As retirement approaches (~10 yrs), a steady income is more important than chasing high returns in my portfolio due to lower risk tolerance.
I was invited to a dinner for retirement planning. They mentioned a Fixed Index Annuity: 10-year contract, you are allowed to withdraw 10% each year, at the end of contract, you walk away with13% bonus, and the indexed returns over the years. The indexed return is capped at 10%, so when market is up to 20%, you get only 10%; when market is down, your get 0%. Never lose your principal and “should” beat the inflation.
The green vs red line below is their side of the story.
I find it interesting that they “cherry picked” a timeframe that had 2 bear markets. I would like to see their graph over a 10-year period starting in 2013.
Also, if I did the math right…their annual ROI over the 14 years in the graph is around 3%
How do you come up with 3%?
ROI certainly depends upon the sampling time period. Below is another example:
I think their point is if you retire in 2010-2015, you may not have enough principal to recover from the loss.
Jim Dahle has a very good article that reviews the limitations of Fixed Index Annuities which are also called Euity Indexed Annuities… His conclusion: “The bottom line is that the money for the profits and the commissions comes out of your pocket, and what you get in return is of far less value. The guarantees that seem so attractive to the purchaser, while valuable, are simply sold at far too high a price. Avoid complex financial products and don’t take investment advice from commissioned salespeople.”
I looked into those some time ago and decided that there are too many unknowns to give me the peace of mind that I want during retirement. Instead I decided to, over the next three to five years before I retire, build a long TIPS (Treasury Inflation Adjusted Securities) ladder (30 years of future spending) funded by liquidation of equities in my tax-deferred retirement accounts. What does not go into the ladder will remain in equity index funds to hopefully supply needs in any years remaining to DW and I after the ladder is exhausted. Hopefully well before then we will know enough about our health to decide to simply add new future “rungs” to the ladder.
The extremely low semi-annual interest plus inflation-adjusted principal of those bonds as one matures each year will provide known amounts in today’s dollars into the future.
This is not commonly mentioned by financial advisors, but there is a large amount of information about it both on line and in books. If you’re interested, I suggest you check out Boggleheads.org. That website was founded and mostly posted on by followers of John Bogle, the founder of Vanguard and creator of index funds. But again, there are many resources available on the topic.
Danger, you have come into contact with a land shark disguised as an insurance salesman. Annuities are very expensive insurance contracts with hidden fees including commissions of up to 10 percent. That’s why they are so aggressively marketed. If you are interested in an annuity, look at what Vanguard has to offer. It used to be that their annuities cost less than 1 percent per year with no surrender fees. If ex-military, look at what USAA has to offer, also.
I’d stay away from this or any annuity because of the high fees and the loss of control of your principal. If you give your hard-earned nest egg to an insurance company just so they can dole it back out to you little by little, you’ll likely regret it. What if you suddenly need to access part of the principal to pay for out-of-pocket health costs, a new roof, a vacation?
Since you mentioned “lower risk” but not “lowest risk” I suggest putting a small percentage of your nest egg savings into a total stock market index fund (or S&P 500 fund), making sure it’s one of the low- or no-cost offerings from Vanguard, Schwab, or Fidelity. Maybe invest 10%-25%. Less than 100% but more than 0%, so you’re taking some market risk but not with all of your savings. You could also do the same with an index bond fund (again, low- or no-cost).
Then take the remaining 75%-90% and do what Byron suggests: TIPS ladder or even a bank or broker CD ladder. If you had, say, $100K then put $20K into each of a 1-year, 2-year, 3-year, 4-year, and 5-year CDs or treasuries. Each year one of them will come due and you’ll simply re-invest it into a 5-year. You can withdraw any interest you get and if you need more, then take part of the principal out when it’s time to re-invest.
Or if you don’t want to do it yourself, find an honest, ethical, fee-only fiduciary certified financial planner and tell them what your risk tolerance is, how much you have in savings, how much you need to withdraw each year or each month, etc. and let them figure it out.
Also remember that Social Security is itself a kind of annuity or pension. You’ll get a monthly check for the rest of your life with zero risk no matter what the economy or stock market does.
