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Greetings. I am looking to the Fatwallet community to weigh-in on annuities as part of my retirement plan.

I am now working, just turned 60. I want to retire next May (1 year out). I will have a small pension $17K annually. I have $1.2 million saved in 401K. Both my wife and I plan to take SSI at full retirement age (66). We seek at least $120K annually in retirement.

Our credit union offers a SunAmerica product that guarantees 6% for 12 yrs. They give a 6% signing bonus. The principal is guaranteed to be returned after 12 yrs, with possible gains.

I’m considering a 500K purchase.

I could take this annuity as immediate, or let it roll to double my initial payment in 12 years. I could live with either scenario, but the deferred scenario seems best.

Your thoughts on this are welcome…..please warn me of risks or something better. Humble thanks.

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In order for 6% to generate 103K you would need a principal of about 1.7 million. Be aware that an insurance annuity is probably not FDIC insured, and at the end of the 12 years they may not be offerring 6% anymore. What will you be living off of for the next 12 years if you let the annuity roll the 6% back in?

An annuity is a contract. Don't buy it without reading the contract. I guarantee that you don't understand what you are buying. Read the contract and then ask questions.

You're not going to get anywhere near $120k p.a. with a 6% annuity on $500k + pension, that's only $47k until you hit 66. Are you saying they'll give you a guaranteed 6% and return your $500k after 12 years?

Generally speaking if your 401k is asset-allocated appropriately with low-cost index funds you're better off doing your own withdrawals, but you are subject to speed bumps in the market.

To clarify....I would augment the annuity yield with money from savings to achieve the 120K target. Yes....they are guaranteeing the return of principal after 12 yrs.....whether I take immediate 6% payments or let it roll.

Not sure we have the full picture here... OP, are you buying the annuity with your 401K? What other assets do you have at this time?

as brody mentioned, you need to read the contract.....the reason he said that is it isnt currently possible for an insurance company to guarantee a 6% return like that. Without reading the contract, it is hard to know how you are confused or what they said to confuse you but you arent likely to get any 6% guaranteed return.

meggacat said:   To clarify....I would augment the annuity yield with money from savings to achieve the 120K target. Yes....they are guaranteeing the return of principal after 12 yrs.....whether I take immediate 6% payments or let it roll.


In order for the "roll" to double your money in 12 years, it must compound. That is, they must not only take the starting money and give it back in 12 years but also add the 6% from year one and give that back to you in 11 years, and so forth.

And 500k, doubled, will get you 60k a year, starting at age 72.

and you need money to live off of until then.


Edit: so, since you have 1.2 million, and want 103k a year, and need 1.7 million to get 103k a year, you should take 850k, put it in the annuity and let it roll, then also take the remaining 350k and put it into the annuity, taking the 6% out annually. Thus, you are provided with $21k+$17k for the years until you are 72, then provided with 103k+17k per year after age 72, with an additional 350k still in savings.

this assumes, of course, that you actually want to use the annuity.


Second edit: The closer numbers would be let 600k roll, and also put 600k in and take out the 6% annually, so that's $36k+$17K= 53K a year until 72, and then 1.8million*0.06=108k plus 17k for a total of 125k per year after age 72.

I am not sure of your risk tolerance or willingness to consider investing in index funds vs an annuity, but to give you an idea of a lot of the fees hidden in annuities, I recommend glancing at the following http://retireearlyhomepage.com/glwb.html. It is for GLWBs, but the concept of hidden fees is helpful to keep in mind. A lot of people that are far more knowledgeable than I am recommend only purchasing SPIAs if you ever get an annuity (since it is more of a commodity that can be compared apples to apples, thus working to keep fees down).

So I am very early in this process....no contract presented yet, only the sales pitch. Yes, I would use 401K funds for this....they will structure the annuity inside an IRA. I am debt-free. I have 60K cash outside of any retirement funds. I own the house ($600K value). I appreciate the responses here.

Get a specimen contract. You should not consider this product until after you read and understand the contract.

I would also recommend that perhaps you check out the bogleheads forum (just google it), there a few annuity guys over there that will be able to give you solid expectations.

Thanks!!

Thanks!!

This appears to be the product that OP is referring to:

https://www.sunamerica.com/TridionData.do?Page_ID=372633

Are you buying the annuity in the 401k or taking cash out to buy it? Is this some type of tax deferred rollover? If not and you are just trying to get 500k in cash you are looking at paying 40% or more in taxes, so you withdrawal would have to be more like 850k to buy the annuity.

awstick said:   Are you buying the annuity in the 401k or taking cash out to buy it? Is this some type of tax deferred rollover? If not and you are just trying to get 500k in cash you are looking at paying 40% or more in taxes, so you withdrawal would have to be more like 850k to buy the annuity.

