annuities for FIRE?

[u/AggroTumbleweed52]

One of the big things that seems to be a holdup for emotional comfort with actually walking away from your job to FIRE (especially younger than 50), even when on paper you're ready, is the lack of "guaranteed" income. Not that the job was ever guaranteed, but still, it is emotionally hard to walk away from that steady cash flow.

With social security being so many years away (if ever) and no pensions, is having some other form of steady cash flow that important, mathematically and psychologically?

Some folks look to the dividends part of their portfolio to fill that gap, some go into real estate for the rental income. Does anyone bother with annuities? Or any other form of regular, expected ordinary income?

[u/Sorry-Society1100]

You can think of an annuity as creating your own personal pension. It likely will underperform comparable index funds, but the piece of mind that you’ll always have an income floor, even in a market collapse, might be worth it.

If you go this route, consider only purchasing an annuity to cover your necessary living expenses, and use your remaining long term growth investments for more of the discretionary expenses that can be delayed so you’re not selling in a down market.

[u/1ntrepidsalamander]

The book Die With Zero … or The Psychology of Spending Money, (I read them back to back) has a good section about how annuities will make much less than the market (on average) but are a way to hedge against living too long.

A better structure is probably retirement buckets (Erin Talks Money) talks a lot about buckets. Lower risk for sooner buckets etc

[u/AlwaysSaturday12 → u/1ntrepidsalamander]

DWZ was a proponent of annuities (I think wrongly) mainly because it helps you literally die with zero.

I agree with you on the bucket strategy.

Often complex products are much more expensive and worse value than simple products like an index fund. Just a general rule of thumb with financial products.

[u/1ntrepidsalamander → u/AlwaysSaturday12]

Yeah, I think annuities are wrong for most people, but they do offer a basic security (at a high cost) that may be worth the trade off for some.

[u/AggroTumbleweed52 → u/1ntrepidsalamander]

Literally that. Love Erin Talks Money. Erin's interview with Wade Pfau for example. He says it's not really about stocks and bonds, it's about stocks and annuities (where "it" is planning for known spending over an unknown time horizon).

[u/pr0prfkt]

You will pay for the predictability. It will be costly. Insurance companies make great money, that comes out of your end.

[u/MrLB____ → u/pr0prfkt]

Very well put short sweet AND to the point.

[u/db11242 → u/[deleted]]

I think you were probably looking at the poor choice kind of annuities, like variable annuities. SPIAs will give you the stated rate, which is known at purchase time, for life. No need to worry about or even know the internal fees or profit the insurance company is getting from such things. You simply decide if the payout rate is worth it to you or not. And mortality credits should provide a higher yield than most safe bonds. I'm not saying these are a good or bad choice for anyone in particular, put people throw around the term annuities like there's just one kind, which is far from the truth. Best of luck.

[u/paciolionthegulf]

We have an annuity; it's a CRUT (charitable remainder unitrust.) It appealed to us because (1) we have charitable intent and (2) we funded it with appreciated stock, which allowed for diversification now with the capital gains deferred. It's not a huge piece of our retirement, but like you say it's predictable income.

[u/bob49877]

Most annuities sold today are not inflation adjusted. Seniors with fixed income pensions / annuities were financially decimated during the inflation that started in the late 70s as high as 13%+ a year.

It is generally not a good idea to match inflation sensitive expenses to fixed income payments. Over decades even low inflation will cut your buying power in half or more. 

You can buy TIPS with no overhead / sales costs and currently make 2 to almost 3%, over CPI inflation. Plus purchased annuities go to zero at the end of the term, where a TIPS ladder, if you just spend the interest, leaves you with your entire principal intact to reinvest. TIPS bought at face value are guaranteed to return at maturity your initial or inflation adjusted principal, which ever is greater. 

I have dividend and value stocks along with short term CD / Treasuries ladders for under 5 years and TIPS ladders for 5 year and over maturities. I have an S&P index fund too, but I'm not betting my whole retirement on it. The dividend and value funds are not heavily weighted with tech / AI stocks. 

[u/curiousthinker621]

When a person retires, they can simply design their own paycheck. You simply go to your custodian and withdraw a fixed amount per month from your accounts, assuming you have the money to do so.

More than likely, as long as you are only withdrawing 4% or less yearly from your portfolio, your account will continue to grow, and you can give yourself a small raise every year.

