Are annuities the best way to fund one's retirement?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
CULater
Posts: 2047
Joined: Sun Nov 13, 2016 10:59 am

Are annuities the best way to fund one's retirement?

Post by CULater » Tue Apr 02, 2019 8:13 am

Yes. Produces a higher level of income at a lower level of risk. And you can stop playing the game. Bequest motive? Just annuitize a portion of your nestegg. What's not to like?
Even at no more than 90% assurance that the money won’t run out over an investor’s lifetime, and emphatically for any level of certainty above that, an annuity is preferable to a safe withdrawal strategy. The annuity’s advantage is that it leaves no money for bequests when you die, while a safe withdrawal strategy usually leaves a large amount.

If one believes that future returns may be even lower – as, for example, Jeremy Grantham does – then a “safe withdrawal rate” may not be safe at all; an annuity is the clear safe haven. Thus, uncertainty about the expected returns on stocks and bonds adds to the uncertainty of the safe withdrawal strategy.
https://www.advisorperspectives.com/art ... retirement
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

smitcat
Posts: 3571
Joined: Mon Nov 07, 2016 10:51 am

Re: Are annuities the best way to fund one's retirement?

Post by smitcat » Tue Apr 02, 2019 8:16 am

"Produces a higher level of income at a lower level of risk."

Depends upon your definition of risk, your tax situation, your thoughts on inflation and the funds you have available vs your needs.
Saying yes for everyone does not work in this situation any more than most other 'rules of thumb' do.

User avatar
marklearnsbogle
Posts: 139
Joined: Tue Jul 15, 2014 7:56 pm
Location: New York City

Are annuities the best way to fund one's retirement?

Post by marklearnsbogle » Tue Apr 02, 2019 8:37 am

I agree, and obviously, none of this is "one size fits all." I am planning on purchasing a SPIA with the $ from my tIRA and 403(b), and alongside that my Roth, SS, and some DRIP investments. SS and a SPIA are steady, reliable streams of income, but I wouldn't limit my retirement to just those, if possible.
"Nothing is simpler than owning the stock market and holding it forever, and that’s essentially the idea behind the index fund.” - Bogle.

chipperd
Posts: 435
Joined: Sat Sep 24, 2011 5:58 am

Re: Are annuities the best way to fund one's retirement?

Post by chipperd » Tue Apr 02, 2019 9:01 am

"The best way..."
Really subjective. I looked at the payout rate from the link you posted. Since I am married, I always consider 100% joint continuation, so just above 5% payout rate. Not sure that number is best return given that I need to give up all principle to get that 5%+ return rate.

Dottie57
Posts: 6332
Joined: Thu May 19, 2016 5:43 pm

Re: Are annuities the best way to fund one's retirement?

Post by Dottie57 » Tue Apr 02, 2019 9:23 am

I like the idea of a steady paycheck. I think an annuity + SS would cover me well. Especially if SS ends up a reduced amount.

Admiral
Posts: 2082
Joined: Mon Oct 27, 2014 12:35 pm

Re: Are annuities the best way to fund one's retirement?

Post by Admiral » Tue Apr 02, 2019 9:31 am

CULater wrote:
Tue Apr 02, 2019 8:13 am
Yes. Produces a higher level of income at a lower level of risk. And you can stop playing the game. Bequest motive? Just annuitize a portion of your nestegg. What's not to like?
Even at no more than 90% assurance that the money won’t run out over an investor’s lifetime, and emphatically for any level of certainty above that, an annuity is preferable to a safe withdrawal strategy. The annuity’s advantage is that it leaves no money for bequests when you die, while a safe withdrawal strategy usually leaves a large amount.

If one believes that future returns may be even lower – as, for example, Jeremy Grantham does – then a “safe withdrawal rate” may not be safe at all; an annuity is the clear safe haven. Thus, uncertainty about the expected returns on stocks and bonds adds to the uncertainty of the safe withdrawal strategy.
https://www.advisorperspectives.com/art ... retirement
Sounds like a quote from someone trying to sell an annuity. I have a pension, so...why do I need an annuity? So, there's that not to like.

Annuities are (or perhaps "have been made to be by those selling them") complex financial products. Most people are not savvy financial consumers. Ergo, annuities can end up being bad substitutes for careful and conservative financial planning, which can generate income in place of what an annuity can provide.

IMO they are appropriate only for people with moderate retirement savings who are at risk of depleting their portfolios even WITH a SWR.

John Laurens
Posts: 430
Joined: Mon Nov 14, 2016 7:31 pm

Re: Are annuities the best way to fund one's retirement?

Post by John Laurens » Tue Apr 02, 2019 9:35 am

There is no free lunch. One can not transfer risk without accepting lower returns. Total return is what matters. If you are susceptible to behavioral mistakes then a SPIA is reasonable.

Regards,
John

rantk81
Posts: 229
Joined: Tue Apr 18, 2017 8:12 am

Re: Are annuities the best way to fund one's retirement?

Post by rantk81 » Tue Apr 02, 2019 9:39 am

The idea of buying an annuity to "guarantee" income for the rest of my life is nice, in theory.
In practice, however, whenever pricing out annuities (for someone my age), it always seems that the dividend yield on the insurance company's stock is higher than the effective yield on an annuity product... Both of which come with the same 'default risk' of the company going belly-up.
:P

User avatar
Mel Lindauer
Moderator
Posts: 29546
Joined: Mon Feb 19, 2007 8:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: Are annuities the best way to fund one's retirement?

