Retirement income

[LotsaGray]

Now personally I might believe that OP is "too young" for such because inflation is likely to drastically eat into the $5K of income over the next expected 20+. But that is a far different discussion than "annuities are bad'.

I don't think they're a good idea for most people. Also if there's no inflation adjustment built in, I think they're easy to write off. Do any annuities other than SS offer inflation protection?

When annuities are sold, it's always that headline number that gets people's attention. But it's all too easy for people to forget that the headline number is going to look pretty bad 10, 20 years from now. In that sense, I think many annuities are sold deceptively. Given that over time, real estate and stocks have been two of the best inflation hedges, when people put money into annuities that they otherwise would have in a balanced portfolio with stock exposure is a very questionable decision. It's like locking in losses each year to inflation, not to mention the fees you pay. I can't think of a much worse "investment."

But this isn’t what you said. You called them a pyramid scheme. You said or implied they were never good for anyone.

Annuities are not an inflation hedge and they are not sold as such. This is just one reason reputable companies will not allow one to put entire $ into annuities. There is only one fixed income asset with similar or less risk to promises keep up with inflation. Those are inflation protected govt securities (I Bonds and TIPS in US). So by your logic no one should ever hold CDs, nominal treasuries, corp bonds, muni bonds, etc. also no one should ever take the pension annuity option and should always take lump sum.

You continue to insist on comparing annuities to equity investments like stocks and RE. You talk about a balanced portfolio but by your logic no one should ever have a balanced portfolio. Or at best should only own TIPS as their fixed income assets. Annuities are fixed income assets. They should be compared against other fixed income assets.

annuities are fixed income assets that provide longevity insurance (at least for income annuities since you don’t seem to acknowledge other kinds of good annuities).

So no annuities are not a pyramid scheme. The are not and are not sold as inflation protections. The are not comparable to RE or stocks. They are not the best tool for everyone every time. You should not put 100% your assets into them. Those are all strawman arguments that only you are putting forward.

[LotsaGray]

Can you provide a source where an inflation adjusted annuity can be purchased? AFAIK those do not exist in the US. So you literally are precluding anyone ever purchasing a SPIA. There are some fairly famous posters here who would disagree.

I met with my local Fidelity rep this past week. He was talking about annuities. I asked if they had any inflation adjusted annuities. He showed there was a pull down where one could select the inflation adjustment. I have not played with this on-line to see what kind of annuity it was, but it seemed like Fidelity had them. I believe he said they use 4 different insurance companies for their annuities. They were names I recognized, but I don't remember them.

I'm not looking to annuitize part of our portfolio, so I didn't pursue it further. I think this was in the retirement tool that shows one how to convert the portfolio into income.

That is interesting. I have no access to Fido as no account there. But several here, far more knowledgeable than me on annuities, have stated there are no annuities which adjust with inflation. There are some which have fixed % increases riders. These can help protect from inflation but they are not tied to inflation, also will lower income amount or cost more.

If you purchase one of these with 3% income growth but inflation runs 5%, you still lose out in the long run. And they are not a cheap option

[mhc]

I met with my local Fidelity rep this past week. He was talking about annuities. I asked if they had any inflation adjusted annuities. He showed there was a pull down where one could select the inflation adjustment. I have not played with this on-line to see what kind of annuity it was, but it seemed like Fidelity had them. I believe he said they use 4 different insurance companies for their annuities. They were names I recognized, but I don't remember them.

I'm not looking to annuitize part of our portfolio, so I didn't pursue it further. I think this was in the retirement tool that shows one how to convert the portfolio into income.

That is interesting. I have no access to Fido as no account there. But several here, far more knowledgeable than me on annuities, have stated there are no annuities which adjust with inflation. There are some which have fixed % increases riders. These can help protect from inflation but they are not tied to inflation, also will lower income amount or cost more.

If you purchase one of these with 3% income growth but inflation runs 5%, you still lose out in the long run. And they are not a cheap option

I was just playing with it in Fidelity to see what they offer. Everyone is correct. It is a fixed % increase rider.

[grok87]

I met with my local Fidelity rep this past week. He was talking about annuities. I asked if they had any inflation adjusted annuities. He showed there was a pull down where one could select the inflation adjustment. I have not played with this on-line to see what kind of annuity it was, but it seemed like Fidelity had them. I believe he said they use 4 different insurance companies for their annuities. They were names I recognized, but I don't remember them.

I'm not looking to annuitize part of our portfolio, so I didn't pursue it further. I think this was in the retirement tool that shows one how to convert the portfolio into income.

That is interesting. I have no access to Fido as no account there. But several here, far more knowledgeable than me on annuities, have stated there are no annuities which adjust with inflation. There are some which have fixed % increases riders. These can help protect from inflation but they are not tied to inflation, also will lower income amount or cost more.

