Annuity replacing SS shortfall?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Locked
User avatar
oldcomputerguy
Posts: 1800
Joined: Sun Nov 22, 2015 6:50 am
Location: In the middle of five acres of woods

Annuity replacing SS shortfall?

Post by oldcomputerguy » Wed Oct 11, 2017 10:45 am

I've never thought much about an annuity, tending more toward living off SS, our pensions, and our IRAs. The thought struck me just this morning, however, that perhaps I am missing a bet.

We've all read how Social Security is expected to hit a shortfall sometime around 2034 (no comments regarding possible changes in this, please, per board rules), which for me will be around five years short of my actuarial life expectancy. I had planned on just increasing draws from our investments after that point. But if I were to purchase some sort of joint annuity at that point, with a payout that would make up the shortfall difference, then we'd not have to worry about market down years.

I know that this question would in large part be impacted by expected lifespan, which is problematic at best. But in general, what does the brain trust think about the desirability of purchasing an annuity around age 80 to make up for the projected shortfall in SS?
Anybody know why there's a 20-pound frozen turkey up in the light grid?

rkhusky
Posts: 4313
Joined: Thu Aug 18, 2011 8:09 pm

Re: Annuity replacing SS shortfall?

Post by rkhusky » Wed Oct 11, 2017 11:15 am

Depends on the cost of the annuity, the size of the SS shortfall, and the remaining size of the portfolio. If my remaining conservative portfolio could reasonably support my needs to age 100, I would likely pass on the annuity. You can also purchase the annuity now at a reduced cost as insurance for living longer than expected and for the expected SS shortfall.

arizonaslim
Posts: 136
Joined: Tue Feb 09, 2016 10:29 am
Location: Tucson, Arizona

Re: Annuity replacing SS shortfall?

Post by arizonaslim » Wed Oct 11, 2017 11:17 am

Sounds like that annuity salesman has a pretty good pitch:

"Social Security is going broke! It will be outta money in 17 years! Buy this annuity NOW!"

Fear not. Social Security isn't going anywhere. But that annuity salesman needs his commissions -- NOW!

jwhitaker
Posts: 18
Joined: Thu Jun 16, 2016 12:57 pm

Re: Annuity replacing SS shortfall?

Post by jwhitaker » Wed Oct 11, 2017 1:18 pm

arizona slim is not wrong but I would worry more about scams with variable, deferred or equity indexed annuities, e.g. with guaranteed withdrawal features. Single premium immediate (fixed) annuities should be a relatively efficient market where it is easy to get multiple quotes for the same product, and I think that is what you are referring to, although SS is inflation adjusted so to perfectly replace it, you would need to buy an inflation adjusted annuity (with CPI or a fixed interest rate, not stock returns). I have read that it is better to buy fixed and slightly increase the amount to cover some future inflation.

There is concrete evidence supporting the use of SPIAs in retirement planning. Check out Wade Pfau's article "Breaking Free from the Safe Withdrawal Rate Paradigm: Extending the Efficient Frontier for Retirement". But note that the hypothetical couple in his examples have something like a 4% of assets need even after receiving SS. I think if your need is lower, or alternatively your assets are higher than that, an annuity might not be necessary, e.g. if you have a 2 or 3% of assets annual need (aka expenses) and on top of that you get SS, then you probably don't need an annuity. Also, there is a point below which annuities purchased in your 60's cannot help you, e.g. you have an immediate 10% need even after SS. In that case you just can't retire mathematically speaking. If you are 80, you are not able to receive SS and you have 5 years of expenses left in assets (and are not on your deathbed), you should probably go ahead and use most of your money to buy an annuity.

Buying an SPIA is really just a tradeoff between probability you run out of money and expected value of assets at death. A lot of bogleheads are in the spectrum of very low probability of running out (say, below a 4% withdrawl rate) and therefore are rational in not valuing the additional risk reduction an annuity would provide. But there is a spectrum of withdrawal rates where it makes sense, probably 4% to 6%, and the risk reduction is a good value.