Post by Mel Lindauer » Tue Apr 02, 2019 9:56 am

To call this statement an "annuity's advantage" is simply ridiculous.
The annuity’s advantage is that it leaves no money for bequests when you die, while a safe withdrawal strategy usually leaves a large amount.
While that may apply to folks with no heirs, many (perhaps most) folks want to leave bequests for their heirs.

Sounds like an annuity company's spin to me. While there may well be a place for an SPIA, they don't need to make silly statements like this to promote them. And they're definitely not for everyone.
Best Regards - Mel | | Semper Fi

megabad
Posts: 1808
Joined: Fri Jun 01, 2018 4:00 pm

Re: Are annuities the best way to fund one's retirement?

Post by megabad » Tue Apr 02, 2019 10:05 am

CULater wrote:
Tue Apr 02, 2019 8:13 am
Yes. Produces a higher level of income at a lower level of risk. And you can stop playing the game. Bequest motive? Just annuitize a portion of your nestegg. What's not to like?
Let me fix your statement for you: Annuities, by definition, will for most people "Produce a lower level of income at a lower level of risk." I believe that the linked article is an unimpressive math exercise that provides no information in my mind that is supportive of annuities (and some info that is nonsensical as pointed out above) despite the fact that I am more pro annuity than most here.

Also, I caution against the use of the word "annuity" as it is ambiguous. I think that a SPDA or SPIA can be very useful in retirement planning for some folks though. However, I expect that most folks understand that you are actuarially going to be worse off compared to a market based strategy (since the insurance company must cover its costs/profit). If the insurance company does not allow enough room for market fluctuations, than they will go out of business quickly.

Additionally, almost all annuities are highly exposed to inflation risk (except for one company now I think). Also, annuities usually present tax/RMD complexities that must also be considered (but can present opportunities for savings).

An annuity means paying more for more security (from the market) which is not necessarily a bad thing for a small part of your portfolio depending on your situation. SPDA and SPIA can definitely be a useful tool for retirement, but they are neither better nor worse than any other strategy since everyone's situation varies. For the average American, I would argue that annuities are not useful since most qualify for SS (an inflation adjusted lifetime annuity) that represents a large portion of their retirement expenses.

User avatar
HomerJ
Posts: 13020
Joined: Fri Jun 06, 2008 12:50 pm

Re: Are annuities the best way to fund one's retirement?

Post by HomerJ » Tue Apr 02, 2019 10:09 am

CULater wrote:
Tue Apr 02, 2019 8:13 am
Yes. Produces a higher level of income at a lower level of risk.
This is false because it ignores inflation risk.

Don't get me wrong. I like the idea of a SPIA to create a partial income stream in retirement.

I think SPIAs should definitely be considered in a retirement plan. I'll probably use one myself.

But I would never make a blanket statement that they are the "best way".
The J stands for Jay

randomguy
Posts: 7821
Joined: Wed Sep 17, 2014 9:00 am

Re: Are annuities the best way to fund one's retirement?

Post by randomguy » Tue Apr 02, 2019 10:10 am

smitcat wrote:
Tue Apr 02, 2019 8:16 am
"Produces a higher level of income at a lower level of risk."

Depends upon your definition of risk, your tax situation, your thoughts on inflation and the funds you have available vs your needs.
Saying yes for everyone does not work in this situation any more than most other 'rules of thumb' do.
3.84% SWR doesn't seem like a higher level of income to start with. Historically if you look at annuities, you do about the same results in the bottom 10% or so of cases where you make ~4% and die broke. In the "average" case, you make 4% AND leave your heirs 2x your starting amount in real money. That makes paying for your lower risk very expensive in my book. Now if your a person who is planning on a 2% SWR, yeah annuitize half your money:)

Why do the numbers look so good in this article for annuities? Because they used made up data that we have not way of verifying how legit it is.:) Just because you run a computer simulation and it pops out numbers, it doesn't mean they have any validity. For example read the footnote where they specifically mention that bonds returns and inflation are linked over time but they ignore it. Nominal dollar averages are also a bit of weird way of looking at the problem. The value of 1 dollar in year one is not the same as 1 dollar in year 30.

Personally I always find the annuitize between 75-85 strategies to make more sense. In some ways they are riskier (i.e. your odds of dying before much of a payout is greater) but that is also the appeal. You are making a more direct hedge against longevity and less of an investment play (i.e. buying a SPIA at 25 is almost 100% investment. Buying one at 110 would be a pure gamble on longevity. :) ). Though I sort of hope I get average market returns and end up with some 2% SWR and don't have to worry about it.

Grt2bOutdoors
Posts: 20742
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Are annuities the best way to fund one's retirement?

Post by Grt2bOutdoors » Tue Apr 02, 2019 10:19 am

If you believe future returns are going lower, then annuities will not solve your problem. Annuities are priced by insurance companies based on market returns + mortality credits - middleman markup. If insurance company today is offering a rate of 6% at age 70 and returns fall by 1%, you will now need more money upfront to obtain the same dollar income you would have received when returns were higher in the bond market. The best way to fund one's retirement is to save, save alot of money because that and an ability to control your expenditures is what will get you through retirement.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

DesertDiva
Posts: 412
Joined: Thu Mar 01, 2018 12:49 pm
Location: In the desert

Re: Are annuities the best way to fund one's retirement?

Post by DesertDiva » Tue Apr 02, 2019 10:21 am

Brought to you by "Advisor Perspectives"...

TN_Boy
Posts: 858
Joined: Sat Jan 17, 2009 12:51 pm

Re: Are annuities the best way to fund one's retirement?

