I see in MONEY Magazine that "a New Yorker" could plunk down $100,000.00 on an "immediate annuity" and receive $591.00 monthly. Why does the location make a difference?
Apparently, I'm still too "young" for the annuity sellers to be interested in me? (60, later this month.)
I have chewed on the idea of a charitable gift annuity. And I see that a spouse could be included in the arrangement, so payments would continue after I'm gone. My spouse is much younger.
I went to the Episcopalian website and they explain it there, but there's no numbers or percentages offered. The minimum gift annuity, though, requires a minimum gift/contribution of $5,000.00. I DO see THAT. But it seems to me that a $5,000.00 figure would generate mere "pin money" for postage stamps or a couple of cans of coffee per month (?) On the Presbyterian site, at 65 years old, a 4.7% return is offered. But I bet the monthly checks are smaller when a spouse gets added into the mix, eh?
I'm not going to be throwing $100,000.00 at an annuity. But guaranteed income to supplement my small pension and SS (in two more years) sounds good. I realize that after death, the denomination keeps and uses whatever is left. And the giver can specify exactly how the $$$ will be used. I'm a Presby, but not a happy one. I'd rather give the $$$ to the Episcopalians--- but I'm not limiting myself to these two choices. I'm willing to look at something else.
Does the charitable aspect in effect reduce what is paid to the one who buys the annuity? A fixed rate may be more prudent, too, as opposed to a Variable Annuity--- yes? ....My pension gives me annual raises from time to time. Just this month, a 4.6% increase kicked-in. It's still small, and will ever be so. Last year, it was just 2%.
I'd like to find a way to generate just enough every month to cover the natural gas bill. That's about $230.00 now. On their budget plan. At the same time, I want to avoid tapping the portfolio for income. Wife is still working, but will be cutting back and switching to something else soon that doesn't leave her feeling physically half-dead at the end of every day. She's 41. I'd just as soon leave what I've got to loved ones, in the end.
Anyone willing to fill me in on whether the charitable gift annuity is a good deal? Or whether a fixed rate is the way to go? What does "immediate annuity" mean? Is such a thing not done, customarily, until you're 65? Thanks.
EDITED to add: I just caught-up with Saturday's WSJ and found a thing in there. "If pension and SS will cover your monthly expenses in general, you probably don't need an annuity." I see where that's coming from. Or if you're so well off that you'll just never run out of money, an annuity would not serve much of a purpose. .....
But at 65, Medicare monthly premiums kick-in. What's a mother to DO???
Comments
FWIW, Vanguard and Fidelity both offer annuities, and I strongly recommend that you speak with both of them. Several months ago I spoke with Fidelity about their immediate annuities, and learned a lot from the extensive conversation. Annuities can be complex, so the more you learn about them, the better.
Let's start with just a few of the things you mentioned. First, $591 monthly is $7092/year, which is 7.09% on the $100,000. That sounds surprisingly high for guaranteed lifetime payments. Compare that to any other fixed income alternative out there. I'd want to discuss that with a few annuity providers as I'm a bit skeptical of it. It's a great deal. Keep in mind that this is guaranteed by the insurance company, so you want to make sure they are very financially strong. If they go under, all you have is your state's insurance board and whatever coverage they may or may not have.
You asked what an immediate annuity means: You pay the premium, which in the above example was $100,000; then you receive the $591 immediately. Contrast this to a delayed annuity, where you can pay now and start receiving the payments in the future, such as several years from now. Or you can pay monthly until you put in the amount you want, and start receiving payments at the pre-arranged date.
So the most common type has a fancy name of Single Premium, Immediate Annuity. In the above case, the $100,000 is the single premium, which in this case you pay outright, up front.....then you get the immediate payments for life.
There's a lot of options that you can get. For example, a few annuities have a cost of living adjustment built in, but these of course cost more. And most don't have the cost of living adjustment. Some cease all payments upon your death; others pay your wife or beneficiaries until the amount you paid into the annuity equals the amount you plus your beneficiaries have received. It's like a car: you can get one with automatic transmission vs. standard; etc etc....all sorts of "options" on the annuity, although the word options is not a good one.
Variable annuity programs have similar options to mutual fund programs. From your post, I gather you are looking for a fixed annuity, which is similar to a bond, where you get a guaranteed fixed amount each month for life. That is the product that would accomplish your goal of paying for some utilities each month, for example equaling $230/month you mentioned.
Note that you don't have to put down $100K. It can be almost any amount. BTW, don't go for a "fixed index" annuity. Stay with a plain vanilla immediate annuity for the purposes you described.
There's more issues to discuss, but let's do that in another post. Crash, any comments, questions on this? You brought up a lot of issues, and it's a complex subject.
