deferred income annuity

[purplegoatlady99]

Just a thought exercise here. I played with the deferred income annuity calculator on Fidelity's website and is intrigued by it.

If I purchase $100K worth of deferred income annuity, and want to start payments 10 years from today (I am 45 now, so payment start at 55), I will receive $9284 per year every year until I die. That is about 9.2% yield on the original 100K. Of course the money has 10 year to grow and I will not see the original $100K ever again, but I do not have kids or anyone to will the money to.

In order to withdraw $9384 per year in 2030, at 4% withdrawal rate, I would need an investment amount of $234K. I am not confident my $100K will grow to $234K in 10 years time.

Yes, I am aware the income is fixed, no protection from inflation. Still, I am conservative and only want to have a 3% WR. But if I know I am getting this income every month for life, I have no problem spending it. I think it will buy me a peace of mind.

Can someone provide more insight as to why I should or should not purchase the annuity. I was thinking of purchasing $100K, which is a small fraction of my net worth.

[exodusNH]

Just a thought exercise here. I played with the deferred income annuity calculator on Fidelity's website and is intrigued by it.

If I purchase $100K worth of deferred income annuity, and want to start payments 10 years from today (I am 45 now, so payment start at 55), I will receive $9284 per year every year until I die. That is about 9.2% yield on the original 100K. Of course the money has 10 year to grow and I will not see the original $100K ever again, but I do not have kids or anyone to will the money to.

In order to withdraw $9384 per year in 2030, at 4% withdrawal rate, I would need an investment amount of $234K. I am not confident my $100K will grow to $234K in 10 years time.

Yes, I am aware the income is fixed, no protection from inflation. Still, I am conservative and only want to have a 3% WR. But if I know I am getting this income every month for life, I have no problem spending it. I think it will buy me a peace of mind.

Can someone provide more insight as to why I should or should not purchase the annuity. I was thinking of purchasing $100K, which is a small fraction of my net worth.

Because if you take payments before age 59.5, you'll pay a 10% penalty on the gains?

Not to mention that $9830 will be worth half that amount by the time you're 85 if inflation runs at 2.5% over the period.

Income annuities are generally not worth it until you're in your late 60s-70s.

Canvas Annuities has a MYGA for 7 years that's paying 6.something%. After that, you'll have to roll it into another MYGA for another 7 years to avoid the penalty, taking your chances with interest rates at that time.

[Wiggums]

Deferred Income Annuity contracts are irrevocable, have no cash surrender value and no withdrawals are permitted prior to the income start date. You are subject to ordinary income tax, and, if taken before age 59 1/2, may be subject to a 10% IRS penalty.

[arcticpineapplecorp.]

does any of the following hold true:

The earnings in a fixed deferred annuity are tax deferred until the owner begins receiving income from the annuity. If pretax dollars are invested in a fixed deferred annuity, the payout will be taxed. If taxes have been paid on the money invested, the return of principal will not be taxed, but the earnings will be taxed. Withdrawals may be subject to regular income tax, and if made prior to age 59 ½, may be subject to a 10% IRS penalty. In addition, surrender charges may apply.

source: https://www.newyorklife.com/articles/de ... -annuities

Before you buy a Deferred Income Annuity (DIA), you need to have us run quotes on our proprietary annuity calculators to find the highest contractual guarantees for your specific situation. You also need to schedule a time to speak with “America’s Annuity Agent,” Stan The Annuity Man®. Talk to the top annuity expert in the country before making any decision because he will provide you with brutal facts without any sales pitch. He will treat you like a professional and provide the best information and quotes so you can make an informed decision on your terms and time frame.

source: https://www.stantheannuityman.com/defer ... me-annuity

[purplegoatlady99]

Just a thought exercise here. I played with the deferred income annuity calculator on Fidelity's website and is intrigued by it.

