This fellow is a CPA and although an author of several financial books, I don’t agree about the desire for a SPIA.
He also states “Most annuities are a raw deal for investors.”
That gives him an out.
We are pleased with the way ours are set up and how they reduce our portfolio risk while performing better than other instruments for reducing the risk (bonds and mutual funds) given the higher risk of our stock accounts (and our stock accounts are diversified groups of stocks within the investment choices we have in our 401k).
The inflation risk is definitely a reality - as stated in the article.
Our annuities are for 10 years or less. So when they mature, we can decide what we want to do next with the money. Also at different ages, we might have different choices we will want to make. For example, we are both 67 this year, and in 10 years, we probably won’t own our current primary residence – we have to plan over these years how we plan to acquire maybe a smaller primary and a secondary residence (4 grandchildren at one location, as they are newborn to five years of age right now).
We definitely have to plan on the real estate switches.
Annuities can eliminate longevity risk but to accomplish that, they add Inflation risk. There is no risk-free lunch! So the question becomes which risks are one comfortable with and which ones do we want to manage more than the others? And what is the risk tolerance that allows one to sleep well at night?
"Our annuities are for 10 years or less. So when they mature, we can decide what we want to do next with the money. "
A lot of folks purchase CD ladders, or Bills.
fwiw: I agree with Piper in that most annuities aren’t great for the investor. (But ALL annuities are great for the broker/seller since they have high commissions, and that commission has to come from somewhere.)
There was an interesting thing I read recently about transferring $50K or $100K from a retirement plan to a charitable annuity or, I think, to a donor advised fund.
Personally, I’m a fan the 2-fund portfolio, (as recommended by John Bogle), which is the 3-fund portfolio without International. I trade longevity risk to reduce inflation risk. (I still remember the 70’s.). As mentioned previously, can’t eliminate all risk so one needs to accept whichever portfolio risk that allows them to sleep better at night.
If you have some time, ask your FA to backtest their recommendations against a so-called Lazy Portfolio.
“The evidence has shown that even most professional investors can’t pick winners that beat [the market] over 10+ years, much less the average retail investor…”
I will digest the 3 fund portfolio review article (last updated May 17, 2023) – and also have a discussion with our FA. We have a FA group ‘state of the markets’ update about a week before our individual appointment.
DH and I manage DH’s 401k (kept it w/o FA) and we have had quite a lot of success with that. In fact we beat our FA’s numbers in all but 2022 (he had more protection against downturn). And we didn’t want/don’t want to ‘get out’ of our funds because one doesn’t know when to jump back in (and that runs true historically). We are in 4 fund groups that have done better than the other investment choices in our 401k — large cap/value; large cap/growth; small cap/blend; and small cap/growth. Larger % in large cap/growth and small cap/growth due to better long term results and also better results in down market (these two fund groups don’t drop as much as the other two)…
We have used low cost indexed funds for DDs’ Roth IRAs.
We all have benefited from Jack Bogle’s index investing concepts/actions with Vanguard.
I dislike Bonds. So maybe some of you like bonds better than annuities. There are some bonds with FA’s groups. Our funds are in their group funds - 3 different levels of risk to choose from.
What the annuity for 10 years does is has the fair market value (your initial investment amount plus returns, less withdrawals), and has interest credit based on the choices made for investment/allocation. For example, the one I am looking at, had annual choices: point-to-point with cap (choices of S & P 500 Index, Nasdaq 100 index, Blended Index, and Russell 2000 index); Annual point-to-point with spread,(Bloomberg US Dynamic Balance Index, and Bloomberg Balance II ER Index); Monthly sum (same 3 indexes of the annual point-to-point with cap); and monthly averaging (blended index). Does not ever go below your initial investment amount unless you have made withdrawals.
Of course, during those 10 years you have inflation. Your returns should keep up the value of your initial investment (with inflation), but this instrument is used as a method to lower our portfolio risk.