The money will be in an IRA. He won't pay tax.

ryoung81 said:   I would also recommend that perhaps you check out the bogleheads forum (just google it), there a few annuity guys over there that will be able to give you solid expectations.

This is exactly what will happen if he goes to Bogleheads:

1)A bunch of people who have never read an annuity contract will tell him how it is terrible and that other than a SPIA an annuity should never be purchased.
2)Mel will direct him to his series of annuity articles that are full of incorrect information.

Meggacat, what you really need to understand with these products is that the great sounding guarantees come at a tremendous cost. Because of this, although the guarantees are the worst case scenario, they are also the most like scenario.

So, the bottom line with these is that the worst case scenario is probably better than the alternative, but the likely outcome is probably much worse than the alternative.

BrodyInsurance said:   ryoung81 said:   I would also recommend that perhaps you check out the bogleheads forum (just google it), there a few annuity guys over there that will be able to give you solid expectations.

This is exactly what will happen if he goes to Bogleheads:

1)A bunch of people who have never read an annuity contract will tell him how it is terrible and that other than a SPIA an annuity should never be purchased.
2)Mel will direct him to his series of annuity articles that are full of incorrect information.


Perhaps correct, but my intent was for someone who would bust out a calculator to explain to him that what he is trying to do isn't feasible. Which I don't think you disagree with. So the advice he gets there, for his situation, is likely correct.

I don't think this is compounding. It looks like it must just give you 6% of your base every year for 12 years.

meggacat said:   We seek at least $120K annually in retirement.
Are you sure you need that much in retirement? No debt, $600K house, $1.2M 401k, etc. $10K/month is an awful lot of money when you've passed the saving/acquisition stage and have moved on to spending/enjoying.

I don't mean to be nosy, you don't have to provide details of your planned budget here, but just as a point of reference, I've been retired 7 years and we do very well on much less. Multiple international trips every year (we're in Portugal right now), a month in Argentina in August to get out of the Texas heat, whatever toys and gadgets I want, etc., basically complete financial freedom and independence. I'm putting off SS as long as possible just because we don't need the money.

P.S. To answer your original question, I avoid annuities and insurance products because I can never understand them. All of our investments are in index funds, cash in FDIC-insured products.

the advice at bogleheads will highly likely provide him more money then what he is going to get via this insurance agents plan.

many of us who post at bogleheads have unfortunately purchased the wrong kind of annuity in the past (which is most of them).

i havent seen Mel link information (correct or incorrect in some time). Sorry you got kicked from there but your assessment of that site is flawed.

Given he has a small pension and could defer social security, it isnt likely that an annuity (especially within an IRA) is a good answer. Sure all the facts arent known but its highly unlikely.

dhodson said:   the advice at bogleheads will highly likely provide him more money then what he is going to get via this insurance agents plan.

many of us who post at bogleheads have unfortunately purchased the wrong kind of annuity in the past (which is most of them).

i havent seen Mel link information (correct or incorrect in some time). Sorry you got kicked from there but your assessment of that site is flawed.

Given he has a small pension and could defer social security, it isnt likely that an annuity (especially within an IRA) is a good answer. Sure all the facts arent known but its highly unlikely.


None of my comments were about whether the annuity is appropriate or not. If he posts there, I am pretty sure that I'll be proven correct.

An annuity can be a good choice if the guarantees give him what he needs. Most likely, they won't which will make the annuity a bad choice. The annuity makes more sense in the IRA than outside of it. Inside of the IRA, it gets taxed identically to any IRA. Outside of an IRA, all of the gains will be removed first and will all be subject to income tax.

My "too good to be true" suspicions are probably right concerning this particular product. I believe the 6% yield per year is reliable. Why? Because it is the product of a rider that is accompanied by a fee. Once I get a chance to examine the contract, I suspect I will take a hit on the invested principal. 2-3% fees will take their toll over 12 years.

BrodyInsurance said:   dhodson said:   the advice at bogleheads will highly likely provide him more money then what he is going to get via this insurance agents plan.

many of us who post at bogleheads have unfortunately purchased the wrong kind of annuity in the past (which is most of them).

i havent seen Mel link information (correct or incorrect in some time). Sorry you got kicked from there but your assessment of that site is flawed.

Given he has a small pension and could defer social security, it isnt likely that an annuity (especially within an IRA) is a good answer. Sure all the facts arent known but its highly unlikely.


None of my comments were about whether the annuity is appropriate or not. If he posts there, I am pretty sure that I'll be proven correct.

An annuity can be a good choice if the guarantees give him what he needs. Most likely, they won't which will make the annuity a bad choice. The annuity makes more sense in the IRA than outside of it. Inside of the IRA, it gets taxed identically to any IRA. Outside of an IRA, all of the gains will be removed first and will all be subject to income tax.


thats a false argument. Sure its an even more horrible idea to pull it out of the IRA to purchase an annuity but that doesnt change the fact that likely purchasing it within the IRA is also a bad idea the great majority of the time. The OP thinks he is getting a real 6% compounded return guaranteed and we all know that isnt happening.

