Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
FYI: Unless you can get a guaranteed annual return of 8% on your retirement savings, employing a Social Security “bridge” with 401(k) and other savings until age 70 is the right move for almost all Americans who can afford to forgo the income.
About a third is in (relatively) plain English. It discusses why people might want to use annuities and why they might not (both rational and irrational reasons). This includes the newer advanced life deferred annuities ("longevity insurance"). A good summary of the pros and cons.
The paper compares four options: the baseline (drawing SS at age 65); (1) buying an immediate annuity at age 65 (with 20% or 40% of retirement assets); (2) spending an amount equal to SS's PIA (full retirement benefit) out of 20% or 40% of retirement assets until age 70 or assets depleted, then taking SS; and (3) buying longevity insurance with 20% of retirement assets.
Generally, non-annuitized assets are drawn down according to RMDs. But if one buys longevity insurance, this doesn't make sense, because at age 85 another income stream kicks in. So the researchers looked at two cases: (a) drawing down according to RMD (i.e. underspending), and (b) spending everything between ages 65 and 85.
A discussion of the results starts on p. 26 (pdf p. 27). Table 3 summarizes the results. The lower the number, the less you have to spend to get the same result as the baseline. The two cases that came out best were: using 40% of assets to fund income until age 70 and then drawing SS; and buying longevity insurance (spending down everything by age 85).
A concern with the latter is that you don't have reserves for an emergency around age 85. The next three tables in the results section show how good the strategies are if one assumes random "shocks" (needs for sums of cass). The wealthier you are, the more you can survive shocks even after spending money on annuities (because you're getting higher income from the annuities).
Perhaps it would only have made a marginal difference, but they might have also considered buying a temporary life annuity to serve as the bridge to SS. That's an annuity that would pay out an income stream from, say, age 65 to age 70 or until death, whichever came first. Since you're betting that you'll live to collect SS at age 70, a temporary life annuity just increases the bet a little. And because you forfeit some money if you don't make it to 70, that temporary annuity costs less than "self-funding" the bridge.
"For both immediate and deferred annuities, the quotes for men and women are averaged to arrive at unisex pricing. This step is necessary since employer-sponsored plans are legally prohibited from discriminating on gender with respect to payouts."
Likewise, SS is unisex. Commercial policies generally are not.
@ msf I have done a rudimentary scan of the paper - I contend most people don't like dealing with insurance companies! I have problems finding the true cost of the insurance. Especially as I see it every insurance company is too costly. They have the framework set up to favor growing their costs rather than provide an affordable service. The whole health care industry is based on hidden administrative costs. There needs to be an audit system set up to perform audits (like the SEC) of all insurance companies use of providers funds. This would be done to reveal the true costs of - say an annuity or the pure costs to administer a Medicare program or even automobile insurance.
I gather you've been watching the esurance commercials ("Let's be honest. Nobody likes dealing with insurance.") See video below.
That aside, IMHO people focus too much on cost as opposed to value received, but only from some products and services. Do people complain about how little Apple products cost to manufacture compared with the price they're paying? To keep it in the financial industry, does it bother you that banks pay you so much less in interest than they make by lending your money out? Or do you just shop for higher APYs?
Rational life cycle consumers with no interest in leaving a bequest would always choose to annuitize 100 percent of their wealth. After all, they face a choice between a traditional investment with a market return and an annuity with a market return plus a mortality credit.
You appear to be saying that because the insurance company is skimming some unknown ("true cost") amount, you're getting less than "a market return" with the annuity. Fair enough, but because of mortality credits, one still comes out better than making "a traditional investment with a market return." The paper uses the net value of immediate annuities, so its results do incorporate their underlying costs.
Health insurance companies are required to spend at least 80% (85% in the case of large employer plans) on actual health care (Medical Loss Ratio). The amount they are allowed to spend on administrative costs and profits combined is limited to 20%. These figures are already audited, and I've received checks back from my insurer because it spent less than 80% for a couple of years.
