any sense in purchasing an annuity before retirement?

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nick evets
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any sense in purchasing an annuity before retirement?

Post by nick evets » Thu Dec 14, 2017 1:59 pm

Neither my wife nor I have children thus no desire to leave an estate, nor a pension, so in retirement (~5 years off), a SPIA seems attractive -- at least for some portion of our income requirements.

I realize the "I" in SPIA is for 'I'mmediate, but a couple annuity calculators I've found offer the option to surrender some portion of my IRA in advance. I'm 52 and my wife is 5 years older at 57. The notion of establishing at least a partial floor now, with money removed from (some) market risk is attractive -- why not in an annuity instead of bonds? -- but I'm not sure the math works. Has anyone considered or acted on a similar scenario?

Many thanks

whiteprius
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Re: any sense in purchasing an annuity before retirement?

Post by whiteprius » Thu Dec 14, 2017 2:06 pm

They make sense for people like you, who don't want to bother with investing and who want a stable source of income, but try to get one indexed to inflation so you can be completely worry free and of course only buy from the highest rated gigantic insurers. Also, consider waiting a year to see how they price out after next year's rate increases. But professionals generally say to get a variable annuity (which is subject to market risk) or, even better, invest your money and take a little out each month -- because SPIA's pay too little investment income.

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Tamarind
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Re: any sense in purchasing an annuity before retirement?

Post by Tamarind » Thu Dec 14, 2017 2:40 pm

whiteprius wrote:
Thu Dec 14, 2017 2:06 pm
But professionals generally say to get a variable annuity (which is subject to market risk)
This is not good advice. I don't recommend mixing insurance (the annuity is longevity insurance) with investing. It is definitely worth getting some quotes for single-premium deferred annuities. Or you could remove money from market risk by moving to savings accounts or CDs for the time being.

There are a few posters here with really well-developed plans about liability matching portfolios that might interest you. Usually those use TIPs ladders to guarantee future income.

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Re: any sense in purchasing an annuity before retirement?

Post by mhalley » Thu Dec 14, 2017 2:42 pm

SPIA is certainly a reasonable approach for a portion of your portfolio. 52 seems a little young, waiting and doing an annuity ladder might be a better plan. Plus I would not buy one until you actually retire. I often see 65 or 70 as the time to consider spia purchases. Check out the age vs payout graph in this article:

https://retirementresearcher.com/are-an ... s-are-low/

Link to just the graph:
https://3a05ty2ohkvc1zboze4eczal-wpengi ... 0x2251.jpg


Wci thoughts on when to buy spia:
. Some experts, such as Larry Swedroe, recommend you buy them around age 70. My personal opinion is that you should buy them when you need them. If you’re retired at 50, there’s nothing wrong with putting some of your money into SPIAs to ensure a “floor” for your retirement income. I wouldn’t put it all in SPIAs at that young age, and you can always buy more later.
Last edited by mhalley on Thu Dec 14, 2017 2:56 pm, edited 2 times in total.

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hand
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Re: any sense in purchasing an annuity before retirement?

Post by hand » Thu Dec 14, 2017 2:45 pm

It sounds like you're already leaning in this direction, but just to make it explicit - annuitization isn't an all or nothing decision. Make sure you also consider partially anuitizing or some sort of an "annuity ladder."

whiteprius
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Re: any sense in purchasing an annuity before retirement?

Post by whiteprius » Thu Dec 14, 2017 2:46 pm

Tamarind wrote:
Thu Dec 14, 2017 2:40 pm


This is not good advice. I don't recommend mixing insurance (the annuity is longevity insurance) with investing.
Many don't like variable annuities, but historically, over the long-term, they have paid more investment income (and thus a higher monthly benefit) than SPIA's. That's why they blew up in popularity once they entered the market. I can see getting an SPIA and never worrying about investing though.

I don't understand the "get an SPIA but also worry about investing the rest of your money" approach though. That's the worst of both worlds.
Last edited by whiteprius on Thu Dec 14, 2017 2:47 pm, edited 1 time in total.

livesoft
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Re: any sense in purchasing an annuity before retirement?

Post by livesoft » Thu Dec 14, 2017 2:47 pm

I think the answer is: Nope, no sense in purchasing an annuity before retirement or until several years into retirement.
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Re: any sense in purchasing an annuity before retirement?

