What percentage of your assets to annuitize?

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What percentage of your assets do you annuitize

10%-25%
17
40%
26%-30%
6
14%
26%-30%
6
14%
31%-40%
4
10%
31%-40%
4
10%
41%-50%
2
5%
41%-50%
2
5%
76%-100%
1
2%
 
Total votes: 42

penngy
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What percentage of your assets to annuitize?

Post by penngy » Wed Jan 05, 2011 3:03 pm

If you have annuitized a portion of your retirement savings or plan to, what is the percentage of assets that you have chosen to annuitize?

I am thinking 25% with inflation adjustment. That payment plus pension and SSN should cover my expenses very comfortably with the remaining 3/4 for emergency, legacy, and self-insurance for long-term care.

Gill
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Post by Gill » Wed Jan 05, 2011 3:09 pm

You need 0 to 10%.
Bruce

Ron
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Post by Ron » Wed Jan 05, 2011 3:13 pm

At the time of purchase of my/our first SPIA, I paid a premium equal to 10% of our total retirement portfolios, in order to form a pension (I had none), and to delay SS for eleven years.

The application required me to state that the current SPIA, along with all additional current annuity products did not exceed 50% of my/our total retirement assets.

Sure, I could have lied, but the company at least was asking the question. I believe you will find writings looking at the same maximum 50% ratio, to allow a portion of the portfolio to remain for purposes of drawing money outside of what just an annuity would provide as a revenue stream.

- Ron

chaz
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Post by chaz » Wed Jan 05, 2011 3:15 pm

0%.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

Ron
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Post by Ron » Wed Jan 05, 2011 3:36 pm

chaz wrote:0%.
I bet you don't have to pay taxes on your monthly check :wink: ...

- Ron

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englishgirl
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Post by englishgirl » Wed Jan 05, 2011 3:49 pm

OK, I'm the only one that voted high so far! But if there was an "I don't know" button, that's what I would have picked.

What I would like is for SS + annuity income to cover my rock-bottom bare minimum expenses, and for that income stream to be inflation protected with COLAs every year. So I have in my head that I would like to fund an income stream that was very roughly 1/3 SS, 1/3 annuity, and 1/3 porfolio withdrawals. So, this leaves me a comfortable income that I can use for day-to-day living. And then any discretionary spending on top is gravy that comes out of the portfolio too.

But I haven't figured out how much of my portfolio this means that I will need to annuitize. So I assumed maybe 1/3 again, so I went with 31-40%. But I could be way off.
Sarah

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Jake46
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Post by Jake46 » Wed Jan 05, 2011 3:51 pm

0%

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Random Musings
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Post by Random Musings » Wed Jan 05, 2011 3:52 pm

0%. I'll probably end up using TIP's, but never say never to a fixed annuity.

RM

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bob90245
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Post by bob90245 » Wed Jan 05, 2011 4:16 pm

The question may or may not have enough context. Most States Guaranty Associations coverage limits are $300K. If you follow the common advice that Ron cited to not annuitize more than 50% of one's retirement portfolio, that translates to a portfolio of $600K (roughly speaking, based on coverage limits just mentioned).
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

dbr
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Re: What percentage of your assets to annuitize?

Post by dbr » Wed Jan 05, 2011 5:29 pm

penngy wrote:If you have annuitized a portion of your retirement savings or plan to, what is the percentage of assets that you have chosen to annuitize?

I am thinking 25% with inflation adjustment. That payment plus pension and SSN should cover my expenses very comfortably with the remaining 3/4 for emergency, legacy, and self-insurance for long-term care.
Following your thought process, the question makes no sense except relative to the rest of one's income streams. Your answer is that one annuitizes enough to annuitize the entirety of one's expected income stream. The calculation gets tricky if the pension is not COLA'd.

I did not answer the survey.

natureexplorer
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Post by natureexplorer » Wed Jan 05, 2011 5:36 pm

I haven't studied this in detail but I will probably inflation-annuitize the amount that is state-guaranteed. It doesn't get you very far these days, but if nothing else it's some form of diversification if you will.

