends, it will grow to nearly match inflation all by itself.

It's a stiff price to pay for control, but for me it is probably worth it. Still thinking but leaning towards Wellesley.

 

[Dawg52]

Given my new (still hypothetical) circumstances with the inheritance, which is supposed to add a few hundred thou (but not millions) to my ER plan, I think I can afford to just use Wellesley for the needed enhancement to my fixed income portion. If I am only withdrawing the dividends, it will grow to nearly match inflation all by itself.

You just described my situation. I think I can easily get by on dividends and interest to support my retirement lifestyle. I haven't totally written off a small immediate annuity but I'm having a tough time justifying one.

 

[unclemick]

Without resurrecting an ancient thread - I view my non cola pension and early SS as 'effectively annuities.' which kicked in at 55 and 62 (now 64).

And NO! - I do not fiddle around with x times the income or net present value calculations to giggle around asset mix.

On cold winter nights - I sometimes take the no 2 pencil vs expenses and do a hard times/what if I needed to live off income streams check.

Roth and maybe fixed annuities are vaguely 'on the table' if I fail to croak precisely at the IRS expected 84.6 or RMD doesn't get it done.

heh heh heh - good to go for now - I have maybe 20 yrs to putz.

 

[W2R]

Without resurrecting an ancient thread - I view my non cola pension and early SS as 'effectively annuities.' which kicked in at 55 and 62 (now 64).

Me too. But my cola pension and SS together add up to a pretty measly sum, in my case, even if I wait until 66 for SS. You are only 5 years older than me, you young thing! 59.5 years old here and aging fast.

And NO! - I do not fiddle around with x times the income or net present value calculations to giggle around asset mix.

On cold winter nights - I sometimes take the no 2 pencil vs expenses and do a hard times/what if I needed to live off income streams check.[/

I think we are on the same wavelength, here. I am working with "what do I need/want in 2007 dollars to live on", especially under rock bottom, bad market conditions. What if the market crashes, and inflation hits, and the economy is in the toilet for ten years or so. That kind of thing. In that case, I would like to ensure more (reliable, fixed) income than SS/pension will provide.

Roth and maybe fixed annuities are vaguely 'on the table' if I fail to croak precisely at the IRS expected 84.6 or RMD doesn't get it done.

heh heh heh - good to go for now - I have maybe 20 yrs to putz.

I think the TSP annuity is probably the best deal I could get from a company as solid as MetLife, and the TSP has rules about when it can be purchased that would prevent me from waiting that long to buy it.

So, the annuity's function (or Wellesley's function) in my case would be to supplement my pension/SS fixed income stream for my entire ER, rather than just to provide for my old age.

 

[W2R]

You just described my situation. I think I can easily get by on dividends and interest to support my retirement lifestyle. I haven't totally written off a small immediate annuity but I'm having a tough time justifying one.

It doesn't sound like you need one, unless later on when you are in your 80's (such as UncleMick is proposing). Maybe I don't either.

Still, I have to admit that I like the idea of income coming from a variety of sources. However, I'm not sure buying an annuity is worth it, for me. Still kicking the idea around, though.

 

[JohnEyles]

I suppose an application of this would be that if you start retirement with not very much savings, you'll have to annuitize virtually everything up front. Does that sound right?

Yes, that's how I interpret it (but the the article is kinda dense).
And no one responsible seriously recommends this, even the
SPIA-shilling articles which have been popping up everywhere
(and will probably accelerate as the baby boomers go into
retirement, I think things could REALLY start getting ugly !)
recommend at most half of your egg.

 

[twaddle]

I just noticed that Vanguard publishes expense information for their (AIG and Lincoln Life) annuity offerings. Do insurance companies publish these numbers?

The average annual fee under the Vanguard Lifetime Income Program's variable income option is 0.79%—well below half the 2.39% industry average.* That's a potential savings of nearly $1,600 a year on a $100,000 annuity.

The average annual fee for the Vanguard Variable Annuity is 0.57%, compared with an industry average of 2.39%—a potential savings of over $1,800 a year on a $100,000 contract.

 

[Hillbilly]

Funny how a simple fund like Vanguard Wellesley fund can get such a response. I plan to hold this fund starrting in my 60's.

 

[yakers]

DW retired last year & her funds were tied up in a 403b/annuity/funds from hell structure. Just passed the date for surrender fees and her funds went straight into VG Wellesley IRA. There may be later diversifications but I expect she will hold this fund forever as her annuity/income source.