I had a Certified Financial Planner who called himself a fiduciary getting me all lined up for a couple of annuities. Fortunately I got some financial education before I signed the contract and sent both back. There are no shortage of people out there who want to help you manage your money while taking a piece of it....
All annuities are not bad. Checkout the Fixed Index Annuity with deferred payments like Athene Performance Elite, they have capital peservation guarantee and have better returns than the indexes.
I appreciate how you approached this decision. While I like the idea of guaranteed income, I had not fully thought through the limitations that puts on flexibility of total income/taxes in any given year. Thanks for the easy to understand and unbiased perspective.
Having annuities as an option depends largely also on the personalities of the retirees. For those who value security over market volatility where earnings can dip, annuities serve to offer the bedrock for daily essentials over which other investment incomes are built on top.
It’s not just earnings that can dip in the stock market, it’s principle, too, and it frequently does! People, especially older people, should be afraid of that.
That should be everyone concern as well, right? See on videos that talks about sequence of return during retirement. If it happens negatively during initial period of the retirement can be painful. Annuities portion can give you some comfort there.
As a saving overachiever, it can be really hard to transition from the accumulation phase to the enjoy it phase of life. An Annuity can be a great crutch to convert savings into freedom. It may not be the best financial decision, but converting a portion of your ample savings into a forced income stream can be a great quality of life decision.
Financial planning is like navigation. If you know where you are and where you want to go, navigation isn't such a great problem. It's when you don't know the two points that it's difficult...
Income annuities have become extremely popular with retirees in the last few years. People like guaranteed income. There are a number of circumstances that need to be studied to make the right decision. Don't jump right into it, but don't rule it out either. We love ours.
You love the steady income. The Annuity only makes money for the Insurance company. The trick is Education on how the Market works and how withdrawal strategies work. Most people don't put their life savings into purchasing an Annuity and can therefore realize the same return from a Portfolio at only 1, 2 or even 3% of said Portfolio. Even if you were to take an annual distribution, on the "higher end" say 3% and such withdrawal is annually adjusted for inflation, your Portfolio is "GUARANTEED" (based on over 140 years of Historical Data!) TO NEVER RUN OUT!
@@Elephantine999 why? how about MYGAs? you put in 100K for 3, 5, 7, 8, 9, 10 years and they pay you 5.3% interest for all of those years. After contract expires you call your money back. No fees, nothing. What is wrong with that?
I went the path of having the “hybrid”: half my IRA into a fixed annuity and half to stay in the market to cover inflation. I did it for peace of mind and to alleviate the stress of money management.
from what I hear in this video, the ONLY pro about annuity is that they provide fixed income for the rest of your / your spouse's life if you are depending on such income. And then I have written down about 5 CONS about annuity. Yikes!
Immediate annuity contracts commonly contain a provision for beneficiaries. Any balance of the initial premium remaining upon death can certainly be left to heirs. This does reduce the monthly benefit amount compared to a contract with no such provision.
As usual, a very clear video, on a topic many are interested in. The biggest problem I see with them, is that they are frequently pushed on people who are NOT good candidates for them. I know of one situation, where the people are even in MUCH better shape this this couple, and still they were seriously thinking of buying one. (Of course give a fat comission to the sales guy).
Much has to do with your age. I started a SPIA for my wife and I when I turned 72 as part of my RMD. We love the guaranteed income. But don't start it too young. As far as inflation, you can buy a new annuity every few years with a lesser amount each time. BTW, there are certain provisions to leave money to heirs, depending on what you purchase.
Interesting comment about "don't start it too young". Reason? I'm 52 looking at retiring maybe as early as 55 and not claiming SS until 70. For me having the highest amount between 55-70 is important. At 70 my income will have a big jump where a good portion of the income will be indexed to inflation so I will be protected.
@@fecat93you may want to look at at 15 year period certain. Get income from 55 to 70 then it stops. And you start SSA. If you pass before the 15 years it goes to a beneficiary.
