Immediate annunities

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martie67
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Joined: Mon Jul 07, 2014 7:40 pm

Immediate annunities

Post by martie67 »

Hello all

I am relatively new to investing and retired about 4 years. I am considering purchasing an immediate fixed annuity to supplement soc. sec of 1900. Fidelity has proposed a single life annuity to provide approx 500/month at a cost of 91,500. Not inflation based. There is currently 226K in deferred IRA. Balance would remain in Wellesley. PS. Insurance company is Guardian insurance and annuity.

Question:

would this be my best way to obtain additional income.

Is there a fund I could invest in to generate 5-6% annually with minimal risk. Would this be a better alternative?

all responses appreciated
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Uncle Pennybags
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Re: Immediate annunities

Post by Uncle Pennybags »

martie67 wrote:Is there a fund I could invest in to generate 5-6% annually with minimal risk. Would this be a better alternative?

all responses appreciated
There is more to think about then just annual return. Your premium belongs to the insurance company; if you die a month after buying it all you get is one payment.

The question is how long are you going to live? I took the annuity instead of a lump sum for my defined benefit plan and it does give me peace of mind but that is guaranteed by a US government insurance program.
Gill
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Re: Immediate annuities

Post by Gill »

First of all, don't just accept one quote on an immediate annuity. There are many insurance companies offering such arrangements and you will very likely find a better quote. Give us your age, sex and state of residence and we can give you some examples.
And, no, there is no safe investment that can give you the return you mentioned.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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windhog
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Re: Immediate annunities

Post by windhog »

First, remember that a SPIA is not an investment, it is a form of insurance, and once you pay the premium it is gone, a sunk cost.

That said, a guaranteed stream of additional income for as long as you (and your spouse?) live can be a worthwhile purchase. This type of insurance is made possible by mortality credits, which effectively re-distribute future income from those who check out early to those who live longer. There are no investments I know of that have this feature, so it is pretty difficult to find an equivalent investment that will allow you to 'roll your own'.

When you have one policy and one price, it is nearly impossible to tell if you have a good deal. I have dealt with immediateannuities.com and found them to be a respected broker of SPIAs. You can get multiple quotes for identical coverage from multiple companies, which will tell you something important about the offer you have in hand.

I hope this helps.
Paul
dhodson
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Re: Immediate annunities

Post by dhodson »

Remember that return with a SPIA include return of principal so it isn't a real 5-6% return.

With that said IF you need or want a guaranteed income stream then that is what you are purchasing and that can be a reasonable purchase.
Topic Author
martie67
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Re: Immediate annunities

Post by martie67 »

Thank you for your responses:

I am a 68 year old female living in Ohio.

the policy covers my life and if I check out before using full annuity, balance will go to my beneficiaries.

Any stats on how many member investors chose the annuity option for retirement income vs relying totally on investments for income.
adamthesmythe
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Re: Immediate annunities

Post by adamthesmythe »

> the policy covers my life and if I check out before using full annuity, balance will go to my beneficiaries.

I believe you are considering the SPIA option with "cash refund". You should be aware than any option beyond single life payment has a cost, and you should run the numbers with and without these options before making a decision.

(immediateannuities.com provides a good tool for investigating your options).
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BL
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Re: Immediate annunities

Post by BL »

You are quite young for a SPIA. I am not saying it is bad, but if you can wait a few years you would benefit from mortality credits, that is, others are dying early and so do not benefit. Also, the rate you get is partly return of principal so can't be compared directly.

Would you have more than enough to live on if you withdrew 4% of your total savings? This would be similar to the SPIA since it could include principal as well as dividends. If so, you may not have a great need to buy this this young. I don't think you should reduce your benefits by buying insurance for heirs (unless you have a handicapped person or others who critically need this and are relying on you for the next 20 years). It would be better to pay less for the same benefit and keep the rest in your Wellesley or CDs so you could perhaps buy some later when inflation has increased your needs.