If you purchase one of these with 3% income growth but inflation runs 5%, you still lose out in the long run. And they are not a cheap option

agree.
mhc- this may be semantics, or it could be deceptive market on fidelity's part. as LotsaGray says these are NOT inflation adjustments but fixed % increase annuities. for most people the only current way to get inflation indexed annuity protection is via social security. maybe some people are lucky enough to get it from their state and local government pensions.
cheers,
grok

[LotsaGray]

Can you provide a source where an inflation adjusted annuity can be purchased? AFAIK those do not exist in the US. So you literally are precluding anyone ever purchasing a SPIA. There are some fairly famous posters here who would disagree.

Yes inflation will eat into an annuity. No one is recommending putting 100% into an annuity. In fact no legit insurance company would allow such if they knew it.

The bet one makes buying annuity is not that they will beat inflation or die soon enough that inflation doesn’t matter. The bet one is making is you will live longer than median life expectancy. If you are 45 and have end stage pancreatic cancer, don’t buy an annuity. Otoh if you are 84, perfectly healthy, all your ancestors lived to 115 yrs and the issuer is using standard life expectancy tables, a life annuity makes great sense. Reality is nearly everyone falls between these extremes.

Yes you can do the same or something similar using a rolling TIPS ladder but it would take far more capital. How much would it take to provide $60k/yr guaranteed income? I am guessing $4mil plus. That same $4mil will buy a SPIA paying over $26k/MONTH or $300k/yr. If op lives to 90 and we have normal inflation that $26/k will deteriorate in value to about $13 k/mnth.

The difference is what is left for heirs. Ladder is better there since it would be about $2mil. But since we don’t come with an expiration date, you can’t touch that principal. If you did use some principal for income, you create a risk you will outlive your money. That is exactly the risk an annuity insures against. You won’t outlive it even if the it has less value.

OP wants pixed payments of $5K/mo. or $60K/yr. With zero inflation, that would cost about $720K per decade of coverage with a TIPS ladder and be INFLATION-PROTECTED. Your quoted "4 mil plus" would provide that income, with zero inflation, for 56+ years. Few people would buy a TIPS ladder that long, even if one was available (currently the outer limit is 30 years). And with inflation you would probably need to pay a lot less to receive $5K NOMINAL/year.
But nominal returns are meaningless in terms of spending power. Most likely there will be inflation cutting into the value of a fixed annuity, meaning it will be worth less and less every year, and probably a lot less if one lives long enough. And if one dies early, heirs get nothing. The TIPS ladder would also be state income tax exempt. What is unspent at death is inherited by heirs.

A TIPS ladder would preserve SPENDING POWER. That is what is important.

Also, you mentioned "normal inflation", but there is no such thing as "normal inflation". It is impossible to predict inflation decades going forward. A few years of double digit inflation could rapidly make $5K/month nearly useless. Would you want to bet against a few years of double digit inflation sometime during your retirement? In 1970 a typical home cost $17,000. By 2000 that number was $119,600. Now it is $412,300.

If one can afford it and is very risk-averse, some here have advocated buying a SPIA at some advanced age as a backup to a TIPS ladder for additional longevity security. I can see their logic, though I am not that risk-averse....I am counting on equities (or unspent and reinvested TIPS returns) to hopefully serve that function if I outlive my TIPS ladder . I think it is a much less risky approach than to ignore the very real inflation risk built into a fixed annuity, which will almost definitely reduce spending power over time (the only question is by how much).

You implied inflation-adjusted annuities are not available in the USA. I think that is wrong, though don't quote me, since I have not looked into them (due to lack of interest). My recollection is that they are very expensive.

There are annuities which have income increase riders. But AFAIK, these are fixed increase rates. The increase is not tied to inflation. So you have to guess what inflation will be years into the future. And as you note we really can’t do that.

You cannot get guaranteed $5000 per month with $720k TIPS ladder. Your guaranteed TIPS rate is about 1.5% (Hint, my guess wasn’t a wild guess). To get the income op desires you need to either get a higher rate or consume principal. You would need 8.33% nominal rate. you can’t get that rate with TIPS and the latter defeats the reason for getting annuity. Consuming principal increases longevity risk that annuities protect against

What you should be comparing to is a nominal treasury ladder which can probably get the rate you need but then you have reinvestment rate risk. Actually a nominal treasury ladder and a fixed income annuity are quite comparable but the ladder is likely cheaper but with more risk (and I am not referring to default risk). Both and also a TIPS ladder have their place in investing but they are not the same. Each has its own use.

I agree we don’t have normal inflation. I should have said average which is about 3% in US. The point is that what ever fixed income we start with it will be halved roughly in 25 yrs. But annuities are not about inflation risk. They protect against longevity risk. TIPS ladders provide inflation protection but have lower but protected income with duration risk. Nominal treasury ladder also has duration risk with inflation risk but at a higher initial nominal income vs TIPS. Which is right depends on your situation.

