SPIA. Nay or yeah?

Investing
1

I know Clark doesn’t like annuities but from his video he seems to give a pass on Immediate annuities.
I’m 65 in March and retired and plan on getting SS at age 70 or that’s the plan. I have a little over 500k in a traditional IRA and about 90k in a Roth along with 80k in a MMA. No debt and house paid for.

If I put 250,000k in a 15 year period certain SPIA I’ll receive $1955 a month . The other option would be to fill in 5 years until age 70 and SS and a 100k would pay $1844 a month.
My objective is to get a stream of income to pay my expenses which are pretty low and to sleep better at night since I’ll be preserving my cash in the MMA. Big trade off with losing money in the market for a guarantee stream of income with no cola.
My friend thinks I should do the 15 year but I’m leaning to the 5 year since it’s less money out of the IRA/market and will get me to age 70 plus if I want I can always get another SPIA later.
Curious what anyones thinks. Thanks.

2

Some additional information would be helpful for comments. What is your general health status and longevity expectations. What are your annual expenses? How much will your S.S. be at age 70? What is your current asset allocation for equity/bonds/cash? If you have used a retirement calculator, what was the output?

3

I benched 230 10 reps yesterday only weight 150(brag)health is good. Longevity = maybe 20 more years. expenses about 18-20k or less. 100% equities. 5 funds with 25 year inception all north of 11% both retirement calculator and Monte Carlo are favorable. Just retired in January and no more income and realize there is a different feel at 65 opposed to 45 with market turns. SS = 2800 a month @70.

4

So just running some numbers here:

5-yr SPIA

  • Amount Invested = $100k
  • Amount Returned = ($1,844 x 12 x 5) = $110,640
  • Annual ROI = 2.04%

15-yr SPIA

  • Amount Invested = $250k
  • Amount Returned = ($1,955 x 12 x 15) = $351,900
  • Annual ROI = 2.31%

Unless I am missing something these are terrible. You can get 4.5% on a highly liquid MMF at the moment. Sure, the Fed is likely to cut rates a couple of times over the next few years, but you should easily beat those ROI numbers.

5

WHOA full stop! You are running straight into a behavioral finance weak spot called “Recency Bias”. That is, the US stock market has had since March 2009 (“The Obama Low”) a spectacular stock market, and in people’s minds they think, well, it’ll just keep going, right?

You’re not going to compound 11%. I subscribe to a service which tracks in real time a large number of stock market forecasts, among many other things. I’m posting an image. Though you can see that there is a very large spread in the individual methods, the weighted average forecast for the stock market over the next ten years is 1.7%, not 11%.

Your 100% stock market strategy could work if you make sure you put into the Monte Carlo simulator the 15% Expected Annualized Volatility for 100% stocks, you want to capture the full range of up and down outcomes. But then you have to buckle up and not sell at the bottom, which retail investors are legendary for. Your heirs might love you, or hate you if you’re living with them at the end. With 100% stocks, the range of outcomes is really broad.

The weighted average forecast predicts very well what the market does in ten years. I post amother image. Over the next decade, there will be a significant “catching down” of the black line to the orange forecast. I’m not predicting a crash, maybe returns will be onesies twosies threesies for a few years, then a few actually down years, maybe a small to medium crash, do that for a decade and that will be your 1.7% annualized return by 2035.

The verbiage says, you can’t time your investments with this thing. But…it gives you something to work with, something to put into your planner. It’s like hurricane spaghetti models in the Gulf of America (giggle). There is a lot of dispersion, but if you live in that cone, it’s PAN PAN PAN “pay attention now”.

What you are doing is common by the way - (CNBC) ““About 37% of boomers have more equity than we would recommend for their particular life stage,” said Mike Shamrell, vice president of thought leadership at Fidelity Workplace Investing.”

Given that scenario, I’d take the 15 year annuity now as part of a de-risking strategy, and then you’ll have to use a lower expected return appropriate for a diversified portfolio. The 60/40 historically has a 9.2% CAGR and 10% Expected Annualized Volatility.

What happens after your 15 year annuity ends??? What’s the plan then? My plan goes to 95, though my Dad lived to 89. My Mom is 95 and healthy now.

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6

Butler
I thought the math goes $1955 X 12 = $23460 . $23460/$250000 =0.09384 Which is a 9% yield ?

This the info from immediate annuities.com
Explanation: A 15 Year Period Certain annuity pays income for 15 years. It does not pay for your lifetime. If you die during the 15 year period, your beneficiaries receive this income for the remainder of the term. At the end of the 15 years, your original premium is not returned since it was paid out during the term. (15PC)
The Cashflow or Payout Rate is 9.39%. It is the percentage of premium paid out each year and includes interest plus return of principal.

