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Annuities?

   What d’you know about the annuity as a vehicle for retirement strategy?

I’ve always been dubious about them. However… I have a friend, whom I’ve now known for five or six years and whom I believe to be fundamentally honest and above board. Part of his business is financial management, and one his favorite strategies entails setting clients up with annuities.

He points out that if I took about $300,000 of my vast riches — approximately half of investments and cash holdings — and put it in a lifetime annuity with a death benefit of 300 grand, I could generate more than the amount I need to live on for the rest of my life, still have money invested in securities, and leave a guaranteed $300,000 to my son when I croak over.

Given my chronic bag lady syndrome, this sounds pretty tempting.

My concern is that if the prominent oncologist who de-boobed me is right — that I should live to about 95, barring accidents and unforeseen circumstances — I will outlive my money by ten or twenty years and than spend advanced old age in serious poverty.

I do not want to continue teaching freshman comp courses, a job I truly dislike whether in the classroom or online, and I’m certainly not betting that publishing Racy Books for Racy Readers is going to make me rich. Right now I can’t even get accursed Amazon to let me create an Author’s Page for our pseudonymous scribbler, Roberta Stuart.

So, assuming no money is going to come in from side gigs or the S-corp, and knowing the government is shearing the hell out of my savings by forcing me to take large required minimum drawdowns just as the stock market heads back into negative territory, I’m thinking an annuity that would return enough to live on would give me some peace of mind and also allow me to preserve at least SOME capital as I age. And also leave at least something for my son.

Two drawbacks come to mind, as I consider this scheme:

a) it locks up $300,000, which presumably I will never be able to access again; and
b) the payouts do not seem to be inflation-adjusted.

Even though we’re not seeing much inflation now, it would be absurd to assume that we won’t in the future. My father’s retirement was devastated by the inflationary period of the 1970s, which reduced a healthy savings account to…well, not enough to live on. He had signed himself into a life-care community just as that period started, so at least he had a roof over his head and a couple of meals a day. But because of the loss of his dollars’ buying power, he did not have enough to do much other than stay underneath that communal roof and eat in the (awful!) institutional dining hall. That’s even though he started out with the 1960s equivalent of just over a million dollars!

That, IMHO, makes for quite the dreary lifestyle.

US politics grow increasingly negative. Some extremely dangerous fools are trying to attain power, and sooner or later they will succeed. When that happens, the US economy will become even more unstable than it is. So, runaway inflation — or another profound recession like the one that’s taken us 8 or 10 years to come out of — is a distinct possibility. I have no faith in the country’s economic future, and I do not believe the stock market alone is a safe place to keep all of one’s savings.

Nor, obviously, is stuffing the mattress with gold bullion a great idea. The insomnia factor aside, gold bars are too heavy for an old bat to haul to the grocery store.

I’ve talked with WonderAcccountant about the annuity question, as well as the highly knowledgeable Evan at My Journey to Millions.

WonderAccountant thinks I don’t really need to set up an annuity, as she believes there’s enough money in securities to support me into my old age, no matter how much I take out, but she suggests the peace of mind could be worth the hassle and the risk. Evan observes that some annuities are excellent retirement strategies and some are not: they’re complicated instruments that you need to understand fully before you buy.

So, I’m thinking about it.

Even if most of my money were drawn down by the time I died, if I invested half of it in an annuity, my son would inherit my paid-off house and also the $300,000 death benefit. The house is probably worth $280,000 or $300,000 now — but we know how reliable those figures can be. Nevertheless, with a paid off house in hand, he could either sell the house he’s in or rent it, providing a little cash flow for him. Or he could sell this house and use the proceeds to salt his own retirement savings.

But…do I really want to tie up half my savings in an instrument that’s not inflation-adjusted? Twenty-five or thirty grand now sounds, well, just grand. But in ten years, even if inflation stays low, it won’t be enough to keep me going. In 20 years, when I’m 90, I‘ll need over $45,000 to buy what $25,000 buys today. And as for that $300,000 death benefit: if I die at age 90, it will take $541,833 to equate to today’s 300 grand. It will be worth a little more than half of what it’s worth now.

