Increased happiness and more stable investor w/annuities?


#1

Hi All,

In my particular situation, after much research, it would appear a major SPIA stake (ie, ~ >25% of assets) may statistically not be the wisest choice at current market rates and my young-ish (~51) age.

… BUT… maybe a relatively small stake now in a SPIA with laddered DIA’s probably does make considerable sense, given I otherwise will have no regular stress-free, guaranteed, market independent cash-flow, guilt-free income that I will be able to rely on no matter what and forever.

I figure this would cover just half my minimum current income needs, but will still provide enormous mental relief and confidence in my ability to remain reasonably financially independent, even in the worst and most prolonged downturn we’ve historically seen. Worst case, I can supplement income by literally ANY work, even minimum wage if need-be + move elsewhere if things get really bad to substantially reduce my cost of living, even if that is another country.

And, with the much cheaper-to-purchase but very potent (because of the time leverage) thoughtfully-laddered DIA’s, this income floor would likely approximately keep up with inflation and therefore maintain the same general spending power over time. And I would still have a reasonable portfolio of equities and bonds to help track inflation (in case inflation really got out of hand, which is unlikely in the U.S. for any extended period).

Primarily though, given all my research and thinking on this topic, essentially annuities come down to PEACE OF MIND and establishing/making up a portion of a STABLE INCOME FLOOR… which is not only mentally so much more healthy, especially for worriers like me, but ALSO allows me to spend a bit more w/o as much guilt in the early days of financial independence, when I’m HEALTHIEST and most able to enjoy life. It also allows me to head off much of the menace of “Sequence of Return Risk” in the early days of retirement, and have a stronger investing hand at ANY time in any market… I will always be less likely to be forced to sell stock holdings at the worst possible times… at or near bottoms of deep market corrections, which can be devastating to a portfolio.

And of course, annuities seem to be the only financial product that can provide at least some level of guaranteed lifetime income and mitigate longevity risk, allowing me to spend down more of my assets more confidently and thus better enjoy my retirement knowing that virtually no matter what, I’ll always have something to help sustain me.

Here is just one of many good articles I’ve read supporting some of the mental benefits of having a solid, dependable, income floor:
https://www.towerswatson.com/en/insights/newsletters/americas/insider/2012/annuities-and-retirement-happiness

Much research by the well-respected Wade Pfau has even shown how annuities, properly deployed, can substantially reduce risk of running out of money/assets in retirement in many, if not most, cases. I don’t have the exact article/study link handy, but his site (https://retirementresearcher.com) is a treasure trove of fact-based investment research.

Even IF (huge “if”, especially with this overly-inflated market and overly extended bull run) it was marginally statistically more beneficial to go it alone w/stocks/bonds and rebalancing only, the fact is, I’m not Data from Star-Trek… I’m human, so need to factor in human emotion, foibles, peace, happiness, and those type of aspects too… keeping in mind markets have gone sideways for ~20+ years more than once in the past 100 years. I need to plan for success in ANY circumstance to the best of my ability. Yeah, the chance of failure may be 10% without the annuity, but that 10% risk of ruin has catastrophic consequences, so I should plan accordingly. I may or may not optimize total wealth, but likely will optimize my chance at a decent, workable, happy, retirment and almost completely remove the absolute worst-case scenario.

So Blueprint… and forum members:

Please provide any feedback to help me further refine my thinking here. What major pros and cons am I missing here based on this limited info of my exact situation… more focused on the general / big-picture ideas suitable for a public discussion.

Thanks,
Alan


#2

I think your thought process is extremely thorough. You’ve covered the pros & cons of income annuity purchases:

Pros

  • Steady, dependable income
  • No market risk
  • No longevity risk
  • Peace of mind; comfort
  • Ability to spend more without fear

Cons

  • Give up potentially higher market returns
  • Income doesn’t (typically) grow with inflation
  • Need to pay insurer for their services (thus lower returns)
  • No access to your principal in case of emergency

I like to say that not taking risk is a luxury. Many of us “need” to invest in risky options to give themselves the potential to have the lifestyle that we want. If you don’t have to do that, i.e. if you can get the lifestyle you want without taking risk, then why not do that? Some object to the insurance company making money, but they’re making money by providing a significant service. If that’s a service you value, then it makes sense to use it.

Of course, you always need to consider what income annuities don’t offer: liquidity, inflation protection, etc. and make sure you have a balanced portfolio to cover all of them. The strategy you suggested with a SPIA, DIA ladder, and market investments makes sense to me.

