Annuitizing vs. 4% withdrawls

[LittletonRetire]

Please help us understand how to choose between an annuity and just withdrawing ~4% of a portfolio.

My 68 year old mother-in-law needs about $30,000/per year in addition to social security. She has an $800,000 portfolio.

Option 1: As I detailed in this post, she could annuitize $400,000 of her 403(B) for $30,000/year with a 10 year guarantee. She could then use the remaining $400,000 to augment her income as the annuity's spending power is inflated away.

Option 2: Just withdraw 3.75% of the portfolio each year ($30,000), adjusting upward each year based on the inflation rate. Maintain a 60/40 or 75/25 stock/fixed portfolio.

My instinct is to go with Option 2. She prefers Option 1, as it's "guaranteed" income". I worry about inflation over a 25-30 year retirement. How should we think about this decision? What else should we consider?

[000]

Your link doesn't work.

When you say 10 year guarantee, what does that mean? The payout isn't guaranteed for life? What happens at the end of the 10 years?

[David Jay]

When you say 10 year guarantee, what does that mean? The payout isn't guaranteed for life? What happens at the end of the 10 years?

I am guessing it is “10 years certain”.

[LittletonRetire]

Link to my other post: viewtopic.php?f=1&t=324120&p=5465615

10 year guarantee means that if she dies within the first 10 years, her heirs will still receive the annuity payout through the 10th year. This is something she wants if she annuitizes, as she doesn't like the idea the money will just go away.

[David Jay]

She prefers Option 1, as it's "guaranteed" income".

So tell me again, what’s the issue?

As far as I am concerned, it’s “her money, her choice”.

[David Jay]

Link to my other post: viewtopic.php?f=1&t=324120&p=5465615

10 year guarantee means that if she dies within the first 10 years, her heirs will still receive the annuity payout through the 10th year. This is something she wants if she annuitizes, as she doesn't like the idea the money will just go away.

At her age, “10 years certain” (the insurance lingo) does not cost very much, as odds are extremely high that she will live to 78. Again, if it makes her feel good, so be it.

[petulant]

It depends on asset allocation. If she would have been 50/50, increase the stock allocation mightily after buying the annuity; it's not rocket science.

[QBoy]

The case for the annuity is that it provides insurance against outliving her assets. I am skeptical about the value of the ten-year certain. Without that, she could get a better income from the annuity.

[LittletonRetire]

She prefers Option 1, as it's "guaranteed" income".

So tell me again, what’s the issue?

As far as I am concerned, it’s “her money, her choice”.

She's asked for help. She originally thought an annuity is a good idea because that's what her friends have done. I suggested that many people just take 4%, which has been fine historically and that inflation could be a big issue. I'd like some thoughts on how to help her decide.

[petulant]

She prefers Option 1, as it's "guaranteed" income".

So tell me again, what’s the issue?

As far as I am concerned, it’s “her money, her choice”.

She's asked for help. She originally thought an annuity is a good idea because that's what her friends have done. I suggested that many people just take 4%, which has been fine historically and that inflation could be a big issue. I'd like some thoughts on how to help her decide.

The inflation is not an issue if the rest of the portfolio is designed to respond to inflation.

[Stinky]

It depends on asset allocation. If she would have been 50/50, increase the stock allocation mightily after buying the annuity; it's not rocket science.

I agree with this.

If she likes the idea of buying an annuity with a 10-year certain period, I'm fine with that. Just increase her equity percentage on the remaining portfolio.

As David Jay said, "her money, her choice". Both options presented are potentially good choices.

[vineviz]

She prefers Option 1, as it's "guaranteed" income".

So tell me again, what’s the issue?

As far as I am concerned, it’s “her money, her choice”.

She's asked for help. She originally thought an annuity is a good idea because that's what her friends have done. I suggested that many people just take 4%, which has been fine historically and that inflation could be a big issue. I'd like some thoughts on how to help her decide.

The inflation is not an issue if the rest of the portfolio is designed to respond to inflation.

Also Social Security is fully indexed to inflation, so if the annuity income is covering mostly discretionary expenses it might not need to match CPI.

