Impact on Social Security and Annuities on Asset Allocation

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
diversifire
Posts: 10
Joined: Mon Apr 01, 2024 9:32 am

Impact on Social Security and Annuities on Asset Allocation

Post by diversifire »

I am looking to provide some assistance to a relative who is trying to leave a high fee investment advisor. They are currently in approximately 20 mutual funds and etfs with an average expense ratio in the 0.5-1.0% range with a 0.9% advisor fee. I want to help them simplify their portfolio to a 3-5 fund portfolio at Schwab.

They are hoping to retire in the next 3-5 years. They are married and husband/wife each have an annuity that while in hindsight was not the best investment they are too far in to get out of. Social security will likely make up the bulk of their income, around $60,000/year, with two annuities each providing around $12,000/year. There is also an IRA with around $200,000 in it. The budget will be $80-90,000/year so the hope is that initially social security and the annuities will provide all of the necessary income.

The initial asset allocation that we settled on was 40% US Stock / 20% International Stock / 40% Bond using low cost etfs or mutual funds. The stock allocation seems straightforward but I was debating on what would be most appropriate for the bond allocation. I know it is popular to incorporate TIPS into the portfolio but since their income is primarily from social security which is already inflation adjusted I was leaning towards an intermediate term treasury fund for the bond allocation. My main concern is the reduction in real income in the future as the annuities will pay less in real terms due to inflation.

They also have a significant amount of equity in their home and are looking to downsize, I am hoping they will net an additional $50,000 from the downsizing and have a paid off house and I suggested they try to save $20,000-$30,000 over the next 3-5 years before they commit to retiring. They may also continue to work after "retirement" but at a reduced rate.

Any advice on how to best think about asset allocation in this situation would be helpful.
User avatar
Stinky
Posts: 14708
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Impact on Social Security and Annuities on Asset Allocation

Post by Stinky »

diversifire wrote: Tue Jun 11, 2024 2:55 am. They are married and husband/wife each have an annuity that while in hindsight was not the best investment they are too far in to get out of.
Even if it was a mistake buying the annuities, what’s past is past.

All they can do is make the best choices on the annuities going forward.

Do you have any more information on the annuities? Some of the answers might be useful include -
—- What types of policies they are (variable, indexed, fixed, etc)?
—- Could they be surrendered now, and if so, what is the surrender value?
— What rate of interest are they currently paying?
—- Are they IRA annuities or taxable?

It may very well be that keeping the annuities is the best thing for them to do. But they might consider looking at the annuities to see if they are the best course forward.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
diversifire
Posts: 10
Joined: Mon Apr 01, 2024 9:32 am

Re: Impact on Social Security and Annuities on Asset Allocation

Post by diversifire »

Stinky wrote: Tue Jun 11, 2024 4:04 am
diversifire wrote: Tue Jun 11, 2024 2:55 am. They are married and husband/wife each have an annuity that while in hindsight was not the best investment they are too far in to get out of.
Even if it was a mistake buying the annuities, what’s past is past.

All they can do is make the best choices on the annuities going forward.

Do you have any more information on the annuities? Some of the answers might be useful include -
—- What types of policies they are (variable, indexed, fixed, etc)?
—- Could they be surrendered now, and if so, what is the surrender value?
— What rate of interest are they currently paying?
—- Are they IRA annuities or taxable?

It may very well be that keeping the annuities is the best thing for them to do. But they might consider looking at the annuities to see if they are the best course forward.
They are variable annuities with a guaranteed minimum I believe. One has a surrender value of around $75,000 and the other $150,000. The first has an income base that increases 6% yearly and the other has an income base that is guaranteed to be double after 12 years (which will be in 2 years), they are IRA annuities. $24,000 a year seems much better than anything you could do with $225,000.
User avatar
Stinky
Posts: 14708
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Impact on Social Security and Annuities on Asset Allocation

Post by Stinky »

diversifire wrote: Tue Jun 11, 2024 4:44 am They are variable annuities with a guaranteed minimum I believe. One has a surrender value of around $75,000 and the other $150,000. The first has an income base that increases 6% yearly and the other has an income base that is guaranteed to be double after 12 years (which will be in 2 years), they are IRA annuities. $24,000 a year seems much better than anything you could do with $225,000.
It sounds to me like you’re looking at the annuities in the right way. That is, looking to exercise the guaranteed withdrawal benefit option to generate monthly income. And the relative numbers ($24k per year income vs $225k surrender value) probably lean in favor of keeping the annuities.