If I purchase $100K worth of deferred income annuity, and want to start payments 10 years from today (I am 45 now, so payment start at 55), I will receive $9284 per year every year until I die. That is about 9.2% yield on the original 100K. Of course the money has 10 year to grow and I will not see the original $100K ever again, but I do not have kids or anyone to will the money to.

In order to withdraw $9384 per year in 2030, at 4% withdrawal rate, I would need an investment amount of $234K. I am not confident my $100K will grow to $234K in 10 years time.

Yes, I am aware the income is fixed, no protection from inflation. Still, I am conservative and only want to have a 3% WR. But if I know I am getting this income every month for life, I have no problem spending it. I think it will buy me a peace of mind.

Can someone provide more insight as to why I should or should not purchase the annuity. I was thinking of purchasing $100K, which is a small fraction of my net worth.

Because if you take payments before age 59.5, you'll pay a 10% penalty on the gains?

Not to mention that $9830 will be worth half that amount by the time you're 85 if inflation runs at 2.5% over the period.

Income annuities are generally not worth it until you're in your late 60s-70s.

Canvas Annuities has a MYGA for 7 years that's paying 6.something%. After that, you'll have to roll it into another MYGA for another 7 years to avoid the penalty, taking your chances with interest rates at that time.

Are you saying the $9384 will incur a 10% penalty when I receive it from age 55 to 59.5 on top of the regular income tax? Annuity will be purchased with after tax money (not IRA or any tax deferred account).

[petulant]

No, it only has that penalty on earnings withdrawals from age 55 to 59.5 if there are earnings in the contract. Annuitized payments qualify for the SEPP exception under IRC Sec. 72(q)(2)(D).

[petulant]

A deferred annuity with a return of premium rider is a fair contract. I don't see how the economics are that different from an allocation to BND. Just cut the bond allocation.

You can compare pricing using a site like immediateannuities.com. You can even drill down and compare to a quote for a 55-year-old annuitant to see the implied return over the deferral period.

If you have no heirs you can drop the return of premium rider.

[Stinky]

Welcome to the Forum! Glad that you posted your question.

First of all, repeating what petulant said, there is no 10% tax penalty when receiving SPIA or DIA payments.

Second, I’m wondering why you’d want to do this now? Why purchase at age 45? Why start income at age 55? Are you retired now, or planning to retire when you’re 55?

Many folks your age would prefer to keep their investments in their regular allocation of stocks and bonds, and would defer making income annuity purchases until they’re older than you are now.

There’s nothing inherently wrong with your plan. Just wondering what underlies it.

[jimkinny]

A lot can happen in 10 years. Inflation during 2022-2023 was not expected. You can take a guess that inflation might be in the 2% range, but even if that happens your real dollar value of your annuity is reduced by about 22%. That is the best expected case. Then you have to consider the next 20 or 30 years.

The standard advice here used to be wait until at about age 75. You will minimize credit and inflation risk. Your mortality credits will be much higher. Between now and age 75 you may find you do want an annuity or need an annuity.

You can always put the money you would use to buy the annuity into some TIPS that mature 10 or 20 years from now and buy the annuity at maturity. Your peace of mind would be you would know that you can spend more now because you will have more later.

[runningshoes]

We recently pulled the trigger on a similar annuity, 8 years out, payment at age 68, joint/survivor. I did this for three basic reasons;
1. My wife is less than fluent on the financial side and I wanted to simplify financial planning if anything happens to me in the near term
2. Her family has some serious longevity, so the return (statistically at least) improves with the additional years
3. I wanted to diversify the risk of a market based portfolio, so we now have a meaningful amount of expenses covered by fixed income starting at age 68 (SS to follow in the same year or a year after)
And 4, as an added benefit only, the high interest rates helped make this an "easier" decision as the return in % terms has gone up over the last year.

In your case, I don't see any of these common issues being addressed by the annuity, especially given the age at which you plan to receive payments. As others have asked, what are you trying to solve for?

