#16
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When I retire I’m going to have to decide how to receive my pension. The company gives you the option of taking a lump sum (LS), or monthly payments. However, I’ve calculated the % return I’d have to get on the LS to match the annuity payments, and it’s close to the average S&P annual return, and well above the zero-risk return.
Bottom line, in that case it sure looks like taking the annuity is the way to go. Plus, having a nearly 100% guaranteed monthly income (certainly more stable than the market as a whole) helps smooth things out and would give me more flexibility with my other investments. YMMV |
#17
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Youtube can be very educational but many are salesmen trying to up their views and possibly have you use their services but good useful info can still be gleaned.
Once I understood what the market and its options were, I chose a low cost index fund, a 5 percent money market fund and a Bitcoin etf all through Fidelity. Fidelity makes it simple and local...a walk-in office is 10 miles away, im not on hold for phone questions and when I do get through the customer service is great. |
#18
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Keep an eye on that one. There's no such thing as a "5 percent money market fund", just money market funds that happen to be returning 5% at the moment.
Money market funds invest in short-term vehicles that are benefitting enormously from the inverted yield curve and high interest rates. Those yields could dry up in short order if the situation changes. This wouldn't cause you to take a loss, but the rate of gains could drop significantly. (And it's not necessarily a bad idea to have some allocation in longer-term bonds, since a drop in rates would make reallocating to them after the fact more expensive.) |
#19
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#20
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This is the crux of the biscuit. They have myriad variables which are combined in a near infinite number of possible combinations. There are several terms which you should understand. You need to understand the positives and negatives of each type you are considering, and balance them against your intended use of the annuity. It's by no means simple.
I have one, and I went through a lot to decide if I actually needed or wanted an annuity, what types my best suited me, etc.
__________________
It's not an adventure until something goes wrong. - Yvon C. |
#21
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Your company does not need to make a "profit" on your pension payout.* A salesperson and the financial or insurance company both need to make a profit on selling an "Annuity Product" to a person/couple. If there is not profit motive, they would not do it. And annuities come in all shapes and sizes so not easily comparable without lots of knowledge and information. * And employee pension payout options are not always that simple. One needs to know if the annuity payouts are based on the employee's lifetime, the employee's spouse's lifetime, if others can be beneficiaries of the pension payout. What is the age of the retiree at retirement? Are the payout amounts fixed or variable? If variable what are they based on? What if the company can't meet its pension payout obligations (it happens)? What if the company goes bankrupt or closes (it happens)? Last edited by NYCfixie; 03-20-2024 at 03:44 PM. |
#22
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Another vote for spending time on Bogleheads https://www.bogleheads.org/wiki/Main_Page
Link above is their wiki page but also a lot of interesting discussions in the forums. The Boglehead philosophy is basically live frugally and invest in broad market, low fee index funds. I don’t necessarily subscribe to either of those but I’ve found tons of useful insights there for retirement planning. I hear “annuity”, I think “scam” first. I know that’s not nearly always the case but one has to have a solid understanding to invest wisely in those. Kind of like real estate. I think there are better options for the bulk of a nest egg. |
#23
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1) Agreed, there are lots of details that need to be taken into account.
2) Regarding the statement I quoted above, the math comparing the NPV of future payments (annuity or pension) to the current cost or value of the stream of payments is fundamentally the same. Anyone faced with the decision of current cost vs future benefits needs to make that calculation. It will help show if an annuity is a good or a bad deal. |
#24
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Yes, but...That is my point, an "Annuity Product" has profit built-in for the seller so it is already a bad investment because some of the future earnings/profit goes to the seller (and not all to the Annuitant/Buyer of the Annuity) in addition to the upfront sales commission. With a pension, it is technically all the employee's money so the choice is: do I want all my money now because I can beat what the pension "annuity payments" will give me over time if I invest it myself or do I want the safety of the multiple payments and trust that the company will continue to make good investment decisions with my money and still be solvent for years to come? Yes, many variables to consider with a pension and annuity payments but still not the same as an Annuity Product/Contract. This is not a great example but it is similar to a Lottery. Lottery payouts are often "lump sum" or "paid out over 20 years". Most people who cannot manage money (or their own desires) choose a 20 year payout but others who can often and easily beat the returns of the 20 year payout take the lump sum an invest the winnings on their own (or with the help of a professional financial advisor). And, maybe most importantly, most people do not understand NPV and/or have the ability (even with an online calculator) to factor it. |
#25
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I have no clue what protections, if any, there might be for "normal" annuities one could purchase. https://www.pbgc.gov/wr/benefits/gua...imum-guarantee |
#26
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Annuities are not a good investment, you can do a lot better.