Great information! Thank you. I’ve been struggling with whether or not to buy an annuity. I did not consider there was no cost-of-living adjustment with the fixed annuity. Very informative.
One thing to know. Annuities are available to your heirs and cannot be put in a trust. It's a big deal when you are gone for your heirs to have money they can access. I am living this now.
I agree, I don't think a SPIA would be suitable in this situation. However, that doesn't mean an annuity isn't right for their situation, it would just be a different kind of annuity. They don't need the guaranteed income, so a SPIA or an FIA with a guaranteed income rider is not ideal. He could get a high-cap Fixed indexed annuity (FIA). The answer to whether or not it is suitable depends on how they want to invest their money. If they want high-growth assets, then maybe they forgo the FIA. If they were going to have a large allocation to bonds anyway, then the FIA would be an excellent substitute. If they were going to do 50% stocks and 50% bonds, then the FIA would be an excellent replacement for those bonds. They could draw from their stocks when the market is up and their FIA when the market is down. Their FIA would not be subject to interest rate risk or loss of principal, where their bonds would be. If they pass away, the balance in the FIA gets passed to their heirs.
I like the episode but wish you put a list of assets on the screen and tally them up. Then include the results - compare the Annuity with the Portfolio income.
We have asset tested social security In Australia - so getting no SS we can buy lifetime annuities with full inflation cover or partial (inflation less 2%) - income is tax free. We will use one to under write our cost of living. Remaining superannuation, real estate and shares will be lifestyle income and legacy.
I am retired and have thought about a SPIA but have made no decision. One new consideration is that Section 2.04 of Secure Act 2.0 now allows annuity payments from within an IRA to potentially be used to offset RMDs for the remaining portions of your IRA. Since annuity payments typically pay much higher than the RMD for the cost of the annuity, this can lower RMDs for the remaining IRA balance.
At 1:54 - I'm curious if any real world retirees are actually able to use a 4% rule. The reason is because most retirees have staggered and uneven income sources, like delaying SS until 70 y/o or one spouse is older so the younger spouse continues working for a couple years. After both spouses collect SS then 4% may be too much income, but before either spouse collects SS then 4% will not cover basic living expenses. Even if both spouses were set on using a 4% rule so planned to synchronize their future retirement work date and begin SS on the same month so their retirement income becomes fixed and even, most (or all?) retired couples have uneven (but still planned) expenses, like a car every 7 years, roof every 20 years, child's wedding every ? years. It doesn't seem reasonable to fund a savings account for these once-a-decade planned expenses. Should most retirees plan to pull an unsustainably high percent from their investments for the first few years of retirement and then drop down drastically once both spouses collect SS?
As with life in general, robotically following a rule isn’t always the ideal choice. The point of the “4%r rule” is to attempt to provide a safe guideline for withdrawals. While there are likely some folks who hard and fast follow the rule, a smarter process - that does not neatly fit into a one sentence explanation is to use “guardrails” and “buckets”. First fill 2-5 years of buckets with near term spending needs and keep that money in cash or near-cash. Spend out of those buckets and replenish them when the market is up, but spend them down when the market is down (guardrails). The 4% rule gives you some comfort that your replenishment withdrawals will not deplete your long term funds.
You make an excellent point! Variable income needs are extremely common. We are in that situation. There are other strategies to deal with this. The 4% should be seen as a guidepost, not a rule. We are starting with a 6.5% withdrawal rate until I get my SS at age 70. Then our needed funds will be zero. It will strictly be for discretionary spending. We expect a 2-3% rate. One way to figure out where you stand is by calculating one’s “funding ratio” as suggested by Wade Pfau PHD(a retirement researcher). The basic concept is to budget each year going forward till age 85-90. Then look at expected income each year including all sources. Keep everything in current dollars. Then figure out the portfolio needs compared to the actual portfolio value as of today. If the needs after adding up all the years, are covered by the current portfolio, you are adequately funded, if no you are not. He suggests a funding ratio of 1.0 or better. We are well above that. Remember it is much easier to increase spending than to decrease it.
