Annuity explanation for Chuck

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
The Wizard
Posts: 11111
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Annuity explanation for Chuck

Post by The Wizard » Wed Oct 11, 2017 5:00 pm

Excerpted from a locked thread:

Wed Oct 11, 2017 4:14 pm
The Wizard wrote: ↑

But I'm all in favor of having large pension and/or annuity income each month in retirement as well.
But I only do Immediate Annuities.
When I throw the switch on another $100K at TIAA, the additional income starts the following month...

Hi Wizzard, I would like to better understand your post but I cannot figure out what you mean when you say ...

"When I throw the switch on another $100K at TIAA, the additional income starts the following month..."

If you see this and would like to explain it I would be interested.

Regards

Chuck
What I meant was:
I have a good sized tax deferred 403(b) accumulation with TIAA from 40+ years of employment.
I annuitized a portion of it for lifetime income when I retired at age 63 in 2013.

My remaining 403(b) balance at TIAA continues to grow with market returns. I can withdraw additional money from it for additional taxable income if I choose.
Or I can just leave it alone until RMDs need to start in 2020.

For various reasons, I chose to "annuitize" around $100,000 of that accumulation this past May, thus getting an additional $7000+ income per year.
I found the Payout Rate of just over 7% to be agreeable at my age 67.
This was an "immediate" annuitization in that additional income started hitting my checking account the month after paperwork was completed...
Attempted new signature...

User avatar
nedsaid
Posts: 8821
Joined: Fri Nov 23, 2012 12:33 pm

Re: Annuity explanation for Chuck

Post by nedsaid » Sun Oct 22, 2017 11:39 am

Bumping this for Chuck.
A fool and his money are good for business.

LonnieG
Posts: 17
Joined: Fri Oct 20, 2017 8:36 pm

Re: Annuity explanation for Chuck (Query for the Wizard)

Post by LonnieG » Thu Oct 26, 2017 1:52 am

Wizard

You mentioned annuitzing when you retired in 2013. Did you annuitize with TIAA? And you added another $100,000 recently to yield 7% on the $100,000 annually. Could you share more information in addition to it being immediate the annuity that you bought into? Also you said your TIAA continues to grow? At what percentage rate on average annually? How are your funds in TIAA allocated for continued growth? And this growth is occurring with no money being added to it? Thank you for your insight.

dbr
Posts: 24147
Joined: Sun Mar 04, 2007 9:50 am

Re: Annuity explanation for Chuck (Query for the Wizard)

Post by dbr » Thu Oct 26, 2017 8:50 am

LonnieG wrote:
Thu Oct 26, 2017 1:52 am
Wizard

You mentioned annuitzing when you retired in 2013. Did you annuitize with TIAA? And you added another $100,000 recently to yield 7% on the $100,000 annually. Could you share more information in addition to it being immediate the annuity that you bought into? Also you said your TIAA continues to grow? At what percentage rate on average annually? How are your funds in TIAA allocated for continued growth? And this growth is occurring with no money being added to it? Thank you for your insight.
I would like to be sure that everyone understands that payout of 7% on an annuity is not 7% yield on an investment.

smitcat
Posts: 778
Joined: Mon Nov 07, 2016 10:51 am

Re: Annuity explanation for Chuck

Post by smitcat » Thu Oct 26, 2017 9:28 am

The Wizard wrote:
Wed Oct 11, 2017 5:00 pm
Excerpted from a locked thread:

Wed Oct 11, 2017 4:14 pm
The Wizard wrote: ↑

But I'm all in favor of having large pension and/or annuity income each month in retirement as well.
But I only do Immediate Annuities.
When I throw the switch on another $100K at TIAA, the additional income starts the following month...

Hi Wizzard, I would like to better understand your post but I cannot figure out what you mean when you say ...

"When I throw the switch on another $100K at TIAA, the additional income starts the following month..."

If you see this and would like to explain it I would be interested.

Regards

Chuck
What I meant was:
I have a good sized tax deferred 403(b) accumulation with TIAA from 40+ years of employment.
I annuitized a portion of it for lifetime income when I retired at age 63 in 2013.

My remaining 403(b) balance at TIAA continues to grow with market returns. I can withdraw additional money from it for additional taxable income if I choose.
Or I can just leave it alone until RMDs need to start in 2020.

For various reasons, I chose to "annuitize" around $100,000 of that accumulation this past May, thus getting an additional $7000+ income per year.
I found the Payout Rate of just over 7% to be agreeable at my age 67.
This was an "immediate" annuitization in that additional income started hitting my checking account the month after paperwork was completed...

