Milevsky's got me thinking immediate annuity????

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
Dave C.
Posts: 301
Joined: Sun Jul 10, 2011 10:18 pm
Location: Mesa, AZ

Milevsky's got me thinking immediate annuity????

Post by Dave C. »

I 'm just about finished with Moshe Milevsky's book, "Pensionize your Nest Egg". He is a huge advocate of building your own pension by way of immediate annuities. His logic is daunting.
Following is my current financial situation, the numbers are rounded, but they're pretty close. Do you folks think I am a candidate for such an annuity within the next 5 to 10 years?

Age: me 62, she 61...both retired, me 9 months ago, she 3 years ago.

Portfolio: 1.5M--1.2 tax sheltered, $300K already taxed savings. (85% index funds, Fidelity & Vanguard)
Debt: No mortgage, no auto loans...no debt.
Pension: $1800/mo for life of both us, started 9-months ago.
Monthly living expense: $4,500-$5,000 (higher than we spent while I worked)
Social security: not taking until 66 years of age, our total SS by 2019 wil be $3200/mo.
We have no desire to leave a legacy.

By 2019 my monthly draw on my own savings will be reduced to less than $1K plus an annual inflation adjustment. Currently I am drawing from our already taxed funds for living expenses.
I've moved $150K into MM funds and intermediate bond funds for a couple years of living expenses.

While I like Milevsky's product allocation to create a guaranteed income for life by the use of immediate annuities, I ask you if I am appropriate candidate for pensionizing my nest egg sometime in the future? :shock: 8-)
Easy does it/Live & Let Live/One day at a time. Thanks Bill.
adamthesmythe
Posts: 5774
Joined: Mon Sep 22, 2014 4:47 pm

Re: Milevsky's got me thinking immediate annuity????

Post by adamthesmythe »

A single premium immediate annuity is a reasonable option for many for part of their retirement funds. However, you have both a pension and social security to provide lifetime income. In your case I would lean toward a smaller fraction in SPIA.

This is probably not the best time to buy an SPIA because of low bond interest rates.
Bill M
Posts: 440
Joined: Sun Dec 30, 2012 9:10 pm

Re: Milevsky's got me thinking immediate annuity????

Post by Bill M »

I'm also planning on an immediate annuity, so I understand your thinking. With current rates being so bad, I'm actually planning on splitting it across three purchases, three years apart, so that not all of it will be the lowest rates.

You didn't mention whether provision for income taxes was included in the $5K monthly spending. Likewise expected medical costs. If not, ignore the following.

I'm not sure I see the need for a SPIA in your case right now. Your pension will be eroding in value due to inflation, but that is hardly a problem in the near future. SocSec plus pension plus those pesky RMDs (coming once you turn 70) covers the $5K spending. So its just the pension erosion that could be covered by either a SPIA or withdrawals from investments. You have planned withdrawals until 66 to replace the delayed SocSec, and smaller withdrawals to cover pension erosion until 70, but I don't see withdrawals likely for many years once you start RMDs.

You might consider a deferred SPIA (sometimes called a SPDA, or a QLAC) to cover the pension erosion once you turn 80 or so. The pro is they're cheap 20 years in advance. The con is you can't calculate the proper amount to buy.
dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Milevsky's got me thinking immediate annuity????

Post by dhodson »

As mentioned, you already have two annuities (SS and a pension).

Most SPIA products are not inflation adjusted and those that are typically but not always have caps and give significantly less money early on as their way of inflation adjusting. If you do this with the rest of your funds then you have made an irrevocable decision. If you for some reason want to spend more money now (for instance want to go on more vacations or one of you becomes ill and you want to do more now) then you cant. You will likely although not guaranteed get a lower return over the decades. With a SPIA you are in essence getting a return from mortality credits (which are few early on) and the returns of the insurance company (which invests heavily in bonds) minus their huge fees. When you need this insurance bc there is significant risk that sequence of events would lead you to run out of money, its a smart move. If you don't need it then it can be a choice.

