Can I retire in 10 years through annuities?

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Bb073084
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Can I retire in 10 years through annuities?

Post by Bb073084 »

So random thought but if have $2m today and an age 39. Annuity calculators say I could buy an annuity with joint life and 20 year certain payout to start paying in 10 years with monthly payments of $15,403 and $3.7m minimum payment.

We currently spend about $15k a month but that includes daycare for 1 child at $2k a month. It seems like I could buy annuities and what ever I save between now and 10 years would just be gravy. What am I missing?
Johm221122
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Re: Can I retire in 10 years through annuities?

Post by Johm221122 »

Inflation?
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simplesimon
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Re: Can I retire in 10 years through annuities?

Post by simplesimon »

Bb073084 wrote: Mon Apr 01, 2024 12:11 pm So random thought but if have $2m today and an age 39. Annuity calculators say I could buy an annuity with joint life and 20 year certain payout to start paying in 10 years with monthly payments of $15,403 and $3.7m minimum payment.

We currently spend about $15k a month but that includes daycare for 1 child at $2k a month. It seems like I could buy annuities and what ever I save between now and 10 years would just be gravy. What am I missing?
Losing all the options that $2 million of liquidity can provide. The flexibility needed for a 39 year old with a young child in daycare is a lot more than a 59 year old when kids are out of the house.

Are you that risk averse?
123
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Re: Can I retire in 10 years through annuities?

Post by 123 »

Bb073084 wrote: Mon Apr 01, 2024 12:11 pm ...and $3.7m minimum payment.
It's not a payment but it's a payout that takes you 30 years to collect.
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Johm221122
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Re: Can I retire in 10 years through annuities?

Post by Johm221122 »

After inflation I would also would worry about how much after taxes will you get

Years paid into Social security do you have enough?

Medical premiums!

Will an insurance company sell you an annuity that big with your assets?
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Re: Can I retire in 10 years through annuities?

Post by bsteiner »

If you could retire in 8 years without an annuity then you can likely retire in 10 years with an annuity.
Wrench
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Re: Can I retire in 10 years through annuities?

Post by Wrench »

The providers will not let you invest all your assets into an annuity. They don't publish or tell you the limit but it appears to be around 40 or 50% of your investable assets. Also, do you really want to put all your assets in one basket? What if the insurance industry goes belly-up? Unlikely, but it could happen.

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David Jay
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Re: Can I retire in 10 years through annuities?

Post by David Jay »

Bb073084 wrote: Mon Apr 01, 2024 12:11 pm So random thought but if have $2m today and an age 39. Annuity calculators say I could buy an annuity with joint life and 20 year certain payout to start paying in 10 years with monthly payments of $15,403 and $3.7m minimum payment.

... What am I missing?
Inflation.

Now price the same policy with a 3% annual escalator, that will give you a better idea of the cost of maintaining your purchasing power.
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Tom_T
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Re: Can I retire in 10 years through annuities?

Post by Tom_T »

What do you think the annuity is giving you that you can't accomplish without it?
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greenrebellion
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Re: Can I retire in 10 years through annuities?

Post by greenrebellion »

TIPS ladder would accomplish the same thing without annuity fees and would eliminate inflation risk.
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Metsfan91
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Re: Can I retire in 10 years through annuities?

Post by Metsfan91 »

Bb073084 wrote: Mon Apr 01, 2024 12:11 pm So random thought but if have $2m today and an age 39. Annuity calculators say I could buy an annuity with joint life and 20 year certain payout to start paying in 10 years with monthly payments of $15,403 and $3.7m minimum payment.

We currently spend about $15k a month but that includes daycare for 1 child at $2k a month. It seems like I could buy annuities and what ever I save between now and 10 years would just be gravy. What am I missing?
Portfolio visualizer shows $2M invested in the market in a 60/40 portfolio will grow to $4.6M in 10 years. 4% of 4.6M is 184K - which is more than you will be getting from the annuity. You also get to control all your money… Annuity can’t beat this.
"Know what you own, and know why you own it." — Peter Lynch
Josh5000
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Re: Can I retire in 10 years through annuities?