Would I be better off simply loading-up on income-producing equity and bond funds? That would negate the need to take a chunk out of my meager portfolio to buy the annuity. Trouble is, rates are so low, and meaningful pay-outs would necessitate putting vast sums into those mutual funds to get to a meaningful monthly income stream. I've barely got 10 or 11 percent in bond funds right now. Housing is covered. And here in MA, med. ins. is an individual mandate. Has been, going back to 2006. We'll soon have to go back and rely on the beautiful, wonderful, splendid, sweet-smelling, delicious State Exchange again for coverage. It was rather affordable, the first time around, but it's a ridiculous non-system. Quite dysfunctional. Utterly FUBAR. But I'll surely need coverage, and not just to avoid the tax penalty.
By the way, wife's health is just plain excellent. She needs no medication, has had check-ups along the way and can generally not have to worry about anything like bad health for many years to come. The job she'll be switching to shortly will be less physically demanding and will pay just a bit better than the current job she's in. But after I'm gone, I bet she spends about 5 minutes more here and then will move back to The Philippines--- where even our small portfolio ($128,000 right now) can let her live like a queen, as long as she doesn't get foolish with it. She is a USA citizen now, though.
OK, enough for now. Thanks for your patience. I am all too aware that these annuities come in many flavors, and the seller can fleece you, if you let him/her. Like buying a damn car! No thank you: I don't need the push-button gizmo which will order me a pizza next Wednesday for lunch in Nairobi. Jesus! Thanks a million for your willingness to engage further about this...
The above article (you have to scroll down a bit for the actual article) is one of the best cases I've seen for staying clear of immediate annuities or any annuity for that matter. I've been thinking about putting a portion (20 to 25%) of my IRA in an immediate annuity when I turn 70 and 1/2 in three years. At that age now you can get 7% to 8% from some of the more reputable companies such as NY Life and Northwestern Mutual. Hopefully more if the long awaited rise in rates ever materializes. I think health is an important consideration in purchasing an annuity - you better be in great shape and plan to live to a ripe old age. The only purpose I can see for an annuity is peace of mind from a consistent income stream in retirement to cover all expenses. Hopefully, I will get over my present fixation with an immediate annuity as I don't believe in the scheme of things they are worth it. Then again, if we ever get into a long term world of very low single digit returns in equity and bond land..........
1-Cash invested in USSBX or similar
2-UUSTX (or your favorite Ultra ST Corporate Bond) to cover expenses equal to 6 years.
3-VWINX (or your favorite conservative allocation fund) that will disperse new monies into Cash position for future expenses (indexed for 3% inflation)
4-PRWCX (or your favorite Moderate Allocation fund) for long term growth (5 years or more) of your remaining portfolio.
This portfolio would start with:
-$10K Cash equivalent (something like USSBX) for moments of opportunity.
- $18K in UUSTX based on your stated needs for expenses to cover first 6 years
-$25K in VWINX with a historic probability of at least 5% years.
-$47K in PRWCX for long term growth probability of at least (8%/yr long term).
With your initial investment of $100K and then drawing expenses in the fashion you described above I put together a quick spread sheet:
“That would negate the need to take a chunk out of my meager portfolio to buy the annuity” : If you can pay your monthly expenses from your SS, pension and your portfolio, it definitely would negate the need to buy an annuity.
“I just caught-up with Saturday's WSJ and found a thing in there. "If pension and SS will cover your monthly expenses in general, you probably don't need an annuity."” : That’s true. If you’ve got your monthly expenses covered, you don’t need an annuity.
Think of a fixed annuity as a form of financial longevity insurance. You are guaranteed a fixed amount of dollars per month for the rest of your life. You can guarantee that a certain amount of your expenses get covered, a “floor level” if you will. For that financial longevity insurance, you have to pay. There’s certain disadvantages, and certain advantages. One big disadvantage of an annuity is you give up that money for life, the “premium” part of the single premium, fixed income annuity, the $100,000 in your first example. On the other hand, some people will take that money and invest it instead, and some will do poorly with the investment, and lose money. In bear markets for stocks and bonds, many people with annuities will be very happy they have the annuity. In bull markets for stocks and bonds, many people will have wished they invested the money instead.
“Trouble is, rates are so low, and meaningful pay-outs would necessitate putting vast sums into those mutual funds to get to a meaningful monthly income stream” : That’s the issue. Again, I’m surprised that in the example you gave, the monthly payment was the equivalent to a bond paying 7.09% for life. That’s a very high rate in today’s interest rate environment, and again, I’m a bit skeptical of it and would look into it.
That’s why I recommended you call Vanguard and Fidelity. They represent several different life insurance companies, and are much more likely to give you the straight talk. I would avoid a private insurance salesman who is going to collect a commission and has potential conflicts of interest. Vanguard especially tends to have very low cost products, and I was very pleased with the conversation I had with Fidelity about annuities.