However, a SPIA with a 1% or 2% COLA market might be a wise choice if the annuity income is providing for non-discretionary expenses like food, clothing, shelter etc.

[000]

One thing I would avoid is annuitizing half and then leaving the other half conservative, i.e. IMO it's better for the annuity to replace bonds.

[vineviz]

One thing I would avoid is annuitizing half and then leaving the other half conservative, i.e. IMO it's better for the annuity to replace bonds.

I agree

[JoMoney]

I like 'Option 1'
To the extent I would have bonds and be withdrawing from those in the portfolio, I'd rather have the annuity instead of bonds.
So if I was otherwise withdrawing from a 50/50 Stock/Bond portfolio... I'd just as soon put half in stocks and the other half in a SPIA and call it equivalent (but better, as the SPIA is guaranteed I won't out-live and deplete it).

[heyyou]

Whatever is chosen, the other choice will likely do better in the long run. That is just how the cookie crumbles.

As the son-in-law, and not a direct descendant, stay quiet about your opinion but do make sure that the choices that are offered, are all good enough. Let your wife help her choose, do not be involved at that level, nor even present, so they can talk freely. You are only a phone call away from their questions.

[catdoctor]

How much better is the annuity if you get life only and not 10 year certain?

[Sandtrap]

A middle road is good.
Annuities in increments over time.
Doesn’t have to be all now or nothing.
IE: try 200k SPIA and a 50/50 allocation with the rest.
Evaluate at age 70,75,80,etc
Read up on annuities by Wade Pfau.

Adequate cash or cash like allocation with age and health concerns.

Search forum archives for “laddered SPIA”.

j

[JoMoney]

... Annuities in increments over time.Doesn’t have to be all now or nothing...

That sounds like a good option too, you likely don't want to be 'all in' with a single insurance company either, spread it around trying to stay under state insurance guaranty association limits
https://www.annuity.org/annuities/regul ... ociations/

[22twain]

Another thing to consider is that the payout rate for a new annuity will increase as she gets older. She could withdraw from her portfolio until she's 75 or 80, and then annuitize at a higher payout rate.

[bikechuck]

Another thing to consider is that the payout rate for a new annuity will increase as she gets older. She could withdraw from her portfolio until she's 75 or 80, and then annuitize at a higher payout rate.

That is the path that I am currently on. These are not easy decisions with today's interest rates!

[venkman]

She has $830,000 in a 403B with TIAA:
* 48% of that is in a TIAA Traditional annuity which will pay $28,000/yr with a 20 year guarantee.

$28k per year with a 20-year guarantee for $398k is a pretty good deal. Immediateannuities.com quotes $517k for a $28k, 20-year certain life annuity for a 68-year-old female. Single life annuity with no guarantee is $468k.

[JoMoney]

Another thing to consider is that the payout rate for a new annuity will increase as she gets older. She could withdraw from her portfolio until she's 75 or 80, and then annuitize at a higher payout rate.

That is the path that I am currently on. These are not easy decisions with today's interest rates!

To the extent the portfolio withdrawals are coming from bonds, the remaining portfolio will diminish in value from the withdrawals, leaving a smaller amount to purchase the SPIA with. If interest rates rise the present market value of remaining bond portfolio will go down, it should also mean the interest rates SPIA is calculated goes up, but with the smaller amount with which to buy it is likely a wash...

[ScubaHogg]

It depends on asset allocation. If she would have been 50/50, increase the stock allocation mightily after buying the annuity; it's not rocket science.

+1.

[Ramjet]

Option 1, then the rest of the money 70/30 - 100/0

[jimkinny]

If she goes with the annuity option, consider spreading the 400K purchase out over 4-5 years or more by buying multiple annuities from different insurance companies over that time period. This spreads the risk of insurance company failure out a bit and also lessens the impact of inflation and interest rate risk. If possible, see if she would be willing to delay the annuity purchasers for some years in order to build up mortality credits.