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*strong text
ochotona
Thank you for your reply/info. That was a lot to ingest. I can only go by historical performance and my funds all have 25 plus years of data. Maybe your sources are spot on but who knows and who has the crystal ball to predict?
The plan could be after 15 years is to use some of the other$300k(remainder in IRA) to fund my remaining years and in 15 years without touching it should have some decent growth. My house is worth north of 400k and 2100 sq feet by then might be a nice time to down size. It’s my first year since 1977 of not having a job and who knows I might do something part time that is some what enjoyable.

8

The data I have goes back to 1970… 55 years. Compounded Annualize Growth Rate (CAGR), Annualized Volatility, Sharpe Ratio after the name

60/40 Benchmark 9.5%, 10.0%, 0.49
Dow Jones Industrial Average 10.9%, 15.3%, 0.42
Global 60/40 8.0%, 10.2%, 0.34
Global Stocks (ACWI) 8.8%, 15.2%, 0.28
NASDAQ 100 11.7%, 22.7%, 0.31
S&P 500 10.8%, 15.4%, 0.41
Total US Stock Market, 11.0%, 15.8%, 0.40
10 year US Treasuries, 6.6%, 7.6%, 0.48

A very strange portfolio, which is 25% each to cash, gold, US stocks, and 30 year US Treasury bonds is the Permanent Portfolio… and it beats all of the above for retiree portfolio survivability, because the volatility number is less than the returns number, leading to a Sharpe Ratio above 0.50.

Permanent Portfolio 8.5%, 7.3%, 0.53

If the financial news media were to talk about Sharpe Ratio as a way to choose investments, people would make different choices, but they put on content which reflects the desires of their sponsors. You see ads for Ozempic, but not for exercise, eating well and moderately, and getting enough sleep. There’s no money in that!

9

I thought that as well initially…but when we apply that same logic to the 5-yr we would get:

$1,844 x 12 = $22,128 from $100k Investment would be 22% yield

No way that is happening.

10

*strong text
ochotona
Let me state that your financial knowledge is north of mine. I couldn’t tell you the difference between sharpe ratio and a Persian cat let alone Recency Bias.
My origional question was should I do a 5 year or a 15 year SPIA and it seems as though we got into the weeds when I gave my financial numbers on my 5 funds that I have had in My IRA. That’s ok and I appreciate your feedback but remember I don’t look at a SPIA as an investment but more of just a way to help me sleep at night knowing I have a stream of income every month and not worry about the ups and downs of the market. If anything I might compare the annuity to a CD. However let me list my funds since we went down this road.
Prmtx 14.69 since 1993 inception
TRBCX 11.79 since 1993 inception
Prhsx 13.14 since inception 1995
PRWCX 11.30 since 1986 inception.
RPMGX 12.85 since 1992 inception.
Even if these returned 40% less in the next 15 years they would still pay well. In my way of thinking we can only use past historical performance especially with 30 plus track records . I know that voice “past performance does not mean future performance”.

11

Butler
A 5-Year Period Certain annuity means that you will receive guaranteed income payments for a fixed period of 5 years. If you die during those 5 years, your beneficiaries will receive the remaining payments for the rest of the term. Importantly, at the end of the 5 years, your initial premium is not returned to you because it has been distributed as income throughout the period. The “Cashflow or Payout Rate” of 22.13% represents the percentage of your premium that is paid out each year, including both interest and the return of your principal. This means that every year, you will receive 22.13% of your initial premium as income, with no refund at the end of the 5-year

This is from their website. I’m sort of confused about the percentage return but to repeat myself I look at this as a stream of income(pension) and not as an investment and was curious based on my info if 5 year vs 15 was the better option. Thanks for your reply.

12

Sorry I didn’t mean to dazzle with my BS … I’ll restate it more clearly.

#1 is don’t try to make decisions about your retirement finances without running the proposed changes through the Monte Carlo retirement simulator. Everything in your financial life affects everything else to some degree. That’s how you make your annuity decision. Which alternative gives you a better life?

Did you run the Monte Carlo or did someone else?

#2 also regarding 100% stocks in your accounts, again, it’s not a problem as long as the human operator of the Monte Carlo simulator properly coded not only the 11% return but also the high volatility of that choice. Do you know what they did?

I don’t think it’s sufficient to assume that the funds will at least return 40% of their past performance. That’s just pulling numbers out of the air. We’ve had Lost Decades in the US market. 1968-1982 was brutal. 2000-2009 was brutal. Those are within my lifetime. Before that, the Great Depression though 1968-1982 was worse for retirees. Why? Inflation. Let the Monte Carlo do what it’s designed to do, model uncertainty.

In other words, though we may depend on financial planners to take care of subtle details, as consumers of their services we still need to be curious and make sure they’re doing the work required for us.

You gave some details which made me wonder, so I expressed those questions.