Post by TN_Boy » Tue Apr 02, 2019 10:24 am

CULater wrote:
Tue Apr 02, 2019 8:13 am
Yes. Produces a higher level of income at a lower level of risk. And you can stop playing the game. Bequest motive? Just annuitize a portion of your nestegg. What's not to like?
Even at no more than 90% assurance that the money won’t run out over an investor’s lifetime, and emphatically for any level of certainty above that, an annuity is preferable to a safe withdrawal strategy. The annuity’s advantage is that it leaves no money for bequests when you die, while a safe withdrawal strategy usually leaves a large amount.

If one believes that future returns may be even lower – as, for example, Jeremy Grantham does – then a “safe withdrawal rate” may not be safe at all; an annuity is the clear safe haven. Thus, uncertainty about the expected returns on stocks and bonds adds to the uncertainty of the safe withdrawal strategy.
https://www.advisorperspectives.com/art ... retirement
Your sentence "Just annuitize a portion of your nestegg" is reasonable. The rest of your statements are controversial.

I'll post a short easy to read discussion of annuities that I've posted before:

https://www.onefpa.org/journal/Pages/DE ... Tower.aspx

See especially the bit about how one might be over-annuitized.

I think the notion of annuziting almost all your assets is absurd (a portion could make sense).

More importantly, many people already have an annuity that pays a decent percentage of their living expenses. We call it SS.

GT99
Posts: 211
Joined: Wed Jun 20, 2018 5:26 pm

Re: Are annuities the best way to fund one's retirement?

Post by GT99 » Tue Apr 02, 2019 10:29 am

Let's look at this in simple terms. Annuity providers make money in 2 ways:
1. Taking a cut of your money (or all of it, depending on survivorship terms, etc)
2. Return on investment from investing your money.

If you're looking at it as an investment vehicle to guarantee long term income in retirement, why not invest your own money and not give them a cut? I'd probably only recommend that to people who are bad with money or who are hyper-conservative.
Now, if you're looking at it as a form of insurance (e.g. old age insurance), that's different.

User avatar
Taylor Larimore
Advisory Board
Posts: 28391
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Our Two SPIAs (Single Premium Immediate Annuities)

Post by Taylor Larimore » Tue Apr 02, 2019 10:42 am

Admiral wrote:IMO they are appropriate only for people with moderate retirement savings who are at risk of depleting their portfolios even WITH a SWR.
Bogleheads:

I agree that SPIA's (Single Premium Immediate Annuities) may be ideal for people who are at risk of depleting their portfolio. However, there is another situation (like mine) where a SPIA has also been very useful.

When my wife and I were approaching our 80s, we thought it would be ideal if we could give our children their inheritance while we are alive and when they needed it most.

We bought one joint SPIA. We found the transaction so easy, and the contract so simple to understand, that we bought another SPIA a year later. My only problem is that I occasionally receive a letter wanting proof that I am still alive at age 95. :happy

After purchasing the SPIA annuities (the only good annuity), and knowing that we had a guaranteed lifetime income (similar to a pension), we felt comfortable giving our sons their inheritance early. It made us happy and they are very grateful!!

Note: A SPIA provides the largest guaranteed lifetime income of any investment. Example: for a couple age 80, a SPIA will provide a guaranteed lifetime income of over 8%.

Best wishes.
Taylor
Last edited by Taylor Larimore on Tue Apr 02, 2019 12:32 pm, edited 2 times in total.
"Simplicity is the master key to financial success." -- Jack Bogle

Presintense
Posts: 189
Joined: Thu Nov 06, 2014 1:58 pm
Location: "Somewhere in the middle of America"

Re: Are annuities the best way to fund one's retirement?

Post by Presintense » Tue Apr 02, 2019 10:43 am

Annuities are the best way to fund your annuity salesperson’s retirement. :oops:
Performance = Potential - Distraction

smitcat
Posts: 3571
Joined: Mon Nov 07, 2016 10:51 am

Re: Are annuities the best way to fund one's retirement?

Post by smitcat » Tue Apr 02, 2019 10:50 am

randomguy wrote:
Tue Apr 02, 2019 10:10 am
smitcat wrote:
Tue Apr 02, 2019 8:16 am
"Produces a higher level of income at a lower level of risk."

Depends upon your definition of risk, your tax situation, your thoughts on inflation and the funds you have available vs your needs.
Saying yes for everyone does not work in this situation any more than most other 'rules of thumb' do.
3.84% SWR doesn't seem like a higher level of income to start with. Historically if you look at annuities, you do about the same results in the bottom 10% or so of cases where you make ~4% and die broke. In the "average" case, you make 4% AND leave your heirs 2x your starting amount in real money. That makes paying for your lower risk very expensive in my book. Now if your a person who is planning on a 2% SWR, yeah annuitize half your money:)

Why do the numbers look so good in this article for annuities? Because they used made up data that we have not way of verifying how legit it is.:) Just because you run a computer simulation and it pops out numbers, it doesn't mean they have any validity. For example read the footnote where they specifically mention that bonds returns and inflation are linked over time but they ignore it. Nominal dollar averages are also a bit of weird way of looking at the problem. The value of 1 dollar in year one is not the same as 1 dollar in year 30.

Personally I always find the annuitize between 75-85 strategies to make more sense. In some ways they are riskier (i.e. your odds of dying before much of a payout is greater) but that is also the appeal. You are making a more direct hedge against longevity and less of an investment play (i.e. buying a SPIA at 25 is almost 100% investment. Buying one at 110 would be a pure gamble on longevity. :) ). Though I sort of hope I get average market returns and end up with some 2% SWR and don't have to worry about it.
"Now if your a person who is planning on a 2% SWR, yeah annuitize half your money:)"
Interesting - that is exactly why we will likely not utilize annuities.