James addresses these sorts of questions in his videos in detail. I'd encourage you to watch more of them to see how he takes that into account. TLDR: The 4% rule is a guideline, but there are years where >5% can be rationalized for short periods of time or if using the 'guardrails' methodology. It's all about being intentional with your withdrawals.
While they may not need to rely on their portfolio once they reach age 70, if they retire in their early 60's with a market like the early 2000's and have to withdraw $42K each year to cover their spending gap, the are going to wish they had purchased a period certain annuity to cover the difference. It comes down to their risk profile. I see value in some portion of essential expenses covered by contractual income. I would not purchase the lifetime income, but something to bridge them until they turn on social security might work for them.
Good advice. Forget the locked in annuity with a big portfolio and multiple sources already of excess monthly income. I’m similar as them but maybe younger. Retired, ss & pension and dividend income from 401k and once yearly capital gains taking from an outside investment. I’m definitely taking excess from my 401k. This is where I’m taking dividends only from stocks and stock funds. Principal remains . This gets me real close to the RMD that will be required one day and I’m okay paying taxes on withdrawals now to enjoy life before my 70’s. The excess gets invested in a regular either money market or right back into the general market which can be just capital appreciation stocks that don’t pay dividends so long term capital gains , hopefully on them at some point if need be.
So many little things gathered from your videos. This touched on an aspect of things I have been considering, which is a "windfall"due to sale of company stock that will be coming before retirement.
It's "gauranteed" right? They know what they are doing, right? Obviously I'm being facetious. I came to the same conclusion that I trust myself, amateur that I am, more than an insurance company - especially nowadays.
New York life has been in business since 1845. Mass Mutual since 1851. You have to do your research, and maybe diversify annuity purchases. Just a thought. Peace.
I agree you should look at your spending first, then look at your fixed incomes (pension and SS) and finally look at your investment income. My our case we do not have a pension so we are taking our SS at 70 to get the max amount. We will have 2 1/2 years where we will need to take a larger amount from our investments about 5%. Once SS starts we can live off just SS but most likely we will spend about 2% to have some fun in the 1st 10 years of retirement. We can do this because we have do debts, paid off home, all major home repairs completed and 2 good cars.
The annuity invests the money and then gives you a portion back. You can invest it yourself and do the same thing without the cut. The only real reason to have an annuity is as a hedge in case you lost all your other assets due to an extreme situation. If it was a broad market situation your annuity would be in the same boat and they may not pay so there’s no insurance for that, just government but not if government fails.
I would like to hear from you on a INDEX ANNUITY. I have some that reset every 6 years at which time I can elect to get out & put that money elsewhere. I am struggling as to what I should do as my annuities are only paying me 4%. I have several of them that are coming up for renewal soon. I did this shortly after my husband passed away,as I was a mess and I found out at that time my husband had lost 2/3 of our retirement savings & I couldn't afford to lose anymore of it. I will be 73 this year & will need to start taking my RMD out this year. I am risk adverse after what my hubby did. Mine do pay out a healthy lump sum to my heirs when I'm gone.
Without a doubt, this year will be worse than the last. I lost a lot of money last year as a result of bad investment choices that I would not have made if I hadn't been so worried about my portfolio. I kept investing, but I couldn't determine whether to start paying for a house. In the end, I sold my positions, and the house needed more work than I had planned. I'm not sure how long I can keep going like this
I am 55 and am considering a small annuity for longevity risk. Pay in at 55 to start and receive monthly income starting 82. 50k now gives me 3k/month with 2% inflation adjustment. Not much but helps with worst case planning for small amount of money.
Put all excess money in index funds. You have a pension and 401k income, why invest into a insurance company if they could not steal your money they would not sell you one.
