With Rates Falling Should U Buy Annuity?

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antiqueman
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With Rates Falling Should U Buy Annuity?

Post by antiqueman » Sun Aug 11, 2019 1:58 pm

I think there is at least a reasonable probability we may see zero, or very close to zero, rates for sometime.

Should one purchase an annuity now even though current interest rates are low. At least they aren't zero.

So if you were 65 and had thought about buying an annuity in your 70's would you seriously consider moving up the purchase to the present. If rates go down, we don't know how long they will be low.

sport
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Re: With Rates Falling Should U Buy Annuity?

Post by sport » Sun Aug 11, 2019 2:10 pm

There have been numerous posts about how impossible it is to predict interest rates. Rates may go up, instead of the decrease you expect. How good is your crystal ball?

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Rob5TCP
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Re: With Rates Falling Should U Buy Annuity?

Post by Rob5TCP » Sun Aug 11, 2019 3:07 pm

One of my clients asked me this a month or two ago.
We did some searching:
Most of your annuity payback comes from your investment. (anywhere from 40-65%)
Second payback is from mortality credits. (10-60%)
Third most important is interest rates. (2-15%)
This will vary depending on the age of person buying the annuity.
If you were 80; interest rates would pretty much be irrelevant --- unless they were super sky high.
If your 40 interest rates would go a great deal in determine your payout rate (since mortality
credit would be very minimal).
One example I could find for a 68 year old male
59% of payout was from return of principal
36% was from mortality credits
5% was from interest rate

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willthrill81
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Re: With Rates Falling Should U Buy Annuity?

Post by willthrill81 » Sun Aug 11, 2019 3:12 pm

Rob5TCP wrote:
Sun Aug 11, 2019 3:07 pm
One of my clients asked me this a month or two ago.
We did some searching:
Most of your annuity payback comes from your investment. (anywhere from 40-65%)
Second payback is from mortality credits. (10-60%)
Third most important is interest rates. (2-15%)
This will vary depending on the age of person buying the annuity.
If you were 80; interest rates would pretty much be irrelevant --- unless they were super sky high.
If your 40 interest rates would go a great deal in determine your payout rate (since mortality
credit would be very minimal).
One example I could find for a 68 year old male
59% of payout was from return of principal
36% was from mortality credits
5% was from interest rate
You beat me to it, although your analysis is far better than anything I would have put forward. I would just add that the annuitant's age is going to be the biggest variable impacting the annuity's payout ratio.

I certainly hope the OP is talking about a SPIA and not some other kind of annuity.
“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

wootwoot
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Re: With Rates Falling Should U Buy Annuity?

Post by wootwoot » Sun Aug 11, 2019 3:23 pm

antiqueman wrote:
Sun Aug 11, 2019 1:58 pm
I think there is at least a reasonable probability we may see zero, or very close to zero, rates for sometime.
This line of thinking has been repeated in other threads here. Why do you think this?

Geezer-Rich
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Re: With Rates Falling Should U Buy Annuity?

Post by Geezer-Rich » Sun Aug 11, 2019 4:02 pm

Well, I wouldn't buy an annuity whatever the rates are unless there were certain giuarantees. Once you buy it, you haver absolutely no control over your money. If married, I would want a joint life annuity with 100% to the survivor with increasing yearly payments based on ther rate of inflation. IF you can find an annuity like that, thern grab it. Otherwise, you are rolling the dice. What if you invest in an annuity and three years later you die. There goes the $$$.

rich126
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Re: With Rates Falling Should U Buy Annuity?

Post by rich126 » Sun Aug 11, 2019 5:24 pm

While I'm definitely one that doesn't think inflation will be a factor for quite some time, I'm not sure I'd want to buy an annuity since that locks you in for many, many decades unless it is some kind of 10 year annuity. Of course the "best" (if there is ever one) time would have been when rates were higher. Would kind of payout would an annuity give you now?

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Stinky
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Re: With Rates Falling Should U Buy Annuity?

Post by Stinky » Sun Aug 11, 2019 5:25 pm

antiqueman wrote:
Sun Aug 11, 2019 1:58 pm
I think there is at least a reasonable probability we may see zero, or very close to zero, rates for sometime.
Channeling Yogi Berra :”It’s tough to make predictions, especially about the future.”

Of course there’s a possibility that rates are lower over the next five years. But there’s a possibility that rates are higher, too.

OP, are you talking about buying a SPIA? I hope it’s not an indexed annuity or variable annuity.
It's a GREAT day to be alive - Travis Tritt

gd
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Re: With Rates Falling Should U Buy Annuity?

Post by gd » Mon Aug 12, 2019 7:16 am

Just faced with this decision. I've been collecting crude data for years, and came up with a vaguer version of RobSTCP's points, although my guess as to the interest rate proportion was considerably larger. But an annuity purchase is specifically made with an eye towards death now visible on the horizon. You're kinda running out of time to wait out interest rates, building pressure disruptive to the decision. We went with our original schedule from decades ago. I learned my lesson about forecasting interest rates 10-15 years ago, keeping money in CD-type stuff short and watching everyone be wrong.