I'm not talking about whether it is a good purchase or not. I am saying that if someone is going to make this purchase, it is better to purchase it within an IRA. The purpose of the purchase of these things is not to get tax deferred growth. The purpose is to have the guarantees.

why dont you list some annuity products the OP could consider since its highly unlikely this one is worth it?

How much will your SSI benefits be?

Honestly I don't see any way you'll be getting $120k total annual income safely for a long period.

My SSI, combined with my wife and my small pension will be 62K per year. I need to use my 1.2M in some combination of investment(annuity?) and other mechanisms to get another 60K each year for 25 yrs.....the guaranteed 6% from the annuity is attractive for say, 500K investment, and then use the balance of the 1.2m as required to meet the goal. I have no desire to spend hours per day trying to invest funds in the market...most probably screwing that up.

$60K is going to be a stretch at normal 'safe' withdrawal rates, but you 'get it' that your spending will go down considerably after a certain age. Although that is not a given if you factor in healthcare costs...

Have you done some playing with firecalc? (again, google it) It can help you come up with some scenarios and see how likely it is that you run out of money.

BTW, just doing some very basic spreadsheet playing.... assuming a very conservative 3% average annual return (if you stuff the 1.2mm in index funds) and withdraw $60k annually, after 25 years you'll have ~$325k left. For what you are describing you are probably fine with a strategy like this.

why would anyone spend hours per day watching the market except for entertainment purposes if that is what you find entertaining?

Good luck with that 6% guaranteed return.

You are leaving alot of money on the table taking SS at 66 and not 70

"I am now working, just turned 60. I want to retire next May (1 year out). I will have a small pension $17K annually. I have $1.2 million saved in 401K. Both my wife and I plan to take SSI at full retirement age (66). We seek at least $120K annually in retirement."

How much will you get from SSI? My general reaction is that this does not compute. Even if you make...say $36K a year in SSI plus your pension, both taxed, you're trying to get at least $70K/year for at least 20 years out of $1.2M. Sounds almost do-able until you think about inflation.

This article goes into it and this tool will let you lay it all out.

I'm assuming when you say $120K/year you mean at today's prices. If inflation runs 2.5% for example, when you're 70 you'll need to be spending $156K to live at the same level...$210K by the time you're 80.

Don't just go with a sales pitch. Or at least, get pitched an actual product. Get the exact name of the base annuity and any living benefit. I can then explain it in detail for you. Generally speaking, the "roll up" (ie 6%) is never a walk away/ cash value. Its an income benefit base guarantee. Feel free to give the exact name, and I'm glad to help.

You "own your house"...so you have no mortgage payments on it? If so why do you need $120K a year? I am not sure you have saved enough to live that richly and retire at 60. You need to run some more numbers or seek a trusted CFP's advice (one that won't try to sell you complex annuity or insurance products). Stop considering complex too good to be true annuities that will cause you to think you can live more richly than can afford for a few years and but likely leave you in a worse position in later years.

dunnrobert said:   "I am now working, just turned 60. I want to retire next May (1 year out). I will have a small pension $17K annually. I have $1.2 million saved in 401K. Both my wife and I plan to take SSI at full retirement age (66). We seek at least $120K annually in retirement."

How much will you get from SSI? My general reaction is that this does not compute. Even if you make...say $36K a year in SSI plus your pension, both taxed, you're trying to get at least $70K/year for at least 20 years out of $1.2M. Sounds almost do-able until you think about inflation.

This article goes into it and this tool will let you lay it all out.

I'm assuming when you say $120K/year you mean at today's prices. If inflation runs 2.5% for example, when you're 70 you'll need to be spending $156K to live at the same level...$210K by the time you're 80.


if you are going to retire early, then you need to have another income stream -- you do not have enough saved up to retire next year unless you win the lotto. I'd reconsider your early retirement decision -- why not work until full retirement age and save more $.

stanolshefski said:   This appears to be the product that OP is referring to:

https://www.sunamerica.com/TridionData.do?Page_ID=372633


Guaranteed 6% growth of income is very different than guaranteed 6% return on principal.

What happens after 25 years?

Skipping 45 Messages...
daw4888 said:   Does your wife have her own career? If so then you both should not be taking your full SS at 66. One of you can take yours, and the other claim the spousal benefits on that persons plan. Then wait until 70 and switch to their own full SS at the increased payout.
Assumes SS doesnt change the rule that allows claiming on spouses income and or paying back monies if collecting early doesnt turn out beneficial. <== not sure that makes sense ...



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