How to factor an Annuity into a 3-portfolio approach/allocation

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crocc
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Joined: Thu Jun 06, 2019 10:08 am

How to factor an Annuity into a 3-portfolio approach/allocation

Post by crocc » Thu Jun 06, 2019 10:27 am

So, this is my first post. I have recently fired my financial advisor and am now at the helm of my own ship. With about a year of research under my belt, I am very excited to now be on this messageboard charting my own course.

My plan is to implement a 3-fund bogglehead approach at Fidelity via iShares as follows:
  • iShares Core S&P Total Market ETF (ITOT)
    iShares Core MSCI Total International Stock ETF (IXUS)
    iShares Core Total U.S. Bond Market ETF (AGG)
A remnant of my Financial Advisor relationship is an Annuity that I own. It represents about 16% of my overall portfolio. As far as annuities go (and I know there are a lot of people that don' like these things), it is not bad. It is a guaranteed 5% with additional interest on top tied to market indexes, etc. With zero downside risk. Over the past 6 years it has been performing quite well.

So, here is my question. How do I factor this annuity into my 3-fund allocation? I have about 20 years until retirement and am considering a 20 % bonds/80 % stocks allocation. Seeing as how this annuity is a safe investment returning 5%+ year over year, and already represents 16% of my portfolio, is it redundant with a 20% bond fund allocation? Should I allocate 16% annuity / 84% stocks? Or something else? Perhaps 16% Annuity / 74% socks / 10 % REIT?

Any food for thought would be very appreciated. Thanks!

randomguy
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by randomguy » Thu Jun 06, 2019 11:20 am

To some extent replacing bonds makes sense. But you don't have liquidity and the ability to rebalance so they are not 1:1 replacements. It is hard to be specific as a person would have to really read that annuity contract to understand what it's return is likely to be and what the risk is also likely to be. My impression is that very,very few of these products will return 5% over 10-15 year periods.

I am thinking 75% stocks/10% bonds/15% annuities would be some what sane. If you want to add Reits, take them out of the stock allocation.

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Tyler Aspect
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by Tyler Aspect » Thu Jun 06, 2019 11:23 am

I treat the lump sum value of an annuity as bond classification. Record the annuity's lump sum value just prior to the distribution phase, and use the recorded historical lump sum value during the distribution phase as bond classification.

This is just my perspective. Other people may consider annuity distribution as income. In that perspective the lump sum value drops to $0 at distribution, but for me the perspective switching has a disconcerting lack of continuity.
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dbr
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by dbr » Thu Jun 06, 2019 2:04 pm

If you already think 80/20 stocks/bonds is right for you then you could indeed just hold the annuity and the single stock fund.

I would advocate taking a very close look at why you need and want that much in stocks and how willing and able you are to take that risk, but that is up to you.

I think the answer regarding international on this forum is a solid agreement that international stocks should comprise between 0% and maybe 50% of your equities, for US investors.

Dandy
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by Dandy » Thu Jun 06, 2019 2:32 pm

I wouldn't included it in your investment allocation. It isn't a bond and doesn't provide current income. Just like someone who has a vested pension that is years away from being activated. It allows you to take more risk in your investments if you choose to since it is far better than not having the annuity. But, 80/20 is pretty aggressive already. So, it is a separate product like life insurance or a stamp collection. Has value but isn't a stock/bond product.

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Sandtrap
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by Sandtrap » Thu Jun 06, 2019 3:44 pm

I would keep an annuity "outside" of a 3 fund portfolio.
Somewhat like pension income.
Keeps it simple.

The 3 fund portfolio is an investment.
An SPIA is an insurance product.

j
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Dottie57
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by Dottie57 » Thu Jun 06, 2019 3:55 pm

Sandtrap wrote:
Thu Jun 06, 2019 3:44 pm
I would keep an annuity "outside" of a 3 fund portfolio.
Somewhat like pension income.
Keeps it simple.

The 3 fund portfolio is an investment.
An SPIA is an insurance product.

j
Agree.

dbr
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by dbr » Thu Jun 06, 2019 4:31 pm

Dottie57 wrote:
Thu Jun 06, 2019 3:55 pm
Sandtrap wrote:
Thu Jun 06, 2019 3:44 pm
I would keep an annuity "outside" of a 3 fund portfolio.
Somewhat like pension income.
Keeps it simple.

The 3 fund portfolio is an investment.
An SPIA is an insurance product.

j
Agree.
I'm not sure the OP said SPIA. We would like to know what kind of annuity this is and what the provisions are for extracting the assets sooner or later. If the only intention or possibility is an eventual stream of annuity payments then the annuity is not a portfolio asset but the existence of the annuity affects the need and ability to take risk by investing all the actual assets in stocks.