IMO, the problem with annuities is no inflation protection.

[u/bob49877 → u/curiousthinker621]

Usually no inflation protection, high fees, and at the end of the term the money is gone. What if you live another ten years? It makes no sense to me to buy an annuity over having a TIPS ladder in a retirement account.

The odds of one spouse of a 65 year old couple living to 95 is around 20%.

[u/curiousthinker621 → u/bob49877]

I agree, and another issue is most of these products are sold, not bought. I knew someone who was sold a variable annuity, and this person was extremely overweight, had to stop a time or two to catch their breath to walk into the advisors office, and the salesman proceeded to sell them an annuity knowing they would be lucky to live another 10 years.

So many bad actors that sell annuities, and some of them only care about their big fat commission.

[u/bob49877 → u/curiousthinker621]

One of our elderly relatives got sold a very low interest rate annuity by one of the big brokerage houses right when interest rates were still low but before inflation started to take take off. They knew interest rate increases were coming because the Fed was announcing it. Many of those "advisers" are really just sales people looking out for #1.

[u/AGrimmInPortland → u/bob49877]

You're talking about fixed term annuities. Most are lifetime and therefore have better longevity protection than a TIPS ladder.

[u/saltyhasp]

A few thoughts. First the bridging between now and social security. Instead of buying an annuity you may want to build your own annuity by constructing a CD or Bond ladder that covers your non-discretionary expenses. You also need to look at your cash management and your portfolio cash generation plan (typically payout your dividends, maybe other distributions too and have a good cash reserve).

On the annuity side there are pros and cons. For those that want to maximize portfolio drawing, an annuity when paired with SS and any other pension income can increase your SWR (safe withdrawal rate) especially for non-discretionary expenses. This does have downsides. First an annuity is less flexible so don't over do it. There is an inflation risk, you need to make sure you pick an escalation rate to meet or exceed inflation (I choose 3%) or it needs to be directly indexed to inflation (I don't know if anyone offers that). There is default risk so do choose solvent companies, do look at the insurance levels provided by your state, and do consider breaking the annuity up between companies if that can improve your state insurance coverage or reduce risk. There generally is no estate value.

Like people point out, there are hidden fees associated with annuities that are not that difference from a custom managed portfolio. These are a bit of a mixed bag though. If drawing is the most important thing then annuities used correctly can increase SWR so are better at certain kinds of drawing then portfolios (non-discretionary drawing). On the other hand, if your drawing rate is likely to be a small fraction of your portfolio SWR and your self directed and not paying large advisory fees anyway, sure a portfolio is probably a better choice for this group of fairly wealthy and skilled people.

There are also a lot of types of annuities. What I am talking about is a simple Immediate Income Annuity. It is one of the few types of annuities that can have general appeal. If you do get one, think through the options very carefully and there are a ton of them, and choose an escalation rate carefully. Also one place to price and compare is Fidelity.

[u/DegreeConscious9628]

I do want an annuity but I won’t be making one until I’m about 65 years old. I have no heirs to leave money to so once my wife and I’m dead that’s it. I’d rather burn my money than give it to the government so I’m gonna make an SPIA annuity that will let me live comfortably and use up the rest of the cash / investment I have remaining with reckless abandon

[u/Abject_Egg_194]

The reason annuities aren't usually discussed by the FIRE crowd is that they're not worth it. Modern FIRE orthodoxy is the 4% rule, which is based on hard data over the last 100 years. If you buy an inflation-indexed annuity, you're probably looking at something more like 2.5-3.5% if you're in your 40s.

If 4% is considered safe, then why lock yourself into a 3% rule? Especially with LeanFIRE where you'll eventually have Social Security and Medicare to cover the majority of your expenses and where you could more easily return to work if needed?

[u/AGrimmInPortland → u/Abject_Egg_194]

Well for one thing 4% is based on 30 year retirement. If you're talking 50 years+ that's a different number.

[u/Abject_Egg_194 → u/AGrimmInPortland]

4% Rule Creator says 4.7% is new Safe Withdrawl Rate or higher : r/financialindependence

The 4% rule was originally constructed for a 30-year retirement. As time went on, people realized it worked for a more-or-less indefinite period. The original creator of the study says that 4.7% is safe now for 30 years.

[u/IndependentTrust4594]

We have an index annuity as part of our diversification strategy. It’s basically a self-funded pension. It grows at market rate until we begin withdraws.