User avatar
vineviz
Posts: 4385
Joined: Tue May 15, 2018 1:55 pm

Re: Are annuities the best way to fund one's retirement?

Post by vineviz » Tue Apr 02, 2019 10:55 am

Admiral wrote:
Tue Apr 02, 2019 9:31 am
CULater wrote:
Tue Apr 02, 2019 8:13 am
Yes. Produces a higher level of income at a lower level of risk. And you can stop playing the game. Bequest motive? Just annuitize a portion of your nestegg. What's not to like?
IMO they are appropriate only for people with moderate retirement savings who are at risk of depleting their portfolios even WITH a SWR.
As the article points out, SPIAs are also appropriate for people who WANT to deplete their portfolios while maintaining the highest level of expected lifetime income.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

smitcat
Posts: 3571
Joined: Mon Nov 07, 2016 10:51 am

Re: Are annuities the best way to fund one's retirement?

Post by smitcat » Tue Apr 02, 2019 10:58 am

vineviz wrote:
Tue Apr 02, 2019 10:55 am
Admiral wrote:
Tue Apr 02, 2019 9:31 am
CULater wrote:
Tue Apr 02, 2019 8:13 am
Yes. Produces a higher level of income at a lower level of risk. And you can stop playing the game. Bequest motive? Just annuitize a portion of your nestegg. What's not to like?
IMO they are appropriate only for people with moderate retirement savings who are at risk of depleting their portfolios even WITH a SWR.
As the article points out, SPIAs are also appropriate for people who WANT to deplete their portfolios while maintaining the highest level of expected lifetime income.
Changed the wording for clarity....
"As the article points out, SPIAs are also appropriate for people who WANT to deplete their portfolios while maintaining the highest level of reasonably low risk lifetime income."

Admiral
Posts: 2082
Joined: Mon Oct 27, 2014 12:35 pm

Re: Are annuities the best way to fund one's retirement?

Post by Admiral » Tue Apr 02, 2019 11:07 am

vineviz wrote:
Tue Apr 02, 2019 10:55 am
Admiral wrote:
Tue Apr 02, 2019 9:31 am
CULater wrote:
Tue Apr 02, 2019 8:13 am
Yes. Produces a higher level of income at a lower level of risk. And you can stop playing the game. Bequest motive? Just annuitize a portion of your nestegg. What's not to like?
IMO they are appropriate only for people with moderate retirement savings who are at risk of depleting their portfolios even WITH a SWR.
As the article points out, SPIAs are also appropriate for people who WANT to deplete their portfolios while maintaining the highest level of expected lifetime income.
There are lots of ways to deplete one's portfolio (if that's the desire) aside from giving your money to an insurance company. Here are two: charity, and spend more money.

User avatar
vineviz
Posts: 4385
Joined: Tue May 15, 2018 1:55 pm

Re: Are annuities the best way to fund one's retirement?

Post by vineviz » Tue Apr 02, 2019 11:08 am

smitcat wrote:
Tue Apr 02, 2019 10:58 am
Changed the wording for clarity....
"As the article points out, SPIAs are also appropriate for people who WANT to deplete their portfolios while maintaining the highest level of reasonably low risk lifetime income."
I don't see how that clarifies anything: "highest level of expected lifetime income" is unambiguously and objectively what you get with a SPIA.

On the other hand, a "reasonably low risk lifetime income" seems awfully vague and subjective to me.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

ThrustVectoring
Posts: 742
Joined: Wed Jul 12, 2017 2:51 pm

Re: Are annuities the best way to fund one's retirement?

Post by ThrustVectoring » Tue Apr 02, 2019 11:12 am

It's the most efficient way to fund your retirement after the age of 70 or so, assuming you don't care about heirs or leaving money to charitable causes. If you're significantly younger, the mortality credits are negligible, so you're far better off with a standard stock and bond portfolio.
Last edited by ThrustVectoring on Tue Apr 02, 2019 11:12 am, edited 1 time in total.
Current portfolio: 60% VTI / 40% VXUS

smitcat
Posts: 3571
Joined: Mon Nov 07, 2016 10:51 am

Re: Are annuities the best way to fund one's retirement?

Post by smitcat » Tue Apr 02, 2019 11:12 am

vineviz wrote:
Tue Apr 02, 2019 11:08 am
smitcat wrote:
Tue Apr 02, 2019 10:58 am
Changed the wording for clarity....
"As the article points out, SPIAs are also appropriate for people who WANT to deplete their portfolios while maintaining the highest level of reasonably low risk lifetime income."
I don't see how that clarifies anything: "highest level of expected lifetime income" is unambiguously and objectively what you get with a SPIA.

On the other hand, a "reasonably low risk lifetime income" seems awfully vague and subjective to me.
"On the other hand, a "reasonably low risk lifetime income" seems awfully vague and subjective to me."
And that is exactly whet it is - a vague and subjective statement.
Without knowing the rate of inflation, the tax rate of the holder etc - this is all pretty subjective & vague.

User avatar
vineviz
Posts: 4385
Joined: Tue May 15, 2018 1:55 pm

Re: Are annuities the best way to fund one's retirement?

Post by vineviz » Tue Apr 02, 2019 11:13 am

Admiral wrote:
Tue Apr 02, 2019 11:07 am
There are lots of ways to deplete one's portfolio (if that's the desire) aside from giving your money to an insurance company. Here are two: charity, and spend more money.
You're missing the point, I think.

Someone who wants to bequeath money to a charity upon their death is, by definition, NOT someone who wants to deplete their portfolio during their lifetime.

On the other hand, someone who wants to spend as much of their money as they can while they are alive is EXACTLY the person for whom a SPIA is appropriate.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

randomguy
Posts: 7821
Joined: Wed Sep 17, 2014 9:00 am

Re: Are annuities the best way to fund one's retirement?

