Take this annuity?

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abqguy
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Take this annuity?

Post by abqguy »

Hello, in a recent Bogleheads thread regarding annuities, the poster was counseled to suggest to her parents that they transfer their annuities to a low-cost company like Fidelity, unless they were older annuities (like 15 or 20 years old). This is because there might be a generous annuitization provision that guaranteed them a good return on their money.

I have a Vanguard annuity from 2000, and I am thinking I may be in a similar situation. So I am asking the forum to critique my thinking.

I reviewed my annuity contract from Vanguard, and learned that at age 65, I could elect to receive a payment for life (‘Option 1’) of $5.87 per thousand per month, which is $70.4 per thousand per year, or 7.04%. This sounds like a pretty good deal! If I wait till age 66, the payment increases by 2.39%, and each year after, the payment increases become greater.

My thinking is I should take this deal. By locking up about ¼ of my portfolio, I could generate the income that right now I pull from my overall portfolio (about 2% per year). This would reduce the uncertainty of depending upon my portfolio to generate income (although I could probably count on the bond funds to get me through all but the worst market downturns). As for giving up the ability to do Roth IRA conversions till I reach age 72, I don’t think that is a big downside. My rental income almost fills up the 12% tax bracket. So I would be converting IRAs to Roths at the 22% rate. Even once I begin Minimum Required Distributions at age 72, I think I will still be in the 22% or 24% bracket.

Can anyone point out holes in my thinking?


Emergency funds: my bonds funds are my emergency fund

Debt: only debt is a $30K mortgage

Tax Filing Status: single

Tax Rate: 22% federal, 5% state

State of Residence: New Mexico

Age: 65

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 20% of stocks

Current total portfolio approx. $1.2m. About $300K of this is in the Vanguard variable annuity. Apart from the annuity, almost all of my holdings are in tax-deferred

Annuity: from Vanguard, now serviced by TransAmerica. Total expenses are about .45% per year. Initial payment was $60K, which has grown to $300K now.

Rental property: I clear about $50K/yr (before taxes) from rental properties

Yearly expenses: my yearly expenses are about $60K. I would enjoy spending more on travel.

Leaving a legacy: not a goal. I have no kids, and my siblings are pretty well-off.
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David Jay
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Re: Take this annuity?

Post by David Jay »

Your plan to annuitize falls into the "reasonable" category.

Two thoughts:
1. Remember that the 7.04% is not inflation adjusted. So the spending power will shrink over the decades. Traditional SWR formulas assume inflation adjustment, so one can't directly compare 7% to 2%
2. You mentioned the 22% and 24% future tax brackets, keep in mind that those brackets are scheduled to revert in 2026, becoming the 25% and 28% respectively.

Finally, I don't see any mention of Social Security. I presume at some point that SS will add to your income. If you are spending 60K, you have 70K coming in between rental income and annuity, what will be the impact of SS? Will that "programmed" income exceed your needs, especially after the mortgage is removed from your expenses?
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Stinky
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Re: Take this annuity?

Post by Stinky »

Immediateannuities.com quotes a payout of $4.85 per $1000 per month for a life annuity for a male age 65.

So your potential payout from Vanguard annuity of $5.87 per $1000 per month sounds very attractive.

Given what you’ve described, I’d take that deal.
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jimkinny
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Re: Take this annuity?

Post by jimkinny »

Stinky wrote: Mon Apr 19, 2021 4:18 pm Immediateannuities.com quotes a payout of $4.85 per $1000 per month for a life annuity for a male age 65.

So your potential payout from Vanguard annuity of $5.87 per $1000 per month sounds very attractive.

Given what you’ve described, I’d take that deal.
+1, and consider delaying SS because it is the best annuity you can buy. It increases by about 8% for each year you delay and is inflation adjusted. SS is supposed to be neutral meaning the average person with a normal life life expectancy gets the same payout whether it is delayed or taken at 62. What you get depends on how long you live. Delaying is the best longevity insurance you can buy. Your annuity may help you delay taking it if that is appealing to you.
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grabiner
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Re: Take this annuity?

