0% COLA Annuity vs COLA Annuity vs Managed Payout

[PSM]

Facts:
My wife and I have a retirement benefit available from the same company.
Me: Age 66 She: Age 67

We have defined contribution invested account balances that must be converted to an annuity no later than age 73.

We also have a new option forthcoming: a managed payout of the account balances. The investments continue, but the monthly
distributions will set annually to adapt to the account balance, inflation and life expectancy. The stock and bond
funds in the accounts are private and actively managed, with expense ratios less than 1%.

Today our account balances are: Me: $501,294 She: $424,432
We do not have the option of rolling out these funds or managing them ourselves. This is not the typical choice between receiving a pension or a lump sum. And the only tweak we can make for these accounts is a risk profile that would change the mix of stocks to a low of 0% to a high of about 40% (based on expected distribution date).

The annuity option has multiple choices regarding COLAs and survivor benefits.
For example, if I were to elect an annuity beginning 2/1/2023, a 0% COLA with 100% survivor would be $2861 monthly, with a 2% COLA $2311, and 5% COLA $1608. I would be about age 77 or 78 before the monthly payments with COLA would be greater than the 0 COLA annuity, and age 88 or 89 when the grand total of a COLA payment option would be greater than the payout of the 0% COLA option. I have used the calculator at https://www.hughcalc.org/cola.php to come up with my estimates. At the end of 25 years, 2/1/2048, age 91, the 0 COLA would have paid out $858,300, the 2% COLA would be $888,264 and the 5% COLA would be $920,942.

My wife's annuity would be similar in scale, though smaller because of her lower account balance.
Because of our other assets, benefits and social security, we do not have to make a decision now. However, as part of our tax and RMD planning, I want to have a feel for how others have decided on receiving benefits.

1) Does it make sense to choose an annuity with COLA, if the total payout does not pass the 0 COLA option till after about age 88?
It would seem that higher payments early would be worth more than higher payments later due to the effects of inflation and the ability to invest those higher early distributions. Also, any thoughts about choosing a 100% survivor vs a 70%? I can see how the 100% would help if one of us were widowed for a long time. But if both of us lived about the same lifespan, the 70% annuities would be more beneficial.

2) The managed payout option is attractive mainly because the account could possibly continue to grow due to continuing investments, and any leftover could be distributed to our heir. However, no matter what our wishes might be, the managed payout would only be distributed as a monthly benefit adjusted annually. If the account balance reaches 0 before the end of life, there would be no other benefit. Because of the opportunity for account growth and leaving any balances to our heir, is the managed payout better than the annuity option?

3) My wife and I could opt for a. annuities for both of us or, b. one annuity and one managed payout or c. two managed payouts.

I am aware that there is a benefit to having "guaranteed income" in retirement. We already have social security, plus some defined benefits (pensions) from the same company, plus our 2 Rollover IRA accounts (from personal savings done via the company), 2 Roth accounts (from conversions), and a brokerage account. Total asset balances can provide enough cash flow until we will be required to start receiving this last benefit from our employer, annuities or managed payouts.

To any who have read this far, thank you. As you can see, this is a decision involving nearly a million dollars, with the effects lasting perhaps 30 years....

[tibbitts]

Since this plan is so generous with options, can you divide your funds into multiple options (per person)? Not being good at decision making that be might be my choice: every available option. You'd complicate life for yourself and your beneficiaries, but for all we talk about simplification here, almost nobody actually does that.

[PSM]

Perhaps I need to clarify:
My wife and I will EACH have only one choice: an annuity OR the managed payout. The annuity, of course, will have the COLA and survivor options.

[Silk McCue]

The joint life annuity rates you are being quoted closely match what I found using your numbers at immediateannuities.com. I mention this because the payouts are favorably high due to the current and likely temporary high interest rates that impact annuities (how ever long you define that). Waiting to start benefits later MAY result in lower joint life benefits.

You didn’t share the 70% survivor based benefit quotes but it would be a bigger impact to your wife than to you should you predecease her. You MIGHT consider having her survivor benefit be 70% should she predecease you but I would not do the reverse as the one with the higher benefit. That’s clearly a personal decision.

I would take the no COLA option as you explored it in your item 1).

I would let your other assets be the inheritance for the survivors of you both in place of any benefit coming from the alternate approach where these funds are a managed payout.


Cheers

[#Cruncher]

Me: Age 66 She: Age 67
... The annuity option has multiple choices regarding COLAs and survivor benefits.
For example, if I were to elect an annuity beginning 2/1/2023, a 0% COLA with 100% survivor would be $2861 monthly, with a 2% COLA $2311, and 5% COLA $1608.

Using the SSA 1960 Cohort Life Table for both you and your wife, the "Alive" sheet of my Longevity Estimator shows the present value of the survival-weighted benefits to be slightly higher with the No COLA option with a 4%, 5% or 6% discount rate.

Code: Select all

                  ---- Discount Rate ----
         Per Mo    0%     4%    5%    6%
         ------   ----   ----  ----  ----
No COLA  $2,861   807K   513K  466K  426K
2% COLA  $2,311   843K   510K  458K  414K
5% COLA  $1,608   901K   502K  443K  393K

Here's the detail from the "ToPaste" sheet for the "No COLA" with 5% discount rate.

