Fixed Income Life Annuity Question

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Fixed Income Life Annuity Question

Postby ghostdog1108 » Tue Feb 12, 2013 7:20 pm

In 8 months I will be retiring at age 64 years, eight months.
I will have around 950K in my employers defined contribution plan, invested as follows:
Vanguard Total Stock Market Index- 50%
TIAA Creff Fixed Annuity------------- 40% (3% minimum guarantee, can move in and out at will)
V. Wellington--------------------------- 10%
Zero debt, 150K in emergency funds, basic essentials run 36K yr.

Anticipate 36K yr in SS between my wife and me.

At this point the 401K withdrawals would be for fun stuff.

My question; the one time 'opportunity' for a fixed income lifetime annuity would essentially double what I would receive versus withdrawing
4%/yr. if I continue investing like I am.

Knowing inflation could be an issue down the road and there are pro's and con's to all finanical decisions, what advice would you give me?
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Re: Fixed Income Life Annuity Question

Postby dbr » Tue Feb 12, 2013 7:35 pm

ghostdog1108 wrote:In 8 months I will be retiring at age 64 years, eight months.
I will have around 950K in my employers defined contribution plan, invested as follows:
Vanguard Total Stock Market Index- 50%
TIAA Creff Fixed Annuity------------- 40% (3% minimum guarantee, can move in and out at will)
V. Wellington--------------------------- 10%
Zero debt, 150K in emergency funds, basic essentials run 36K yr.

Anticipate 36K yr in SS between my wife and me.

At this point the 401K withdrawals would be for fun stuff.

My question; the one time 'opportunity' for a fixed income lifetime annuity would essentially double what I would receive versus withdrawing
4%/yr. if I continue investing like I am.

Knowing inflation could be an issue down the road and there are pro's and con's to all finanical decisions, what advice would you give me?


Are you saying you can exchange the $950K for a fixed annuity with a payout of 8% of $950K = $76K/year? Your reference to a one time opportunity annuity is a bit obscure.
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Re: Fixed Income Life Annuity Question

Postby ghostdog1108 » Tue Feb 12, 2013 7:44 pm

Yes, approximately $6.55/ per thousand invested per year based on my age and the age of my wife.
If I die the amount is cut in half for my wife.
When we both die, no principle remains.
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Re: Fixed Income Life Annuity Question

Postby MN Finance » Tue Feb 12, 2013 10:03 pm

I would generally say that you don't want to annuitize if you don't need to unless it really helps you sleep well at night. Bottom line is that the calculation is actuarially based, so if you know how long you'll live, taking your own income vs an annuity will be an easy choice. If you live a long life you will certainly benefit, if not, then less for your heirs. And clearly you wouldn't turn the whole thing into an annuity, but potentially 1/3 at most to create that income floor. Then you will need a small w/d rate from your remaining investments which can grow in a balanced portfolio to combat inflation and/or leave more as a legacy.
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Re: Fixed Income Life Annuity Question

Postby ghostdog1108 » Tue Feb 12, 2013 10:24 pm

Thanks for the advice. Makes sense.
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Re: Fixed Income Life Annuity Question

Postby dbr » Tue Feb 12, 2013 11:14 pm

ghostdog1108 wrote:Yes, approximately $6.55/ per thousand invested per year based on my age and the age of my wife.
If I die the amount is cut in half for my wife.
When we both die, no principle remains.


$6.55/thousand is not 8% (hence not double 4%) it is .655%. I think you mean the payout is 6.55%. A going rate for a 50% survivor annuity might be a little less than 6% so the terms offered seem a little better than typical, maybe. I was astonished to understand how you could be getting an 8% annuity payout at age 65.

As posted above it would make no sense to annuitize the whole thing, if those are the only terms offered.

I think with SS covering your basic expenses I wouldn't annuitize anything.

HOWEVER, when people talk about basic expenses that might suggest some over optimistic thinking about what you will really spend. I would suggest planning out a budget on what you actually are going to do and see how much shortfall there is after SS.
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Re: Fixed Income Life Annuity Question

Postby Ozonewanderer » Wed Feb 13, 2013 12:40 am

When I looked at single premium immediate annuities once (2-3 years ago?) I was surprised to find that the payout rate for TIAA-CREF annuities was much lower than its competitors. The rep said it was because TIAA-CREF annuitants tend to be teachers in good health with higher education levels and longer projected lifespans so they had to payout less. My point is if you want to consider an annuity to shop around. You might be better off taking a lump sum and purchasing the annuity elsewhere.
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Re: Fixed Income Life Annuity Question

Postby Dale_G » Wed Feb 13, 2013 12:54 am

We need the right number. If the the payout is $6.55/thousand per month that would amount to about 8%. The rate looks about right for something that might have been negotiated / contracted some time ago.