I plan to purchase a SPIA at age 80 for basic living expense needs assuming I'm in good health. It will be a small part of my portfolio. I also wouldn't want to put a ton of money into any one company for 30-40 years.
User avatar
22twain
Posts: 4030
Joined: Thu May 10, 2012 5:42 pm

Re: Milevsky's got me thinking immediate annuity????

Post by 22twain »

Bill M wrote:SocSec plus pension plus those pesky RMDs (coming once you turn 70) covers the $5K spending.
I wouldn't lump RMDs together with SS and pension. RMDs aren't really income; they're just a forced transfer of assets that you already have, from pre-tax to post-tax status. The IRS doesn't care whether you actually spend your RMDs, only whether you pay income tax on them. :wink:
Meet my pet, Peeve, who loves to convert non-acronyms into acronyms: FED, ROTH, CASH, IVY, ...
User avatar
Frugal Al
Posts: 1736
Joined: Fri May 28, 2010 10:09 am

Re: Milevsky's got me thinking immediate annuity????

Post by Frugal Al »

Why annuitize more of your retirement income when you are not maximizing the value of the inflation indexed annuity you already have: Social Security. Your $3200/month SS will be worth about $4224/month if deferred to age 70. That plus your $1800 pension will provide over $6k/month in income, with two thirds of that inflation indexed. By age 70, assuming 3% inflation, your expenses will be about $6k/month. Your retirement portfolio won't have to do much heavy lifting; therefore, it shouldn't need to be insured. If circumstances change you can always annuitize at a later date.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Milevsky's got me thinking immediate annuity????

Post by dbr »

Frugal Al wrote:Why annuitize more of your retirement income when you are not maximizing the value of the inflation indexed annuity you already have: social security. Your $3200/month SS will be worth about $4224/month if deferred to age 70. That plus your $1800 pension will provide over $6k/month in income, with two thirds of that inflation indexed. By age 70, assuming 3% inflation, your expenses will be about $6k/month. Your retirement portfolio won't have do any heavy lifting; therefore, it shouldn't need to be insured.
Milevsky is exactly right about the idea, but as other posters are saying you already have annuities. The best annuity purchase today is, as suggested, probably to delay SS until age 70 for one of you and age 66, then 70, for the other. To get a good analysis of SS strategy I suggest you pay up $19.95 and use this source: http://www.socialsecuritysolutions.com/ I used them and their advice was helpful.

If you find yourself past age 70 and concerned about the state of your income and assets you can purchase another SPIA or two over time.
Angst
Posts: 2968
Joined: Sat Jun 09, 2007 11:31 am

Re: Milevsky's got me thinking immediate annuity????

Post by Angst »

Frugal Al wrote:Why annuitize more of your retirement income when you are not maximizing the value of the inflation indexed annuity you already have: Social Security. Your $3200/month SS will be worth about $4224/month if deferred to age 70. That plus your $1800 pension will provide over $6k/month in income, with two thirds of that inflation indexed. By age 70, assuming 3% inflation, your expenses will be about $6k/month. Your retirement portfolio won't have do much heavy lifting; therefore, it shouldn't need to be insured. If circumstances change you can always annuitize at a later date.
+1
Dave C. wrote:We have no desire to leave a legacy.
To this end, wait until you're 80 if buying an SPIA. You might have more income than you know what to do with. Then again, things happen.
User avatar
White Coat Investor
Posts: 17409
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: Milevsky's got me thinking immediate annuity????

Post by White Coat Investor »

My parents turn 70 this year and we just sat down and had a big discussion about whether to buy SPIAs with 1/10th to 1/4 of their portfolio. They decided against it for various reasons:

1) Their pension is larger than yours and actually covers all their current living expenses
2) They do have a desire to leave money behind (yay for me)
3) They delayed SS to 70 already (actually filed and suspended)

At the end of the discussion my mom said to me- I thought this was something you thought we should do? They didn't like all the negatives and have been perfectly happy with the performance of their 50/50 Vanguard portfolio.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Independent
Posts: 551
Joined: Tue Sep 22, 2009 1:09 pm

Re: Milevsky's got me thinking immediate annuity????