Post by Grt2bOutdoors » Thu Dec 14, 2017 2:48 pm

Ignore any advice that advocates the use of a variable annuity for "floor" planning.
Acceptable vehicles for floor planning - Social Security, inflation adjusted fixed income ladders preferably as opposed to nominal instruments only, Single Premium Immediate Annuities.

viewtopic.php?f=2&t=205824&start=50 <---read this thread.
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Re: any sense in purchasing an annuity before retirement?

Post by Grt2bOutdoors » Thu Dec 14, 2017 2:49 pm

whiteprius wrote:
Thu Dec 14, 2017 2:46 pm
Tamarind wrote:
Thu Dec 14, 2017 2:40 pm


This is not good advice. I don't recommend mixing insurance (the annuity is longevity insurance) with investing.
Many don't like variable annuities, but historically, over the long-term, they have paid more investment income (and thus a higher monthly benefit) than SPIA's. That's why they blew up in popularity once they entered the market. I can see getting an SPIA and never worrying about investing though.

I don't understand the "get an SPIA but also worry about investing the rest of your money" approach though. That's the worst of both worlds.
SPIA's offer mortality credits when purchased in one's mid 70's and up. Variable annuities are fee sucking vacum cleaners siphoning your money into the hands of the insurance agent. You can do better usually holding low cost diversified index funds with an asset allocation that meets your requirements.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

whiteprius
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Re: any sense in purchasing an annuity before retirement?

Post by whiteprius » Thu Dec 14, 2017 2:53 pm

Grt2bOutdoors wrote:
Thu Dec 14, 2017 2:49 pm
SPIA's offer mortality credits when purchased in one's mid 70's and up. Variable annuities are fee sucking vacum cleaners siphoning your money into the hands of the insurance agent. You can do better usually holding low cost diversified index funds with an asset allocation that meets your requirements.
SPIA's have huge fees too, often larger than variables. They're just hidden in that lump sum you pay unlike transparent variable annuities that break them out. Insurance companies actually love SPIA's. I don't know about late 70's mortality credits but there is no reason why variable annuities shouldn't be able to offer them.

But I agree if you're going to get a variable, just invest your own money and take a little out each month.

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Re: any sense in purchasing an annuity before retirement?

Post by ResearchMed » Thu Dec 14, 2017 3:02 pm

We are in a situation much like yours, but we are older.

Because neither of us has a pension from work, we'll definitely be using SPIA's to "make a pension" (and we do have Social Security, of course).

You might search this site for "SPIA".

There have been several very good discussions of SPIA's, including assorted strategies for using them.
As you read, keep in mind that some of the attitude differences definitely reflect whether the person/couple writing has children or other heirs to whom they wish to leave either everything or as much as possible. That can make a big difference, no surprise.
(One may still want to leave something to some favorite non-profits and/or non-profits, but that is usually with a different emphasis that leaving money to children/grandchildren...)

There are quite a few different ways to use SPIA's, and you'll come across a variety of approaches.
And... don't annuitize "everything". Make sure you have some extra money available for unexpected large expenses.

It seems that waiting until an older age would give you annuities where the mortality credits start to add up more, and that is one of the serious benefits of annuities.
Obviously, the underlying basis is also very important: having an income stream no matter how long you live.

And the "I" can be replaced by a "D" for the Deferred annuities you are mentioning.

RM
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nick evets
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Re: any sense in purchasing an annuity before retirement?

Post by nick evets » Thu Dec 14, 2017 3:08 pm

Hmm...I've categorically heard, "avoid variable annuities," so I don't think I want to lean in that direction. I'm not sure, either, I understand mortality credits -- have to research that. Anyway, below is what inspired my question:

Suppose, for the sake of a nice round number $1,000,000. If I put 500k into an annuity now, with payments starting in 5 years, I could expect $2372/mo. for life (incl. spouse) or $3853/mo. for 15 years. The other 500k would be 100% in stocks.

Using the same immediateannuities calculator, if I were hypothetically 57 today, and annuitized $500k I'd receive $2075/mo.

However, if waited 5 years, but put the $500k in relatively 'safe' bond funds, assuming an annual return of 3% (realistic?), it would appreciate to $580k, which annuitized immediately would be $2407/mo., which is a much smaller difference than I'd expect with me managing the $500k for 5 years (and worrying about rising interest rates, etc.) vs. the insurance company,

whiteprius
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Re: any sense in purchasing an annuity before retirement?