Some annuities charge fees, while others don’t, but for those that do, the fees might be 2% to 3% per year. That fee range is higher than the range for some other investment types like mutual funds, but the fees don't stop with just that. You also have surrender charges; an annuity seller subtracts this charge from the cash value of your annuity when you sell or withdraw money from a variable annuity during what’s known as the surrender period. Mortality and expense risk charges apply to variable annuities and can be around 1.25%. The seller tacks on this charge, usually every month, to make up for lost income in case an annuity holder dies before the seller has estimated the person would die. The seller of an annuity might charge fees for maintaining your account. These fees can cover costs such as recordkeeping and accounting. Some annuities may come with sales commissions of 7% or more! Then there are optional riders that will water down your investment even further. There are also a lot of scams going on with annuities as well. You could make more money if you take the money you're thinking of putting into an annuity and pay off your home, that would free up X amount of dollars every month. Or if you have already paid off your house then look into buying rental property with that money, depending on where you live this could be the best option of anything you could invest in. I cashed out my 401k after I calculated how much per month I would make when I retired, assuming of course there wasn't a huge market correction, and I figured I could make at least 2 times the monthly income from rents, after expenses of course, then I could from my 401k and not be worried about a major correction. So, that's what I did, but then I found out that instead of making 2 times more a month after expenses, I'm actually making 4 times more! And that income goes up every year due to rent increases, so I'm keeping pace, and then some, with inflation. But as with any investment, you have to study whatever you get into a lot, because there are downsides to real estate, but the upsides far exceed the downsides, but there are some downsides and you need to be aware of them. You also need to know how to bargain hunt for property, you need to know about the neighborhoods those properties are in, whether they are good or bad, do properties rent fast or slow in a particular area. Lots to consider before diving into it. I had a bit of a heads up on this stuff due to being a manager once when I was in college, I had college courses I took about this stuff, and I was studying it for quite a while, and actually moved to an area where I could afford the prices of rental properties. You also need to have a business checking account with about a year's worth of rent tucked away, this is in case of expenses, so you can get stuff fixed. You need to find people who work at lower price points than big companies do, or do the work yourself if you are capable, There is a lot of simple stuff that goes wrong anyone can fix, even YouTube University will show you how to fix almost anything. With real estate, I not only get the income from the rents, but I also get a huge tax break, and if I ever have to sell, properties have gone up over double what I paid so I'll make a bunch of money on that! I can go on and on, but you need to research this stuff for yourself and see if it fits into your mindset and personality. I owned a business for 35 years, even though renting is different than what my business was, it still is running a business, so doing what I do now is extremely easy. I rarely have to do anything, I do the books and pay the bills on the 15th, and that's about it! When something goes wrong, which isn't often, then I handle it. I keep my rents on the lower side for the area so I don't have people moving out and moving in all the time. Something to seriously ponder, but there is no annuity, no CD, no mutual fund, no bond fund, nothing, that is going to remotely come close to the money I make renting property. That's why I do it. |
#27
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It's not an adventure until something goes wrong. - Yvon C. |
#28
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Yeah, being a landlord isn’t for everyone by a long shot. I have a buddy who has done this and he’s a real pro actually and he’s selling his last property in the next month or so. Lots of plusses and minuses to real estate. Not for everyone for sure. For some people definitely.
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#29
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Years ago a buddy of mine at work who had a rental property told me about having to go unclog a toilet one night. Turned out the renters had tried to flush a soup bone down the WC. Not my idea of retirement...
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#30
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For a few of us, who have a good view of a specific industry, can sometimes do better than market averages...if...we buy what we know and are diligent about setting goals and dumping dogs. I've bought a variety of tech stocks, both products and services. In good years I do well. In down years, I do worse than the market. Over the past twenty years up years have outpaced down years...but...it is not a strategy for the squeamish or for those who do not know the specific market well... I mean...who knew that NVDA would move on from a lucrative graphics market to bitcoin mining. I hear they're into something else now. I'm just happy I bought and held from that first growth phase. I've seen an interesting niche with spin-offs, by the way. Apologies to Bob, please skip this. Buy the parent, get the spin-off distribution "free". Chrysler spun off RACE. Turned out to be free money. GE spun off GE Healthcare. Free money. MMM is spinning off its health sub. I'm starting to look for others. You get the new stock "free" and in these examples, the parent company didn't seem to dip after either the announcement or the spin-off.
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