Based on his pension and cash from sale of house/gallery and social at 70, annuity does not make sense. For me, being single with no dependents I took a portion of my portfolio and purchased 2 annuities. One starting at 65 that pays till I die. And another that pays for 5 years that will help fill the income gap from 65 to 70 when I would take social security. You can get annuities that have riders for survivor benefit and cost of living increases albeit with a smaller monthly payout. In addition to these annuities I will have savings and Ira’s to draw from as well as owning my home outright. While annuities are not for everyone, they do have a place.
In broad brush strokes, I agree with your general overview of this couple's situation But even in this couple's scenario, annuities should not be dismissed Mathematical calculations show annuities are a better replacement for bonds in one's portfolio ~ they increase the percentage of success for almost all monte carlo simulations Bonds got clobbered in 2022, along with stocks ~ if one's bond allocation was in annuities, they would have been protected All advisors, but especially those who are Fiduciaries, should know this and promote this ~ it's math And NO, I do not sell annuities or any financial products ~ but I do believe in and have annuities as part of my portfolio
Great video. Captured much of my experience 5 years into retirement. Particularly resonated with your insights regarding busyness snd gosld. Greetings from portugal.
An Annuity only makes money for the Insurance company. The trick is Education on how the Market works and how withdrawal strategies work. Most people don't put their life savings into purchasing an Annuity and can therefore realize the same return from a Portfolio at only a 1, 2 or even 3% withdrawal rate of said Portfolio. Even if you were to take an annual distribution, on the "higher end" say 3% and such withdrawal is annually adjusted for inflation, your Portfolio is "GUARANTEED" (based on over 140 years of Historical Data!) TO NEVER RUN OUT! For Life and YOUR ACCCOUNT iS Also likely to continue to grow too....FOREVER!
Wait! That's not true that annuities don't go to your heirs. I've looked into this same strategy that your viewer asks -- take out a annuity for a given amount and leave the rest to grow/shrink with the Market. The annuities I have looked at all have a beneficiary clause: whatever amount is remaining will be dispersed to my beneficiaries. TIAA and Fidelity both have that option, if you so choose. BTW: this was all good information and new questions I will be asking/calculating for retirement when I finally retire. Thanks so much!!!
I agree that there’s much comfort to having some sort of constant income. But with a pension and SS, this couple has no need for more of that with the poor returns annuities generally provide.
One could invest in 5 dividend paying stocks that pay 7 to 10 per cent and have another income stream. If ROTH dividends they would be tax free dividends correct? Of course, this income stream amount depends on how much one invests dividend yield etc.😊
companies paying dividends in the 7 - 10% range will likely have a depreciating or at least highly volatile share price. Loss of principle in high dividend paying stocks typically out weighs any benefit gained by the dividends paid. Dividends are also never guaranteed and can be cut or reduced at anytime. Don't get me wrong I love dividends but there is a lot of risk and instability that should be assessed when considering them in a retirement income planning They certainly have no where near the same stability as Social Security, Pensions, & Income Annuities
So much misinformation about annuities! Is this your specialty? They don't have to buy an income annuity, they could buy a fixed indexed annuity with no fees. They would be guaranteed to never lose money on their investment and have the whole account transfer to their heirs when they pass. Can any of the investments you recommend do that? And have zero fees? I doubt it. And almost all fixed index annuities will allow you to turn them into a lifetime income stream later on if you want to.
What is guaranteeing the income? I’d assume the financial viability of the annuity company or who they are insuring with and then ultimately the government, all of which could fail if things got bad enough.
As someone who is very enthusiastic about investment opportunities, I'm constantly curious about how successful investors make millions off their portfolios. I recently came into a good amount of money through inheritance and have been interested about investing or buying stocks to potentially help overtime.
Your money in a coffee can is a 'guaranteed income stream for life' if you take out the right amount, and you'll pay no fees. Isn't an annuity just you betting against the insurance company that it'll have to keep paying long after your principal in the can is returned to you? But for how long after, and could you have done better in a basic bank account?