Post by whiteprius » Thu Dec 14, 2017 3:18 pm

nick evets wrote:
Thu Dec 14, 2017 3:08 pm
Hmm...I've categorically heard, "avoid variable annuities," so I don't think I want to lean in that direction. I'm not sure, either, I understand mortality credits -- have to research that. Anyway, below is what inspired my question:

Suppose, for the sake of a nice round number $1,000,000. If I put 500k into an annuity now, with payments starting in 5 years, I could expect $2372/mo. for life (incl. spouse) or $3853/mo. for 15 years. The other 500k would be 100% in stocks.

Using the same immediateannuities calculator, if I were hypothetically 57 today, and annuitized $500k I'd receive $2075/mo.

However, if waited 5 years, but put the $500k in relatively 'safe' bond funds, assuming an annual return of 3% (realistic?), it would appreciate to $580k, which annuitized immediately would be $2407/mo., which is a much smaller difference than I'd expect with me managing the $500k for 5 years (and worrying about rising interest rates, etc.) vs. the insurance company,
That makes perfect sense. All the insurance co. is going to do is put it into safe bonds and charge you a fee. Insurance companies have an advantage over you, though, because they can invest according to the duration of their entire portfolio which might be longer than the five years you're using so they may be able to earn a little more than you.

If you're OK with earning a low rate of return over the next five years then go with the SPIA. But . . . don't be jealous when you're neighbor invested that $500k in the stock market (either directly or with a variable annuity) for five years, which turned out to be booming, and retired with twice your monthly income. That's the dilemma.

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Re: any sense in purchasing an annuity before retirement?

Post by nick evets » Thu Dec 14, 2017 4:20 pm

whiteprius wrote:
Thu Dec 14, 2017 3:18 pm
If you're OK with earning a low rate of return over the next five years then go with the SPIA. But . . . don't be jealous when you're neighbor invested that $500k in the stock market (either directly or with a variable annuity) for five years, which turned out to be booming, and retired with twice your monthly income. That's the dilemma.
I guess my point was, either way, I'm going to be stuck with a low rate of return over the next 5 years for some portion -- say 50% for even numbers -- of our portfolio. If my neighbor has 100% of his assets in the market or a variable annuity, he might come out 2x ahead, but I don't want to take that risk.

What I'm seeing is, I don't come out that much farther ahead if I manage this 'safe' 50% myself, vs. letting the insurance company worry about it, which really surprises me.

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Re: any sense in purchasing an annuity before retirement?

Post by Tal- » Thu Dec 14, 2017 4:33 pm

Does a SPIA make sense for you?
It might. Understand that a SPIA will almost always produce a lower return than other investments, but will also have much lower risk (and once set up, lower complexity). So, if you understand this trade-off, I would consider a SPIA.

Should you get a SPIA or Variable Annuity?
SPIA. I feel strongly that a variable annuity is rarely a good fit. If you were open to the risks of a variable annuity, I would simply invest in a traditional taxable account rather than an annuity.

Should my SPIA be inflation adjusted?
Yes. You will get less on year 1, but will keep purchasing power over time. Also, this allows for a better apples-to-apples comparison with a traditional 4% withdrawal strategy which also assumes inflation. Again, you will almost always have more money with a traditional 4% strategy, but more security with a SPIA.

If you get a SPIA, when should you get it? Now or when you retire in 5 years?
I'd wait the 5 years until you retire. There are several reasons for this, but some of the bigger ones are that your money for the annuity would have 5 more years to grow, interest rates are still very low which probably impacts SPIA payout amounts, and generally - SPIAs are intended to be taken on day 1.

Just my two cents.
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Re: any sense in purchasing an annuity before retirement?

Post by bhsince87 » Thu Dec 14, 2017 4:36 pm

I've been considering the same thing. I'm 52, spouse 50. I'm planning to retire in the next few years (or weeks :happy ), and was thinking a SPIA might make a nice safe floor to tide us over until Social Security kicks in at age 70.

Most of the advice I've seen says that's not necessarily a bad way to go EXCEPT....now is a bad time to lock in a long term annuity because interest rates are so low, historically speaking. That sort of makes sense, but also seems to have a whiff of market timing.