The Wizard
Posts: 10937
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Annuity replacing SS shortfall?

Post by The Wizard » Wed Oct 11, 2017 1:29 pm

I'm not at all concerned about SS hitting the wall and reducing payouts. A fix will be devised before that happens.

But I'm all in favor of having large pension and/or annuity income each month in retirement as well.
But I only do Immediate Annuities.
When I throw the switch on another $100K at TIAA, the additional income starts the following month...
Attempted new signature...

JBTX
Posts: 1289
Joined: Wed Jul 26, 2017 12:46 pm

Re: Annuity replacing SS shortfall?

Post by JBTX » Wed Oct 11, 2017 1:49 pm

SS will only have about 70 cents coming in for every dollar going out around 2034 give or take. So I think it is a reasonable assumption that those who have more savings or income in retirement will probably get significantly less than the current law stipulates and people should be prepared for that contingency. Beyond that is purely speculative. Seems to me you save more accordingly. As to buying an annuity now, while a case can be made for a fixed annuity but buying that now when you have no idea how any theoretically law change could affect you seems speculative to me.

aristotelian
Posts: 2824
Joined: Wed Jan 11, 2017 8:05 pm

Re: Annuity replacing SS shortfall?

Post by aristotelian » Wed Oct 11, 2017 2:03 pm

Sounds like mental accounting. Either you need the annuity or you don't. Whether it is replacing SS or not is irrelevant.

The Wizard
Posts: 10937
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Annuity replacing SS shortfall?

Post by The Wizard » Wed Oct 11, 2017 2:35 pm

aristotelian wrote:
Wed Oct 11, 2017 2:03 pm
Sounds like mental accounting. Either you need the annuity or you don't. Whether it is replacing SS or not is irrelevant.
I'm not sure about that.
I'll be getting ~$3500/month from SS at age 70 in a few years.
If the payout was to decline 30% as some folks fear, then I'd be getting $1050 less per month to live on henceforth.

If that amount of income was important to my well-being, I'd want to find a way to replace it.

I could withdraw an additional $1050 per month from my portfolio or I could annuitize an appropriate amount for lifetime income of $1050/month.
Either way would work...
Attempted new signature...

goingup
Posts: 2708
Joined: Tue Jan 26, 2010 1:02 pm

Re: Annuity replacing SS shortfall?

Post by goingup » Wed Oct 11, 2017 3:07 pm

Are you asking if it's wise to purchase an annuity 17 years from now because you think SS will have a shortfall then?

That's definitely a cross-the-bridge-when-you-come-to-it kind of thing.

itstoomuch
Posts: 4562
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Annuity replacing SS shortfall?

Post by itstoomuch » Wed Oct 11, 2017 3:08 pm

JMO,
If your SS and Pension income is 66%+ of your expected living requirements, I'd skip the annuity for Income because the cost is very high. Look into LMP and funding ratio to determine requirements.
Ymmv
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

bikechuck
Posts: 85
Joined: Sun Aug 16, 2015 9:22 pm

Re: Annuity replacing SS shortfall?

Post by bikechuck » Wed Oct 11, 2017 3:14 pm

The Wizard wrote:
Wed Oct 11, 2017 1:29 pm
I'm not at all concerned about SS hitting the wall and reducing payouts. A fix will be devised before that happens.

But I'm all in favor of having large pension and/or annuity income each month in retirement as well.
But I only do Immediate Annuities.
When I throw the switch on another $100K at TIAA, the additional income starts the following month...
Hi Wizzard, I would like to better understand your post but I cannot figure out what you mean when you say ...

"When I throw the switch on another $100K at TIAA, the additional income starts the following month..."

If you see this and would like to explain it I would be interested.

Regards

Chuck

aristotelian
Posts: 2824
Joined: Wed Jan 11, 2017 8:05 pm

Re: Annuity replacing SS shortfall?