Post by grabiner »

jimkinny wrote: Mon Apr 19, 2021 6:48 pm +1, and consider delaying SS because it is the best annuity you can buy. It increases by about 8% for each year you delay and is inflation adjusted. SS is supposed to be neutral meaning the average person with a normal life life expectancy gets the same payout whether it is delayed or taken at 62.
It's actually even better than that. It is based on old actuarial tables, so there is a benefit for waiting even if you have an average life expectancy. And even the original formula is not neutral from year to year. The net is that it's usually best to wait until 70. (Men of average life expectancy with no spouse maximize expected value by claiming at 68 or 69, but the men who have the opportunity to make this decision are likely to have an above-average life expectancy.)
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Watty
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Re: Take this annuity?

Post by Watty »

abqguy wrote: Mon Apr 19, 2021 2:19 pm I reviewed my annuity contract from Vanguard, and learned that at age 65, I could elect to receive a payment for life (‘Option 1’) of $5.87 per thousand per month, which is $70.4 per thousand per year, or 7.04%. This sounds like a pretty good deal!
......
Can anyone point out holes in my thinking?
I know very little about annuities so this is more of a question than a suggestion about what to do.

My question is if part of that 7.04% is a return of your money and not really an investment return. For example if you have $100 at the beginning of the year and it earns 2% then they could pay you that $2 and then pay another $5 and you would get 7% but your balance at the end of the year would only be $95. That would a lot different than actually earning 7%.

Anyway be sure to research just how this works with your annuity.

I don't have any links but I vaguely recall people posting about there being services that will analyze an annuity for a modest fee to give you an unbiased opinion on if it is a good deal or not.
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grabiner
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Re: Take this annuity?

Post by grabiner »

Watty wrote: Mon Apr 19, 2021 8:14 pm
abqguy wrote: Mon Apr 19, 2021 2:19 pm I reviewed my annuity contract from Vanguard, and learned that at age 65, I could elect to receive a payment for life (‘Option 1’) of $5.87 per thousand per month, which is $70.4 per thousand per year, or 7.04%. This sounds like a pretty good deal!
......
Can anyone point out holes in my thinking?
I know very little about annuities so this is more of a question than a suggestion about what to do.

My question is if part of that 7.04% is a return of your money and not really an investment return. For example if you have $100 at the beginning of the year and it earns 2% then they could pay you that $2 and then pay another $5 and you would get 7% but your balance at the end of the year would only be $95. That would a lot different than actually earning 7%.
This is correct. 7.04% is not a rate of return; it means that you get $70.40 for every $1000 you put into the annuity. If you purchase the annuity with after-tax funds, some of the payment is considered a return of your money, so you don't get taxed on that gain. (The effect of this return-of-capital is that annuity rates increase with age, as the return-of-capital is spread over fewer years.)

But the annuity is still a good deal because the annuity rate in the contract is significantly higher than the current rate for purchasing a new annuity at retail.
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rgs92
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Re: Take this annuity?

Post by rgs92 »

Right, It's more of an amortization rather than a rate of return.
But still, I would take the annuity because you can consider this part of your fixed income allocation and even the internal amortization rate is way above what you could get as a risk-free rate of return.
So go for it.
Good luck.
deikel
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Re: Take this annuity?

Post by deikel »

Maybe I am missing something but what is the alternative ?

OP mentioned an option 1 with out saying what option 2 is ? A Pay out presumably ? How high or with what fees ect.

Compared to another annuity on the open market it seems like a good idea - but it is a binary decision of this annuity or one on the market right now ? Or is there a no annuity option as well ?

Just to compare the right things and not choose between two lesser evils...not saying an annuity is an evil....
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abqguy
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Re: Take this annuity?

Post by abqguy »

'Option 1' from my annuity contract is payments for life, but with no guarantee about the total amount of the payout I might receive. 'Option 2' is a 'period certain' of payouts of 10 or 15 or 20 years. 'Option 3' would guarantee at least the payout of the amount I originally invested. And then of course there is the option of not annuitizing at all, and just pulling money from the account as needed, like a typical mutual fund account.
Last edited by abqguy on Tue Apr 20, 2021 4:37 pm, edited 1 time in total.
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David Jay
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Re: Take this annuity?