But if that is the case, a ladder makes more sense. But if I'm going to go to that trouble, why not just use bonds and do it myself for a few years?
BH87

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Re: any sense in purchasing an annuity before retirement?

Post by Tamarind » Thu Dec 14, 2017 6:08 pm

bhsince87 wrote:
Thu Dec 14, 2017 4:36 pm
But if that is the case, a ladder makes more sense. But if I'm going to go to that trouble, why not just use bonds and do it myself for a few years?
Generally the SPIA makes more sense than a DIY ladder for:
1) those who don't want to or can't manage their own investments

2) those who don't quite have enough money and can't afford to take any risk at all (assuming it's an inflation adjusted annuity)

3) those who have very high probable longevity

If these don't apply to you, a ladder is probably going to make more sense.

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Re: any sense in purchasing an annuity before retirement?

Post by ResearchMed » Thu Dec 14, 2017 6:18 pm

bhsince87 wrote:
Thu Dec 14, 2017 4:36 pm
I've been considering the same thing. I'm 52, spouse 50. I'm planning to retire in the next few years (or weeks :happy ), and was thinking a SPIA might make a nice safe floor to tide us over until Social Security kicks in at age 70.

Most of the advice I've seen says that's not necessarily a bad way to go EXCEPT....now is a bad time to lock in a long term annuity because interest rates are so low, historically speaking. That sort of makes sense, but also seems to have a whiff of market timing.

But if that is the case, a ladder makes more sense. But if I'm going to go to that trouble, why not just use bonds and do it myself for a few years?
A bond or CD ladder might make sense to tide you over until age 70.

In my opinion, an annuity doesn't make as much sense for a fixed term (such as "until age 70") as it does as a true SPIA... a lifetime annuity.
Then it really does become insuring against running out of money if one lives especially long.
And if one lives especially long, that's also when one would get the very most from those mortality credits.

RM
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Re: any sense in purchasing an annuity before retirement?

Post by lawman3966 » Thu Dec 14, 2017 6:55 pm

nick evets wrote:
Thu Dec 14, 2017 4:20 pm
I guess my point was, either way, I'm going to be stuck with a low rate of return over the next 5 years for some portion -- say 50% for even numbers -- of our portfolio. If my neighbor has 100% of his assets in the market or a variable annuity, he might come out 2x ahead, but I don't want to take that risk.
What I'm seeing is, I don't come out that much farther ahead if I manage this 'safe' 50% myself, vs. letting the insurance company worry about it, which really surprises me.
I think that idealized or even average stock market returns are the wrong basis for comparison to SPIAs. One good framework for evaluating SPIAs is the safe withdrawal rate (SWR) from your portfolio as a function of your age. A commonly accepted SWR for a thirty year period from a 60/40 mix of stocks/bonds is about 4% (some authors say 3.6% or 3.8%, but I'm trying to avoid that complication here). If your SPIA offers a an effect safe 5% (inflation adjusted) return based on your initial surrender of capital, then it seems like a good deal, compared to a potentially risky 4% return from a stock/bond portfolio. For some people, being able to sleep at night is part of the benefit of an investment or insurance purchase.

There are other factors to bear in mind in connection with annuities. The level of security of your annuity will depend on the financial security of your insurance company and of the guaranty association in your state. You can search for "NOLHGA" to get more info on this. The levels of reimbursement vary by state. If memory serves, the reimbursement amount (in the event the insurance company issuing your annuity goes into liquidation) varies from $100K up to $500K. You can google to get more detail.

To address the benefits and concerns about SPIAs, one financial author, Walter Updegrave, once recommended placing no more than 1/3 of your net worth into SPIA, and then dividing that 1/3 among three insurance companies, with the three companies having independent guaranty associations. (you will have to research how that can be accomplished). That seems like reasonable, prudent advice to me.

If you have enough income from secure sources, whether social security and/or a pension, you may not need an SPIA at all. That is now my situation. Although I once researched SPIAs at length, I no longer plan to purchase any.

Separately, I don't see how variable annuities can help you. I heard long ago that the only people who like them are variable annuity salesmen and have never seen anything that would change my mind.

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Re: any sense in purchasing an annuity before retirement?