That assumes an inflation rate of just 3%, staying stable over two decades…

 

7 thoughts on “Annuities?”

  1. Not a fan of annuities….these are very complex instruments and as I age I seem to enjoy simpler things that I can understand. Like AT & T’s dividend which is supported by young folks appetite for data and being connected. Let us not forget the folks that get your $300K then invest it but what happens if they fail and go under….what then….does the government pick up the tab….all of it…. part of it? And as you pointed out, if you were able to get a return of 10% or $30K a year that’s OK now but ten years from now $2500 a month may not buy very much. And to be clear I lived thru the 70’s and inflation was rampant. I have fond memories of getting 16% on one year CD’s….And some would say the turmoil in the Middle East and “oil embargo” lit the flame of inflation back then. And hmmmmm …. today we have even more tension in the Middle East….will history repeat itself?

  2. I’ve always thought that it might be a good idea for you to pay off your son’s house (that you co-own). The money you pay every month for your part of the mortgage is–in effect–an annuity. As for your son, he would be getting his inheritance early!

    • Yah, Financial Adviser Dude believes my son could carry the entire mortgage payment himself. And he probably could.

      But you know…the house is old. The area looked like it would gentrify at the time we bought: right before the Bush Recession. But now that’s problematic. Though the place is now worth more than we owe on it, I think it’s unlikely that the neighborhood will have one of those central-city young middle-class explosions of value — too close to a dangerous slum anchored by a Walmart shopping center. Crime rate is very high. And something about the houses in that area makes the utility bills astronomical. This summer he had a $350 power bill on a 1200-s.f. house whose AC he hardly runs — he has a Nest that turns the thing off when he’s not there, and when he is there he keeps the place stifling hot.

      My sense now is that the place isn’t worth what we’ve put into it — never will be — and that he’d be better off renting or moving to a neighborhood of newer construction.

      In any event, right now the money is making more in the stock market by far than it would if a big chunk of it were used to pay off the mortgage.

  3. I have a variable annuity I set up about four years ago at the suggestion of my financial planner. I just set it up through Vanguard, which is also where I have my 401(k).

    I’m not sure what type of annuity you’re looking at, but I’ve read through the fine print of mine and I can pull out the capital I’ve contributed at any time; what I can’t access until I’m retirement age is any gains.

    Your situation is very different than mine, though. I still have nearly 20 years to work before my SSI-defined retirement age, and I’m not trying to leave a legacy for anyone. I’m just trying to save to support myself in my dotage.

    • It’s not a variable annuity; this would be a lifetime annuity with a death benefit in the amount of the actual dollars you paid to buy into it at the outset.

      Annuities are very complex and difficult for the non-expert to understand. And they’re designed to serve different purposes.

      But my biggest concern about my friend’s plans for my money, as I reflect upon it, is spelled i-n-f-l-a-t-i-o-n. The thing is going to lose value as each minute passes, especially after inflation starts to rise again, as it inevitably will. The death benefit my son would get will be worth less than the amount I put into it, even though the numerals are the same. In 20 or 25 years, $300,000 will have about half the buying power the same figure commands today.

      Additionally, the payouts are not inflation-adjusted. In theory, this thing could be engineered to generate a total income (all things considered) of around 30 grand. Again: when I’m old and I need the money more than I do now (because I’ll have more health-care needs and I’ll need to pay people to help care for me), my income off the thing would be half of what it is today, which TODAY is just barely what I need to live on.

      In other words, I lose money and my son loses money.

      It’s an idea that can be pitched to sound terrific. But when you think about it…hm.

  4. Sometimes I think too much planning for the future interferes with current happiness. Remember – man plans, God laughs. (But, I thoroughly enjoy your blog.)

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