Post by randomguy » Tue Apr 02, 2019 11:29 am

vineviz wrote:
Tue Apr 02, 2019 11:13 am
Admiral wrote:
Tue Apr 02, 2019 11:07 am
There are lots of ways to deplete one's portfolio (if that's the desire) aside from giving your money to an insurance company. Here are two: charity, and spend more money.
You're missing the point, I think.

Someone who wants to bequeath money to a charity upon their death is, by definition, NOT someone who wants to deplete their portfolio during their lifetime.

On the other hand, someone who wants to spend as much of their money as they can while they are alive is EXACTLY the person for whom a SPIA is appropriate.
Is it better to spend 100% of 1 million or 50% of 3 million? In the first case, you have spend all your money. In the second case you have spend more money. If you want to do A, the SPIA makes it easy. If you want to maximize your spending amount, not percentage, investing wins 90% of the time.

Admiral
Posts: 2082
Joined: Mon Oct 27, 2014 12:35 pm

Re: Are annuities the best way to fund one's retirement?

Post by Admiral » Tue Apr 02, 2019 11:31 am

vineviz wrote:
Tue Apr 02, 2019 11:13 am
Admiral wrote:
Tue Apr 02, 2019 11:07 am
There are lots of ways to deplete one's portfolio (if that's the desire) aside from giving your money to an insurance company. Here are two: charity, and spend more money.
You're missing the point, I think.

Someone who wants to bequeath money to a charity upon their death is, by definition, NOT someone who wants to deplete their portfolio during their lifetime.

On the other hand, someone who wants to spend as much of their money as they can while they are alive is EXACTLY the person for whom a SPIA is appropriate.
I think you're missing my point. You can spend money (or give it to charity) while you are alive if you want to spend down your portfolio and have nothing. You can then live on your annuity (i.e. social security) which gets a COLA increase each year (usually). If SS is not enough, then you can take some portion of your portfolio and put it in bonds, and spend the rest. If you don't deplete it, you can die with no will and give it to the state.

Either way, it is you, and not the insurance company, that has the money to spend/gift.

randomguy
Posts: 7821
Joined: Wed Sep 17, 2014 9:00 am

Re: Are annuities the best way to fund one's retirement?

Post by randomguy » Tue Apr 02, 2019 11:32 am

smitcat wrote:
Tue Apr 02, 2019 10:50 am


"Now if your a person who is planning on a 2% SWR, yeah annuitize half your money:)"
Interesting - that is exactly why we will likely not utilize annuities.
Sort of depends on why you are at 2%. If it is because you want to leave a big inheritance, then yeah don't annuitize. If it is because of fear, you should think about it. Annuitize half and get a 2% SWR and then getting 2% from what is left gets you a 3% SWR.

smitcat
Posts: 3571
Joined: Mon Nov 07, 2016 10:51 am

Re: Are annuities the best way to fund one's retirement?

Post by smitcat » Tue Apr 02, 2019 11:45 am

randomguy wrote:
Tue Apr 02, 2019 11:32 am
smitcat wrote:
Tue Apr 02, 2019 10:50 am


"Now if your a person who is planning on a 2% SWR, yeah annuitize half your money:)"
Interesting - that is exactly why we will likely not utilize annuities.
Sort of depends on why you are at 2%. If it is because you want to leave a big inheritance, then yeah don't annuitize. If it is because of fear, you should think about it. Annuitize half and get a 2% SWR and then getting 2% from what is left gets you a 3% SWR.
OK - those ideas for folks would work.

User avatar
willthrill81
Posts: 10808
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Are annuities the best way to fund one's retirement?

Post by willthrill81 » Tue Apr 02, 2019 11:52 am

Personally, the thought of handing over a significant portion of the portfolio that I will have worked so hard for so long to get to an insurance company in return for their promise to give me a nominal amount of money until I die, leaving none of the annuitized assets for my daughter, is not one that I relish.

A SPIA has its place in the retiree's toolbox, but it's not "the best way" because there is no such thing.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Mr.BB
Posts: 937
Joined: Sun May 08, 2016 10:10 am

Re: Are annuities the best way to fund one's retirement?

Post by Mr.BB » Tue Apr 02, 2019 11:58 am

There are different forms of annuities. Social security, pensions.
Why ould somebody need another annuity if they already have those? Possibly a SPIA, but that's about it.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

User avatar
vineviz
Posts: 4385
Joined: Tue May 15, 2018 1:55 pm

Re: Are annuities the best way to fund one's retirement?

Post by vineviz » Tue Apr 02, 2019 12:01 pm

randomguy wrote:
Tue Apr 02, 2019 11:29 am
Is it better to spend 100% of 1 million or 50% of 3 million?
But that's not the choice is it?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
vineviz
Posts: 4385
Joined: Tue May 15, 2018 1:55 pm

Re: Are annuities the best way to fund one's retirement?

Post by vineviz » Tue Apr 02, 2019 12:06 pm

Admiral wrote:
Tue Apr 02, 2019 11:31 am
If you don't deplete it, you can die with no will and give it to the state.
I think you're still not understanding.

Some people have no desire to leave anything to anyone after they die. They want, for whatever reason, to spend as much of their savings as they possibly can while they are alive.

So the question becomes, for those people, what is the best way to accomplish this goal? The article answers this question: a SPIA, under virtually all conceivable scenarios, is the best way to do this.

If you are NOT one of these people, the article isn't necessarily written for you. If you have different goals, then different tools or a different plan might be best.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
munemaker
Posts: 4144
Joined: Sat Jan 18, 2014 6:14 pm

Re: Are annuities the best way to fund one's retirement?