I myself have a QLAC annuity it starts when I turn 82. Someone, me and/ or my heirs will get a guaranteed amount

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I do not think that the that either the 5 year or in particular 15 year SPIA is a good alternative. A note about the return of principle: lookinv at a 5-year annuity you would be paying $100,000 in 2025 and getting $20,000 each year for 5 years. That is not equivalent return of principle considering the time value of money- a sum of money has greater value now than in the future.
A better alternative is to use some of your cash for your expenses over the next 5 years. Consider using a Money Market Fund for your income needs over the next few months and a Treasury Bill ladder for your subsequent income needs. Toward the end of the 5 years you can use withdrawals for your traditional IRA keeping enough cash for your emergency/goal needs.
Consider reducing your equity exposure. The U.S. equity market has had annual declines of 40-50% and at times it has been more than 6 years for recovery. So zero return over a 6 year interval. The worse time to have a significant decline in your portfolio is early in retirement (sequence of returns risk). The Ages of the Investor by William Bernstein is a short book that you may find helpful if you wish to reassess your asset allocation.

14

ochotona
I ran the monte Carlo simulator my self on portfolio visualizer. Did this last summer before I ever had an annuity on my mind and I would have to re-visit the site to figure how if one can factor in an annuity with my portfolio.
When I plugged my tickers in I always had a 92% success rate on a 30 year horizon. I was under the impression that the visualizer gave a result on past historical analysis. Perhaps I’m somewhat ignorant on how a Monte Carlo works.

15

p1g1
That was my original plan to use up some the cash in my MMA and take SS at 67 with maybe taking 3% or so from the IRA. That was until I saw this video https://www.youtube.com/watch?v=QdD2Tl4s44A&t=17s which showed someone on a modest retirement and factored in an annuity.
Now come on didn’t Dave Ramsey say take 8% out every year ? That’s a bad attempt of humor although I love Dave except on his withdrawl advice because sequence of return is a scarry fact.

16

You’re CLOSE. You want to use Financial Goals in Portfolio Visualizer. It’s just below Monte Carlo. Then you’d specify the annuity in two parts… as a Fixed Withdrawal at a point in time, then the annuity payments as Contribution over however many years the annuity will pay, or “Until End” (of plan, of your life).

Financial Goals has the Monte Carlo in it, as you will see.

After you get done with all of that data entry, you save your “case” by saving the Link (the URL will have everything you typed embedded in it), like so:

https://www.portfoliovisualizer.com/monte-carlo-simulation?s=y&sl=Z9O4ni01ImmRRMiu6TRqr

You can save it for later and modify it and re-run it without having to type everything in again.

I like to plan to a 95% probability of success, personally. I want Russian Roulette with 20 chambers (5% failure) in the revolver, not 10 (10% failure).

What you will find, as I did, is that the addition of risk-free money without volatility really improves the portfolio performance, which runs counter to the popular argument, “you can do much better in the stock market than with an annuity”. Not so! The combination of the two is powerful, not any of them alone.

If I could choose what kind of retirement to have, I’d have 100% of my basic daily needs covered by annuity, Social Security, and pension, and then go 100% into stocks for the rest of it. But, sadly, I have no pension. So I’m trying to do the next best things by taking Social Security at 70, and I bought a QLAC. It’ll be OK.

17

Dave Ramsey gives reckless advice. I would not listen to him. 8% withdrawal rate? Even the best hedge-fund types of portfolios I have seen don’t get up to 8% safe withdrawal rate for a 30 year retirement. This one gets up to 7.6%, but it’s tough to own (it trades frequently) and we have no idea if it will keep working into the future. It’s 13% of my portfolio.

Bold Asset Allocation - Allocate Smartly

18

ochotona
The guy who in my humble opinion is the G.O.A.T. is Nick Murray in his book Simple Wealth, Inevitable Wealth " he uses a 6% withdrawl rate withdrawl and backs it up with a real case scenario using the worst time (black swan) . I would have to find the book to put in his example that was flawless when I read it at the time. In case you’re not familiar with Nick here’s a video that has a lot of simple wisdom if you have time to watch. https://www.youtube.com/watch?v=7lnwlBT6Al0
And yes I will revisit the link you provided on a Monte Carlo.

19

I don’t trust what one person writes in a book, when the numerical evidence I have seen from many different sources including my own modeling suggest that 6% is not a good SWR, UNLESS you combine it with a curtailment of spending method when the market goes south. But 6% FIXED SWR for a buy and hold portfolio and adjust for inflation every year no matter what the market does? It doesn’t exist. It’s too good to be true.

Morningstar thinks the SWR is 3.7% currently. Christine Benz is no fool.

Portfolio Visualizer, Portfolio Charts, Fidelity Planner, Schwab Planner, FICALC, FIRECALC, Flexible Retirement Planner… I’ve tried those. They all roughly agree if you put the same data in.

20

Nick Murray > Christine Benz :laughing: I don’t disagree with your point.