OT: Retirement accounts, annuity vs. dynamic income fund

[Bob Ross]

The wife and I have been talking to several financial advisors about reallocating our assets, and I feel like we've gotten too deep into the weeds and the minutiae for me to think clearly about the pros/cons of two conflicting (?) strategies. So I wanted to step back and take a crowd-sourcing approach to the big picture generality. (Note, I know nothing about investing.)

Scenario #1: Put $X into an annuity fund, which (I believe) freezes the amount of the initial investment but guarantees an annual income of $N in perpetuity.

Scenario #2: Put $X into an dynamic income fund, which grows or shrinks as per the market but still promises (but does not "guarantee") an annual dividend of $N in perpetuity.

For the sake of argument, the values of X and N are identical in both scenarios.

Can anyone see any glaring reasons to choose one strategy over the other?

Did I mention I know nothing about investing?

In case this is germane: We have no interest in having anything left over for legacy/heirs upon our demise. We want our check to the undertaker to bounce.

Thanks.

[echappist]

Originally Posted by Bob Ross

The wife and I have been talking to several financial advisors about reallocating our assets, and I feel like we've gotten too deep into the weeds and the minutiae for me to think clearly about the pros/cons of two conflicting (?) strategies. So I wanted to step back and take a crowd-sourcing approach to the big picture generality. (Plus, I know nothing about investing.)

Scenario #1: Put $X into an annuity fund, which (I believe) freezes the amount of the initial investment but guarantees an annual income of $N in perpetuity.

Scenario #2: Put $X into an dynamic income fund, which grows or shrinks as per the market but still promises (but does not "guarantee") an annual dividend of $N in perpetuity.

For the sake of argument, the values of X and N are identical in both scenarios.

Can anyone see any glaring reasons to choose one strategy over the other?

Did I mention I know nothing about investing?

In case this is germane: We have no interest in having anything left over for legacy/heirs upon our demise. We want our check to the undertaker to bounce.

Thanks.

You should head over to Bogleheads for a question like this.

But in general, the purpose of scenario 1 is a guaranteed fixed* payment, with additional options such as survivor benefits and inflation protection, in the case of the latter, fixed then means fixed when taking into account inflation. Some of these options will have reduced annual payouts, of course. These generally fall into the category of SPIA (single premium, immediate annuity) and are often the only type of annuities recommended.

With that in mind, scenario 2 makes little sense. It's essentially what you get by staying in the market (fluctuation when withdrawing a set percentage of an asset), and there really isn't any hedging for when market goes down. The hedging, after all, is the reason why one pays for a SPIA in the first place. For instance, 3-4% annual draw-down of a nest egg is generally considered "safe" and able to last for 20 years, and when simulations are run on draw-down rates are affected by returns on asset, the only times when a 3-4% draw-down prematurely depletes a nest egg is a series of negative returns near the start of retirement (say 3-4 consecutive years of -6% returns). Such a premature draw-down is a low probability event (~4%), but nonetheless one that is exceedingly difficult to recover from. That's the reason for paying for the hedge. If you are getting a product that doesn't truly provide this hedge, and you have to pay for it, it doesn't make a lot of sense.

IIRC, there's a version of scenario 2 that comes with "guaranteed annual premium", but those also comes with high fees, which makes your financial advisor (the salesperson who makes a commission on the product) very happy, at the expense of yourself or your estate.

[saab2000]

Read and learn to avoid overpaying for advice. There’s no shortage of legitimately good material online and on YouTube. There are also bad ones but the good ones will rise to the top. They’re the ones that direct you to so-called “Fee Only” advisers, low cost index funds, getting their fiduciary position in writing, etc.

I believe annuities will provide a guaranteed income but this can ultimately be a bad deal in terms of costs. Do your homework on fees and expenses, etc. A seemingly inconsequential fee can have enormous effects when compounded over a long time.

[benb]

Anybody who sells annuities is super bullish about them for all age groups and income/asset levels. (See class action lawsuits)

Fee based advisors are pretty often "No f'n way".

Depends on your age, if you're already retired, etc..

It seems very rare for anyone who is still working to ever have a good fee based advisor recommend annuities.

Really it sounds like the main case they can really work is post retirement when you have a certain level of assets and the annuity can shield against taxes a certain way or hedge risk a certain way. Narrow cases.

They are so often sold attached to life insurance to complicate things.

[NHAero]

Another knows nothing advisor here

FWIW - if you are considering something like an annuity, then look into the financial strength of the offering entity. I looked for a while at the options MIT has for gift annuities. Here the money is a gift to MIT, you get annual payments, and also some tax deductions. Attached is a current scenario if I gave $100K and the payout was good for both me (70) and my wife (64). MIT also has the option of allocating a gift in such a way that there are no guaranteed returns but the return you receive is whatever MIT's endowment portfolio is returning. My nephew used to work for their investing group, and they at the time were making double what Harvard and Stanford were making

If MIT goes belly up my guess is that many other things are wrong in the world. The idea of giving funds to an insurance company for an annuity and wondering if they'll go bankrupt doesn't appeal to me, especially if they are small enough for the Feds to let them fail.