I am looking at an annuity table from around 2000 that shows $5.05/month for joint and last survivor (100%, not 50%) for both aged 65 years.

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Re: Fixed Income Life Annuity Question

Postby ThePrune » Wed Feb 13, 2013 6:38 am

Although not your main point of interest, you mentioned a joint annuity with only a 50% Survivor payout. I'd recommend a higher survivor payout percentage in any joint annuity you purchase.

The usual economic "rule of thumb" is that the surviving spouse will need about 63% of what the couple had formerly required for living expenses. (This is usually expressed in the inverted form: 2 poeple can live on 1.6 times what 1 person requires.) From this perspective, a 75% Survivor option would be safer.
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Re: Fixed Income Life Annuity Question

Postby dpbsmith » Wed Feb 13, 2013 7:56 am

As I understand it, you have a 401(k), and a one-time opportunity to convert it to a fixed income life annuity provided by your employer. The essentials here are not that the annuity "would essentially double what I would receive versus withdrawing 4%/yr. if I continue investing like I am." Be careful. That proposition is simply the general life-annuity-versus-portfolio-withdrawals thing. Be aware that the traditional 4% is neither "4% of whatever the portfolio value is" nor is it "4% of the initial portfolio value," it is "4% of the initial portfolio the first year, and adjusted upward for cost-of-living in subsequent years." So, good, bad, safe, or unsafe, the 4% withdrawal rate assumes inflation adjustments.

Anyway. Don't compare the annuity to "4% withdrawals" to make your decision, at least not yet.

The big thing here is that you can buy an annuity from an insurer any time you like. So one of the things you need to find out is how this one-time opportunity compares with what you can just buy for yourself. Two places where you can get actual dollar quotations online are BRK DIrect EZ-Quote, which quotes on flat, level-payment annuities (same number of dollars every month), which I think is comparable to what your employer is offering. I'm in a hurry and can't post the link but Googling should do it. The other place is Vanguard, but you must have an account. Drill down to "what we provide" and "fixed annuities," and you will then need to, essentially, open a second (free) account from within your Vanguard account at a place called "Income Solutions," where you can get a large and useful variety of quotations, including quotations on inflation-adjusted annuities.

Flat, level, payments are not really what you'd like to have, and 50% to survivor seems stingy to me.

Even if the annuity turns out to be a good deal compared to the competition, you may well not want to do it, it all depends. But the first step is to find out whether it's meh, good, or fantastic.

The other alternative to be considered is NOT starting Social Security, but intentionally living on and spending down your savings for a few years in order to delay Social Security and get a bigger benefit. This is logically very similar to buying an annuity, but is typically a better deal.
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Re: Fixed Income Life Annuity Question

Postby ghostdog1108 » Wed Feb 13, 2013 10:37 pm

Dale_G wrote:We need the right number. If the the payout is $6.55/thousand per month that would amount to about 8%. The rate looks about right for something that might have been negotiated / contracted some time ago.

I am looking at an annuity table from around 2000 that shows $5.05/month for joint and last survivor (100%, not 50%) for both aged 65 years.

Dale


7.86% to be exact, however with no COLA and no compounding affect perhaps not that great...,
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Re: Fixed Income Life Annuity Question

Postby Mel Lindauer » Wed Feb 13, 2013 11:04 pm

You need to remember that buying an annuity with a large amount like you're suggesting is very risky, since the lifetime payments depend entirely on the financial stability of one insurance company. While states have a system in place to help rescue owners of failed insurance companies, their coverage limits are very much lower than your suggested purchase price (normally around 200K or so, but it varies by state).

I'd advise caution and learning more about the risks involved.
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Re: Fixed Income Life Annuity Question

Postby ourbrooks » Wed Feb 13, 2013 11:11 pm

If the OP is talking about a TIAA annuity, then holding mutual funds at Vanguard is probably more risky than a TIAA annuity.
One would think that the chairman of the Federal Reserve Board could keep his funds anywhere he wanted to; he has chosen to keep them in TIAA-CREF.
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Re: Fixed Income Life Annuity Question

Postby ghostdog1108 » Wed Feb 13, 2013 11:20 pm

Mel Lindauer wrote:You need to remember that buying an annuity with a large amount like you're suggesting is very risky, since the lifetime payments depend entirely on the financial stability of one insurance company. While states have a system in place to help rescue owners of failed insurance companies, their coverage limits are very much lower than your suggested purchase price (normally around 200K or so, but it varies by state).