You have very sound info, but your scenarios are with people that have a fair amount of money. I understand that's your clientele, which makes your job pretty easy. I'm curious, is that the majority of people in their late 60's early 70's
A $3500 per month annuity for just the years until 70 could help. It would decrease the chance of using assets that are devalued if the market tanks in the beginning of their retirement. Also by knowing their goals are met with fixed income, the remainder of the "extra" money could be invested VERY aggressively. What do you think about that? I'm interested because that is what I'm doing.
Their situation is near to mine. I have 3 retirement pensions including SS. Two are indexed to inflation. I have $250k available in my 401k. My FA wants me to spend $150k in an annuity and $50k in a conservative stocks and bonds portfolio. The annuity makes no sense to me.
He might of missed the taxes and how annuities are taxed if not an Ira - taxed on earnings or growth at highest tax rate for the most NO to annuities and yes I’m a FA
Incorrect regarding passing any principle left upon death to heirs. It's either your personal bias as a planner or product ignorance. Maybe review some of Wade Pfau's research
FYI - your camera was continuously bouncing ever so slightly throughout the entire video, creating a mild motion sickness effect. You may want to investigate why your camera is moving during your filming and address that. Thanks for your informative videos!
Yes, but in the upward direction, so the “4%” direction remains a safe withdrawal rate. Some folks neglect the assumptions the funds must be properly invested and that the rule assumes 30 years of withdrawals (when retiring early).
It's historical data You can change the parameters that the study used or you can guess about the future. But 4% is what worked using large cap US stocks and bonds in the past
This guy only works with individuals that hand their nest egg to him. Yep, he’s selling annuities. Nope, not giving my nest egg to anyone. Yes, I hire fee based advisors every few or more years.
It would seem like an annuity would, like many insurance products, be best deployed while younger. Since you lose all of the principal upon death, it would not seem like the best way to go if you are already over 70.
For an insurance company to offer you an annuity, they MUST make money off the deal, or they would stop doing these. I can't see any reason why buying an annuity would ever make sense, except maybe to provide for a special needs child or spouse after your death. BUT, a life insurance policy paid into a trust would do the same thing. My instinct says RUN AWAY from anyone touting annuities to you.
I'll pass on purchasing an annuity as I'll be already be getting two inflation protected annuities after I retire. One is called a state gov't pension and the other is called Social Security.
Hopefully your pension isn't from Illinois as we're headed to bankruptcy as the pension debt is unsustainable and all the big taxpayers are fleeing. I'll be fleeing also once I can get my wife to find a job out of state.
I always *assumed* that someone telling me that an annuity is great is also someone selling me an annuity.
You generally sound like a narrow-minded loser.
I had a Certified Financial Planner who called himself a fiduciary getting me all lined up for a couple of annuities. Fortunately I got some financial education before I signed the contract and sent both back. There are no shortage of people out there who want to help you manage your money while taking a piece of it....
The best person to manage your money is yourself. If you do not yet have the skills then go to learn about it. It is not difficult! ❤
All annuities are not bad.
Checkout the Fixed Index Annuity with deferred payments like Athene Performance Elite, they have capital peservation guarantee and have better returns than the indexes.
I appreciate how you approached this decision. While I like the idea of guaranteed income, I had not fully thought through the limitations that puts on flexibility of total income/taxes in any given year. Thanks for the easy to understand and unbiased perspective.
Having annuities as an option depends largely also on the personalities of the retirees. For those who value security over market volatility where earnings can dip, annuities serve to offer the bedrock for daily essentials over which other investment incomes are built on top.
It’s not just earnings that can dip in the stock market, it’s principle, too, and it frequently does! People, especially older people, should be afraid of that.
That should be everyone concern as well, right? See on videos that talks about sequence of return during retirement. If it happens negatively during initial period of the retirement can be painful. Annuities portion can give you some comfort there.
As a saving overachiever, it can be really hard to transition from the accumulation phase to the enjoy it phase of life. An Annuity can be a great crutch to convert savings into freedom. It may not be the best financial decision, but converting a portion of your ample savings into a forced income stream can be a great quality of life decision.