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Sandtrap
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by Sandtrap » Thu Jun 06, 2019 4:34 pm

crocc wrote:
Thu Jun 06, 2019 10:27 am
So, this is my first post. I have recently fired my financial advisor and am now at the helm of my own ship. With about a year of research under my belt, I am very excited to now be on this messageboard charting my own course.

My plan is to implement a 3-fund bogglehead approach at Fidelity via iShares as follows:
  • iShares Core S&P Total Market ETF (ITOT)
    iShares Core MSCI Total International Stock ETF (IXUS)
    iShares Core Total U.S. Bond Market ETF (AGG)
A remnant of my Financial Advisor relationship is an Annuity that I own. It represents about 16% of my overall portfolio. As far as annuities go (and I know there are a lot of people that don' like these things), it is not bad. It is a guaranteed 5% with additional interest on top tied to market indexes, etc. With zero downside risk. Over the past 6 years it has been performing quite well.

So, here is my question. How do I factor this annuity into my 3-fund allocation? I have about 20 years until retirement and am considering a 20 % bonds/80 % stocks allocation. Seeing as how this annuity is a safe investment returning 5%+ year over year, and already represents 16% of my portfolio, is it redundant with a 20% bond fund allocation? Should I allocate 16% annuity / 84% stocks? Or something else? Perhaps 16% Annuity / 74% socks / 10 % REIT?

Any food for thought would be very appreciated. Thanks!
What type if annuity do you have?

Thanks
j :happy
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BL
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by BL » Thu Jun 06, 2019 4:56 pm

I would look at it like a pension since you can't re-balance. What do you plan to do with it?

Have you really studied the In-Force Illustration for this annuity? Those numbers they throw around can be very misleading. What fees and ERs (Expense ratios on funds) are you paying? By the way, the stock market has done exceedingly well for some years now. If the money were in the market it would not be capped at some lower rate.

tj
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by tj » Thu Jun 06, 2019 11:33 pm

How do you have a 5% guaranteed annuity with market upside?

Bronco Billy
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by Bronco Billy » Thu Jun 06, 2019 11:42 pm

I would also like to know the name of the annuity. My Ex FA also bought me annuities and i consider them as safe money. I made my annuities house accounts and took control of all three. I didnt want him to get anymore of my money.
It's a POOR woman that cannot support ONE man.

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Nate79
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by Nate79 » Fri Jun 07, 2019 8:14 am

Sounds like a fixed indexed annuity. Sorry OP you were scammed into buying such a horrible product if that is what it is. You are likely not getting the return you think you are. Lots of smoke, mirrors and lies with this junk.

Cody6136
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Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by Cody6136 » Fri Jun 07, 2019 10:37 am

crocc wrote:
Thu Jun 06, 2019 10:27 am
So, this is my first post. I have recently fired my financial advisor and am now at the helm of my own ship. With about a year of research under my belt, I am very excited to now be on this messageboard charting my own course.

My plan is to implement a 3-fund bogglehead approach at Fidelity via iShares as follows:
  • iShares Core S&P Total Market ETF (ITOT)
    iShares Core MSCI Total International Stock ETF (IXUS)
    iShares Core Total U.S. Bond Market ETF (AGG)
A remnant of my Financial Advisor relationship is an Annuity that I own. It represents about 16% of my overall portfolio. As far as annuities go (and I know there are a lot of people that don' like these things), it is not bad. It is a guaranteed 5% with additional interest on top tied to market indexes, etc. With zero downside risk. Over the past 6 years it has been performing quite well.

So, here is my question. How do I factor this annuity into my 3-fund allocation? I have about 20 years until retirement and am considering a 20 % bonds/80 % stocks allocation. Seeing as how this annuity is a safe investment returning 5%+ year over year, and already represents 16% of my portfolio, is it redundant with a 20% bond fund allocation? Should I allocate 16% annuity / 84% stocks? Or something else? Perhaps 16% Annuity / 74% socks / 10 % REIT?

Any food for thought would be very appreciated. Thanks!
Congratulations on taking the reins!

randomguy
Posts: 7974
Joined: Wed Sep 17, 2014 9:00 am

Re: How to factor an Annuity into a 3-portfolio approach/allocation

Post by randomguy » Fri Jun 07, 2019 10:50 am

Nate79 wrote:
Fri Jun 07, 2019 8:14 am
Sounds like a fixed indexed annuity. Sorry OP you were scammed into buying such a horrible product if that is what it is. You are likely not getting the return you think you are. Lots of smoke, mirrors and lies with this junk.
That was my guess of a product. Figuring out what you actually get out of them is very hard. I also have to assume that getting rid of this product will be expensive.

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