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Taylor Larimore
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State Guarantees

Post by Taylor Larimore » Wed Jan 05, 2011 5:42 pm

Bogleheads:

State guarantee's vary:

http://www.annuityadvantage.com/stateguarantee.htm
"Simplicity is the master key to financial success." -- Jack Bogle

Sidney
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Post by Sidney » Wed Jan 05, 2011 5:46 pm

for now my plan is 0
I always wanted to be a procrastinator.

exoilman
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Post by exoilman » Wed Jan 05, 2011 5:54 pm

0%

Sam age 66 and 11mo.

natureexplorer
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Re: State Guarantees

Post by natureexplorer » Wed Jan 05, 2011 6:07 pm

Thanks! $100,000 in Texas sure is not a lot. Is the insurance based on where you live? What if you live abroad for a few years?

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bob90245
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Re: State Guarantees

Post by bob90245 » Wed Jan 05, 2011 6:42 pm

natureexplorer wrote:
Thanks! $100,000 in Texas sure is not a lot. Is the insurance based on where you live? What if you live abroad for a few years?
Don't have an answer to your other questions. But look again on the left column. The coverage limit for Texas is $300,000, like it is for most states. In other words, you can hold annuities from 3 different insurance companies with each at $100,000.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

supersharpie
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Post by supersharpie » Wed Jan 05, 2011 6:45 pm

Ron wrote:At the time of purchase of my/our first SPIA, I paid a premium equal to 10% of our total retirement portfolios, in order to form a pension (I had none), and to delay SS for eleven years.

The application required me to state that the current SPIA, along with all additional current annuity products did not exceed 50% of my/our total retirement assets.

Sure, I could have lied, but the company at least was asking the question. I believe you will find writings looking at the same maximum 50% ratio, to allow a portion of the portfolio to remain for purposes of drawing money outside of what just an annuity would provide as a revenue stream.

- Ron
Delay SS by 11 years? You can only delay for 8 years (62 to 70).

Ron
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Post by Ron » Wed Jan 05, 2011 7:40 pm

supersharpie wrote:Delay SS by 11 years? You can only delay for 8 years (62 to 70).
You are correct :roll: What I should have said that I retired at age 59 and purchased an SPIA to act as "gap insurance" to cover the 11 year period till I turned 70, regardless of any other possible income streams :lol: ...

dpbsmith
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Post by dpbsmith » Wed Jan 05, 2011 8:27 pm

I don't see any sense in thinking of annuitization as a "percentage of portfolio." There are all sorts of ways to adjust this, but it seems to me that the obvious rule-of-thumb calculation comes out in dollars, not in percentages.

Simply, annuitize enough to make sure that your essential living expenses are met by guaranteed income. By essential expenses I mean those you absolutely must meet to avoid wrenching dislocation of your retired life. You know: food, clothing, shelter, health insurance, and Internet :) Annuitize enough to make up the difference between any guaranteed lifetime income streams you already have--Social Security, defined-benefit pensions, and possibly long-term bond income--and your essential living expenses.

In principle, that's how I think you should do it, anyway. In practice it's not so simple, because you want to do it in real (inflation-adjusted) dollars. And it is probably reasonable to count a really conservative percentage of a stocks-and-bonds portfolio as "guaranteed" income, but I'm thinking more like 2%, absolutely not 4%.

The point is, it seems obvious to me that if someone needs $100,000 a year to meet essential expenses, and they have a $5 million portfolio, then they do not need an annuity at all.

Similar, someone can meet their needed expenses from Social Security alone does not need an annuity.

On the other hand, someone who has $1 million and needs Social Security-plus $45,000 to meet essential expenses is in tough shape. The best current quotation for an inflation-indexed annuity from Vanguard... for a single, 65-year-old man... is about 5.4% of premium per year. By annuitizing $500,000, he can secure $27,000 of guaranteed income, leaving $18,000 to be supplied by the remaining $500,000. Thus, he has reduced his needs from 4.5% of portfolio to 3.6% of portfolio. For this individual, annuitizing at least 50% of portfolio seems like a prudent thing to do.

Following my methodology strictly, you might even wonder if this person should annuitize $833,334, thus securing the full $45,000 of needed income. This is a case where one suggested rule of thumb (annuitize enough to meet your essential living expenses with guaranteed income) collides with another (don't annuitize more than half your assets).

AndroAsc
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Post by AndroAsc » Wed Jan 05, 2011 11:36 pm

That's a very low annuitization percentage.

I'm far away from retirement but I was planning to annuitize 50% of my portfolio. Naturally, I'll probably split into at least 5 different insurance companies and buy less than the state's guaranteed coverage to minimize the risk of default.

Any reason why it hovers from 10-20%?