Why can't you just do that yourself without an annuity
Financial planning is like navigation. If you know where you are and where you want to go, navigation isn't such a great problem. It's when you don't know the two points that it's difficult...
I like the way you approach the question and get a right answer.
Income annuities have become extremely popular with retirees in the last few years. People like guaranteed income.
There are a number of circumstances that need to be studied to make the right decision.
Don't jump right into it, but don't rule it out either.
We love ours.
You love the steady income.
The Annuity only makes money for the Insurance company.
The trick is Education on how the Market works and how withdrawal strategies work.
Most people don't put their life savings into purchasing an Annuity and can therefore realize the same return from a Portfolio at only 1, 2 or even 3% of said Portfolio.
Even if you were to take an annual distribution, on the "higher end" say 3% and such withdrawal is annually adjusted for inflation, your Portfolio is "GUARANTEED" (based on over 140 years of Historical Data!)
TO NEVER RUN OUT!
Guaranteed income and not having to worry about the stock market are great, but annuities are expensive peace of mind.
@@Elephantine999at long as your investments do better than the annuity
@@Elephantine999 why? how about MYGAs? you put in 100K for 3, 5, 7, 8, 9, 10 years and they pay you 5.3% interest for all of those years. After contract expires you call your money back. No fees, nothing. What is wrong with that?
I went the path of having the “hybrid”: half my IRA into a fixed annuity and half to stay in the market to cover inflation. I did it for peace of mind and to alleviate the stress of money management.
Great job and unbiased look at the situation of the question.
Very informative video. I have been looking in to pros and cons for annuities. Nicely presented , great job.
These presentations are excellent--so authoritative and well presented. I have learned more at this channel than anywhere else.
from what I hear in this video, the ONLY pro about annuity is that they provide fixed income for the rest of your / your spouse's life if you are depending on such income. And then I have written down about 5 CONS about annuity. Yikes!
Immediate annuity contracts commonly contain a provision for beneficiaries. Any balance of the initial premium remaining upon death can certainly be left to heirs. This does reduce the monthly benefit amount compared to a contract with no such provision.
As usual, a very clear video, on a topic many are interested in. The biggest problem I see with them, is that they are frequently pushed on people who are NOT good candidates for them. I know of one situation, where the people are even in MUCH better shape this this couple, and still they were seriously thinking of buying one. (Of course give a fat comission to the sales guy).
Much has to do with your age.
I started a SPIA for my wife and I when I turned 72 as part of my RMD. We love the guaranteed income.
But don't start it too young.
As far as inflation, you can buy a new annuity every few years with a lesser amount each time.
BTW, there are certain provisions to leave money to heirs, depending on what you purchase.
Interesting comment about "don't start it too young". Reason?
I'm 52 looking at retiring maybe as early as 55 and not claiming SS until 70. For me having the highest amount between 55-70 is important. At 70 my income will have a big jump where a good portion of the income will be indexed to inflation so I will be protected.
@@fecat93you may want to look at at 15 year period certain. Get income from 55 to 70 then it stops. And you start SSA. If you pass before the 15 years it goes to a beneficiary.
Great information! Thank you. I’ve been struggling with whether or not to buy an annuity. I did not consider there was no cost-of-living adjustment with the fixed annuity. Very informative.
One thing to know. Annuities are available to your heirs and cannot be put in a trust. It's a big deal when you are gone for your heirs to have money they can access. I am living this now.
It depends on the annuity. I have several annuities, and the beneficiaries are our trust.
I agree, I don't think a SPIA would be suitable in this situation. However, that doesn't mean an annuity isn't right for their situation, it would just be a different kind of annuity. They don't need the guaranteed income, so a SPIA or an FIA with a guaranteed income rider is not ideal. He could get a high-cap Fixed indexed annuity (FIA). The answer to whether or not it is suitable depends on how they want to invest their money. If they want high-growth assets, then maybe they forgo the FIA. If they were going to have a large allocation to bonds anyway, then the FIA would be an excellent substitute. If they were going to do 50% stocks and 50% bonds, then the FIA would be an excellent replacement for those bonds. They could draw from their stocks when the market is up and their FIA when the market is down. Their FIA would not be subject to interest rate risk or loss of principal, where their bonds would be. If they pass away, the balance in the FIA gets passed to their heirs.