“Apparently, I'm still too "young" for the annuity sellers to be interested in me?” : You can purchase an annuity at your age right now, to either start receiving payments right now [immediate annuity] or at a later date, deferred. You get a better “deal” the longer you wait, meaning your monthly payment is more the older you are when you get an annuity. Also, you get higher monthly payments for life when interest rates are higher. If rates rise, it would have been better to wait. Of course that’s an IF. If you have your interest rate “crystal ball” handy, that will help in “timing” when to get an annuity. Note: You can also "dollar cost average" into several annuities, so you don't have to "market time" the interest rate situation.
Speaking of annuity, the best annuity of all is SS, because it is indexed to inflation. Your full SS retirement age is age 66 [based on the age you stated]. You can take SS early, as early as age 62, but you get a greatly reduced monthly amount for life. The monthly amount you get goes up each year you delay, capping out at age 70. I have all the details on this if you are interested, e.g., exactly how much it goes up if you wait till age 63, 64, 65, 66 etc, each year till age 70. But you mentioned health issues, and many people with health issues want to take SS as early as possible. This whole affair is complex……when to take SS, whether or not to get an annuity, etc…..One option is to use your portfolio to pay retirement expenses for the express purpose of delaying SS a bit, to get that increased lifetime SS payout, indexed to inflation. Or instead of giving that money to an insurance company to buy the annuity, use that money to delay taking SS. You are still “buying an annuity”, but this time you are buying it from SS itself, by delaying the age you take SS.
I have comments on Junkster’s and bee’s posts, but will save that for another post.
Cheers!
PRWCX is closed to new money as of June 30.
However, a nice list and thoughts about this.
Thank you.
Catch
bee, you are an angel. All that work just for me. That's damn nice of you! Thank you. I will tuck that away for future reference. As they say: I "can't get there from HERE." Just setting-up that much simpler portfolio will require big changes in what I'm currently holding. And there are a number of further expenses, of course. Any of you who own a house know about that. Come to think of it, our damnable property tax is due, 01 Aug.
You are extremely thorough and deeply thoughtful in your reply. That's easy to understand, a great explanation. Yes, it will be necessary for me to take SS early. My retirement hit me in an untimely way, three years ago. The extra income of SS will be a relief, a joy to receive. My wife and I are not big spenders. You know what we spend on? Education and medical expenses for nieces and nephews far away. Wife's salary is the lion's share of current income. When my SS kicks-in, it'll be right very near $1,000.00/month. I've already looked at that, online, directly at the SS website. No, that's not a very high figure, because all along, I was being paid a low-ball yearly figure, but with cash-less perks for all those years..... Pension is a bit more than $600.00/month. And COLAS are routine. Some years, the rise in the pension is more generous than in others.
Wife's earnings will be a bit under $30,000.00/year. That's a gross figure. ......I never stopped before to do the very simple math! We will be "sitting pretty" once we get past these next two years. Sorry for taking your time, just "thinking out loud" here. We will pay off the car early, we'll not be at all so squeezed as we are today.
I can surely afford to just keep my portfolio at let it grow, long-term. If I don't spend it, I'll be happy that it will eventually be split among relatives. We DO have a will. And medical power of attorney. ......And I guess it's truthfully NOT a priority, the charitable-giving aspect to this whole business.
I sincerely thank you all for your thoughts and care!
One side benefit of taking SS early is that your personal investments can stay invested rather than being taken out for income. Of course that is not a sure thing but it is one train of thought.
A lot of good advice posted here.
I hope this helps you out .
Derf
The $230/month gas bill is the result of depleted supply and high demand through the past filthy, awful, putrid, worthless, dreadful, stinky, winter of 2013-2014. It cost the Columbia Gas of MA scumbags much more to provide it, so we, the customers, take it in the shorts. Prior to the extreme, God-forsaken, totally ridiculous winter last year, the 12-month budget plan payment was $175.00/month.
Good investing, Derf
This news is less than a day old, still, so I will brag once more about it. Here you go:
Caught my biggest freshwater fish ever, today. Had to be all of 18 inches long, at least 2 pounds. A channel catfish. I was just using night crawlers for bait, at a small urban pond in northern Connecticut. The State stocks it with cats. ...Fishing from the shore where bushes are planted, nice and neat and clear. Lots of room for casting, but it is raised above the water level by a concrete rim around the pond. So I was standing 3 or 4 feet above water level. I wasn't going to let a big one snap my line again and get away. I literally layed down my rod on the ground. I pulled-in the fish deliberately not trying to raise him up using the line. I took off my hat and lay down on my belly and picked him up by his mouth. Deliciously BIG. Turned a lousy day into a good one.
http://www.in-fisherman.com/files/2013/07/Catfish.jpg
Since you opened the gate to fishing, congrats on the great catch. Two weeks ago decided to try fly fishing in Taos, and spent a whole day in hip waders standing in a stream nevercatching a darned thing. I decided this is not my idea of fun, like regular fishing better. Grew up on Long Island fishing offthe endof my street catching snappers all day. Thats my idea of a good day of fishing:)