Interested to hear what other forum members have to say…


#3

Alan, you have done a good job of thinking this through. The reality is if we could all lock in enough income to cover the majority of our expected expenses, we would. However, that is no possible for most people due to the their lack of funds. What this means to me is that people should lock in some amount of income to increase the chance that they will not outlive their money and be exposed to market volatility forever. And doing it over a number of years also seems wise so you can still (hopefully) take advantage of some market gains until the money is locked in.

It seems like we may be entering a period of interest rate increases which will increase one’s DIA buying power. Either way, though, guaranteeing some future level of income should be everyone’s goal.


#4

Lauren,

Wow, very straight-forward and honest. I love that you guys here don’t operate like most other annuity and insurance brokers/advisors. You just tell it like it is, and let people come to their own conclusion based on their own situation, temperament, and importance weightings/risk-tolerance. This is the way it should be. The right annuity (or most any financial product, really), deployed the right way, definitely has a potential place in many (though not all) portfolios… they sell themselves for the people who could benefit the most from them… those people, if just given all the relevant facts in an honest and balanced way, can self-select, and almost always, correctly… by almost definition.

I see zero level of push selling here, and that makes this website and Blueprint among the special to me.

More to the point though, Laura, all of what you write aligns with what I’ve learned. Therefore, it is easy for me to strongly agree with and accept literally EVERYTHING you wrote, and the exact wording you chose was also of interest… not in an evasive sense, but wording to be precise and accurate… noticed and appreciated.

I scoff when I watch Dave Ramsey and Orman reject all annuity products out of hand, regardless of situation. He is an example of financial entertainment… yes he has some helpful advice, especially for getting out of debt, but so much of his advice is so simplistic and black and white, and often treads off the road especially with anything past getting out of debt.

And to be clear, though more fortunate than many, I also do not have the luxury to remove all retirement risk without subjecting myself to real problems in the future with a long life and even normal inflation. And I definitely can’t have a NICE retirement, period, without substantial market risk and decent average market returns over the next 30 years.

The truly golden retirements are those had by highly compensated government employees with their often great DB pensions with forever COLA protections. That is the gold standard. It unfortunately isn’t my situation… but I do not begrudge those that do have it… I just think we need a federal system that could approximate that or at the very minimum, portable defined benefit plans even if they don’t have a COLA, for all workers in the private sector. I’m talking about the power of sponsored plans with group-buying power that can basically get annuities at higher payout rates than individuals can get on the private market, even if that is just 5-10% more, or “free” 1% inflation protection or something. Short of that, annuitizing some of our 401k’s and IRA’s is a close second best option (well, at least in case of non-gov’t subsidy system, like now)… so what you guys do here is important for creating personal pensions or at least mini/part-pensions in the here and now.

Anyway, again, thank your for your thoughtful, honest, quick reply. It’s nice to get some corroboration from others on my general thinking (and strikes against it are also very much welcome too… it may be something I haven’t fully considered, though doubtful at this stage… though one thing I’ve learned in life is to always try to keep an open mind as much as possible about most everything… none of us is as smart as we think we are, knows as much as we think we do, perceive the world as it really is… some are closer to reality than others, but nobody’s reality is THE reality).


#5

Retire2020,

Thanks for your input. I agree that if most of us were just offered the ability to lock in a certain income stream (like 6% level payout rate until death on a single premium at say, starting at age ~55) that maintained the same buying power for sure over the rest of our life, guaranteed… probably a majority of people would be locking in a very significant portion of their portfolio into such a product. Unfortunately, that’s not the world we live in, but even annuities as they currently exist offer a lot deployed in the right way for the right circumstance and person. I bet the majority of people could benefit from some portion of their assets in an annuity at some point in their life, almost definitely in fact.

Thanks for reminding me about the (likely, but not guaranteed) market advantage too of not just laddering the DIAs to come online at different times… but to also not do ALL that laddering at the same time… this allows for potential increased buying power due to potential (and with long enough horizon, say 10-15 years+), even “likely”) market gains, but also, maybe at better rates too. I know that as we age, the rates become less important because lifespan is a bigger piece of the puzzle, but I’m still relatively young, so rates still matter to a decent extent, and will be a decent portion in pricing for at least another decade.

It would seem we are likely to get at least another 100 bp in the next few years, but we can’t really time that too much… still, for the moment, probably a wise idea not to put huge percentages of a portfolio in an annuity at current rates, unless you are at least 65 years old now… but it’s usually best to have some DIA laddering combined with incremental SPIA/DIA buying anyway… just seems like most rational approach, somewhat akin to dollar-cost averaging and/or not throwing one huge amount of money into the stock market at one time.

Anyway, the exchange has been great, thanks for the feedback, will keep an eye out for this forum (alerts on).