Post by munemaker » Tue Apr 02, 2019 12:10 pm

vineviz wrote:
Tue Apr 02, 2019 11:13 am
...someone who wants to spend as much of their money as they can while they are alive is EXACTLY the person for whom a SPIA is appropriate.
I received an email from Fidelity recently about a webcast on annuities. I clicked the link to see what it was about and there was a link to get a quote on annuities. Out of curiosity, I picked an annuity with a 2% inflation adjustment. I was kind of astounded that it worked out to be less than what I would receive using the 4% rule (which has inflation adjustment).

I don't know much about annuities, but am wondering...why would anyone give up their principle for an annuity payment that is less than what you would receive if you kept the principle and invested using the 4% rule?
Last edited by munemaker on Tue Apr 02, 2019 12:11 pm, edited 1 time in total.

randomguy
Posts: 7821
Joined: Wed Sep 17, 2014 9:00 am

Re: Are annuities the best way to fund one's retirement?

Post by randomguy » Tue Apr 02, 2019 12:11 pm

vineviz wrote:
Tue Apr 02, 2019 12:01 pm
randomguy wrote:
Tue Apr 02, 2019 11:29 am
Is it better to spend 100% of 1 million or 50% of 3 million?
But that's not the choice is it?
It is a close approximation of reality. The actual situation is more complicated it would be something along the lines of
a) annuity - spend 1 million
b) invest: spend 800k 1% of the time
spend 1 million 24% of the time
spend 1.5 million 50% of the time
spend 2 million 25% of the time

obviously the numbers aren't remotely exact but they are rough order of magnitude and expressing it in terms of dollars spend has a ton of limitations (dollar now versus dollar later) . Buying the annuity avoids the bottom 1% results BUT it also locks you into bottom 5% returns. That last bit of security is really expensive.

Admiral
Posts: 2082
Joined: Mon Oct 27, 2014 12:35 pm

Re: Are annuities the best way to fund one's retirement?

Post by Admiral » Tue Apr 02, 2019 12:17 pm

vineviz wrote:
Tue Apr 02, 2019 12:06 pm
Admiral wrote:
Tue Apr 02, 2019 11:31 am
If you don't deplete it, you can die with no will and give it to the state.
I think you're still not understanding.

Some people have no desire to leave anything to anyone after they die. They want, for whatever reason, to spend as much of their savings as they possibly can while they are alive.

So the question becomes, for those people, what is the best way to accomplish this goal? The article answers this question: a SPIA, under virtually all conceivable scenarios, is the best way to do this.

If you are NOT one of these people, the article isn't necessarily written for you. If you have different goals, then different tools or a different plan might be best.
I get it. (Please don’t selective quote me and them respond to just that part, ignoring the rest.)

I understand the desire. If one want to die with nothing, then give it all away and live as an acetic. That is not the or my point. My point is you can die with nothing or next o nothing w/o giving it to an annuity company. Determine your expenses, subtract your SS, assume that whatever else is needed comes from a low draw from some bonds, and spend or give away the rest. Doesn’t seem that complicated. The money buys your yacht, or goes to charity. But not to Nationwide or AIG.

User avatar
dodecahedron
Posts: 4437
Joined: Tue Nov 12, 2013 12:28 pm

Re: Are annuities the best way to fund one's retirement?

Post by dodecahedron » Tue Apr 02, 2019 12:23 pm

munemaker wrote:
Tue Apr 02, 2019 12:10 pm
vineviz wrote:
Tue Apr 02, 2019 11:13 am
...someone who wants to spend as much of their money as they can while they are alive is EXACTLY the person for whom a SPIA is appropriate.
I received an email from Fidelity recently about a webcast on annuities. I clicked the link to see what it was about and there was a link to get a quote on annuities. Out of curiosity, I picked an annuity with a 2% inflation adjustment. I was kind of astounded that it worked out to be less than what I would receive using the 4% rule (which has inflation adjustment).

I don't know much about annuities, but am wondering...why would anyone give up their principle for an annuity payment that is less than what you would receive if you kept the principle and invested using the 4% rule?
Some folks might choose to use annuities to replace a portion of their fixed income allocation, thereby allowing the remaining portfolio to be invested (and spent) more aggressively.

User avatar
munemaker
Posts: 4144
Joined: Sat Jan 18, 2014 6:14 pm

Re: Are annuities the best way to fund one's retirement?

Post by munemaker » Tue Apr 02, 2019 12:25 pm

dodecahedron wrote:
Tue Apr 02, 2019 12:23 pm
munemaker wrote:
Tue Apr 02, 2019 12:10 pm
vineviz wrote:
Tue Apr 02, 2019 11:13 am
...someone who wants to spend as much of their money as they can while they are alive is EXACTLY the person for whom a SPIA is appropriate.
I received an email from Fidelity recently about a webcast on annuities. I clicked the link to see what it was about and there was a link to get a quote on annuities. Out of curiosity, I picked an annuity with a 2% inflation adjustment. I was kind of astounded that it worked out to be less than what I would receive using the 4% rule (which has inflation adjustment).

I don't know much about annuities, but am wondering...why would anyone give up their principle for an annuity payment that is less than what you would receive if you kept the principle and invested using the 4% rule?
Some folks might choose to use annuities to replace a portion of their fixed income allocation, thereby allowing the remaining portfolio to be invested (and spent) more aggressively.
Yes, I realize some people do. Makes no sense to me though.

User avatar
willthrill81
Posts: 10808
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Are annuities the best way to fund one's retirement?