Side point, Vanguard's soon-to-be-ex-partner Transamerica gave noticeably better rates than immediateannuities.com was quoting, draw your own conclusions why. No inflation adjustment available. The inflation-adjusted products were, for me, not clearly better as I considered how my cash flow will play out very long term and the role of the annuity in that. For me annuities are NOT simple financial decisions, they are integrated into lifestyle and cognitive health expectations.

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laidback_and_relaxed
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Re: With Rates Falling Should U Buy Annuity?

Post by laidback_and_relaxed » Mon Aug 12, 2019 8:34 am

I'm seriously looking at an Fixed Annuity for a maturing bond in my bond ladder later this year, instead of rolling it over into another bond. High credit 5 year through 8 year bonds are yielding 2.5% to 3.0% at best, less for AA and AAA credit quality. Bond funds aren't yielding much more and I expect their yield will decrease in the coming years. The Fixed Annuities aren't FDIC insured, but are insured up to limits by the State where the insurance company resides. The yield for a 5 year Fixed Annuity is closer to 4% right now.

Doing so is a little problematic; lot's of paper work, expected delays in wire transfers and redemption, non-qualified versus in qualified taxed deferred, but may be worth it.

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willthrill81
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Re: With Rates Falling Should U Buy Annuity?

Post by willthrill81 » Mon Aug 12, 2019 9:16 am

Geezer-Rich wrote:
Sun Aug 11, 2019 4:02 pm
Well, I wouldn't buy an annuity whatever the rates are unless there were certain giuarantees. Once you buy it, you haver absolutely no control over your money. If married, I would want a joint life annuity with 100% to the survivor with increasing yearly payments based on ther rate of inflation. IF you can find an annuity like that, thern grab it. Otherwise, you are rolling the dice. What if you invest in an annuity and three years later you die. There goes the $$$.
Only one company currently offers a SPIA that is linked to CPI, although many offer SPIAs with fixed COLAs (e.g. 3%, 4%).

What if you live off your own portfolio and die with a huge pile of money? It did you no good.

What if you buy an annuity at age 70 and live to 100? You would 'win' big time. That's the calculated risk of buying a lifetime annuity.
“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

johnz1001
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Re: With Rates Falling Should U Buy Annuity?

Post by johnz1001 » Mon Aug 12, 2019 11:47 am

Rob5TCP wrote:
Sun Aug 11, 2019 3:07 pm
One of my clients asked me this a month or two ago.
We did some searching:
Most of your annuity payback comes from your investment. (anywhere from 40-65%)
Second payback is from mortality credits. (10-60%)
Third most important is interest rates. (2-15%)
This will vary depending on the age of person buying the annuity.
If you were 80; interest rates would pretty much be irrelevant --- unless they were super sky high.
If your 40 interest rates would go a great deal in determine your payout rate (since mortality
credit would be very minimal).
One example I could find for a 68 year old male
59% of payout was from return of principal
36% was from mortality credits
5% was from interest rate
Very useful post for thinking about annuities. Thank you for sharing your expertise.

wolf359
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Re: With Rates Falling Should U Buy Annuity?

Post by wolf359 » Mon Aug 12, 2019 12:43 pm

Geezer-Rich wrote:
Sun Aug 11, 2019 4:02 pm
Well, I wouldn't buy an annuity whatever the rates are unless there were certain giuarantees. Once you buy it, you haver absolutely no control over your money. If married, I would want a joint life annuity with 100% to the survivor with increasing yearly payments based on ther rate of inflation. IF you can find an annuity like that, thern grab it. Otherwise, you are rolling the dice. What if you invest in an annuity and three years later you die. There goes the $$$.
An annuity is the mirror image of a life insurance policy. But it's still insurance.

A life insurance policy is bought to provide resources if one should die before the policy expires.

An annuity is a policy bought to provide resources if one should live.

You should only buy one if you're seeking lifelong income.

Insurance feels like a bet with the insurance company. But it really isn't. The insurance company is going to win, because they're basing their returns on the law of large numbers. They will price things in a way that after selling many policies, they will be profitable.

The reason individuals buy insurance is to protect them against the risk that they are insuring against. In the case of the annuity, it's the risk that they outlive their money.

There is a right way and a wrong way to use this tool. And many Bogleheads are biased against them because the financial industry has horribly oversold and mis-represented bad versions of this product. However, there are also examples in the community of when this tool has been used appropriately, and it has made lives better.

The annuity product worth looking at is a SPIA. But just like everybody doesn't need life insurance, everybody doesn't need a SPIA. But that's not the same as saying that NOBODY should buy an annuity.

I think current annuity products which have inflation protection built in are overpriced. As a result, the best deals are not inflation protected. You have to structure your plan to get your inflation adjustments elsewhere (such as through Social Security, real estate, inflation-protected treasury instruments, and/or an equities-heavy investment account).

I'd consider using annuities to replace a portion of your bond asset allocation. If you don't need one now, I'd wait. If you do need one, then interest rate considerations aren't as important.