But again, annuities are about longevity risk mitigation. Ladders cannot address this unless only the interest income is spent. Even then you have interest rate risk as you have no idea what rate you might get XX yrs in the future.

[protagonist]

You cannot get guaranteed $5000 per month with $720k TIPS ladder.

That would roughly cover a 12year ladder, providing $5000 REAL/month, if purchased at zero yield to maturity. That is, $60K/year x 12 years= $720K (plus a small bid-ask spread). It would actually pay more than $5K real since yields to maturity are now close to 2% real.

I recently set up a 16 year ladder for my cousin who is 80 y.o. (through 2040), via Fidelity's web site. It cost about $1M. Not counting the real yield above inflation to maturity (close to 2%/yr. compounded) , it provides between $52-62K REAL every year through 2029, between $80K-102K REAL every year from 2030-2033, and over $50K REAL every year from 2034-2040 (the gap years to be ultimately filled by overweighting 2034 and 2040). My cousin intends to extend the ladder with unused income, and if she dies prior to 2040 her heirs will inherit what is left.

The whole thing took about an hour to set up.

[LotsaGray]

You cannot get guaranteed $5000 per month with $720k TIPS ladder.

That would roughly cover a 12year ladder, providing $5000 REAL/month, if purchased at zero yield to maturity. That is, $60K/year x 12 years= $720K (plus a small bid-ask spread). It would actually pay more than $5K real since yields to maturity are now close to 2% real.

I recently set up a 16 year ladder for my cousin who is 80 y.o. (through 2040), via Fidelity's web site. It cost about $1M. Not counting the real yield above inflation to maturity (close to 2%/yr. compounded) , it provides between $52-62K REAL every year through 2029, between $80K-102K REAL every year from 2030-2033, and over $50K REAL every year from 2034-2040 (the gap years to be ultimately filled by overweighting 2034 and 2040). My cousin intends to extend the ladder with unused income, and if she dies prior to 2040 her heirs will inherit what is left.

The whole thing took about an hour to set up.

You are consuming principal. So if OP lives 15 years how much income will he have? What if it is 25 yrs?

OP specifically wants $5000 of income for life. Since we do not come with an expiration date, a bond ladder must be a rolling ladder to ensure the income continues forever.

If OP needed a real vs nominal income for a fixed duration, I would agree a TIPS ladder is a great fit. That would address an inflation risk. I personally have a TIPS ladder as part of my income until I take SS. But again, that is not what OP seeks.

So as I stated previously, a TIPS ladder to meet what OP specified ($5000/month nominal for life) would require about $4mil rolling ladder. That is just simple math.

[protagonist]

You are consuming principal. So if OP lives 15 years how much income will he have? What if it is 25 yrs?

With a TIPS ladder your initial investment is being consumed buying things you need or want, and its value is growing in real terms over time , whereas with a fixed annuity your investment is consumed paying insurance executives' salaries. What may be left over in a TIPS ladder when you die goes to heirs. The idea of making a guaranteed profit of $5000/month (even $5000 nominal) would be expensive , no matter how one tries to do it. That is a guaranteed 6%/year on a $1M investment. Good luck finding that. You might get that with a $1M TIPS ladder if inflation averages about 4%/yr.

How much would OP have to pay for a $5000 lifetime monthly income of dwindling value over time, and how much could that cost make over an extended lifetime if invested even conservatively, rather than evaporating into the stratosphere? What will $5000 be worth in 20,30, 40 years? The past is not predictive of the future, but in the past the experience was "not much", and consider potential looming higher tariffs....

I would argue that, given how much value $5K/month is likely to lose over extended time, saying that you are betting on longevity is a real stretch.

[LikeNumbers]

I have been with Fidelity for about 30 years, I have never used their advisors.

I am 70 yrs old, retired almost 18 years, and see no need for an annuity beyond our Social Security which
covers all our expenses except some of the Federal taxes. While a consistent cash flow is important, there
are ways to achieve it w/out handing over a chunk of money to purchase an annuity.

It is very easy to perform ROTH conversions or sell some equities every now and then to pay those taxes.

[dbr]

Annuities are a solution for people who are freaked out over the volatility of stocks and bonds. The same applies to TIPS ladders. The same also applies to people who already have so much income from Social Security and pensions that they don't need assets.

A person who wants the security of Social Security, pensions, annuities, and bond ladders should own those things understanding the nature of what it is.

A person who understands and does not like the terms of all those things should avoid Social Security, pensions, annuities, and bond ladders as much as possible.