Post by nick evets » Thu Dec 14, 2017 7:59 pm

lawman3966 wrote:
Thu Dec 14, 2017 6:55 pm
If your SPIA offers a an effect safe 5% (inflation adjusted) return based on your initial surrender of capital, then it seems like a good deal, compared to a potentially risky 4% return from a stock/bond portfolio. For some people, being able to sleep at night is part of the benefit of an investment or insurance purchase.

There are other factors to bear in mind in connection with annuities....
Thanks for a comprehensive reply! Hmm...if I calculate CAGR (which I think is what I want?) using 30 years of $2372/mo. that's 854k, which is an annualized rate of return of 1.8%. Granted the $2372 is just a scratch quote from 'immediateannuities.com' but if it's even close to realistic, that's pretty poor. I think 10 year return of the Vanguard Total Bond Index averaged something like 4.1%

And, as you say, there is some risk of insurance companies folding, although I think defaulting on annuities is rare? Regardless there's a limit in my state of $250k and that's for all annuities, not 'each'.

Thinking this might not be such a hot idea, although I really like the idea of a regular stream of income before Social Security.

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Re: any sense in purchasing an annuity before retirement?

Post by alec » Thu Dec 14, 2017 8:48 pm

nick evets wrote:
Thu Dec 14, 2017 7:59 pm
lawman3966 wrote:
Thu Dec 14, 2017 6:55 pm
If your SPIA offers a an effect safe 5% (inflation adjusted) return based on your initial surrender of capital, then it seems like a good deal, compared to a potentially risky 4% return from a stock/bond portfolio. For some people, being able to sleep at night is part of the benefit of an investment or insurance purchase.

There are other factors to bear in mind in connection with annuities....
Thanks for a comprehensive reply! Hmm...if I calculate CAGR (which I think is what I want?) using 30 years of $2372/mo. that's 854k, which is an annualized rate of return of 1.8%. Granted the $2372 is just a scratch quote from 'immediateannuities.com' but if it's even close to realistic, that's pretty poor. I think 10 year return of the Vanguard Total Bond Index averaged something like 4.1%

And, as you say, there is some risk of insurance companies folding, although I think defaulting on annuities is rare? Regardless there's a limit in my state of $250k and that's for all annuities, not 'each'.

Thinking this might not be such a hot idea, although I really like the idea of a regular stream of income before Social Security.
Nick,

Since you don't have a pension, your plan doesn't seem like that bad of an idea. Though, you don't necessarily have to purchase a deferred life annuity at just one point in time, like now. You can, for example, purchase 1/5 of the amount now, 1/5 next year, and so on for 5 years, so you don't lock yourself into interest/mortality rates at one point in time.

There have been Bogleheads in the past that have purchase SPIA's when they retired in the late 50s, for example Ron. Here are a lot of past conversations on the subject.
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Re: any sense in purchasing an annuity before retirement?

Post by bhsince87 » Thu Dec 14, 2017 9:17 pm

Tamarind wrote:
Thu Dec 14, 2017 6:08 pm
bhsince87 wrote:
Thu Dec 14, 2017 4:36 pm
But if that is the case, a ladder makes more sense. But if I'm going to go to that trouble, why not just use bonds and do it myself for a few years?
Generally the SPIA makes more sense than a DIY ladder for:
1) those who don't want to or can't manage their own investments

2) those who don't quite have enough money and can't afford to take any risk at all (assuming it's an inflation adjusted annuity)

3) those who have very high probable longevity

If these don't apply to you, a ladder is probably going to make more sense.

Thank you for your input. The only one that might apply to me is number 3. But who knows? So I I'll plan on doing the bond thing.
BH87

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Re: any sense in purchasing an annuity before retirement?

Post by itstoomuch » Fri Dec 15, 2017 2:28 am

Nick events wrote: Has anyone considered or acted on a similar scenario?
Yes.
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Re: any sense in purchasing an annuity before retirement?

Post by smitcat » Fri Dec 15, 2017 7:02 am

nick evets wrote:
Thu Dec 14, 2017 1:59 pm
Neither my wife nor I have children thus no desire to leave an estate, nor a pension, so in retirement (~5 years off), a SPIA seems attractive -- at least for some portion of our income requirements.

I realize the "I" in SPIA is for 'I'mmediate, but a couple annuity calculators I've found offer the option to surrender some portion of my IRA in advance. I'm 52 and my wife is 5 years older at 57. The notion of establishing at least a partial floor now, with money removed from (some) market risk is attractive -- why not in an annuity instead of bonds? -- but I'm not sure the math works. Has anyone considered or acted on a similar scenario?