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joe8d
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Post by joe8d » Wed Jan 05, 2011 11:37 pm

0%, but I do have a nominal private sector pension.
All the Best, | Joe

blevine
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Post by blevine » Wed Jan 05, 2011 11:39 pm

Why would anyone "have to" annuitize ?

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Sheepdog
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Post by Sheepdog » Thu Jan 06, 2011 1:07 am

0%
Maybe I am naive, but I trust me more than an insurance company. Over twelve years in retirement now with no pension paying me and I have as much in my nest egg as I had when I left my monthly paychecks. We just controlled our spending and invested conservatively.
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

gw
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Post by gw » Thu Jan 06, 2011 8:58 am

dpbsmith wrote:And it is probably reasonable to count a really conservative percentage of a stocks-and-bonds portfolio as "guaranteed" income, but I'm thinking more like 2%, absolutely not 4%.

...

On the other hand, someone who has $1 million and needs Social Security-plus $45,000 to meet essential expenses is in tough shape. The best current quotation for an inflation-indexed annuity from Vanguard... for a single, 65-year-old man... is about 5.4% of premium per year. By annuitizing $500,000, he can secure $27,000 of guaranteed income, leaving $18,000 to be supplied by the remaining $500,000. Thus, he has reduced his needs from 4.5% of portfolio to 3.6% of portfolio. For this individual, annuitizing at least 50% of portfolio seems like a prudent thing to do.
I think this is a bit too pessimistic, because you're not factoring in the ability to annuitize the rest of your portfolio later. Taking your numbers, let's assume it's reasonable to expect 4% (with inflation adjustments) from your portfolio, and that you can have an inflation-adjusted annuity for 5.4%. Since 4/5.4 = 75%, you could afford to take 4% from your stock/bond portfolio, confident that even if its value dropped by 25%, you could still secure the same income by annuitizing it.

To illustrate, suppose we do as you described above, annuitizing half the $1M today, which secures $27K in annuity income and requires 3.6% from the remaining $500K stock/bond portfolio. Assume a 50/50 stock/bond portfolio, and suppose the market crashes tomorrow, so that stocks fall by 50% while bonds are flat. This is a considerably worse scenario than the 2008 crash, but your portfolio still has 75% of its value, so you can easily cover your income requirements by annuitizing another $333K (because 5.6%*333K = 3.6%*$500K = $18K). So I'd say you've been too conservative.

The point is that annuitization provides a lower bound on the income you can expect from your portfolio --- and importantly, that lower bound improves as you age. In principle, a 65-year-old male can merrily take 4% from his portfolio this year, because even if there's a 50% stock market crash, he can still cover his needs by annuitizing. Next year he can re-evaluate his situation with respect to then-current portfolio value and annuity offerings. There's very little chance that he would ever fail to obtain enough income --- the main risk is that poorly-sequenced market losses will force him to annuitize more of his portfolio than he would have liked.

So back to the scenario of a $1M portfolio requiring $45K income. I would look at it this way.... The portfolio can provide a maximum of $54K by annuitizing immediately, so there's an excess. Here are several viable options:

1) Annuitize the entire portfolio, obtaining an extra $9K in income.

2) Annuitize 83% of the portfolio, retaining $167K in unencumbered assets.

3) Annuitize 0%, retaining full control of the portfolio. However, if the value of the portfolio drops by 17%, we will be forced to annuitize all of the remainder or accept less income.

I think very few people would choose any one of those three extreme choices, but of course there are infinite ways to blend them. People seem to value control of their assets highly, so I think choice (3) is closest to actual practice, and it's important to realize that it's a valid choice. I explored some of the implications in an old thread: http://www.bogleheads.org/forum/viewtop ... highlight=

On the other hand, the threat of full annuitization upon a 17% drop doesn't leave much breathing room, so there may be some value in partial annuitization. Suppose you want to be "reasonably certain" of never having to fully annuitize, where you define "reasonably" to mean that you would be willing to fully annuitize if your 50/50 portfolio dropped in value by 25% (i.e., much worse than 2008). Then you require the following:

i = 0.75*(1-f)*r + f*r = .75*r + .25*f*r
f = (i - .75*r) / (.25*r)

where

i = (required income) / (portfolio value) [i.e., the income rate required]
r = (annuity return)
f = (fraction to annuitize)

So for this case, we have i=4.5%, r=5.4%, which gives f=33%. This means that by annuitizing $333K, the retiree insures the remainder of his portfolio against further annuitization, provided that it doesn't drop by 25% in value this year. The requirements on the remaining $667K are modest: $45K = 5.4% * $333K + 4% * $667K, so a 4% return is [more than] sufficient to make this sustainable. [It's actually better than that because the available annuity rate is expected to get better with age.]

