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Annuity - decision process & why ?

Bogleheads • View forum - Investing - Help with Personal Investments -
Some friends have annuities - I never even considered them...

SO - now I'm wondering, did I miss out - should I re-think getting one - and WHY ?

Where does one even start to think about yes, no, maybe, why, which -

Here are some comments from my friends.....

when we discussed - Long Term Care, Annuity, Life Insurance

For this thread... I'm just focusing on the ANNUITY aspect


I have 3 Variable Annuities, started between 7/01 and 1/06. They all featured the ability to invest in equity funds with a minimum guaranteed growth rate of 5 – 7%. My strategy was to choose the most aggressive funds available given the growth guarantee. The oldest of these only offered annuity options for payout and the growth was guaranteed for 10 years. This has been annuitized since 2011 with the choice of 10 year certain payout (in the event of an early demise) on a single life (mine). This had a CAGR (Compounded Annual Growth Rate) of just under 7.5%, after fees. The annuity payments are about 50% exposed to Income Tax.

The others afford a choice of taking a Lifetime payout of 5 – 6% without annuitizing (which is also a choice). This has the advantage of maintaining a Death Benefit and preserves the ability to annuitize at a future date. These have had a post-fees CAGR of just under 6% and 5%.

Nobody “needs” an annuity, it is just a tool like any other. Currently in a low interest rate environment the payout amounts are relatively low. The tradeoff is a guaranteed, fixed payment amount (guaranteed by the financial strength of the insurance company and state reserve requirements) with some tax advantages but with losing control (and inheritance) of the premium amount expended (ignoring the unacceptable surrender fees).

Review how you would fare under the self-funding plan given another 35- 50% market plunge with a 5 – 15 year recovery period. There are Monte Carlo simulation models to assist with determining the probability of not outliving your assets.

The best advice is to develop a detailed financial model so that you can play out various scenarios and see how you feel. It is advisable to incorporate Social Security payments and Income Taxes with a 10 year planning horizon (enough to encompass IRA/401(k) RMD rules). And, of course, you need a working retirement budget to know how much annual net cash flow is enough. Let me know if you would like an excel spreadsheet to use as a starting point. The Excel Goal Seek function is very helpful in planning to use up income brackets when planning IRA Roth conversions.


I have one immediate pay @5.5% yearly for my life.

I have one future dated 6 years from 5.5 years ago so this fall.

This is also paid as a lump sum - but until you start drawing money out, it Increases @7.5 percent per year.

The payout is @6% yearly for life

Sue has one future dated to 2017 - paid as a lump sum. Accumulates @8% yearly until she starts with drawing - then 6%/yearly for life.

One negative - these were funded from IRAs.

Because of that Sue and I can not jointly hold the annuity.

I did not want the pressure of self funding -


We just opened 2 QLACs (Qualified Longevity Annuity Contract) to allow us to move IRA money to deferred annuities which will commence payments at age 85 (or any earlier date we choose under FL law). The motivation for this is to reduce the amount of our IRA RMD (Required Minimum Distributions) in an effort to control our tax bracket (despite the unknowns of possible tax reform) and avoid additional Medicare premiums (admittedly a High Class Problem). Effectively we harvested the stock gains of this year to create future cash flow and control near term taxes.


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