Post by Josh5000 »

Bb073084 wrote: Mon Apr 01, 2024 12:11 pm So random thought but if have $2m today and an age 39. Annuity calculators say I could buy an annuity with joint life and 20 year certain payout to start paying in 10 years with monthly payments of $15,403 and $3.7m minimum payment.

We currently spend about $15k a month but that includes daycare for 1 child at $2k a month. It seems like I could buy annuities and what ever I save between now and 10 years would just be gravy. What am I missing?
Does the $15k include mortgage and is it $15k against take home pay? For many people, taxes and fees such as Medicare, health insurance, and 401k and Roth contributions are done before tax-home pay; therefore, estimate monthly expenses do not include those cost. For some such as myself who pay for home and car insurances in lump sump, I don't count them in monthly expense either.

What does your $15k cover and what percentage is that on your take-home pay? I ask is because I want to understand what I need to get to the monthly income that afford a $15k expense package.

By the way, your daycare is dirt cheap and will be replaced by after-school care soon. Now, after-school care is a racket but hopefully your schedule will afford you to avoid that cost. Sometime, it is better to pay for after-school activities because the cost isn't that much more but the kid would get some much more out of it.

Thanks.
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Re: Can I retire in 10 years through annuities?

Post by Duzz78 »

Once receiving income, ordinary income rates, not capital gains rates, apply.
avalpert1
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Re: Can I retire in 10 years through annuities?

Post by avalpert1 »

greenrebellion wrote: Mon Apr 01, 2024 6:23 pm TIPS ladder would accomplish the same thing without annuity fees and would eliminate inflation risk.
But introduce longevity risk...
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Re: Can I retire in 10 years through annuities?

Post by GratuitousScrubs »

Annuities seem to be one of those "great in theory, terrible in practice," items. Probably a combo of adverse selection (people who have good reason to suspect they'll have longevity are the ones who gravitate to annuities, thus fewer mortality credits in the pool) and heavy embedded costs related to the way these contracts are generated. It's a narrow selection of people who should be considering them. The ideal case seems to be a retiree without a lot of assets, without a bequest desire, who can improve upon their worst case scenario in a meaningful way by annuitizing a good chunk of whatever they do have (while still reserving enough to deal with lumpy expenses).
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Re: Can I retire in 10 years through annuities?

Post by 4nursebee »

Bb073084 wrote: Mon Apr 01, 2024 12:11 pm So random thought but if have $2m today and an age 39. Annuity calculators say I could buy an annuity with joint life and 20 year certain payout to start paying in 10 years with monthly payments of $15,403 and $3.7m minimum payment.

We currently spend about $15k a month but that includes daycare for 1 child at $2k a month. It seems like I could buy annuities and what ever I save between now and 10 years would just be gravy. What am I missing?
When would you buy the annuities?

What are you missing? Compound interest effects.
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myfrogger
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Re: Can I retire in 10 years through annuities?

Post by myfrogger »

I had the exact same thought because interest rates are higher than they have been in some time. I ultimately decided against it for 3 reasons:
1. Inflation; and the same policies with COLA didn't look good
2. Taxes
3. Liquidity; this is a payout and includes returning your own money to you

Good thought...let me know how you are processing this
Valuethinker
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Re: Can I retire in 10 years through annuities?

Post by Valuethinker »

GratuitousScrubs wrote: Wed Apr 03, 2024 1:53 am Annuities seem to be one of those "great in theory, terrible in practice," items. Probably a combo of adverse selection (people who have good reason to suspect they'll have longevity are the ones who gravitate to annuities, thus fewer mortality credits in the pool) and heavy embedded costs related to the way these contracts are generated. It's a narrow selection of people who should be considering them. The ideal case seems to be a retiree without a lot of assets, without a bequest desire, who can improve upon their worst case scenario in a meaningful way by annuitizing a good chunk of whatever they do have (while still reserving enough to deal with lumpy expenses).
Actually SPIAs are a pretty good product. Private sector Defined Benefit pension schemes are, in effect, SPIAs. (Public sector ones are inflation-linked SPIAs).