@msf: Does this apply to self insured companies, or in my case unions that are self insured? "Health insurance companies are required to spend at least 80% (85% in the case of large employer plans) on actual health care (Medical Loss Ratio." thanks, Derf
Lots of discussion about waiting till 70 to take social security. I was going to wait until 70, then 2 friends died at 67 without ever drawing from social security. I started taking it at my full retirement age; haven't looked back; enjoy the money every month; waiting till 70 sounds enticing if you live that long; government is betting you won't.
Section 2718 of the Public Health Service Act, as added by the ACA, establishes an MLR for all health insurers offering individual or group health insurance coverage. This provision applies to grandfathered plans but not self-insured plans, and states can opt to set a higher minimum MLR.
Under Section 2718, insurers must spend a certain percentage of their premium revenue—80 percent in the individual and small group markets and 85 percent in the large group market—on health care claims or health care quality improvement expenses. The remainder of premium revenue can go towards other expenses, such as administrative expenses, profit, and marketing. Insurers must report this information to the Department of Health and Human Services each year, and the data is made publicly available.
If insurers fail to meet an MLR of 80 or 85 percent (meaning they spend too little of their premium revenue on health care claims or quality improvement), insurers must rebate the difference to their enrollees.
...then 2 friends died at 67 without ever drawing from social security.
@Patrick1, were your 2 friends married? Because if they were their spouses will likely benefit from their waiting. As providers, still works in their favor.
That said, I go back and forth on what I will do next year when I plan to pull back my hours to part time employment. I'll be 66 next year. I've been leaning towards starting SS to supplement the change in wage, but this post gives me more options to think about.
I find the study re annuities you linked of interest based on a quick read of findings / conclusions. Let’s set aside the issues of comparative advantage and individual circumstance / suitability. Those are highly individual and not too hard to sort out.
Where I get confused is the tax implications. Converting a Roth IRA to an annuity would seem a “non-starter” since you’d be surrendering the significant tax advantages a Roth offers and continues to offer over a lifetime. Perhaps the trade-off with a pre-tax IRA is more favorable? Is it relatively easy to continue that tax deferral until payouts are disbursed or would taxes need to be paid up front on the total sum withdrawn from the IRA (and used to purchase the annuity)?
Seems to me there was a temporary “window” in the tax code a few years ago allowing something like that. But suspect that today it probably isn’t available.
Sometimes things are simpler than they appear. Just own the annuity inside the Roth IRA. That preserves its Rothiness.
There is one instance in which annuity payments could be tax free: if you bought an annuity within a Roth IRA or Roth 401(k). In that case, you use after-tax money to buy your annuity and, because it's a Roth, the earnings will grow tax free, as opposed to just tax deferred the way they are in most other annuities.
You can do something similar with a traditional IRA. Taxes are due as the annuity pays out income. The annuity satisfies RMD requirements basically by definition. But what happens in the year you first annuitize if you're already subject to RMDs is less clear. Something for another post.
Comments
https://crr.bc.edu/working-papers/how-best-to-annuitize-defined-contribution-assets/
About a third is in (relatively) plain English. It discusses why people might want to use annuities and why they might not (both rational and irrational reasons). This includes the newer advanced life deferred annuities ("longevity insurance"). A good summary of the pros and cons.
The paper compares four options: the baseline (drawing SS at age 65); (1) buying an immediate annuity at age 65 (with 20% or 40% of retirement assets); (2) spending an amount equal to SS's PIA (full retirement benefit) out of 20% or 40% of retirement assets until age 70 or assets depleted, then taking SS; and (3) buying longevity insurance with 20% of retirement assets.
Generally, non-annuitized assets are drawn down according to RMDs. But if one buys longevity insurance, this doesn't make sense, because at age 85 another income stream kicks in. So the researchers looked at two cases: (a) drawing down according to RMD (i.e. underspending), and (b) spending everything between ages 65 and 85.