[dlw322]

Go with option 1. It's what she wants and she will be fine. It may or may not be the best option, but what if you choose option 2 and the market takes a downturn? Will she stay the course?? Option 1 will let her SWAN

[hulburt1]

If she needs 30000 a year. divide 800000 by 30000. It will give her 30000 until she is 92. Her 800000 will grow. In the last 6 years her money could double.

[tibbitts]

She prefers Option 1, as it's "guaranteed" income".

So tell me again, what’s the issue?

As far as I am concerned, it’s “her money, her choice”.

She's asked for help. She originally thought an annuity is a good idea because that's what her friends have done. I suggested that many people just take 4%, which has been fine historically and that inflation could be a big issue. I'd like some thoughts on how to help her decide.

I agree that inflation could be a big issue, although it also might not be, we just don't know. I don't agree that there will necessarily be an obvious, safe/reliable way to counteract inflation if it does show up, even if you retain control of all your assets. So inflation can be a problem in either scenario.

[rich126]

She prefers Option 1, as it's "guaranteed" income".

So tell me again, what’s the issue?

As far as I am concerned, it’s “her money, her choice”.

She's asked for help. She originally thought an annuity is a good idea because that's what her friends have done. I suggested that many people just take 4%, which has been fine historically and that inflation could be a big issue. I'd like some thoughts on how to help her decide.

I agree that inflation could be a big issue, although it also might not be, we just don't know. I don't agree that there will necessarily be an obvious, safe/reliable way to counteract inflation if it does show up, even if you retain control of all your assets. So inflation can be a problem in either scenario.

Sadly that is going to be true of most investment decisions, you'll never know the future. Annuities are great in the sense you don't have to worry about what stocks/bonds/etc. will return but they are bad in the sense that most provide no inflation adjustments and you generally lose the principal if you die early. You could get an annuity now and if we have deflation or consistent interest rates near 0% and poor stock/bond returns, you'll do well but if inflation comes up it will eat up the value of the annuity.

People always want a clear decision but the best you can do is ask the question, consider all of the possibilities and go with what seems best for you.

[Dottie57]

Link to my other post: viewtopic.php?f=1&t=324120&p=5465615

10 year guarantee means that if she dies within the first 10 years, her heirs will still receive the annuity payout through the 10th year. This is something she wants if she annuitizes, as she doesn't like the idea the money will just go away.

At her age, “10 years certain” (the insurance lingo) does not cost very much, as odds are extremely high that she will live to 78. Again, if it makes her feel good, so be it.

+1. I think she is smart since she will be less worried if she partially annuitizes.

[random_walker_77]

Option 3: annuitize 250K for, at the same rate, 18.8K in annual payout. The remaining 550K, in a 60/40 portfolio, will yield about 2% and give you 11K/yr in dividends. That's 29.8K/yr, and if you need another 1 or 2K, sell a little bit. The remaining 550K will likely grow, but the dividends and interest are relatively stable even in times of adversity.

This option is likely to keep the annuity below state insurance limits. You have 2/3 of the required income stream locked in for life through the annuity, and for the rest, you can make it just living on dividends. The portfolio will grow over time, which will cover you for inflation. And this allows for additional spending flexibility, in case of unexpected emergencies, and will likely end with portfolio growth, while an annuity is guaranteed to end with $0 at death.

[JoMoney]

I think it's a mistake trying to compare SPIA's to stocks or portfolios that include a stock component.
A SPIA is very comparable to a bond and other fixed-income, and I think the decision becomes a lot clearer if you use the comparison of withdrawing from a bond or CD ladder at whatever interest rate is currently available amortized over some expected time period, versus a SPIA's income over the same period.

If you don't need to/won't be making withdrawals from the comparable bond/CD portfolio, then a SPIA is not a desirable option.

[jjustice]

You said that her money is in a 403(b). It wouldn't be TIAA by any chance? They have excellent annuities: both guaranteed and variable. I started three different TIAA annuities when I retired, and it was a good decision. As she knows, an annuity fixes you up for life. A deposit appears automatically in your bank account on the first of each month until you die. It is safe and easy. I think that she has her priorities straight. Go with her wishes. You are lucky to have a wise MIL.