Many thanks
Are you maximizing SS payments by delaying before considering the need/benefit of the SPIA?
Have you looked closely at the relationships of these choices vs the after tax results when you are receiving them?

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Re: any sense in purchasing an annuity before retirement?

Post by TomatoTomahto » Fri Dec 15, 2017 7:54 am

Re: inflation adjusted SPIA - I’ll admit that it has been a couple of years since I looked, but at the time, all the SPIA with “inflation adjusted” payouts were just payments that went up by a fixed percentage each year. To me, that’s close to useless. I would consider a “floor” approach, and inflation has been low, but what I’d want to protect against is a few years of double digit percent inflation down the road.

Has anyone found one of these SPIA tied to CPI or similar? That would be something I’d consider buying, maybe for 10-20% of our nest egg.

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Re: any sense in purchasing an annuity before retirement?

Post by nick evets » Fri Dec 15, 2017 8:23 am

smitcat wrote:
Fri Dec 15, 2017 7:02 am

Are you maximizing SS payments by delaying before considering the need/benefit of the SPIA?
Have you looked closely at the relationships of these choices vs the after tax results when you are receiving them?
We are planning to delay SS until age 70; no I haven't yet considered the tax implications.

In any event, after thinking about it for a bit, I can't see any benefit to locking into an annuity 5-years early, *pre-retirement*, but several significant downsides:

1) presumably, even in conservative investments, I should be able to earn more over 5 years than the insurance company would accrue for me.

2) I'm not sure of the IRS consequences when buying the SPIA (SPDA?) from my 401k to use starting at age 57, if I change my mind and wish to continue working.

3) Why extend the negative aspect of an annuity (complete surrender of the assets) for a period of years where I'm not actually getting paid?

4) If interest rates continue to rise, I might get a better return purchasing in 5 years, vs. now.

Am I way off base with these reasons? I think I should wait and just reconsider when we're actually on the eve of retirement. It's just hard not to get jumpy, when the goalposts are actually starting to become visible. :/

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Re: any sense in purchasing an annuity before retirement?

Post by smitcat » Fri Dec 15, 2017 8:37 am

TomatoTomahto wrote:
Fri Dec 15, 2017 7:54 am
Re: inflation adjusted SPIA - I’ll admit that it has been a couple of years since I looked, but at the time, all the SPIA with “inflation adjusted” payouts were just payments that went up by a fixed percentage each year. To me, that’s close to useless. I would consider a “floor” approach, and inflation has been low, but what I’d want to protect against is a few years of double digit percent inflation down the road.

Has anyone found one of these SPIA tied to CPI or similar? That would be something I’d consider buying, maybe for 10-20% of our nest egg.
No - we have not found one tied to CPI or similar.
But the costs for the fixed 'inflation' numbers (dependent upon choice of %) were very high as well.

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Re: any sense in purchasing an annuity before retirement?

Post by smitcat » Fri Dec 15, 2017 8:40 am

nick evets wrote:
Fri Dec 15, 2017 8:23 am
smitcat wrote:
Fri Dec 15, 2017 7:02 am

Are you maximizing SS payments by delaying before considering the need/benefit of the SPIA?
Have you looked closely at the relationships of these choices vs the after tax results when you are receiving them?
We are planning to delay SS until age 70; no I haven't yet considered the tax implications.

In any event, after thinking about it for a bit, I can't see any benefit to locking into an annuity 5-years early, *pre-retirement*, but several significant downsides:

1) presumably, even in conservative investments, I should be able to earn more over 5 years than the insurance company would accrue for me.

2) I'm not sure of the IRS consequences when buying the SPIA (SPDA?) from my 401k to use starting at age 57, if I change my mind and wish to continue working.

3) Why extend the negative aspect of an annuity (complete surrender of the assets) for a period of years where I'm not actually getting paid?

4) If interest rates continue to rise, I might get a better return purchasing in 5 years, vs. now.

Am I way off base with these reasons? I think I should wait and just reconsider when we're actually on the eve of retirement. It's just hard not to get jumpy, when the goalposts are actually starting to become visible. :/

No - I do not think you are missing anything. You might also consider that you will be tying up money now that has no inflation adjustment either, and its worth while to check the tax implications - we use both the IORP and the RPM for those tasks.