I'd advise caution and learning more about the risks involved.


Excellent points made by all. I will be passing on this 'opportunity'.
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Re: Fixed Income Life Annuity Question

Postby bobcat2 » Thu Feb 14, 2013 12:34 am

The best way to get a large inexpensive inflation-indexed second to die joint life annuity is to delay taking your SS benefits until age 70. Calculate what your SS benefits will be if you wait to age 70 to take SS, and withdraw that amount from your portfolio every year from when you retire to age 70 (when your SS benefits begin).

There are a lot of strategies of what is the very best thing to do with SS when there is a couple both getting benefits. There are several good SS strategy calculators on the market. One of the best of these is Maximize My Social Security for $40.

Link to website http://www.maximizemysocialsecurity.com/

But all good SS strategies involve some delay in taking benefits, if you are under age 70 when you retire. This is particularly true when real interest rates are low. Right now real interest rates are extremely low, which makes delaying SS a very good deal indeed. :D

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Re: Fixed Income Life Annuity Question

Postby stlrick » Thu Feb 14, 2013 10:08 am

Mel Lindauer wrote:You need to remember that buying an annuity with a large amount like you're suggesting is very risky, since the lifetime payments depend entirely on the financial stability of one insurance company. While states have a system in place to help rescue owners of failed insurance companies, their coverage limits are very much lower than your suggested purchase price (normally around 200K or so, but it varies by state).

I'd advise caution and learning more about the risks involved.


ourbrooks wrote:If the OP is talking about a TIAA annuity, then holding mutual funds at Vanguard is probably more risky than a TIAA annuity.
One would think that the chairman of the Federal Reserve Board could keep his funds anywhere he wanted to; he has chosen to keep them in TIAA-CREF.


I find it very interesting that the objective, empirical, quantitative Bogleheads seems to be as subjective about "risk" as everyone else. It is almost universal to misjudge the risk of air travel versus car travel versus slipping in the shower. Risk of insurance company default varies with the insurance company. If TIAA-CREF defaults - in particular, an annuity based on TIAA Traditional, then everything else has already defaulted, including the ability of states to meet their guarantees.
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Re: Fixed Income Life Annuity Question

Postby MN Finance » Thu Feb 14, 2013 11:11 am

Mel Lindauer wrote:You need to remember that buying an annuity with a large amount like you're suggesting is very risky, since the lifetime payments depend entirely on the financial stability of one insurance company. While states have a system in place to help rescue owners of failed insurance companies, their coverage limits are very much lower than your suggested purchase price (normally around 200K or so, but it varies by state).

I'd advise caution and learning more about the risks involved.


Agreed. I'll just point out that the investing in TIAA in the accumulation stage is subject to the identical risks than if the asset were annuitized. It's still a promise to pay by the insurance co. And in fact, maybe this is a leap and not supported by facts, but I'd be more inclined to assume that the money is just slightly safer in the annuity phase because as the largest payer of income to America outside of SS, this would be the last domino to fall.
Last edited by MN Finance on Tue May 14, 2013 12:14 pm, edited 1 time in total.
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Re: Fixed Income Life Annuity Question

Postby ghostdog1108 » Thu Feb 14, 2013 1:14 pm

stlrick wrote:
Mel Lindauer wrote:You need to remember that buying an annuity with a large amount like you're suggesting is very risky, since the lifetime payments depend entirely on the financial stability of one insurance company. While states have a system in place to help rescue owners of failed insurance companies, their coverage limits are very much lower than your suggested purchase price (normally around 200K or so, but it varies by state).

I'd advise caution and learning more about the risks involved.


ourbrooks wrote:If the OP is talking about a TIAA annuity, then holding mutual funds at Vanguard is probably more risky than a TIAA annuity.
One would think that the chairman of the Federal Reserve Board could keep his funds anywhere he wanted to; he has chosen to keep them in TIAA-CREF.


I find it very interesting that the objective, empirical, quantitative Bogleheads seems to be as subjective about "risk" as everyone else. It is almost universal to misjudge the risk of air travel versus car travel versus slipping in the shower. Risk of insurance company default varies with the insurance company. If TIAA-CREF defaults - in particular, an annuity based on TIAA Traditional, then everything else has already defaulted, including the ability of states to meet their guarantees.



:-)
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