John

[JoMoney]

^ If that's the case, was she maybe already part of an annuity contribution plan? She may already have a stake in an annuity purchased while interest rates were much higher and offering better terms then anything available currently, and might be a mistake to sell out of it.

[heyyou]

She originally thought an annuity is a good idea because that's what her friends have done.

Reconsider Option 1, since she is the one who needs to Sleep Well At Night (SWAN). You are wise to have suggested the split investments of annuity plus backup.
There might be less uncertainty next year.
Perhaps buy $100K of annuity each year for four years to spread some of the current risk from low rates, or $200K initially, then $100K after two years, repeated.

[bei22000]

In her current situation, either one should be fine. If the annuity make she feel more secure, go for it. At 68, she may well live pass 78 or older.

[snailderby]

She prefers the guaranteed payout of the annuity, and you're concerned about inflation. Is a SPIA with a yearly inflation adjustment (indexed to CPI) an option? Or would adding that inflation adjustment be too costly?

[arcticpineapplecorp.]

Option 1: As I detailed in this post, she could annuitize $400,000 of her 403(B) for $30,000/year with a 10 year guarantee. She could then use the remaining $400,000 to augment her income as the annuity's spending power is inflated away.

I'm confused. if she annuitizes $400k, why would she only get $30,000/year for 10 years? She'd be paying $400k, only to receive $300k over 10 years.

that sounds backwards. what am I missing here?

[JoMoney]

Option 1: As I detailed in this post, she could annuitize $400,000 of her 403(B) for $30,000/year with a 10 year guarantee. She could then use the remaining $400,000 to augment her income as the annuity's spending power is inflated away.

I'm confused. if she annuitizes $400k, why would she only get $30,000/year for 10 years? She'd be paying $400k, only to receive $300k over 10 years.

that sounds backwards. what am I missing here?

I believe that was already brought up, and was determined to be a 10 year guaranteed annuity will pay out for at least 10 years regardless of how long she lives... her beneficiaries will receive the income if she passes before the 10 years is up.
Not a 10 year "term certain annuity".

[capjak]

If she can get 30,000 per year with 10 year certain for a 400,000 premium that starts immediately, I would do it. That is a very good rate (13.3 years to break even). Is she in good health? I would check those numbers as that seems significantly better than current market rate.


If you choose to wait or ladder the premium over several years than you could hold that "annuity money" in a TIPS ladder the equals the dates/amount of the future premiums.

Also I would want to purchase from an A rated or better AMBEST rated insurance company, perhaps split evenly between 2 companies.

[arcticpineapplecorp.]

Option 1: As I detailed in this post, she could annuitize $400,000 of her 403(B) for $30,000/year with a 10 year guarantee. She could then use the remaining $400,000 to augment her income as the annuity's spending power is inflated away.

I'm confused. if she annuitizes $400k, why would she only get $30,000/year for 10 years? She'd be paying $400k, only to receive $300k over 10 years.

that sounds backwards. what am I missing here?

I believe that was already brought up, and was determined to be a 10 year guaranteed annuity will pay out for at least 10 years regardless of how long she lives... her beneficiaries will receive the income if she passes before the 10 years is up.
Not a 10 year "term certain annuity".

but if she passes in 10 years she paid $400k but only received $300k (and her heirs receive nothing)?

this only sounds good if she expects to live more than 13 years and even then, she's receiving no return essentially until year 14 through death.

[JoMoney]

Option 1: As I detailed in this post, she could annuitize $400,000 of her 403(B) for $30,000/year with a 10 year guarantee. She could then use the remaining $400,000 to augment her income as the annuity's spending power is inflated away.

I'm confused. if she annuitizes $400k, why would she only get $30,000/year for 10 years? She'd be paying $400k, only to receive $300k over 10 years.

that sounds backwards. what am I missing here?

I believe that was already brought up, and was determined to be a 10 year guaranteed annuity will pay out for at least 10 years regardless of how long she lives... her beneficiaries will receive the income if she passes before the 10 years is up.
Not a 10 year "term certain annuity".

but if she passes in 10 years she paid $400k but only received $300k (and her heirs receive nothing)?

this only sounds good if she expects to live more than 13 years and even then, she's receiving no return essentially until year 14 through death.