Post by Independent »

Frugal Al wrote:Why annuitize more of your retirement income when you are not maximizing the value of the inflation indexed annuity you already have: Social Security. Your $3200/month SS will be worth about $4224/month if deferred to age 70. That plus your $1800 pension will provide over $6k/month in income, with two thirds of that inflation indexed. By age 70, assuming 3% inflation, your expenses will be about $6k/month. Your retirement portfolio won't have to do much heavy lifting; therefore, it shouldn't need to be insured. If circumstances change you can always annuitize at a later date.
+1

After you've decided top defer SS, it will be even more clear that you have more money available than you need to cover $5,000 of monthly spending spending.
You have no desire to leave a legacy.

What are you planning top do with the rest? I'll suggest you figure that out before you make an irrevocable decision to put some of that into more non-inflation adjusted income.

Maybe you want to increase travel or other fun stuff while you are healthy enough to enjoy it. Maybe you want to give the money to some worthy cause while you're alive. Make those decisions first, then think about how to arrange your finances.
ubermax
Posts: 1888
Joined: Tue Feb 11, 2014 1:19 pm

Re: Milevsky's got me thinking immediate annuity????

Post by ubermax »

IMO you're a prime candidate to not annuitize - with a 100% J&S annuity & dual SS amounts you're both covered & so too your expenses, just manage the treasure chest .
User avatar
obgyn65
Posts: 770
Joined: Sun May 06, 2012 9:11 am

Re: Milevsky's got me thinking immediate annuity????

Post by obgyn65 »

I agree with this.
ubermax wrote:IMO you're a prime candidate to not annuitize - with a 100% J&S annuity & dual SS amounts you're both covered & so too your expenses, just manage the treasure chest .
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell
Topic Author
Dave C.
Posts: 301
Joined: Sun Jul 10, 2011 10:18 pm
Location: Mesa, AZ

Re: Milevsky's got me thinking immediate annuity????

Post by Dave C. »

I'm the OPer, and Ithanks for everybody's thoughts.
I'll revisit the annuity issue again in 15 or 20 yeaars (if I'm lucky). For now I will happily manage my treasure.
Easy does it/Live & Let Live/One day at a time. Thanks Bill.
User avatar
dodecahedron
Posts: 6607
Joined: Tue Nov 12, 2013 11:28 am

Re: Milevsky's got me thinking immediate annuity????

Post by dodecahedron »

Another reason to defer purchasing annuities in your situation is that you are relatively young and you can reduce the uncertainty about the financial condition of the insurance companies issuing your annuities by waiting until you are older. At this point, there is a significant probability that at least one of you will still be alive in 30 years. That is a long time. Currently well-managed conservative insurance companies may or may not stay that way. When you purchase bonds, you have the option to exchange them if the credit rating starts to drop and you feel uncomfortable. SPIAs offer no such options.

But purchasing an implicit SS annuity (by deferring filing for SS) is an easy recommendation in your situation. And while you are waiting for SS, you can reduce your future RMDs by spending or Rothifying some of your tax-deferred funds while your tax bracket is low (relative to what it will be after SS and RMDs kick in.)
User avatar
GerryL
Posts: 3902
Joined: Fri Sep 20, 2013 11:40 pm

Re: Milevsky's got me thinking immediate annuity????

Post by GerryL »

This discussion combined with a review of how much (little) I have spent in my first 6 months of retirement has prompted me to revisit my plans to buy a SPIA around the same time I start taking SS at 69-70. This was going to amply cover my living expenses. The fact that my RMDs will start about a year after I intend to start SS and the annuity is something to consider. I think it is still a reasonable plan, but I am going to sit down with a calculator and compare two options: SPIA or bigger RMDs (with the option, of course, of purchasing a SPIA at a later date). Since I expect to be able to reinvest a good portion of my RMDs, I'm not seriously worried about outliving my IRA.

I have plenty of time to ponder as I am at least 3 years away from executing what ever plan I choose, but these kinds of discussions on this forum provide useful insights.
heyyou
Posts: 4461
Joined: Tue Feb 20, 2007 3:58 pm

Re: Milevsky's got me thinking immediate annuity????