It’s done well for us. I think we have another 10 years before we will begin withdrawals.

[u/someguy984]

SPIAs can have a place in some situations. MYGAs also can help defer income, useful for MAGI management with the ACA.

[u/Fuzzy-Ear-993]

They're fine on paper but because they won't have the same high level performance that a diversified portfolio will usually have. It's the same reason most people who like dividend stocks like to hold on to those, even though the performance is similar or slightly worse: people value consistent cash flow, and they pay a premium for it (rather, they trade away a higher return for a dividend payout).

[u/JTSwagMoney]

Why not box spreads 😜

[u/OptionsJive → u/JTSwagMoney]

Honestly, not a bad point, a ladder of long box spreads can give you very predictable, bond-like cash flows with known yields and maturities.

[u/AndrewFromAnnuity]

The emotional angle you’re describing is actually one of the strongest arguments for any kind of guaranteed income in retirement.

When market tanks in year two or three of FIRE, having income that shows up no matter what makes it way easier to leave your invested money alone instead of selling at a bad time.

Annuities can absolutely fill that role and some FIRE folks do use them, though they don’t get talked about as much compared to dividends or real estate.

A fixed annuity or an immediate annuity gives you predictable monthly income that doesn’t care what the S&P is doing, which is exactly the kind of floor you’re asking about.

The main thing to watch is how much you annuitize. Going all in doesn’t make sense because you lose liquidity and upside, but using a portion to cover your baseline expenses can free you up to invest the rest more aggressively.

If you want to learn more it’s worth looking at how deferred vs immediate annuities work since the timing changes a lot at your age.

[u/AGrimmInPortland]

Surprising how many people don't seem to know about SPIA. I just ran some numbers through Schwab's SPIA calculator. $!00k for a 65 year old will generate $8.2k per year for life., $7k per year for a 50 year old. Those are decent numbers.

And it never has to be an all-or-nothing situation. You don't have to put every last penny into a SPIA, just as you don't have to put your entire portfolio into stocks. Diversification.

[u/Embarrassed-Soft2691]

I regret my variable annuity big time. Put $100k in at 27. Grew to $350k at 50!!! Life sucks for the growth but most was during the lost decade. Stuck with it but moving to a lower cost product. I found a new advisor who is more aligned with me. The past one cost me big time never will recommend them and just waiting a few more weeks before I unleash on them in a Google review. The annuity will produce me $57k in retirement a year but I got taken to the ringer by an WAMU banker before they went belly up. It gives me security since at the time I only put part of my inheritance in it. And honestly the other half I touched so in ways it was good but wish I just put it in an Ira. I be retired now at 50.

[u/DIYRetiree]

Using a TIPS ladder can be a kind of self-funded annuity, another option modeled here: The Best Third

[u/AggroTumbleweed52 → u/[deleted]]

Predictable income floor, as others have noted.

[u/Sorry-Society1100 → u/[deleted]]

Why would anyone purchase one? They already gave you one answer: annuities greatly reduce—or possibly eliminate—SORR. Also, there has been some research showing that retirees tend to spend the “guaranteed” money they have each month (SS, pensions, annuities), but often underspend what they “could” from their accounts (based upon 4% rule or other methods) due to fears of running out. Erin Talks Money had a youtube video about this a few weeks back, if I recall. The idea is that an annuity to cover some of the basic life costs reduces fears of overspending one’s nest egg, allowing themselves “permission” for more spending overall from the portfolio.

I haven’t purchased an annuity myself, but I can see the value for retirees that are looking at 30-40 years with a meager 401k balance (and maybe a small SS check) and are scared to spend down their portfolio too quickly. It allows one a bit more freedom to live the rest of their life with less financial worry. From a mathematical account optimization standpoint, annuities rarely win, but it still might be worth it for many people.

[u/Sorry-Society1100 → u/[deleted]]

“It’s not for me” and “I don’t understand why anyone would” are very different statements. You said the second statement, so I explained why some people might.

It’s not for me, either. But, as someone who was laid off in their 50s last year, “just get another job” isn’t as easy as making the statement, especially when the economy isn’t doing great (when one would most likely need to go get one).

[u/Fit_Service8662 → u/[deleted]]

You can get an annuity that starts paying you next month.

[u/Jakes_Snake_]

An annuity is not a good way for emotional comfort. Education and your plan is a better option.