Post by willthrill81 » Tue Apr 02, 2019 12:29 pm

munemaker wrote:
Tue Apr 02, 2019 12:25 pm
dodecahedron wrote:
Tue Apr 02, 2019 12:23 pm
munemaker wrote:
Tue Apr 02, 2019 12:10 pm
vineviz wrote:
Tue Apr 02, 2019 11:13 am
...someone who wants to spend as much of their money as they can while they are alive is EXACTLY the person for whom a SPIA is appropriate.
I received an email from Fidelity recently about a webcast on annuities. I clicked the link to see what it was about and there was a link to get a quote on annuities. Out of curiosity, I picked an annuity with a 2% inflation adjustment. I was kind of astounded that it worked out to be less than what I would receive using the 4% rule (which has inflation adjustment).

I don't know much about annuities, but am wondering...why would anyone give up their principle for an annuity payment that is less than what you would receive if you kept the principle and invested using the 4% rule?
Some folks might choose to use annuities to replace a portion of their fixed income allocation, thereby allowing the remaining portfolio to be invested (and spent) more aggressively.
Yes, I realize some people do. Makes no sense to me though.
I'm curious as to why not. For the many investors who hold bonds to provide stability, trading a stable asset for a stable income stream seems like a plausible, though not necessarily optimal, move to me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Topic Author
CULater
Posts: 2047
Joined: Sun Nov 13, 2016 10:59 am

Re: Are annuities the best way to fund one's retirement?

Post by CULater » Tue Apr 02, 2019 12:34 pm

The article triggered a few lightbulbs for me:

1) Inflation risk: Has been a big concern for me. Yes, you have inflation risk with a nominally fixed annuity payout and that's a worry. But you also have "inflation risk" with a portfolio of stocks and bonds - what do you figure is going to happen to your real portfolio returns if there is high inflation? And how much will you have to cut back on your "SWR" when you begin to freak out about it? You can check back to the 1970s for an answer. Stocks can generally represent a good inflation hedge but only over long time periods, and when you're retired your long time periods are probably over. Over the shorter run, not so good. And we know what will happen to bonds - unless you've got some TIPS and I-Bonds. Second, unless you are annualizing everything, nothing says you can't invest some or all of the balance in good inflation hedges such as TIPS.

2) Risk of Insurance Company default under economic duress. Yes, but once again what do you figure that magnitude of economic duress is going to do to your stock investments, and corporate bonds if you have those too? The author points out that there can be a greater risk that your SWR plans will fail than that your annuity Insurance carrier will; and you can lessen and diversify that risk by purchasing SPIAs from more than one company and only the most financially sound companies.

3) It's not all or none. I can purchase one or more SPIAs and keep a portion of my retirement portfolio invested, both to provide diversification and to provide a legacy for heirs.

Everything considered, it's probably correct that an SPIA (or SPIAs) carefully selected represents the single best asset when it comes to providing the greatest lifetime income with the greatest level of predictability. But no single asset is perfect. We should probably avoid having all eggs in one basket, even it it seems like a pretty good basket.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

azanon
Posts: 2429
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR
Contact:

Re: Are annuities the best way to fund one's retirement?

Post by azanon » Tue Apr 02, 2019 12:35 pm

"Fixed Index Annuities explained in 90 Seconds" by the annuityslayer on youtube: https://www.youtube.com/watch?v=Y0-Xn3POG4g
It also has music for your entertainment.

randomguy
Posts: 7821
Joined: Wed Sep 17, 2014 9:00 am

Re: Are annuities the best way to fund one's retirement?

Post by randomguy » Tue Apr 02, 2019 12:39 pm

vineviz wrote:
Tue Apr 02, 2019 12:06 pm
Admiral wrote:
Tue Apr 02, 2019 11:31 am
If you don't deplete it, you can die with no will and give it to the state.
I think you're still not understanding.

Some people have no desire to leave anything to anyone after they die. They want, for whatever reason, to spend as much of their savings as they possibly can while they are alive.

So the question becomes, for those people, what is the best way to accomplish this goal? The article answers this question: a SPIA, under virtually all conceivable scenarios, is the best way to do this.

If you are NOT one of these people, the article isn't necessarily written for you. If you have different goals, then different tools or a different plan might be best.
Given the authors assumptions. Using historical numbers, you get different results. I will leave it up to you to decide if a simulation that is putting out numbers that are 50% worse than historical numbers is reasonable or has flaws.

User avatar
vineviz
Posts: 4385
Joined: Tue May 15, 2018 1:55 pm

Re: Are annuities the best way to fund one's retirement?

Post by vineviz » Tue Apr 02, 2019 12:47 pm

Admiral wrote:
Tue Apr 02, 2019 12:17 pm
My point is you can die with nothing or next o nothing w/o giving it to an annuity company. Determine your expenses, subtract your SS, assume that whatever else is needed comes from a low draw from some bonds, and spend or give away the rest. Doesn’t seem that complicated. The money buys your yacht, or goes to charity. But not to Nationwide or AIG.
First, I'm not sure where you're getting this notion that people who purchase annuities are just "giving" money away to an insurance company. There is no fundamental difference between buying an annuity from an insurance company, buying a yacht from Bill down the street, or buying a collection of antique bobsleds on eBay.

Second, the only way to be sure that you can spend all your money while you're alive without an annuity is if you know ahead of time precisely when you'll die. Most people don't know this.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
willthrill81
Posts: 10808
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Are annuities the best way to fund one's retirement?