My current view on an SPIA is like being in a boat, as long as the engine has power and the visibility is OK we will do without it. If we loose power and cannot see the horizon the SPIA will serve the purpose of a large anchor. It keeps you off the rocks but it really limits your choices and future.

itstoomuch
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Re: any sense in purchasing an annuity before retirement?

Post by itstoomuch » Fri Dec 15, 2017 1:23 pm

Depends. :mrgreen: :annoyed :oops:
[ I have said this already?]

I use deferred annuities as a "flooring", substitute pension, a way to establish monthly income history for lenders, a synthetic to option markets (SPX) to Interest rates, to manage taxes for possible inheritance purposes, for sheltering from creditors, and to add another degree of separation from the Market and from myself.

YMMV, YMMV, YMMV, Beetlgeuse. :oops:
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

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HomerJ
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Re: any sense in purchasing an annuity before retirement?

Post by HomerJ » Fri Dec 15, 2017 1:50 pm

whiteprius wrote:
Thu Dec 14, 2017 2:06 pm
But professionals generally say to get a variable annuity (which is subject to market risk) or, even better, invest your money and take a little out each month -- because SPIA's pay too little investment income.
Whoa... Late to this thread, but whiteprius, you need to do some research about variable annuities. They almost never make financial sense.
SPIA's have huge fees too, often larger than variables. They're just hidden in that lump sum you pay unlike transparent variable annuities that break them out. Insurance companies actually love SPIA's. I don't know about late 70's mortality credits but there is no reason why variable annuities shouldn't be able to offer them.
Ugh, this is completely false. Are you an insurance salesman? Variable annuities are "transparent"? Have you ever read a VA contract?

Insurance salesmen do not love SPIAs. They push variable annuities. To quote Luke Skywalker from the most recent movie. "Every word in that sentence is wrong".

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HomerJ
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Re: any sense in purchasing an annuity before retirement?

Post by HomerJ » Fri Dec 15, 2017 2:22 pm

I like the idea of SPIA ladder, allowing one to spend more in retirement. We suggest 4% as a planning tool around here, which covers most "worst-case" scenarios. The problem is, that 90%+ of the time, you could have spent more and not run out of money.

But you don't know that ahead of time, so you have to stick with 4% or so for at least the first 5-10 years to be careful.

An SPIA is especially useful in the OP's case, since he has no children, nor any desire to leave an estate. Wanting to spend it all down is tailor-made for a SPIA. Sounds like he is looking at a deferred fixed annuity, correct? Basically just a SPIA, but you don't start getting the payments for a few years.

So at 57, you have a quote for $2372 a month or $28464 a year. From a $500,000 payment, that's 5.7% withdrawal rate for life. Of course, for the first 18 years or so, they are just giving you back your own money. If you both die before those 18 years are up (age 75), you didn't make a cent.

But that's not the point. You can freely spend 5.7% each year starting at 57 because you don't have to worry about outliving your money. If you live to 95 or 100, the money keeps on coming. It's not about investment returns, it's basically life insurance in reverse. Insurance for living too long.

The older you are, the higher the pay-out. Basically because the insurance company expects you to die sooner.

At 70, you can get like 8%-9% because, again, they are just giving you back your own money for the first 11-12 years, plus another 3 years worth of interest THEY made using your money and they expect a good percentage of 70-year old people will die before they hit 85.

But if you had your own money invested in the market at age 70, you'd be scared to pull out 9% a year, because what if you were one of the people who lived to 95? You'd probably be broke at 85.

I think an annuity ladder is a good idea for those of us without pensions (most of us). Obviously, you don't want to put ALL your money into it. You want some pool of money left for emergencies or large purchases. I also wouldn't buy just one big SPIA when younger. I'd buy multiple SPIAs in small chunks from different insurance companies over the years to help combat inflation.

I can very much see myself using 20% of our retirement money every 5-10 years to buy a SPIA, so we can up our spending in retirement without worry.

nick evets
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Re: any sense in purchasing an annuity before retirement?