[purplegoatlady99]

I would like to retire in the next few years, and I think knowing I will have a guaranteed income (unless insurance company goes bankrupt) coming in will lessen my fear about spending money. That's just how I am, I worry I will run out of money in my old age.

I have my money mostly in the broad market, like VTI or similar funds like it. No bonds.

I am interested to do it now because of the current higher interest rates.

I would need about $75K/year per year assuming a paid off house. I'm currently not spending anywhere close to it, but it's mostly because of my fear of outliving my money, so I thought an annuity might help me spend more money without overthinking it. My investable assets can currently support a 3.5% WR, but I am not comfortable with that WR given I might have a 40 year or more years in retirement. An annuity yields more than 4%.

[exodusNH]

I would like to retire in the next few years, and I think knowing I will have a guaranteed income (unless insurance company goes bankrupt) coming in will lessen my fear about spending money. That's just how I am, I worry I will run out of money in my old age.

I have my money mostly in the broad market, like VTI or similar funds like it. No bonds.

I am interested to do it now because of the current higher interest rates.

I would need about $75K/year per year assuming a paid off house. I'm currently not spending anywhere close to it, but it's mostly because of my fear of outliving my money, so I thought an annuity might help me spend more money without overthinking it. My investable assets can currently support a 3.5% WR, but I am not comfortable with that WR given I might have a 40 year or more years in retirement. An annuity yields more than 4%.

The problem is at 45, you realistically have 40 years left, unless you know that you have a health condition that will greatly shorten it. You might be able to live on $75,000 now, but you're not old enough to know how your health is going to play out. You might wind up on meds that cost $1000s per month.

Even 2% inflation over that time means the $75k now will be $165,000 then. There's good reason to believe that 2% will not be achievable given supply chain shortening and the demographic picture of the US. Even just 3% inflation puts you at $245,000.

Also, keep in mind that Social Security uses your highest 35 years of earnings. When you look at your potential benefits, the site is assuming you'll continue making your current salary until your full retirement age. If you retire early, you need to look at what you're Social Security will actually be.

[Stinky]

I would like to retire in the next few years, and I think knowing I will have a guaranteed income (unless insurance company goes bankrupt) coming in will lessen my fear about spending money. That's just how I am, I worry I will run out of money in my old age.

I have my money mostly in the broad market, like VTI or similar funds like it. No bonds.

I am interested to do it now because of the current higher interest rates.

I would need about $75K/year per year assuming a paid off house. I'm currently not spending anywhere close to it, but it's mostly because of my fear of outliving my money, so I thought an annuity might help me spend more money without overthinking it. My investable assets can currently support a 3.5% WR, but I am not comfortable with that WR given I might have a 40 year or more years in retirement. An annuity yields more than 4%.

Presuming you purchase your DIA from a highly rated company, you should have essentially no worry of the insurance company going bust. In addition, many states have life insurance guaranty funds that would cover your annuity up to $250k present value of benefits, and your annuity would be under that.

You say that you currently have no bonds. Purchase of a DIA would effectively be a fixed income investment. Most Bogleheads have a significant allocation to fixed income as they approach and enter retirement, so your plan checks that box.

You seem to understand the inflation and other risks. They are real.

As I said upthread, I don’t see anything inherently wrong with your plan.

[bertilak]

I just purchased a DIA. It is like the famed SPIA but the start of payments is deferred. I think a DIA can be a vey useful addition to your investment kit.

But, I would not jump on that Fidelity DIA. Do some shopping around. I'm pretty sure you can get a better deal. I did. I bought from https://www.incomesolutions.com but there are others.

About inflation: A DIA has no inflation protection but you can do it yourself by buying an additional DIA or SPIA sometime in the future to "top up" your payments. This is why I bought my DIA. I projected that IF I was going to need a top up it would likely be 5 or more years out so bought a DIA with a 5-year deferral. If I over estimated my need for that extra income I can invest it. If I under estimated I can buy another or tough it out.