Market is competitive, insurance companies don't make huge profits on them.

Yes the individual annuity market is hampered by adverse selection.

It's a well known puzzle in Financial Economics. Why do people not annuitize more? Lots and lots of papers.

Main problem is (US market) lack of inflation protection. To some extent Social Security fulfils that requirement, however.
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Re: Can I retire in 10 years through annuities?

Post by Valuethinker »

Bb073084 wrote: Mon Apr 01, 2024 12:11 pm So random thought but if have $2m today and an age 39. Annuity calculators say I could buy an annuity with joint life and 20 year certain payout to start paying in 10 years with monthly payments of $15,403 and $3.7m minimum payment.

We currently spend about $15k a month but that includes daycare for 1 child at $2k a month. It seems like I could buy annuities and what ever I save between now and 10 years would just be gravy. What am I missing?
Inflation would destroy you.

It's not wise to tie up your capital, irrevocably, until you are actually at the point of retirement.
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Re: Can I retire in 10 years through annuities?

Post by GratuitousScrubs »

Valuethinker wrote: Wed Apr 03, 2024 3:58 am
GratuitousScrubs wrote: Wed Apr 03, 2024 1:53 am Annuities seem to be one of those "great in theory, terrible in practice," items. Probably a combo of adverse selection (people who have good reason to suspect they'll have longevity are the ones who gravitate to annuities, thus fewer mortality credits in the pool) and heavy embedded costs related to the way these contracts are generated. It's a narrow selection of people who should be considering them. The ideal case seems to be a retiree without a lot of assets, without a bequest desire, who can improve upon their worst case scenario in a meaningful way by annuitizing a good chunk of whatever they do have (while still reserving enough to deal with lumpy expenses).
Actually SPIAs are a pretty good product. Private sector Defined Benefit pension schemes are, in effect, SPIAs. (Public sector ones are inflation-linked SPIAs).

Market is competitive, insurance companies don't make huge profits on them.

Yes the individual annuity market is hampered by adverse selection.

It's a well known puzzle in Financial Economics. Why do people not annuitize more? Lots and lots of papers.

Main problem is (US market) lack of inflation protection. To some extent Social Security fulfils that requirement, however.
The insurance companies don't gouge, but my understanding is that these are all generally sold through commissioned salespeople. Their kids need to go to college too.

If this can ever get solved, I think this is one of those areas where there is potential for very high impact, at the same level as target date funds and 401k auto enrollment. I think there's a mountain of logic and evidence supporting the value of annuitizing -- higher average consumption, higher minimum consumption, greater sense of financial security, minimizes risk of being robbed of one's nest egg in a scam, greater simplicity for aging retirees, etc. And honestly, how many really WANT to leave a huge amount of money to their kids and grandkids? There's just so much potential for it to create unwanted behavioral distortions. Big inheritances often end up being a byproduct of everyone's search for a margin of safety, rather than the initial intention. I think most people would rather give with warm hands (and also have a little more control over how that giving is timed and used) than give with cold hands. It's the fear of unknowns and protecting the downside that hampers this.

Re: inflation, I think the real problem is inflation uncertainty. These things aren't sold with CPI-tied inflation adjustments, but that can be worked around by purchasing fixed % escalation riders or layering a second plan on top with a later start, if you have a reasonable estimate of how much nominal increase you'll need. I think maintaining an equity portfolio, alongside the annnuity, social security, and a cash bucket, would provide inflation protection over the long run, as that equity portfolio will rise with inflation over a long enough horizon.
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Re: Can I retire in 10 years through annuities?

Post by EricGold »

Bb073084 wrote: Mon Apr 01, 2024 12:11 pm What am I missing?
Ohh ... a good 20% of your money, if not a lot more.