The route I've gone, since I know I'm an idiot investor, is primarily in longer duration Treasuries. The math says that if inflation doesn't hyper accelerate (and SS doesn't go away) I'm OK. And of course when the Treasuries come due it's your money, the annuity $ are gone forever.

Here's MIT's Gift Calculator.

[NYCfixie]

1. Educate yourself before you trust anyone else with your money.
2. Annuities are the devil. They only make money for the person selling them to you. Yes, in very niche circumstances an Annuity may make sense for a person or couple but rarely does that happen.
3. Don't take financial advice form a financial advisor who is not a fiduciary and even then be weary of what they tell you and try to sell you.
4. Don't take financial advice from people on internet forums...
5. See rules 1-4


I have never used an advisor.
I have never purchased an annuity.
I read my first book about investing more than 30 years ago.


From 2003-2023 (percentages are annual returns):
- My parents advisor at Citibank barely made them 5% and sold them annuities
- My older brother's Wells Fargo advisor made him 8% (almost as good as the S&P 500 index before fees so worse than the index)
- My younger brother's Fidelity Advisor made him 9% (about the same as the S&P 500 index but with more risk)
- My wife and I made 12% without any "professional" advisors.

The only "advice" we ever received was one time from my wife's aunt who was an independent personal wealth manager for high net worth clients, she said: "You will never beat the market because you do not have access to the information I do so put your money in Vanguard Index Funds [retirement and taxable investment accounts] and never sell until you retire. Do not trade. Just buy and keep buying until you retire and need the money".

[NYCfixie]

Start with this. I'll add more books later.

The Index Card: Why Personal Finance Doesn't Have to Be Complicated

[benb]

Originally Posted by NHAero

Another knows nothing advisor here

FWIW - if you are considering something like an annuity, then look into the financial strength of the offering entity. I looked for a while at the options MIT has for gift annuities. Here the money is a gift to MIT, you get annual payments, and also some tax deductions. Attached is a current scenario if I gave $100K and the payout was good for both me (70) and my wife (64). MIT also has the option of allocating a gift in such a way that there are no guaranteed returns but the return you receive is whatever MIT's endowment portfolio is returning. My nephew used to work for their investing group, and they at the time were making double what Harvard and Stanford were making

If MIT goes belly up my guess is that many other things are wrong in the world. The idea of giving funds to an insurance company for an annuity and wondering if they'll go bankrupt doesn't appeal to me, especially if they are small enough for the Feds to let them fail.

The route I've gone, since I know I'm an idiot investor, is primarily in longer duration Treasuries. The math says that if inflation doesn't hyper accelerate (and SS doesn't go away) I'm OK. And of course when the Treasuries come due it's your money, the annuity $ are gone forever.

Here's MIT's Gift Calculator.

That's a really interesting option, I'm curious how common that is as an option. I am kind of thinking if I'm ever in the position to give a 6-figure sum to my alma mater though it would be at the point where the annuity income wouldn't really matter. Or I would wait and the gift would be in the will/estate. And it does seem like this would be pointless until you can throw at least 6 figures at it.

But at least you are doing it with what most would think is a good cause.

[einreb]

Originally Posted by Bob Ross

The wife and I have been talking to several financial advisors about reallocating our assets, and I feel like we've gotten too deep into the weeds and the minutiae for me to think clearly about the pros/cons of two conflicting (?) strategies. So I wanted to step back and take a crowd-sourcing approach to the big picture generality. (Note, I know nothing about investing.)

I suspect you are going to get differing/good/well meaning advice in this thread and it will hit 4-5 pages.

Good instinct to step back and educate yourself before making *any* moves. The Bogleheads forum is loaded with resources. Lots of different motivation for financial advisors that may not actually align with your best interests. It would be good to understand the difference between % based and fee based advisors.

#1 I am of the opinion that the big thing to figure out for retirement planning is to have a general idea of your retirement income needs as well as your income streams (social security, IRA's, 401ks, taxable accounts) and then figure out how best to fund that income need in a fee and tax efficient method. That gets a little complex in that it changes over time with SS kicking in at different rates depending on when you take it, required minimum distributions for tax deferred accounts, etc.

Originally Posted by Bob Ross

Scenario #1: Put $X into an annuity fund, which (I believe) freezes the amount of the initial investment but guarantees an annual income of $N in perpetuity.

Scenario #2: Put $X into an dynamic income fund, which grows or shrinks as per the market but still promises (but does not "guarantee") an annual dividend of $N in perpetuity.

If these are the only two options you are being presented, it may be good to revisit my comment #1 above and figure out the big picture and how any investment move should fit within that big picture. (i.e. I would be very suspicious of the fact that these are the only two options being presented to you)

Originally Posted by Bob Ross

For the sake of argument, the values of X and N are identical in both scenarios.

Can anyone see any glaring reasons to choose one strategy over the other?

Annuities are complex and arguably costly (to the investor) instruments that (IMO) have very limited applications. The odds of you actually being a good fit for Scenario #1 are very low (IMO). Then the question is why exactly you are being put into #2 and if that is actually a good move.