Post by David Jay »

abqguy wrote: Tue Apr 20, 2021 1:15 pmAnd then of course there is the option of not annuitizing at all, and just pulling money from the account as needed, like a typical mutual fund account.
Not annuitizing will require RMDs beginning at age 72, so you really don’t have the option of “leaving the money in there”. The RMDs must come out of the annuity balance, they cannot be paid from a different source. The amount of RMD with an annuity is a bit obscure and can only be determined the the insurance company. [edit] Note: not qualified funds
Last edited by David Jay on Tue Apr 20, 2021 6:40 pm, edited 1 time in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
abqguy
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Re: Take this annuity?

Post by abqguy »

The original money was after-tax (i.e. this is a 'non qualified' annuity). My understanding is that for non-qualified annuities, there is no requirement to start withdrawing the money at age 72.

By the terms of the contract though if I plan to annuitize, I must do so by age 85, or lose that opportunity.
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Stinky
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Re: Take this annuity?

Post by Stinky »

abqguy wrote: Tue Apr 20, 2021 4:36 pm The original money was after-tax (i.e. this is a 'non qualified' annuity). My understanding is that for non-qualified annuities, there is no requirement to start withdrawing the money at age 72.

By the terms of the contract though if I plan to annuitize, I must do so by age 85, or lose that opportunity.
Your impression is correct.
It's a GREAT day to be alive! - Travis Tritt
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David Jay
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Re: Take this annuity?

Post by David Jay »

abqguy wrote: Tue Apr 20, 2021 4:36 pm The original money was after-tax (i.e. this is a 'non qualified' annuity). My understanding is that for non-qualified annuities, there is no requirement to start withdrawing the money at age 72.
My bad, I was thinking that these were qualified funds (i.e. traditional IRA, etc.)
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
reln
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Re: Take this annuity?

Post by reln »

abqguy wrote: Mon Apr 19, 2021 2:19 pm Hello, in a recent Bogleheads thread regarding annuities, the poster was counseled to suggest to her parents that they transfer their annuities to a low-cost company like Fidelity, unless they were older annuities (like 15 or 20 years old). This is because there might be a generous annuitization provision that guaranteed them a good return on their money.

I have a Vanguard annuity from 2000, and I am thinking I may be in a similar situation. So I am asking the forum to critique my thinking.

I reviewed my annuity contract from Vanguard, and learned that at age 65, I could elect to receive a payment for life (‘Option 1’) of $5.87 per thousand per month, which is $70.4 per thousand per year, or 7.04%. This sounds like a pretty good deal! If I wait till age 66, the payment increases by 2.39%, and each year after, the payment increases become greater.

My thinking is I should take this deal. By locking up about ¼ of my portfolio, I could generate the income that right now I pull from my overall portfolio (about 2% per year). This would reduce the uncertainty of depending upon my portfolio to generate income (although I could probably count on the bond funds to get me through all but the worst market downturns). As for giving up the ability to do Roth IRA conversions till I reach age 72, I don’t think that is a big downside. My rental income almost fills up the 12% tax bracket. So I would be converting IRAs to Roths at the 22% rate. Even once I begin Minimum Required Distributions at age 72, I think I will still be in the 22% or 24% bracket.

Can anyone point out holes in my thinking?


Emergency funds: my bonds funds are my emergency fund

Debt: only debt is a $30K mortgage

Tax Filing Status: single

Tax Rate: 22% federal, 5% state

State of Residence: New Mexico

Age: 65

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 20% of stocks

Current total portfolio approx. $1.2m. About $300K of this is in the Vanguard variable annuity. Apart from the annuity, almost all of my holdings are in tax-deferred

Annuity: from Vanguard, now serviced by TransAmerica. Total expenses are about .45% per year. Initial payment was $60K, which has grown to $300K now.

Rental property: I clear about $50K/yr (before taxes) from rental properties

Yearly expenses: my yearly expenses are about $60K. I would enjoy spending more on travel.

Leaving a legacy: not a goal. I have no kids, and my siblings are pretty well-off.
Annuitizing sounds good.
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Stinky
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Re: Take this annuity?