Post by aristotelian » Wed Oct 11, 2017 3:17 pm

The Wizard wrote:
Wed Oct 11, 2017 2:35 pm
aristotelian wrote:
Wed Oct 11, 2017 2:03 pm
Sounds like mental accounting. Either you need the annuity or you don't. Whether it is replacing SS or not is irrelevant.
I'm not sure about that.
I'll be getting ~$3500/month from SS at age 70 in a few years.
If the payout was to decline 30% as some folks fear, then I'd be getting $1050 less per month to live on henceforth.

If that amount of income was important to my well-being, I'd want to find a way to replace it.

I could withdraw an additional $1050 per month from my portfolio or I could annuitize an appropriate amount for lifetime income of $1050/month.
Either way would work...
Let's say SS goes down by $1050. Then you have a choice to make, whether to replace that income via annuity or withdrawals from a larger portfolio.

Let's say taxes go up by $1050. That is also a possibility that people have talked about because current spending is unsustainable. You still have SS but now you have $1050 less cash flow. Again, you have a choice to make, whether to increase your cash flow via annuity or withdrawals from a larger portfolio.

One could say the same about health care, cost of living inflation, etc. You certainly want to protect yourself from uncertainty.

I think right now you try to protect yourself against a variety of worst case scenarios and save until you are comfortable. Then you take a look at where you are when you hit age 80. Then you decide whether annuity is the way to go.

User avatar
Taylor Larimore
Advisory Board
Posts: 25981
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Annuity replacing SS shortfall?

Post by Taylor Larimore » Wed Oct 11, 2017 3:40 pm

oldcomputerguy wrote:
Wed Oct 11, 2017 10:45 am
I've never thought much about an annuity, tending more toward living off SS, our pensions, and our IRAs. The thought struck me just this morning, however, that perhaps I am missing a bet.

We've all read how Social Security is expected to hit a shortfall sometime around 2034 (no comments regarding possible changes in this, please, per board rules), which for me will be around five years short of my actuarial life expectancy. I had planned on just increasing draws from our investments after that point. But if I were to purchase some sort of joint annuity at that point, with a payout that would make up the shortfall difference, then we'd not have to worry about market down years.

I know that this question would in large part be impacted by expected lifespan, which is problematic at best. But in general, what does the brain trust think about the desirability of purchasing an annuity around age 80 to make up for the projected shortfall in SS?
oldcomputerguy:

My wife and I purchased a joint lifetime annuity (SPIA) about my age 80. We liked it so well we bought another a year later. With no more worry about running out of money, we were able to start giving our heirs their inheritance while we are still alive.

Our SPIA annuities are perhaps the best investments (insurance) we ever made. However, it is best to wait until around 80 for various reasons I'll not explain here (use Search).

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
oldcomputerguy
Posts: 1800
Joined: Sun Nov 22, 2015 6:50 am
Location: In the middle of five acres of woods

Re: Annuity replacing SS shortfall?

Post by oldcomputerguy » Wed Oct 11, 2017 3:59 pm

Thanks, Taylor. Much appreciated.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

User avatar
LadyGeek
Site Admin
Posts: 40504
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Annuity replacing SS shortfall?

Post by LadyGeek » Wed Oct 11, 2017 4:00 pm

This thread has run its course and is locked. Speculation about future legislation* is prohibited by forum policy, see: Unacceptable Topics
Politics and Religion

In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:
  • Common religious expressions such as sending your prayers to an ailing member.
  • Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
  • Discussions about enacted laws or regulations that affect the individual investor. Note that discussions of proposed legislation are prohibited.
  • Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
This forum is focused on investing that is directly actionable to personal investors. We don't hold debates on conjecture.

The whole point of the policy is to (1) eliminate contentious disagreements that result from these discussions and (2) keep investors from making bad decisions. Proposed regulations change many times between the time they're introduced and signed into law.

The disagreements will indeed occur, which is more work for the moderators and results in locking the thread. See: Yellen: "We're taking a look at negative interest rates."

* Social Security is funded by US law. Changes to Social Security requires a change in legislation, which is a political process.
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Locked