Post by heyyou »

revisit my plans to buy a SPIA around the same time I start taking SS at 69-70. This was going to amply cover my living expenses. The fact that my RMDs will start about a year after I intend to start SS and the annuity is something to consider.
Tax (1) A portion of the annuity income is return of principle so that part is not taxed, but the other portion is taxable income, and older annuitants will use up the untaxed portion sooner. Buying more annuity than you need is paying for insurance on unspent income. My guess is that is the reason for buying less annuity than is needed for your total income (liability matching, not discretionary spending matching). Between insurance company fees and income taxes, the expenses are too high if the annuity income is not needed for current spending. Easy solution, don't buy until income is needed.

Tax (2) RMDs on the IRA portion not spent on annuities will boost your taxes, and the RMD percentage/WD amount will grow over time.

Tax (3) Higher income retirees pay tax on some portion of their Social Security and SS amount grows with inflation.

Cost of inflation (4) Inflation reduces the value of your annuity income.

You may be okay for the early years, then face more taxes on almost the same income from the same sources as you age. Annuities are good in many important ways, but they also have risks over time and they have unnecessary costs on unspent income.
User avatar
magellan
Posts: 3489
Joined: Fri Mar 09, 2007 3:12 pm

Re: Milevsky's got me thinking immediate annuity????

Post by magellan »

IMO, a key step in this process is to separate out two distinct decisions. One decision is whether you want to lock-down a guaranteed income stream for part of your retirement spending and the other decision is how to best achieve that goal.

You can decide to lock down some future guaranteed income now, without buying the SPIA now. The way to do this is to purchase one or more TIPS that mature between ages 70 and 85. These maturing TIPS will provide guaranteed lump sums at maturity to purchase SPIAs.

Payout rates on SPIAs purchased later in life aren't very dependent interest rates. For any given lump sum amount (eg. maturing TIPS), you can be fairly certain of the amount of real income it will buy, even years into the future.

For this to work, you have to use tax deferred funds and you should make sure your plan can handle the cash flow impact of RMDs (eg don't get forced into selling TIPS early for RMDs).
choices
Posts: 84
Joined: Sun Dec 21, 2014 7:33 pm

Re: Milevsky's got me thinking immediate annuity????

Post by choices »

Thanks, guys, for reinforcing what I already believed about our situation. I have never liked annuties but as my hair gets more platinum each year, I have been reading more and more about the dreaded A's. Just one more thing I believe I can put off until I grow up and maybe pull that trigger at 80 or so
itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 11:17 am
Location: midValley OR

Re: Milevsky's got me thinking immediate annuity????

Post by itstoomuch »

I think the guy is a pretty good analyst for retirement planning.
I read his other book Life Annuities: An Optimal Product for Retirement Income, and independently came to his same conclusions in 2008, mostly.
We are using laddered by amounts and time in deferred GLWB (Income) annuities as a inflation/deflation/market hedge until we can do SPIA. Will do SPIA, laddered by time, when we finish caring for parents which will be probably close to when RMD hits and end of the guarantee accumulation period. Currently 65/68yo.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
555
Posts: 4955
Joined: Thu Dec 24, 2009 6:21 am

Re: Milevsky's got me thinking immediate annuity????

Post by 555 »

SPIAs are great, but OP, you are very obviously not someone who needs one now. If that book told you to get one now, then it's not a very good book. (However, as others have said, for long term planning, keep SPIAs in mind for starting age 75-85, and maybe have some funds easrmarked for that potential purpose.)
Independent
Posts: 551
Joined: Tue Sep 22, 2009 1:09 pm

Re: Milevsky's got me thinking immediate annuity????

Post by Independent »

itstoomuch wrote:I think the guy is a pretty good analyst for retirement planning.
I read his other book Life Annuities: An Optimal Product for Retirement Income, and independently came to his same conclusions in 2008, mostly.
We are using laddered by amounts and time in deferred GLWB (Income) annuities as a inflation/deflation/market hedge until we can do SPIA. Will do SPIA, laddered by time, when we finish caring for parents which will be probably close to when RMD hits and end of the guarantee accumulation period. Currently 65/68yo.
The jargon can get confusing here.