To sum up --- there are lots of considerations (including several not mentioned above), so the optimal choice will vary from person to person, but I'd say that even in the case of $1M portfolio, $45K required income, the 65-year-old male is unlikely to annuitize more than a third of his portfolio.

Ron
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Post by Ron » Thu Jan 06, 2011 9:36 am

AndroAsc wrote:Any reason why it hovers from 10-20%?
In our case, it was what we needed to ensure a continuous stream of income (without depending on the market) to take care of our early retirement fixed expenses. Additionally, we still have four more income streams yet to come “on-line” in the next few years.

If we need to annuitize more in the future? We have that option. We don't have the need to "convert" more of our assets at this time, but since we put our "toe in the water", have no problem with jumping in, if need be.

- Ron

CAP
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Post by CAP » Thu Jan 06, 2011 9:45 am

I don't need one right now. So my answer is 0. I have more than enough to cover my current expenses.

I might consider a SPIA if they are still selling them when/ if I reach 80 & I feel the need. Then I would not worry about company demise. If I did purchase one, I would make sure it was under the state limits of $100,000. Would use only a small portion of assets.

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shyguy
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Post by shyguy » Sat Jan 08, 2011 7:52 am

Thank you. This post is an eye opener for me.
dpbsmith wrote: To sum up --- there are lots of considerations (including several not mentioned above), so the optimal choice will vary from person to person, but I'd say that even in the case of $1M portfolio, $45K required income, the 65-year-old male is unlikely to annuitize more than a third of his portfolio.

Ron
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Post by Ron » Sat Jan 08, 2011 11:35 am

CAP wrote:I don't need one right now. So my answer is 0. I have more than enough to cover my current expenses.
Then you don't need an SPIA. Every situation is different.

BTW, our 10% "investment" in an SPIA is much greater than our state guarantee for a single SPIA. I overlooked that "fact", since I started investigating these products back in 2005-06, in preparation for retirement.

Oh well, every month I get some of my "principal" (e.g. premium payment) back, so my risk is reduced, and I'm already just under four years of my eleven years "guaranteed fixed expenses income coverage" I planned for. My period of "risk" is reducing every day :lol: ...

BTW, I'm surprised of all the comments on not having an annuity; that was not the goal of the poll, and the reason why 0% should have even been considered in the answer :roll: ...

- Ron

Ron
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Post by Ron » Sat Jan 08, 2011 11:37 am

MBMiner wrote:You need 0 to 10%.
Bruce
No, it should be 1 to 9%. If you don't have an SPIA (or any other annuity product), 0% would be an invalid selection.

- Ron

sscritic
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Post by sscritic » Sat Jan 08, 2011 12:01 pm

I think serial annuitization is recommended by many.

Annuitize some. Wait two or five years. Look at your portfolio and income needs. Annuitize some more if desirable. Rinse and repeat.

It might not even be about the need. At this point I have social security and a good pension that cover my needs. I also have money in TIAA Traditional in an RA. I will be faced with RMDs at some point. I might take the traditional in a life annuity for simplicity's sake, not for income need. To be completely out of Traditional by the time RMDs start, I would have had to have started my 9 year and one day transfer payout annuity several years ago. I could start the transfer payout annuity now and take the RMDs from other holdings when the time comes, but it just seems like a lot of work. I would rather annuitize the Traditional and worry about the RMDs from my other holdings. In the RA, Traditional is earning 3.75% this year (I only have pre-2000 vintages in my RA), better than most other guaranteed investments I can choose from. At least that is my current thinking.

albedo
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Post by albedo » Sat Jan 08, 2011 10:42 pm

As with sscritic, I’ve accumulated a sizeable holding in a TIAA Traditional RA that I’m planning to annuitize at some point. One option I’m considering is to annuitize part of it next year at retirement (age 63.5) to bridge over to delayed social security at age 70, as Ron has done. At 70, as RMD approaches, I might decide to annuitize the rest of it and draw on the non-TIAA accounts (mostly Vanguard and Fido) to meet RMD requirements. As far as I know, TIAA does not offer an inflation-adjusted annuity, so I’d look seriously at a 3% graded annuity. So, I’m looking at annuitizing possibly 30% of my portfolio.

By the way, how do you cast your vote in the poll?

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