You have to understand four things:
1. An annuity is insurance. If the insurance does not have substantial value to you, you paid a lot for nothing
2. The fancy numbers you read do not account for inflation. If inflation is higher than modeled, that is on you
3. If the stock market outperforms, the annuity company reaps the rewards
4. You pay agent commissions, annuity company cost of doing business, and company profit.

Insurance has a role to play when it is dealing in low probability, high cost scenarios because it spreads risk. Term life insurance for young people is a fair example. I'm hard pressed to think of any other personal finance insurance worth considering that is not just preying on insecurities and financial illiteracy.
Wrench
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Re: Can I retire in 10 years through annuities?

Post by Wrench »

EricGold wrote: Thu Apr 04, 2024 2:21 am
Bb073084 wrote: Mon Apr 01, 2024 12:11 pm What am I missing?
I'm hard pressed to think of any other personal finance insurance worth considering that is not just preying on insecurities and financial illiteracy.
MYGAs and SPIAs. Both are relatively low commission cost products. The former for high rates of return for shorter periods, and the latter for those who want longevity insurance to cover nominal liabilities. Large sweeping generalities like the above are rarely accurate in personal finance, which by nature depend on individual circumstances. I do agree that SPIAs are most likely inappropriate for the OP situation. But that is not true for everyone in every situation.

Wrench
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Re: Can I retire in 10 years through annuities?

Post by EricGold »

Wrench wrote: Thu Apr 04, 2024 7:28 am MYGAs and SPIAs. Both are relatively low commission cost products.
That language makes me laugh every time I read it.

I looked into a QLAC the other week. I call it a DIA and it also is labeled "low commission." It was offensive, insurance "value" and all. Breakeven age to just return my inflation adjusted premium with ZERO real appreciation was 90 years old

I'll stick with my opinion that an annuity cannot compete with a balanced portfolio.
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Re: Can I retire in 10 years through annuities?

Post by loghound »

It's sort of like any other investment decision you can make... you can find scenarios where an annuity is attractive and scenarios where it is not.

Probably putting *all* of your money in an annuity is a bit rough (I think that is what OP is suggesting) and not likely to lead to the best possible outcomes but you could certainly put a portion (like maybe < 25%) and as long as it replaces another low risk asset (cash or bonds) it's probably an OK plan.

I played around with this a few months back using Ficalc and in the specific scenario the annuity as a replacement for bonds work out pretty attractive "on average" as long as you purchase it with money that would otherwise buy bonds.

Like seriously, no one should make any financial decisions based on this analysis but but it sort of makes sense (to me) that replacing some portion of the bonds with an annuity could work out just fine (especially if it gives you peace of mind)
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Re: Can I retire in 10 years through annuities?

Post by ivgrivchuck »

I think a much better plan would be to:
a) Now put all that money into 30 year TIPS (which provides inflation protection which is the real risk between the age 40-70)
b) In 30 years if you are still in good health then buy a SPIA (which insures against longevity risk, which is the real risk in 70+ age)

Not that I would be seriously recommending this, because you are missing all the equity risk premium. But it's probably a much better plan than going all in annuities.
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upwind
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Re: Can I retire in 10 years through annuities?

Post by upwind »

20 years assured payout. Starting at 49? Maths was never my thing but ….

Then what?
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loghound
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Re: Can I retire in 10 years through annuities?

Post by loghound »

upwind wrote: Thu Apr 04, 2024 11:23 pm 20 years assured payout. Starting at 49? Maths was never my thing but ….

Then what?
well we don't have the contract in front of us but I assume it's for life with a 20 year guarantee (so even if you die in year 5 your heirs will still get the remaining 15 years).
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Re: Can I retire in 10 years through annuities?