Post by nick evets » Fri Dec 15, 2017 2:58 pm

HomerJ wrote:
Fri Dec 15, 2017 2:22 pm

So at 57, you have a quote for $2372 a month or $28464 a year. From a $500,000 payment, that's 5.7% withdrawal rate for life. Of course, for the first 18 years or so, they are just giving you back your own money. If you both die before those 18 years are up (age 75), you didn't make a cent.

But that's not the point. You can freely spend 5.7% each year starting at 57 because you don't have to worry about outliving your money.
Hmm...I hadn't looked at it that way, but rather from the 'compound annual growth rate' which was around 1.7% if I live to be 85. Although I don't want to purchase one "in advance," I'm trying to find a flaw in your example, and not finding one, and now they're looking attractive again.

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Re: any sense in purchasing an annuity before retirement?

Post by itstoomuch » Fri Dec 15, 2017 3:14 pm

My BIL is a CPA, actuary, corporate officer, in a regional and international insurance/annuity company. They sell a lot of SPIAs. They rather not sell VAs.

We have a small private company pension (non COL) which is an SPIA, 2010. . We own no other SPIAs and at this time have no plans to purchase any. We do have dVA's and dFIa's, purchased 2008-2012. Both types of deferred annuities function as executable income "options" in our portfolio. I did modeling to see how they would react to future Markets and to future spendable income. Do your Due Diligence.

Would I do again today, what we did in 2008-2012 :confused ? Depends :oops: :mrgreen: :greedy
YMMV :sharebeer
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

smitcat
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Re: any sense in purchasing an annuity before retirement?

Post by smitcat » Fri Dec 15, 2017 3:30 pm

itstoomuch wrote:
Fri Dec 15, 2017 1:23 pm
Depends. :mrgreen: :annoyed :oops:
[ I have said this already?]

I use deferred annuities as a "flooring", substitute pension, a way to establish monthly income history for lenders, a synthetic to option markets (SPX) to Interest rates, to manage taxes for possible inheritance purposes, for sheltering from creditors, and to add another degree of separation from the Market and from myself.

YMMV, YMMV, YMMV, Beetlgeuse. :oops:
"I use deferred annuities as a "flooring", substitute pension,"
Taking SS early and then buying an SPIA now is not likely the best choice for flooring.

"a way to establish monthly income history for lenders"
This is not an issue if you just buy what you want with cash.

"to manage taxes for possible inheritance purposes"
In our case the best thing that we can leave our kids is Roth funds , and the conversions benefit our taxes as well.

"for sheltering from creditors,"
??? - I don't understand the need here.

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HomerJ
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Re: any sense in purchasing an annuity before retirement?

Post by HomerJ » Fri Dec 15, 2017 3:37 pm

itstoomuch wrote:
Fri Dec 15, 2017 3:14 pm
My BIL is a CPA, actuary, corporate officer, in a regional and international insurance/annuity company. They sell a lot of SPIAs. They rather not sell VAs.
Everything I've read or seen in real life is the exact opposite. VAs are always more profitable to a insurance company than a SPIA. Everyone in my family and my wife's family have been pushed variable annuities by various "financial advisors", even when asking about SPIAs.

The way most variable annuities are sold should be illegal, in my opinion.

itstoomuch
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Re: any sense in purchasing an annuity before retirement?

Post by itstoomuch » Fri Dec 15, 2017 3:41 pm

smitcat wrote:
Fri Dec 15, 2017 3:30 pm
itstoomuch wrote:
Fri Dec 15, 2017 1:23 pm
Depends. :mrgreen: :annoyed :oops:
[ I have said this already?]

I use deferred annuities as a "flooring", substitute pension, a way to establish monthly income history for lenders, a synthetic to option markets (SPX) to Interest rates, to manage taxes for possible inheritance purposes, for sheltering from creditors, and to add another degree of separation from the Market and from myself.

YMMV, YMMV, YMMV, Beetlgeuse. :oops:
"I use deferred annuities as a "flooring", substitute pension,"
Taking SS early and then buying an SPIA now is not likely the best choice for flooring.

"a way to establish monthly income history for lenders"
This is not an issue if you just buy what you want with cash.

"to manage taxes for possible inheritance purposes"
In our case the best thing that we can leave our kids is Roth funds , and the conversions benefit our taxes as well.

"for sheltering from creditors,"
??? - I don't understand the need here.
We don't have that need. Some may :confused especially when the time comes for assisted or LTC living :annoyed .
Beetlguese, ymmv
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

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