Note there is work that is not covered by SS meaning you do not pay in and you do not get a benefit: https://www.ssa.gov/help/iClaim_nonCov1.html Unfortunately many of those options do provide pensions, avoiding which might be a problem. I myself was able to work in a SS covered job that also offered a pension, but the pension is fixed. If I had known better I would have chosen employment elsewhere such that I would not have ended up saddled with a fixed pension the value of which is being cut away daily by inflation.

[LotsaGray]

You are consuming principal. So if OP lives 15 years how much income will he have? What if it is 25 yrs?

With a TIPS ladder your initial investment is being consumed buying things you need or want, and its value is growing in real terms over time , whereas with a fixed annuity your investment is consumed paying insurance executives' salaries. What may be left over in a TIPS ladder when you die goes to heirs. The idea of making a guaranteed profit of $5000/month (even $5000 nominal) would be expensive , no matter how one tries to do it. That is a guaranteed 6%/year on a $1M investment. Good luck finding that. You might get that with a $1M TIPS ladder if inflation averages about 4%/yr.

How much would OP have to pay for a $5000 lifetime monthly income of dwindling value over time, and how much could that cost make over an extended lifetime if invested even conservatively, rather than evaporating into the stratosphere? What will $5000 be worth in 20,30, 40 years? The past is not predictive of the future, but in the past the experience was "not much", and consider potential looming higher tariffs....

I would argue that, given how much value $5K/month is likely to lose over extended time, saying that you are betting on longevity is a real stretch.

A rolling bond ladder does not consume the principal. If you want lifetime income from a bond ladder it has to be a rolling ladder because we do not know when we will die.

Yes a TIPS rolling ladder to generate a guaranteed nominal $5000 per month lifetime income is expensive. About $4mil expensive. That was my point.

This doesn’t mean that TIPS ladders are bad. I have three treasury ladders in place to assist in income until I draw SS in about 10 yrs. But ladders are a best fit for a known duration nit an open ended one.

If OP has the capital, for probably about 1.3 mil (est. as I have not calculated) would purchase a ROLLING 10 yr TIPS ladder generating about $60k/yr REAL income. Then he could reevaluate at whuch point maybe life income annuity makes more sense. But that is not what OP asked about.

A rolling TIPS ladder using $4 mil would actually throw off $5000/mnth real income and probably more than this in nominal income for life and leave $4 mil for buyers heirs. (Note that such a ladder is actually theoretical because you can only build out 30 yrs so there is reinvestment risk). But that is the only way to meet what OP asked for using TIPS. Thus a TIPS ladder is an expensive choice to guarantee you meet OP criteria. Thus I say it is a poor choice. A nominal bond ladder would be both a cheaper and closer fit but stil more expensive and with reinvestment risk.

For about $750k principal investment OP can get exactly what was asked for. $5000 per month for life. It is an exact fit which in this case make it drastically cheaper than a TIPS ladder. It is 80+% cheaper.

Annuities are definitely a partial answer to longevity. I agree they do nothing about inflation risks. This is why I already stated I do not believe OP should be buying an annuity NOW. OP is imo too young since he is likely to be exposed to maybe 25 yrs of inflation and potentially much longer. So the value of that $5000 will greatly deteriorate if we have even average inflation. If OP were 10 yrs older my recommendation would be different.

But annuities are definitely nominal longevity insurance but with 20+ yrs one needs to definitely inflation protection but if the annuity is less than half of one’s assets, the other half or some of it should be in equities hopefully offsetting at least some of the inflation exposure. Other than SS there is no product available I am aware of which provides both longevity and inflation risks wo reinvestment risk and is affordable. If there is please tell me as I would personally interested.

Just because you don’t agree with what was asked doesn’t mean you should say the request can’t be done or one should recommend something comp,Emely different. In this case a non-rolling 10 yr TIPS ladder was recommended. Today that would cost about $550k but what does OP do in 10 yrs when this ladder ends and there is $0 income and that $550k principal has been spent? Depending on OP total financial picture that could leave OP in pretty dire position.

[LotsaGray]

I have been with Fidelity for about 30 years, I have never used their advisors.

I am 70 yrs old, retired almost 18 years, and see no need for an annuity beyond our Social Security which
covers all our expenses except some of the Federal taxes. While a consistent cash flow is important, there
are ways to achieve it w/out handing over a chunk of money to purchase an annuity.

It is very easy to perform ROTH conversions or sell some equities every now and then to pay those taxes.

Depends. Pick the right tool for your situation. But the FACT is that if you are consuming principal as you describe, there is a potential to consume all of one’s money. If you keep withdraw rate low enough this doesn’t happen but as withdraw increases so does the risk of running out. This is definition of longevity risk.

Annuuties addresss this risk. They provide that guaranteed income for life. If not inflation adjusted, onlySS and some few pensions, they do suffer from inflation risk.

If you live on your SS only, great you don’t really need additional annuities and you will likely never run out of money. But that is not everyone situation.