Post by ScubaHogg »

avalpert1 wrote: Tue Apr 02, 2024 10:57 pm
greenrebellion wrote: Mon Apr 01, 2024 6:23 pm TIPS ladder would accomplish the same thing without annuity fees and would eliminate inflation risk.
But introduce longevity risk...
Ex ante a non-inflation indexed annuities no more eliminates longevity risk than a Confederate dollar annuity would. This goes triple for someone who starts collecting at 49 and looks at collecting for 50+ years

I will die on this hill
Last edited by ScubaHogg on Fri Apr 05, 2024 9:50 am, edited 1 time in total.
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Re: Can I retire in 10 years through annuities?

Post by ScubaHogg »

It's been said, but you are missing the fact you are taking in a giant, heaping pile of inflation risk. Even at a very mild (by worldwide historical standards) 4% annual inflation, by the time you are 59 the purchasing power of that annuity would be cut to $7033

Then you'd be looking at living another 40 years on top of that. And god help you if the US experiences any higher inflation than that
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EricGold
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Re: Can I retire in 10 years through annuities?

Post by EricGold »

ScubaHogg wrote: Fri Apr 05, 2024 9:49 am It's been said, but you are missing the fact you are taking in a giant, heaping pile of inflation risk. Even at a very mild (by worldwide historical standards) 4% annual inflation, by the time you are 59 the purchasing power of that annuity would be cut to $7033

Then you'd be looking at living another 40 years on top of that. And god help you if the US experiences any higher inflation than that
I'm an annuity skeptic on my good days, an annuity hater most of the time. But I popped numbers into a spreadsheet at
https://docs.google.com/spreadsheets/d/ ... sp=sharing

and .... well ... see for yourself. The following example uses 5% inflation
At age 80 the BH has collected about $120k extra 2024 dollars before reinvestment (about $215k including reinvestment) than the annuity but the nest egg is exhausted while the annuity keeps paying out, albeit at much reduced amounts. These two choices do not look much different to me for a couple that has a combined longevity approaching 90. I'm actually amazed. See any errors ?

Addendum: I found my error -- I was mixing up months and years. Back to a mile-high NO to the annuity choice
Last edited by EricGold on Thu Apr 11, 2024 3:36 pm, edited 2 times in total.
capran
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Re: Can I retire in 10 years through annuities?

Post by capran »

Wrench wrote: Mon Apr 01, 2024 5:44 pm The providers will not let you invest all your assets into an annuity. They don't publish or tell you the limit but it appears to be around 40 or 50% of your investable assets. Also, do you really want to put all your assets in one basket? What if the insurance industry goes belly-up? Unlikely, but it could happen.

Wrench
In the early 80's we had an insurance company go bankrupt with our annuities. They ended up selling the company, and the purchasing company offered 50% immediate return of your money or hold it 5 years and get 100% of your balance back with 2% per year return. We took the latter, but it was an eye opening experience.
Carguy85
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Re: Can I retire in 10 years through annuities?

Post by Carguy85 »

Put more people between you and your investable money and you will get less of it….about as predictable as gravity.
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Re: Can I retire in 10 years through annuities?

Post by bertilak »

loghound wrote: Thu Apr 04, 2024 10:11 pm Like seriously, no one should make any financial decisions based on this analysis but but it sort of makes sense (to me) that replacing some portion of the bonds with an annuity could work out just fine (especially if it gives you peace of mind)
It gives you peace of mind in two ways:
  1. You won't outlive your income. This is what most people think of as the purpose of an annuity.
  2. Your income stream is reliable because it does not depend on the stock market or economy. This what attracted me.
Be sure to think about both those aspects.

Inflation:
I say inflation is a non-problem. If your annuity income does not keep up with inflation, buy another using your stock/bond portfolio. This means you must have a stock/bond portfolio of sufficient size. So, don't put it all into an annuity and don't buy one before you need the income. Note that if inflation pushes you into another annuity, that new annuity only needs to cover the amount lost to inflation which will be a relatively small percentage of the total income needed. By that time, your portfolio may have grown enough to cover a substantial portion of the cost of that additional annuity.
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