I like the episode but wish you put a list of assets on the screen and tally them up. Then include the results - compare the Annuity with the Portfolio income.
We have asset tested social security In Australia - so getting no SS we can buy lifetime annuities with full inflation cover or partial (inflation less 2%) - income is tax free. We will use one to under write our cost of living. Remaining superannuation, real estate and shares will be lifestyle income and legacy.
I am retired and have thought about a SPIA but have made no decision. One new consideration is that Section 2.04 of Secure Act 2.0 now allows annuity payments from within an IRA to potentially be used to offset RMDs for the remaining portions of your IRA. Since annuity payments typically pay much higher than the RMD for the cost of the annuity, this can lower RMDs for the remaining IRA balance.
At 1:54 - I'm curious if any real world retirees are actually able to use a 4% rule. The reason is because most retirees have staggered and uneven income sources, like delaying SS until 70 y/o or one spouse is older so the younger spouse continues working for a couple years. After both spouses collect SS then 4% may be too much income, but before either spouse collects SS then 4% will not cover basic living expenses. Even if both spouses were set on using a 4% rule so planned to synchronize their future retirement work date and begin SS on the same month so their retirement income becomes fixed and even, most (or all?) retired couples have uneven (but still planned) expenses, like a car every 7 years, roof every 20 years, child's wedding every ? years. It doesn't seem reasonable to fund a savings account for these once-a-decade planned expenses. Should most retirees plan to pull an unsustainably high percent from their investments for the first few years of retirement and then drop down drastically once both spouses collect SS?
I am retired and don't know anyone using the 4% rule
As with life in general, robotically following a rule isn’t always the ideal choice. The point of the “4%r rule” is to attempt to provide a safe guideline for withdrawals.
While there are likely some folks who hard and fast follow the rule, a smarter process - that does not neatly fit into a one sentence explanation is to use “guardrails” and “buckets”. First fill 2-5 years of buckets with near term spending needs and keep that money in cash or near-cash. Spend out of those buckets and replenish them when the market is up, but spend them down when the market is down (guardrails). The 4% rule gives you some comfort that your replenishment withdrawals will not deplete your long term funds.
You make an excellent point! Variable income needs are extremely common. We are in that situation.
There are other strategies to deal with this. The 4% should be seen as a guidepost, not a rule. We are starting with a 6.5% withdrawal rate until I get my SS at age 70. Then our needed funds will be zero. It will strictly be for discretionary spending. We expect a 2-3% rate.
One way to figure out where you stand is by calculating one’s “funding ratio” as suggested by Wade Pfau PHD(a retirement researcher).
The basic concept is to budget each year going forward till age 85-90. Then look at expected income each year including all sources. Keep everything in current dollars. Then figure out the portfolio needs compared to the actual portfolio value as of today. If the needs after adding up all the years, are covered by the current portfolio, you are adequately funded, if no you are not. He suggests a funding ratio of 1.0 or better. We are well above that.
Remember it is much easier to increase spending than to decrease it.
Agreed, my thoughts exactly as I'm thinking about retiring at 55 and not claiming SS until 70.
James addresses these sorts of questions in his videos in detail. I'd encourage you to watch more of them to see how he takes that into account. TLDR: The 4% rule is a guideline, but there are years where >5% can be rationalized for short periods of time or if using the 'guardrails' methodology. It's all about being intentional with your withdrawals.
While they may not need to rely on their portfolio once they reach age 70, if they retire in their early 60's with a market like the early 2000's and have to withdraw $42K each year to cover their spending gap, the are going to wish they had purchased a period certain annuity to cover the difference. It comes down to their risk profile. I see value in some portion of essential expenses covered by contractual income. I would not purchase the lifetime income, but something to bridge them until they turn on social security might work for them.