The returns we have over the 10 years with our stock portfolio is where we have the gains. Of course in 2022 our stock portfolio is where we had the losses – but over 10 years we expect to have the better returns with our stock portfolio.
We built our home in 1992. We are in an area where we have had incredible growth and appreciation of our home - and with the right improvements of our home before selling, we will have the best selling price for it. However our home was intended to be ‘buy over rent’ - since we were establishing ourselves and have almost always owned a home over our 44 years of marriage. ‘Right sizing’ of one’s home, means instead of having higher mortgage payments, you use the extra funds for investments. However, when one has very good cash flow and they want to enjoy a nicer/bigger home - that is where one chooses where to spend their money, while also knowing how to save; also the component of giving (church, community, needy, etc.).
But what does this have to do with longevity risk? Annuities are supposed to mitigate longevity risk by paying out income (including a partial return of capital) for your lifetime, even if you live longer than expected. That’s not what you are describing, which sounds more like a hedged investment strategy.
A product like annuity has additional cost to you (and profit to the issuer) compared to its underlying investments. Therefore, buying an annuity shouldn’t be thought of as a pure investment (because you can always do better by investing in the underlying products without the additional cost), but as an insurance product to mitigate certain risks that you’re unwilling to take on yourself.
there are several types of annuities, such as the standard payout for the life of the annuitant, or payout for two lives (say annuitant and then spouse), a period certain, and now ULACs for 401ks. Not to mention, deferred and several other iterations.
The former (payout for life) eliminates longevity risk but incurs inflation risk over teh time of the life. The period certain annuity with a guaranteed payout (such as 10 year or 5 years, or 6 years like my MIL had) payout to the annuitant or to the heirs if the annuitant dies during teh period. You are correct, that these do not address longevity risk. But they also have less inflation risk than a typical annuity (payout for life) in that you can roll them over when the period/term is complete.
Annuities should be considered illiquid, unlike a bank CD, which pays less, but which can be cashed out for a small penalty. OTOH, period certain annuities pay higher rates of interest as SOS points out. However, that higher interest payment comes with higher investment risk over Treasuries, as even AAA-rated insurance companies can go under.
There are annuities that specifically do what you are talking about. But it varies, just like ’ life insurance’ means a whole lot of things.
What I am talking about has the cash value at the end of the period - where an annuity set up like a monthly payout for the life of the person usually has nothing left when the person dies. It all is based on the terms of the CONTRACT.
That is correct. Annuities are hedged by the insurance company selling them, and that is what allows them to pay a higher rate than a similar term bond. They hedge thru mortality credits, folks who die ‘early’. So paycheck annuitants are really betting on outliving the statistical pool. But that pool is already comprised of reasonably healthy people, unlike the pool for Social Security.
btw: one thing we haven’t discussed is taxes, both federal and state, LT cap gain vs income (annuity payouts).
It seems to me the best time to do this is in the first year one would be required to make RMDs. The $50K contribution is not taxed but counts against the RMD. So, assuming the interest rate is 5.9% on $50K (each, or $100K total), this would add another $5900 a year (or $492 a month) on top of one’s Social Security check. And then the principal permanently transfers to the charity upon death.
This is a good ‘general’ article (you don’t have to subscribe, just say ‘later’):
I am not familiar with “Betterment” but if one does not want to use a Financial Advisor, they probably can build their own custom portfolio.
Key is not only how one saves for retirement, but understanding how to minimize taxes. Making the conversions to Roth IRAs for example, and how to be strategic when RMD comes into play.
I am looking around at Estate Planning information - Kiplinger has a digital article on that too (published 6-12-2023). That is something we have to get done, but baby steps…
I was looking back on Kiplinger digital, and came across this article. To me it has a ‘calming’ effect, because it sort of has a checklist of things you can actively do before and during retirement. The last paragraph says some key things “Your portfolio…, and the allocation should always be determined by your current risk tolerance.” Also “Financial planning for retirement is a work in progress”, and “…being flexible to change leads to progress and financial stability.”