Post by willthrill81 » Tue Apr 02, 2019 12:53 pm

CULater wrote:
Tue Apr 02, 2019 12:34 pm
1) Inflation risk: Has been a big concern for me. Yes, you have inflation risk with a nominally fixed annuity payout and that's a worry. But you also have "inflation risk" with a portfolio of stocks and bonds - what do you figure is going to happen to your real portfolio returns if there is high inflation? And how much will you have to cut back on your "SWR" when you begin to freak out about it? You can check back to the 1970s for an answer. Stocks can generally represent a good inflation hedge but only over long time periods, and when you're retired your long time periods are probably over. Over the shorter run, not so good. And we know what will happen to bonds - unless you've got some TIPS and I-Bonds. Second, unless you are annualizing everything, nothing says you can't invest some or all of the balance in good inflation hedges such as TIPS.
I'd rather have had stocks and all of their volatility from 1970-1979 than a fixed nominal income during that time. Inflation more than halved a dollar's buying power over that decade.
CULater wrote:
Tue Apr 02, 2019 12:34 pm
2) Risk of Insurance Company default under economic duress. Yes, but once again what do you figure that magnitude of economic duress is going to do to your stock investments, and corporate bonds if you have those too? The author points out that there can be a greater risk that your SWR plans will fail than that your annuity Insurance carrier will; and you can lessen and diversify that risk by purchasing SPIAs from more than one company and only the most financially sound companies.
The inverse could just as easily be true. In fact, I'd say that the likelihood of '4% rule-style' withdrawals failing over the next 30 years seems less than the likelihood of a single insurance company going under. Yes, guaranty associations may step in to cover the obligations, but that's not a 100% certainty, and their are limits on how much they cover ($300k in my state).
CULater wrote:
Tue Apr 02, 2019 12:34 pm
3) It's not all or none. I can purchase one or more SPIAs and keep a portion of my retirement portfolio invested, both to provide diversification and to provide a legacy for heirs.
Vanguard's annuity experts have recommended that retirees annuitize no more than 20% of their portfolio.
CULater wrote:
Tue Apr 02, 2019 12:34 pm
Everything considered, it's probably correct that an SPIA (or SPIAs) carefully selected represents the single best asset when it comes to providing the greatest lifetime income with the greatest level of predictability. But no single asset is perfect. We should probably avoid having all eggs in one basket, even it it seems like a pretty good basket.
I couldn't agree more. All roads carry risk, and as Larry Swedroe has said, "In the absence of clarify, diversification is the only logical strategy."
Last edited by willthrill81 on Tue Apr 02, 2019 12:54 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
munemaker
Posts: 4144
Joined: Sat Jan 18, 2014 6:14 pm

Re: Are annuities the best way to fund one's retirement?

Post by munemaker » Tue Apr 02, 2019 12:54 pm

willthrill81 wrote:
Tue Apr 02, 2019 12:29 pm
I'm curious as to why not. For the many investors who hold bonds to provide stability, trading a stable asset for a stable income stream seems like a plausible, though not necessarily optimal, move to me.
I would rather keep my principle and have higher annual withdrawals than give up my principle for lower annual withdrawals. It seems irrational to me to do otherwise. Am I missing something?
Last edited by munemaker on Tue Apr 02, 2019 12:55 pm, edited 1 time in total.

User avatar
SevenBridgesRoad
Posts: 418
Joined: Sat Jul 07, 2018 12:14 am

Re: Are annuities the best way to fund one's retirement?

Post by SevenBridgesRoad » Tue Apr 02, 2019 12:55 pm

If one wants a thread full of people talking past each other, start a thread on annuities.
Retired 2018 | Every day I choose how I spend my energy | One Vanguard TDF except for bunch of individual stocks...still recovering from my Fidelity AUM days years ago | Now sleeping well at night

User avatar
willthrill81
Posts: 10808
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Are annuities the best way to fund one's retirement?

Post by willthrill81 » Tue Apr 02, 2019 12:59 pm

munemaker wrote:
Tue Apr 02, 2019 12:54 pm
I would rather keep my principle and have higher annual withdrawals than give up my principle for lower annual withdrawals. It seems irrational to me to do otherwise. Am I missing something?
I completely understand the value in retaining control of one's assets rather than surrender them to an insurance company. However, the risk pooling benefit of a SPIA, in every instance I've seen, provides for a higher level of income than what can be achieved by self-annuitizing a bond portfolio over your life expectancy.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

SGM
Posts: 2973
Joined: Wed Mar 23, 2011 4:46 am

Re: Are annuities the best way to fund one's retirement?

Post by SGM » Tue Apr 02, 2019 1:10 pm

I have looked at other studies by Joe Tomlinson whose 2012 study on the safety of annuities was referenced in the above study. I trust Joe's work implicitly and am convinced that a small amount of annuitization will increase both the longevity of my portfolio and the amount of my legacy for my heirs. I am not the typical person who would buy an annuity. There are a lot of advantages to having multiple income streams outside of one's portfolio.

Joe showed in one study how a $1MM portfolio with SS delayed until 70, lasted a much longer time under many different market sequences with the addition of 3 $100k laddered SPIAs. I have sat across the table from Joe Tomlinson a half dozen times and he never tried to sell me anything. I didn't even know he was an actuary until he moved across the pond to Britain.

azanon
Posts: 2429
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR
Contact:

Re: Are annuities the best way to fund one's retirement?

Post by azanon » Tue Apr 02, 2019 1:19 pm

The general rule of thumb I've used for insurance (annuities are a type of insurance) is to buy no more of it than you absolutely have to have. Because the person selling it to you must make more, on average, from what they're selling than they're losing.

And why do so many assuming mortality credits are passed on to the holders of the "policy". I actually assume that's the real profit that they keep, then they pass on CD-like returns to you except they keep your principle when you "mature".

Post Reply