Thank you for an accurate description - it provokes questions for me about taxes....
- How does the annuitization affect your current taxes?
- And your current plan(s) to do Roth conversions?
- How might it affect taxes in future years with higher SS and perhaps a change in filing status at some point?

LonnieG
Posts: 17
Joined: Fri Oct 20, 2017 8:36 pm

Re: Annuity explanation for Chuck

Post by LonnieG » Fri Oct 27, 2017 9:20 pm

DBT

If he did not get a return of 7% on $100,000 annuity (extra $7000) as posted, thenn would be the correct yield on the $100,000 annuity?

dbr
Posts: 24147
Joined: Sun Mar 04, 2007 9:50 am

Re: Annuity explanation for Chuck

Post by dbr » Sat Oct 28, 2017 8:06 am

LonnieG wrote:
Fri Oct 27, 2017 9:20 pm
DBT

If he did not get a return of 7% on $100,000 annuity (extra $7000) as posted, thenn would be the correct yield on the $100,000 annuity?
An annuity doesn't have a yield. What you can do is compute a theoretical interest rate that would be enough to support the return of the annuity money plus enough to make up the total payout for as long as it is paid out. How that comes out depends on the longevity of the annuitant. If he dies early he won't even get his initial premium back. If he outlives his expected lifetime he will get back more than his paid in amount. The insurance company funds this payout by investing the premiums at enough return so that the portfolio of money they have and the earnings they make are sufficient to support the contracts plus pay them expenses and commission. Long lived annuitants collect some of the money left behind by short lived annuitants.

The Wizard
Posts: 11111
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Annuity explanation for Chuck

Post by The Wizard » Sat Oct 28, 2017 8:27 am

Heading out on the dive boat shortly.
Will answer in more detail when I return...
Attempted new signature...

The Wizard
Posts: 11111
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Annuity explanation for Chuck

Post by The Wizard » Sat Oct 28, 2017 2:43 pm

dbr wrote:
Sat Oct 28, 2017 8:06 am
LonnieG wrote:
Fri Oct 27, 2017 9:20 pm
DBT

If he did not get a return of 7% on $100,000 annuity (extra $7000) as posted, thenn would be the correct yield on the $100,000 annuity?
An annuity doesn't have a yield. What you can do is compute a theoretical interest rate that would be enough to support the return of the annuity money plus enough to make up the total payout for as long as it is paid out. How that comes out depends on the longevity of the annuitant. If he dies early he won't even get his initial premium back. If he outlives his expected lifetime he will get back more than his paid in amount. The insurance company funds this payout by investing the premiums at enough return so that the portfolio of money they have and the earnings they make are sufficient to support the contracts plus pay them expenses and commission. Long lived annuitants collect some of the money left behind by short lived annuitants.
Ok, back from this morning's dives (Jamaica).
dbr is quite correct in his explanations.
With TIAA in particular, what we participants have during working years is essentially a portfolio of tax sheltered mutual funds, under the 403(b) tax shelter law most often, not 401(k).

In retirement, we have various options for withdrawing this accumulated money. ALL withdrawal options result in taxable Ordinary Income, same as with IRAs and 401(k)s.
I can withdraw around 4% per year which might be Sustainable forever, or I can withdraw nothing in my early retirement years and let everything be subject to RMDs at age 70.5.

But with TIAA, I have the option of "annuitizing" a portion of my accumulation for lifetime income. When I annuitize a sum of money, like the $100,000 I did last May, it stays in the mutual fund side until the 30th or 31st of the month preceding your chosen start month. Then on the 1st of that month it transforms into an irrevocable lifetime income stream.

In my case, I chose a ten year guarantee period and got a 7.04% PAYOUT RATE, which means that roughly $587 per month hits my checking account each month for the next decade plus, hopefully.
Note: this rather modest monthly amount is on top of a larger amount from funds I annuitized at start of retirement in 2013.

Annuitized income will generally be higher than 3.5% or 4% SWR income, so this is the reason my AGI and marginal tax bracket are somewhat higher in retirement than when working. I've come to accept that.

So what I have is basically a do it yourself pension which, combined with my SS payment, tends to exceed my monthly expenses.
This means that my remaining UNANNUITIZED portfolio, both tax deferred 403(b) and my taxable account at Vanguard are growing at this point, without being needed for routine monthly expenses...
Attempted new signature...

User avatar
nedsaid
Posts: 8821
Joined: Fri Nov 23, 2012 12:33 pm

Re: Annuity explanation for Chuck

Post by nedsaid » Sat Oct 28, 2017 3:15 pm

What happened to Chuck? Did he ever read this?
A fool and his money are good for business.

Post Reply