You don't say your age or how long you have been getting SS. If less than a year, you could change your mind and delay SS which would be the best deal in buying a COLA-based annuity (SS) (spending down savings to delay SS).

Shop around as advised above. Keep it simple and easy to compare by buying a plain SPIA without extra guarantees.

Edit:
Looking at above, I might consider withdrawing $500/month from Wellesley and revisit SPIA at age 75. That is less than a 3% withdrawal so you should be ok. (The rule of thumb used to be 4% was a safe withdrawal rate.) You could also split it or chose any amount from 500 on down for the SPIA and withdraw some from IRA. You will have to withdraw around 4% RMD from IRA anyway when you reach 70 1/2.
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Macmungo
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Re: Immediate annunities

Post by Macmungo »

How does the Required Minimum Distribution work once an Immediate Annuity is set up? Is the RMD taken from the principal or the income?
Gill
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Re: Immediate annunities

Post by Gill »

Macmungo wrote:How does the Required Minimum Distribution work once an Immediate Annuity is set up? Is the RMD taken from the principal or the income?
There is no income or principal in an IRA or an immediate annuity. The payout from the SPIA satisfies the RMD.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
ralph124cf
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Re: Immediate annunities

Post by ralph124cf »

windhog wrote:First, remember that a SPIA is not an investment, it is a form of insurance, and once you pay the premium it is gone, a sunk cost.

That said, a guaranteed stream of additional income for as long as you (and your spouse?) live can be a worthwhile purchase. This type of insurance is made possible by mortality credits, which effectively re-distribute future income from those who check out early to those who live longer. There are no investments I know of that have this feature, so it is pretty difficult to find an equivalent investment that will allow you to 'roll your own'.

When you have one policy and one price, it is nearly impossible to tell if you have a good deal. I have dealt with immediateannuities.com and found them to be a respected broker of SPIAs. You can get multiple quotes for identical coverage from multiple companies, which will tell you something important about the offer you have in hand.

I hope this helps.
Paul
Note that TIAA-CREF variable annuities do have mortality credits built in during the payout period. It is hard to explain exactly how this feature works, but they are the only self directed investments that I am aware of that have this feature.

Ralph
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53timr
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Re: Immediate annunities

Post by 53timr »

Two other things to be mindful of as you are looking at annuities:

Make sure the insurance company is in a good financial position by checking their rating at:
A.M. Best http://www3.ambest.com/ratings/entities/
Moody's https://www.moodys.com/page/lookuparating.aspx

Also, check with your state guaranty association to find out what type of protection you would have should the issuing insurance company default. You can find a link for your state at this web site: https://www.nolhga.com/policyholderinfo/main.cfm
“I take my investment advice from my dentist, because he’s just as likely to lose me money as a financial advisor.” | ― Jarod Kintz, This Book Title is Invisible
Topic Author
martie67
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Re: Immediate annunities

Post by martie67 »

Again, thanks for the feedback.

The responses have started me thinking (not always a good thing), and I wonder if you would comment on this last question.

What would be the pros and cons of leaving the cash in a MM for monthly withdrawals and receiving withdrawals from the annuity.
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Uncle Pennybags
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Re: Immediate annunities

Post by Uncle Pennybags »

martie67 wrote:What would be the pros and cons of leaving the cash in a MM for monthly withdrawals and receiving withdrawals from the annuity.
Pros the money is yours or your estates. Cons you may outlive it. It is not unlike rolling dice, some win, some lose but the house (insurer) always wins. If you knew how long you are going to live it would be easy to figure out what to do.
skepticalobserver
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Re: Immediate annunities

Post by skepticalobserver »

I've certainly said my peace on this board about SPIAs. I don't like them. If, however, the posted arguments (investment? insurance?) have convinced you that an SPIA is a good fit, please evaluate the likelihood that you may need some or all of the lump sum payment in the future. As you know, payment to the annuity carrier for a lifetime non-refundable SPIA is, well, non-refundable.
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