Just a few additional due diligence questions -
—- What are their current ages, and when do they expect to start taking income? (Unless they’re age 70 or more, this likely leans in favor of the variable annuity)
—- Do the withdrawal benefit riders guarantee that they will get the $24k per year, every year that they’re alive, even if the account value is drained, with a death benefit of the positive account value if any? (Most guaranteed withdrawal benefit riders provide all of that)

It sounds like it’s likely a good choice to keep the annuities and activate the withdrawal benefit as you’ve suggested, depending on the answers to the two questions above.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
diversifire
Posts: 10
Joined: Mon Apr 01, 2024 9:32 am

Re: Impact on Social Security and Annuities on Asset Allocation

Post by diversifire »

Stinky wrote: Tue Jun 11, 2024 5:01 am
diversifire wrote: Tue Jun 11, 2024 4:44 am They are variable annuities with a guaranteed minimum I believe. One has a surrender value of around $75,000 and the other $150,000. The first has an income base that increases 6% yearly and the other has an income base that is guaranteed to be double after 12 years (which will be in 2 years), they are IRA annuities. $24,000 a year seems much better than anything you could do with $225,000.
It sounds to me like you’re looking at the annuities in the right way. That is, looking to exercise the guaranteed withdrawal benefit option to generate monthly income. And the relative numbers ($24k per year income vs $225k surrender value) probably lean in favor of keeping the annuities.

Just a few additional due diligence questions -
—- What are their current ages, and when do they expect to start taking income? (Unless they’re age 70 or more, this likely leans in favor of the variable annuity)
—- Do the withdrawal benefit riders guarantee that they will get the $24k per year, every year that they’re alive, even if the account value is drained, with a death benefit of the positive account value if any? (Most guaranteed withdrawal benefit riders provide all of that)

It sounds like it’s likely a good choice to keep the annuities and activate the withdrawal benefit as you’ve suggested, depending on the answers to the two questions above.
They are 63/65 the plan would be to start taking income when they retire and to delay the larger social security benefit until 70 (5 years from now). My understanding is that the annuities will continue to pay regardless of the balance and if they were to die with a balance the remainder would be passed on to the beneficiary (each other).
dbr
Posts: 46665
Joined: Sun Mar 04, 2007 8:50 am

Re: Impact on Social Security and Annuities on Asset Allocation

Post by dbr »

1. The most immediate direct effect on increasing inflation indexed income is to delay SS to 70 in an appropriate combination for a couple.

2. For 40% of an asset allocation that will mostly not even be used for income the selection in bonds is not important. Intermediate Treasury, Intermediate TIPS, some of both seems totally reasonable. Bonds are confusing because there are far more choices than reasons to distinguish among them.
User avatar
Stinky
Posts: 14708
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Impact on Social Security and Annuities on Asset Allocation

Post by Stinky »

diversifire wrote: Tue Jun 11, 2024 5:17 am They are 63/65 the plan would be to start taking income when they retire and to delay the larger social security benefit until 70 (5 years from now). My understanding is that the annuities will continue to pay regardless of the balance and if they were to die with a balance the remainder would be passed on to the beneficiary (each other).
Presuming that they take income from the annuities as is now planned, I think that’s a good use of the annuities.

However, if for some reason they decide to not turn on the withdrawal benefit rider, they likely should cash surrender the annuities and move the funds to a low cost iRA to reduce the fee drag from the variable annuity.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
jimkinny
Posts: 1871
Joined: Sun Mar 14, 2010 1:51 pm

Re: Impact on Social Security and Annuities on Asset Allocation

Post by jimkinny »

It doesn't seem there is a lot of room for error in their budget. I have read that one strategy for married couples is for the higher earner to not claim SS until age 70 and the lower earner at age 62. The best annuity you can buy is to delay taking SS. Each year of delay results in 8% addition SS income per year. You can look up the details of the mentioned strategy. They would likely be better off long term by spending some of their savings to delay taking SS. Or work longer. But, maybe they are comfortable with what they have.
Irene
Posts: 26
Joined: Sun Jun 09, 2024 9:39 pm

Re: Impact on Social Security and Annuities on Asset Allocation

Post by Irene »

In a lot of cases it's a mistake for the lower earner to claim early, because that also reduces the amount of spousal benefit you get, even if your spouse claims at full retirement age or later. If the lower earner would get more than the spousal benefit anyway, then maybe, it would depend. And of course there are sundry scenarios depending on which spouse is older, who has a lower life expectancy, etc.
Irene
Posts: 26
Joined: Sun Jun 09, 2024 9:39 pm

Re: Impact on Social Security and Annuities on Asset Allocation

Post by Irene »

In our case, I will turn 67 a bit before my husband turns 70, so I plan to take my Social Security for those few months and then switch to the spousal benefit. I have a much lower potential payment than he does, but it's a couple thousand dollars I wouldn't have otherwise. Both of us have a number of very long-lived relatives, and while we have sufficient reserves that we can get by without SocSec for a bit, it will be a very significant part of our income, so delaying was a no-brainer once we knew we could afford it.
Post Reply