Originally Posted by Bob Ross

In case this is germane: We have no interest in having anything left over for legacy/heirs upon our demise. We want our check to the undertaker to bounce.

To do this planning you need to have a reasonable understanding of all expenses and investments and then plug into a system that will take historical data to forecast the chances of running out of money and let you figure out what sort of burn rate and risk you feel is appropriate.

[Flinch]

I am not a financial adviser, but have conversed with many, done my research, and self manage my funds. The prime decision making process rules when considering annuities or similar products is this flowchart:

1. If offered annuities, soak your head in boiling water first, then run fast!
2. If in any doubt, repeat rule #1 ten times, then proceed to rule #2.

Annuities =

[JedB]

Originally Posted by NYCfixie

1. Educate yourself before you trust anyone else with your money.
2. Annuities are the devil. They only make money for the person selling them to you. Yes, in very niche circumstances an Annuity may make sense for a person or couple but rarely does that happen.
3. Don't take financial advice form a financial advisor who is not a fiduciary and even then be weary of what they tell you and try to sell you.
4. Don't take financial advice from people on internet forums...
5. See rules 1-4


I have never used an advisor.
I have never purchased an annuity.
I read my first book about investing more than 30 years ago.


From 2003-2023 (percentages are annual returns):
- My parents advisor at Citibank barely made them 5% and sold them annuities
- My older brother's Wells Fargo advisor made him 8% (almost as good as the S&P 500 index before fees so worse than the index)
- My younger brother's Fidelity Advisor made him 9% (about the same as the S&P 500 index but with more risk)
- My wife and I made 12% without any "professional" advisors.

The only "advice" we ever received was one time from my wife's aunt who was an independent personal wealth manager for high net worth clients, she said: "You will never beat the market because you do not have access to the information I do so put your money in Vanguard Index Funds [retirement and taxable investment accounts] and never sell until you retire. Do not trade. Just buy and keep buying until you retire and need the money".

I have found your method to also be true for me.
"The Big Investment Lie" is a good read for reasons to avoid managed assets.

11.18% since 2018 by being in the below index funds:
Fidelity Equity Income FEQIX
Fidelity Emerging Markets IDX FPADX
Fidelity Puritan FPURX
Fidelity International Index FSPSX
Fidelity® 500 Index Fund FXAIX - 2
American Funds EuroPacific Growth Fund® Class R-6 RERGX
Vanguard Equity-Income Fund Admiral Shares VEIRX
Fidelity Freedom Index 2035 Y FidFrdm
SP Ext. Mkt IDX Class F S&P
SP 500 Indix PL Cass F S&P
SCHWAB IDX RET 2035 IDX RET 2035
Fidelity Freedom® 2035 Fund - CP B FidFrdm

There's some risk overlap and I need to consolidate several former 401Ks into an IRA that I can then direct.

No annuities, ever.

[biker72]

Originally Posted by Flinch

I am not a financial adviser, but have conversed with many, done my research, and self manage my funds. The prime decision making process rules when considering annuities or similar products is this flowchart:

1. If offered annuities, soak your head in boiling water first, then run fast!
2. If in any doubt, repeat rule #1 ten times, then proceed to rule #2.

Annuities =

Funny but true. The people that get the most income from annuities are the ones that sell them.

I've done well with index ETF's. Vanguard & Schwab.

[jds108]

Originally Posted by NHAero

Another knows nothing advisor here

FWIW - if you are considering something like an annuity, then look into the financial strength of the offering entity. I looked for a while at the options MIT has for gift annuities. Here the money is a gift to MIT, you get annual payments, and also some tax deductions. Attached is a current scenario if I gave $100K and the payout was good for both me (70) and my wife (64). MIT also has the option of allocating a gift in such a way that there are no guaranteed returns but the return you receive is whatever MIT's endowment portfolio is returning. My nephew used to work for their investing group, and they at the time were making double what Harvard and Stanford were making

Thanks, I had no idea anything like this existed.

[Ken Robb]

How old are you and your wife? Any one still working?

[Mr. Pink]

Originally Posted by NYCfixie

Start with this. I'll add more books later.

The Index Card: Why Personal Finance Doesn't Have to Be Complicated

Look, even Buffet has said more than once that low cost index funds, both stock and bond, is the way to go. The 60-40 rule has worked for decades, until very recently, but that time period included a very unusual interest rate hike from zero to 6-8 percent, which massacred bond value. But, they'll be back, and now you can actually get 5% for a CD with the full backing oF The FDIC, which is pretty damn good for a "retirement portfolio". Don't get greedy when you're old, you're in the no second chance zone.
Don't forget quality real estate, too, as a place to park money, especially if you want to "gift" your kids pre casket. It's a marvelous money laundering vehicle with a lot of tax breaks for the middle class.

Go to Vanguard, buy some low cast index funds (they are all low cost there), set it, forget it. Avoid fees. Nobody can predict the future. Even most well paid active fund managers can't beat the market beyond the short term.
DO NOT SELL LOW. It's the biggest mistake most people make, besides not saving at all. Patience.