To me, a Guaranteed Lifetime Withdrawal Benefit is a rider that can be attached to a variable annuity.
For example, Vanguard's version: https://personal.vanguard.com/us/whatwe ... al-benefit
You can put money into the variable annuity today and exercise your rider sometime in the future.

A Single Premium Immediate Annuity is a stand-alone contract where you put money in today and your income begins (typically) one month from today.

It's certainly possible to put a lump sum into a variable annuity today, withdraw a lump sum X years from now, and buy a SPIA with that withdrawal.

But, I'm confused about the "end of the guarantee accumulation period". What's that?
Lynette
Posts: 2407
Joined: Sun Jul 27, 2014 9:47 am

Re: Milevsky's got me thinking immediate annuity????

Post by Lynette »

Does one pay tax on the income generated by a SPIA? After all it is simply a return of one's money.

Lynette
dhodson
Posts: 4117
Joined: Mon May 24, 2010 3:03 pm

Re: Milevsky's got me thinking immediate annuity????

Post by dhodson »

Lynette wrote:Does one pay tax on the income generated by a SPIA? After all it is simply a return of one's money.

Lynette
With all annuities, income level tax on all gains

Insurance company will tell you how much is return vs gain
itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 11:17 am
Location: midValley OR

Re: Milevsky's got me thinking immediate annuity????

Post by itstoomuch »

He also cautions the use of added guarantees as period certain, survivors benefit, etc which erode the pay rate to where one may be better off in using a bond fund. YMMV. :annoyed :oops:
Last edited by itstoomuch on Mon Jan 19, 2015 12:48 pm, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
Ron
Posts: 6972
Joined: Fri Feb 23, 2007 6:46 pm
Location: Allentown–Bethlehem–Easton, PA-NJ Metropolitan Statistical Area

Re: Milevsky's got me thinking immediate annuity????

Post by Ron »

Lynette wrote:Does one pay tax on the income generated by a SPIA? After all it is simply a return of one's money.

Lynette
In my case, it's a case of returning my untaxed money (both original premium paid along with ongoing gains at an IRR of 4.79% which does not include the preimum), since it was funded from my company's cash balance plan upon retirement; my company eliminated their traditional pension (defined benefit) plan back in the early '80's.

While I pay FIT on 100% of distributions (no state/local in my residence) at my/our current marginal tax rate it does have the advantage of not being considered for RMD's at age 70.5.

- Ron
J295
Posts: 3401
Joined: Sun Jan 01, 2012 10:40 pm

Re: Milevsky's got me thinking immediate annuity????

Post by J295 »

dhodson » Wed Jan 14, 2015 7:48 am
I also wouldn't want to put a ton of money into any one company for 30-40 years.


Agree
Independent
Posts: 551
Joined: Tue Sep 22, 2009 1:09 pm

Re: Milevsky's got me thinking immediate annuity????

Post by Independent »

Lynette wrote:Does one pay tax on the income generated by a SPIA? After all it is simply a return of one's money.

Lynette
I'm guessing that the question assumes you are buying the SPIA with after tax money.

In that case, the tax law has a formula that looks at prospective payments and estimates how much will be a return of your money and how much will be investment earnings after you buy the annuity. This is from the Bogleheads Wiki
Exclusion ratio
Fixed immediate annuities receive a degree of tax relief (for non-qualified dollars) due to the income exclusion rules. The IRS allows the investment in the contract to be recovered over the annuitant's life expectancy. The calculation of the Exclusion Ratio is made according to the General Rule (found in IRS Publication 939 General Rule for Pensions and Annuities. The annuity payments will be partially taxable due to the exclusion over the recipient's life expectancy. After this term. the full income payment will be taxed. If the owner dies before the total investment in the contract is recovered, and annuity payments cease as a result of his death, the un-recovered amount is allowed as a deduction to the owner on the final tax return.
https://www.bogleheads.org/wiki/Immedia ... sion_ratio
itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 11:17 am
Location: midValley OR

Re: Milevsky's got me thinking immediate annuity????

Post by itstoomuch »

If and when we do SPIA, it's going to come from the IRA bucket where any income would be ordinary income. We have non-IRA buckets that are used for tax and income/divestment/investment optimization.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
Post Reply