If she passes early, she won't miss the money... and for however long her remaining life is, she can sleep well not worrying about her diminishing portfolio and whether or not it will last, or what the gyrations of the market/interest rate changes do to the quoted value (although other options like CD's avoid market volatility risks).
If she lives long enough to receive more than what could have been purchased in a bond/CD ladder at current rates, that's a bonus, but for some the insurance against the risk/consequences of outliving the portfolio is worth it.

[tibbitts]

Option 1: As I detailed in this post, she could annuitize $400,000 of her 403(B) for $30,000/year with a 10 year guarantee. She could then use the remaining $400,000 to augment her income as the annuity's spending power is inflated away.

I'm confused. if she annuitizes $400k, why would she only get $30,000/year for 10 years? She'd be paying $400k, only to receive $300k over 10 years.

that sounds backwards. what am I missing here?

I believe that was already brought up, and was determined to be a 10 year guaranteed annuity will pay out for at least 10 years regardless of how long she lives... her beneficiaries will receive the income if she passes before the 10 years is up.
Not a 10 year "term certain annuity".

but if she passes in 10 years she paid $400k but only received $300k (and her heirs receive nothing)?

this only sounds good if she expects to live more than 13 years and even then, she's receiving no return essentially until year 14 through death.

And you don't think that's reasonable because... ??? That's how annuities work. My mom bought an annuity at about the same age and lived to almost 96. If you invested in something with similar principal security today - like treasuries - and withdrew $30k/yr, you'd have almost no money left in 13 years.

[arcticpineapplecorp.]

Option 1: As I detailed in this post, she could annuitize $400,000 of her 403(B) for $30,000/year with a 10 year guarantee. She could then use the remaining $400,000 to augment her income as the annuity's spending power is inflated away.

I'm confused. if she annuitizes $400k, why would she only get $30,000/year for 10 years? She'd be paying $400k, only to receive $300k over 10 years.

that sounds backwards. what am I missing here?

I believe that was already brought up, and was determined to be a 10 year guaranteed annuity will pay out for at least 10 years regardless of how long she lives... her beneficiaries will receive the income if she passes before the 10 years is up.
Not a 10 year "term certain annuity".

but if she passes in 10 years she paid $400k but only received $300k (and her heirs receive nothing)?

this only sounds good if she expects to live more than 13 years and even then, she's receiving no return essentially until year 14 through death.

And you don't think that's reasonable because... ??? That's how annuities work. My mom bought an annuity at about the same age and lived to almost 96. If you invested in something with similar principal security today - like treasuries - and withdrew $30k/yr, you'd have almost no money left in 13 years.

got it, thanks.

[arcticpineapplecorp.]

Option 1: As I detailed in this post, she could annuitize $400,000 of her 403(B) for $30,000/year with a 10 year guarantee. She could then use the remaining $400,000 to augment her income as the annuity's spending power is inflated away.

I'm confused. if she annuitizes $400k, why would she only get $30,000/year for 10 years? She'd be paying $400k, only to receive $300k over 10 years.

that sounds backwards. what am I missing here?

I believe that was already brought up, and was determined to be a 10 year guaranteed annuity will pay out for at least 10 years regardless of how long she lives... her beneficiaries will receive the income if she passes before the 10 years is up.
Not a 10 year "term certain annuity".

but if she passes in 10 years she paid $400k but only received $300k (and her heirs receive nothing)?

this only sounds good if she expects to live more than 13 years and even then, she's receiving no return essentially until year 14 through death.

If she passes early, she won't miss the money... and for however long her remaining life is, she can sleep well not worrying about her diminishing portfolio and whether or not it will last, or what the gyrations of the market/interest rate changes do to the quoted value (although other options like CD's avoid market volatility risks).
If she lives long enough to receive more than what could have been purchased in a bond/CD ladder at current rates, that's a bonus, but for some the insurance against the risk/consequences of outliving the portfolio is worth it.

thanks.