Code: Select all

  Cell  Item                         Value
    F3  Table - Pers 1          Cohort1960
    F4  Table - Pers 2          Cohort1960
    H3  Sex - Pers 1                     M
    H4  Sex - Pers 2                     F
    I3  Age Years - Pers 1              66
    I4  Age Years - Pers 2              67
    O1  Amount - Pers 1 only      2,861.00
    O2  Amount - Pers 2 only      2,861.00
    O3  Amount - Both Alive       2,861.00
    O4  Discount Rate - Joint       5.000%
    T3  Annual Increase              0.00% (No COLA)
    T4  Year Increase Begins             1
    O5  Present Value - Joint      465,993

[retireIn2020]

I'm curious how much the survivor option is costing you per month on each of the policies. You could compare that cost with the cost of life insurance.

[PSM]

The survivor option costs some to be sure, but at our current ages 66/67…plus a few minor/moderate medical issues, new life insurance would undoubtedly be much more expensive or impossible.

I did some extensive calculations with my New Retirement software subscription module in the past few days. One thing that did seem true after modeling a lot of scenarios…Taking annuities anytime soon would be less beneficial than continuing to live off of our other assets for now. It’s better to make further IRA withdrawals and conversions over the next few years and utilize available tax bracket space….rather than having the brackets taken up with annuity income.

Calculations also showed that after fairly sizable conversions in 2021, 2022 and 2023…future large Roth conversions may not be necessary since they would become more of a gamble on life expectancies and projected investment returns. Anyone considering Roth conversions should do careful calculations, since one can actually end up paying too much tax too early and deplete taxable accounts vs using the money to enjoy life or maintain cash flow. Before all the calculations I had nearly convinced myself that another super huge conversion this year with all the taxes and future IRMAA would be worthwhile, but it’s not. It would be more of a gamble. Depleting every traditional IRA or 401k/403b isn’t necessarily the goal.

[randomguy]

Facts:

1) Does it make sense to choose an annuity with COLA, if the total payout does not pass the 0 COLA option till after about age 88?
It would seem that higher payments early would be worth more than higher payments later due to the effects of inflation and the ability to invest those higher early distributions. Also, any thoughts about choosing a 100% survivor vs a 70%? I can see how the 100% would help if one of us were widowed for a long time. But if both of us lived about the same lifespan, the 70% annuities would be more beneficial.

The math will have all of these options pretty close in value. The insurance company doesn't really care what you pick. There can be slight differences as they are required to be gender blind and they might be making adjustments based on the population that don't apply to you. If you have inside info (i.e. you eat healthy, in shape, no known health issues,...), you might have a more accurate guess about your life expectancy.

If you both die right on time (call it like 82/84), you will win by not getting the survivorship benefit on either of them or the COLA. If one of you lives to 100, the COLA will pay off. If one of you outlives the other by a decade, the survivorship benefit pays off. In the end survivorship hedges against someone dying early. COLA hedges against someone living a long time. Most of the time neither one is going to pay off. But if you need the risk protection against those cases, you want to pay the cost. You would need to think about how much you need.

Managed payout is hard to evaluated. I expect on average you are going to get more money but the in the bottom 10% cases you could end up with noticeably less. I am sort of assuming that they will let you invest like 50/50 and the payouts are along the lines of an RMD...

Personally I would go with the 70% survivorship, no COLA option. I would rather invest more aggressive with my other assets than deal with the managed payout. 70% hedges enough against the risk of early death for me. And no COLA because I expect expenses to be a lot higher early on and drop over time as I slow down. But you could easily change those assumptions? SS is plenty to live on and you are basically reinvesting these annuity payouts? Might as well use the managed payout. Is the loss of SS and annuity on spouses death making things too tight for the survivor? Go 100%.

[PSM]

A helpful analysis. Thanks.
Now it gets me to thinking about each of us choosing the single life annuity….which til now I’ve always thought might be too risky. Add in a 0 COLA, and those monthly payments get very nice indeed.

[PSM]

Here are some updated numbers, for illustration:

ME: 66y, 6 mo
Account balance under consideration: $506088
If starting an annuity Feb 1, 2023, for example:

0% COLA:
Life only, $3331 per month
Life with 10 years certain to 2/1/33, if I die in that period, payments continue to wife til end of term: $3232
Joint life 70%: $3008
Joint life 100%: $2888

2% COLA:
Life: $2753, Life 10: 2677, Joint 70: 2445, Joint 100: 2333

WIFE: 67y, 4 mo
Account balance: $428348

0% COLA:
Life: 2887, Life 10: 2792, Joint 70: 2561, Joint 100: 2443

2% COLA:
Life: 2400, Life 10: 2326, Joint 70: 2561, Joint 100: 1972


The managed payout option will probably have about a 50% stock/50 bond allocation and payments will be similar to annuities,
but last as long as the account balance, with anything left going to heirs.

We don’t anticipate starting either until 2025 or up to age 73, but want to do good tax and investment planning.