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willthrill81
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Re: With Rates Falling Should U Buy Annuity?

Post by willthrill81 » Mon Aug 12, 2019 4:04 pm

wolf359 wrote:
Mon Aug 12, 2019 12:43 pm
Insurance feels like a bet with the insurance company. But it really isn't. The insurance company is going to win, because they're basing their returns on the law of large numbers. They will price things in a way that after selling many policies, they will be profitable.
Small note: the insurer will 'win' on average. Whether they 'win' on their contract with you is more of a 'bet' where the odds are slightly stacked in their favor.
“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

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Stinky
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Re: With Rates Falling Should U Buy Annuity?

Post by Stinky » Mon Aug 12, 2019 4:15 pm

willthrill81 wrote:
Mon Aug 12, 2019 4:04 pm
wolf359 wrote:
Mon Aug 12, 2019 12:43 pm
Insurance feels like a bet with the insurance company. But it really isn't. The insurance company is going to win, because they're basing their returns on the law of large numbers. They will price things in a way that after selling many policies, they will be profitable.
Small note: the insurer will 'win' on average. Whether they 'win' on their contract with you is more of a 'bet' where the odds are slightly stacked in their favor.
Correct. Just like a life insurer “wins” on term life insurance on average, or a property insurer “wins” on homeowners coverage.

But that didn’t stop me from buying term life or homeowners coverage. Because I wanted to have a payout if I had died or had a fire.
It's a GREAT day to be alive - Travis Tritt

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willthrill81
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Re: With Rates Falling Should U Buy Annuity?

Post by willthrill81 » Mon Aug 12, 2019 4:18 pm

Stinky wrote:
Mon Aug 12, 2019 4:15 pm
willthrill81 wrote:
Mon Aug 12, 2019 4:04 pm
wolf359 wrote:
Mon Aug 12, 2019 12:43 pm
Insurance feels like a bet with the insurance company. But it really isn't. The insurance company is going to win, because they're basing their returns on the law of large numbers. They will price things in a way that after selling many policies, they will be profitable.
Small note: the insurer will 'win' on average. Whether they 'win' on their contract with you is more of a 'bet' where the odds are slightly stacked in their favor.
Correct. Just like a life insurer “wins” on term life insurance on average, or a property insurer “wins” on homeowners coverage.

But that didn’t stop me from buying term life or homeowners coverage. Because I wanted to have a payout if I had died or had a fire.
It may be possible to stack the odds in your favor if you have more relevant data about your own longevity than the insurance company. For instance, if you're a high income earner, you're likely to live significantly longer than the general populace, and this longevity advantage could tilt the table toward you.

I've completed various longevity calculators online, and they estimate my median longevity to be between ages 92 and 101. Even at that lower bound level, if that's an accurate estimate, a SPIA somewhere down the road might be a slam dunk 'win' for 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

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antiqueman
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Re: With Rates Falling Should U Buy Annuity?

Post by antiqueman » Mon Aug 12, 2019 10:49 pm

I am the OP.

Yes it would be a SPIA, if purchased.

I am considering purchasing it because it would pay about 45% of a fixed debt for the next twenty years. Not worried about inflation.

Purchasing the annuity will leave me 95% of my investable assets.

My thought is I can buy the annuity and not have to worry about 45% of the fixed payment for the rest of my life. ( I realize this my be some form of mental accounting).

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JoMoney
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Re: With Rates Falling Should U Buy Annuity?

Post by JoMoney » Tue Aug 13, 2019 12:31 am

OP, I'm curious if there's a reason you don't/can't just pay off or refinance all or part of the debt rather than buying an annuity to pay on it?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

wolf359
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Re: With Rates Falling Should U Buy Annuity?

Post by wolf359 » Tue Aug 13, 2019 2:47 pm

antiqueman wrote:
Mon Aug 12, 2019 10:49 pm
I am the OP.

Yes it would be a SPIA, if purchased.

I am considering purchasing it because it would pay about 45% of a fixed debt for the next twenty years. Not worried about inflation.

Purchasing the annuity will leave me 95% of my investable assets.

My thought is I can buy the annuity and not have to worry about 45% of the fixed payment for the rest of my life. ( I realize this my be some form of mental accounting).
Some more thoughts:

This tactic of matching future assets sales and income streams against the timing of expected future expenses is called "liability matching." There's nothing wrong with it. It's a good idea to liability match your fixed expenses, and use market investments for your discretionary expenses.

Keep in mind that previous comment that SPIAs are partially paying you by returning your principal to you. This is bad in the sense that they're paying you with your own money. This is good in that when they're returning your principal, it is not a taxable gain. The SPIA income stream starts out mostly tax-free, then gradually gets more and more taxable until you're no longer getting your principal back.

This also means that eventually you're going to have a taxable income stream for the rest of your life in the amount of the annuity. What impact does that have on your income taxes, your social security payout (if your income is high enough, it's partially taxable), and your Medicare premiums (the higher your taxable income, the higher the premiums).

I'm not sure, since I don't have your numbers. You may need to run them or pay someone to do so.

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