Post by Stinky »

abqguy wrote: Tue Apr 20, 2021 1:15 pm 'Option 1' from my annuity contract is payments for life, but with no guarantee about the total amount of the payout I might receive. 'Option 2' is a 'period certain' of payouts of 10 or 15 or 20 years. 'Option 3' would guarantee at least the payout of the amount I originally invested. And then of course there is the option of not annuitizing at all, and just pulling money from the account as needed, like a typical mutual fund account.
Just curious - what is your thinking after all of the comments received?

From previous posts, you can see that if you select Option 1 from the Vanguard annuity, you will receive a higher payment than you will if you use the same amount of money to purchase a SPIA from another insurer.

You haven't provided information as to Vanguard's rates for Options 2 or 3, so we can't opine on the competitiveness of those compared to the rates from another insurer.

But the basic decision is yours - are you now thinking of annuitizing using any of the three Options, or just not annuitizing at this time?
It's a GREAT day to be alive! - Travis Tritt
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abqguy
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Re: Take this annuity?

Post by abqguy »

I am going to take the annuity, with Option 1. My family is pretty long-lived.

I will re-read the contract carefully first. If all looks good, I will file the paperwork, probably this week.

I would like to express my sincere thanks to the people who weighed in here. If not for this forum, it would likely not have occurred to me to check the details of my contract with Vanguard. I would have missed this great opportunity. I have been very lucky. Again, a sincere thanks to all.
ginrummy
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Re: Take this annuity?

Post by ginrummy »

Op,

You mentioned being grateful for not missing the opportunity...Was this because if you’d have 1035’d the annuity to Fidelity, they would not have met the original contract terms?

Could you shed some light on this?
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Stinky
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Re: Take this annuity?

Post by Stinky »

ginrummy wrote: Wed Apr 28, 2021 11:10 pm Op,

You mentioned being grateful for not missing the opportunity...Was this because if you’d have 1035’d the annuity to Fidelity, they would not have met the original contract terms?

Could you shed some light on this?
I’ll weigh in.

If OP had done a 1035 exchange, the terms and provisions of the original Vanguard contract would have ceased, since that policy would be no longer in force. So the favorable purchase rates under Option 1 of the Vanguard contract would not be available to OP.
It's a GREAT day to be alive! - Travis Tritt
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abqguy
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Re: Take this annuity?

Post by abqguy »

I completed the paperwork to annuitize, and it turns out the payout rate is higher for a male. I will be receiving 7.75% (no COLA though). Thanks again to everyone for weighing in.
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Stinky
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Re: Take this annuity?

Post by Stinky »

abqguy wrote: Thu Apr 29, 2021 10:15 am I completed the paperwork to annuitize, and it turns out the payout rate is higher for a male. I will be receiving 7.75% (no COLA though). Thanks again to everyone for weighing in.
Excellent!

Congratulations on making a move that sounds very good for you.
It's a GREAT day to be alive! - Travis Tritt
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Oicuryy
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Re: Take this annuity?

Post by Oicuryy »

abqguy wrote: Thu Apr 29, 2021 10:15 am I completed the paperwork to annuitize, and it turns out the payout rate is higher for a male. I will be receiving 7.75% (no COLA though). Thanks again to everyone for weighing in.
Did you get that payout rate from Transamerica or from the tables in your contract? My first annuity payment looks to be based on a payout rate a lot lower than the one I read in the contract. The phone rep could not tell me what payout rate they used.

Ron
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Re: Take this annuity?

Post by Dottie57 »

Stinky wrote: Mon Apr 19, 2021 4:18 pm Immediateannuities.com quotes a payout of $4.85 per $1000 per month for a life annuity for a male age 65.

So your potential payout from Vanguard annuity of $5.87 per $1000 per month sounds very attractive.

Given what you’ve described, I’d take that deal.
+1

I’m jealous.
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abqguy
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Re: Take this annuity?

Post by abqguy »

My payout figure (7.04%) comes from my original contract with Vanguard. My understanding is that TransAmerica, as the administrator, is required to abide by the contract. When I contacted TransAmerica for the actual payout rate, it came in higher, at 7.75%.
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Re: Take this annuity?

Post by Oicuryy »

Thanks. It sounds like neither of us got the rate that is in the contract.

Ron
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