A discussion of the results starts on p. 26 (pdf p. 27). Table 3 summarizes the results. The lower the number, the less you have to spend to get the same result as the baseline. The two cases that came out best were: using 40% of assets to fund income until age 70 and then drawing SS; and buying longevity insurance (spending down everything by age 85).
A concern with the latter is that you don't have reserves for an emergency around age 85. The next three tables in the results section show how good the strategies are if one assumes random "shocks" (needs for sums of cass). The wealthier you are, the more you can survive shocks even after spending money on annuities (because you're getting higher income from the annuities).
Perhaps it would only have made a marginal difference, but they might have also considered buying a temporary life annuity to serve as the bridge to SS. That's an annuity that would pay out an income stream from, say, age 65 to age 70 or until death, whichever came first. Since you're betting that you'll live to collect SS at age 70, a temporary life annuity just increases the bet a little. And because you forfeit some money if you don't make it to 70, that temporary annuity costs less than "self-funding" the bridge.
Derf
P.S. I didn't read link.
"For both immediate and deferred annuities, the quotes for men and women are averaged to arrive at unisex pricing. This step is necessary since employer-sponsored plans are legally prohibited from discriminating on gender with respect to payouts."
Likewise, SS is unisex. Commercial policies generally are not.
I have done a rudimentary scan of the paper - I contend most people don't like dealing with insurance companies! I have problems finding the true cost of the insurance. Especially as I see it every insurance company is too costly. They have the framework set up to favor growing their costs rather than provide an affordable service. The whole health care industry is based on hidden administrative costs. There needs to be an audit system set up to perform audits (like the SEC) of all insurance companies use of providers funds. This would be done to reveal the true costs of - say an annuity or the pure costs to administer a Medicare program or even automobile insurance.
That aside, IMHO people focus too much on cost as opposed to value received, but only from some products and services. Do people complain about how little Apple products cost to manufacture compared with the price they're paying? To keep it in the financial industry, does it bother you that banks pay you so much less in interest than they make by lending your money out? Or do you just shop for higher APYs? You appear to be saying that because the insurance company is skimming some unknown ("true cost") amount, you're getting less than "a market return" with the annuity. Fair enough, but because of mortality credits, one still comes out better than making "a traditional investment with a market return." The paper uses the net value of immediate annuities, so its results do incorporate their underlying costs.
Health insurance companies are required to spend at least 80% (85% in the case of large employer plans) on actual health care (Medical Loss Ratio). The amount they are allowed to spend on administrative costs and profits combined is limited to 20%. These figures are already audited, and I've received checks back from my insurer because it spent less than 80% for a couple of years.
"Health insurance companies are required to spend at least 80% (85% in the case of large employer plans) on actual health care (Medical Loss Ratio."
thanks, Derf
That said, I go back and forth on what I will do next year when I plan to pull back my hours to part time employment. I'll be 66 next year. I've been leaning towards starting SS to supplement the change in wage, but this post gives me more options to think about.
Derf
I find the study re annuities you linked of interest based on a quick read of findings / conclusions. Let’s set aside the issues of comparative advantage and individual circumstance / suitability. Those are highly individual and not too hard to sort out.
Where I get confused is the tax implications. Converting a Roth IRA to an annuity would seem a “non-starter” since you’d be surrendering the significant tax advantages a Roth offers and continues to offer over a lifetime. Perhaps the trade-off with a pre-tax IRA is more favorable? Is it relatively easy to continue that tax deferral until payouts are disbursed or would taxes need to be paid up front on the total sum withdrawn from the IRA (and used to purchase the annuity)?
Seems to me there was a temporary “window” in the tax code a few years ago allowing something like that. But suspect that today it probably isn’t available.
You can do something similar with a traditional IRA. Taxes are due as the annuity pays out income. The annuity satisfies RMD requirements basically by definition. But what happens in the year you first annuitize if you're already subject to RMDs is less clear. Something for another post.
https://www.latimes.com/business/story/2019-12-10/retirement-crisis-six-charts