The annuities I’ve seen offer an index so value does increase and downside is protected.
There are many types of annuities. This video was talking about single premium immediate annuities (SPIA(
Good advice. Forget the locked in annuity with a big portfolio and multiple sources already of excess monthly income. I’m similar as them but maybe younger. Retired, ss & pension and dividend income from 401k and once yearly capital gains taking from an outside investment. I’m definitely taking excess from my 401k. This is where I’m taking dividends only from stocks and stock funds. Principal remains . This gets me real close to the RMD that will be required one day and I’m okay paying taxes on withdrawals now to enjoy life before my 70’s. The excess gets invested in a regular either money market or right back into the general market which can be just capital appreciation stocks that don’t pay dividends so long term capital gains , hopefully on them at some point if need be.
So many little things gathered from your videos. This touched on an aspect of things I have been considering, which is a "windfall"due to sale of company stock that will be coming before retirement.
Depending on an insurance company to stay afloat for 30 years seems like a roll if the dice.
It's "gauranteed" right? They know what they are doing, right?
Obviously I'm being facetious. I came to the same conclusion that I trust myself, amateur that I am, more than an insurance company - especially nowadays.
New York life has been in business since 1845. Mass Mutual since 1851. You have to do your research, and maybe diversify annuity purchases. Just a thought. Peace.
great information and I like how you organized your thoughts and presented things - made it easier to follow for my brain as well. Now subscribed.
I agree you should look at your spending first, then look at your fixed incomes (pension and SS) and finally look at your investment income.
My our case we do not have a pension so we are taking our SS at 70 to get the max amount.
We will have 2 1/2 years where we will need to take a larger amount from our investments about 5%.
Once SS starts we can live off just SS but most likely we will spend about 2% to have some fun in the 1st 10 years of retirement.
We can do this because we have do debts, paid off home, all major home repairs completed and 2 good cars.
The annuity invests the money and then gives you a portion back. You can invest it yourself and do the same thing without the cut. The only real reason to have an annuity is as a hedge in case you lost all your other assets due to an extreme situation. If it was a broad market situation your annuity would be in the same boat and they may not pay so there’s no insurance for that, just government but not if government fails.
Thanks James for another video with great information!
I would like to hear from you on a INDEX ANNUITY. I have some that reset every 6 years at which time I can elect to get out & put that money elsewhere. I am struggling as to what I should do as my annuities are only paying me 4%. I have several of them that are coming up for renewal soon. I did this shortly after my husband passed away,as I was a mess and I found out at that time my husband had lost 2/3 of our retirement savings & I couldn't afford to lose anymore of it. I will be 73 this year & will need to start taking my RMD out this year. I am risk adverse after what my hubby did. Mine do pay out a healthy lump sum to my heirs when I'm gone.
I love your talk! I want to learn more on dividends.
Without a doubt, this year will be worse than the last. I lost a lot of money last year as a result of bad investment choices that I would not have made if I hadn't been so worried about my portfolio. I kept investing, but I couldn't determine whether to start paying for a house. In the end, I sold my positions, and the house needed more work than I had planned. I'm not sure how long I can keep going like this
I am 55 and am considering a small annuity for longevity risk. Pay in at 55 to start and receive monthly income starting 82. 50k now gives me 3k/month with 2% inflation adjustment. Not much but helps with worst case planning for small amount of money.
Annuities are shielded from civil liability too.
Put all excess money in index funds. You have a pension and 401k income, why invest into a insurance company if they could not steal your money they would not sell you one.
many annuities offer the unpaid amounts to go to heirs, many many many do
Seems $2,000 is low for those who defer Social Security until age 70. Don't seem to have 35 years of paying SS taxes.
I considered this and assume that it is partly that he was self employed.
Half of our portfolio is Roth Annuity instead of bonds. And doubles as long term care income.
I enjoy your content tremendously. It would be great to have an episode devoted to understanding the different types of annuities.
Based on his pension and cash from sale of house/gallery and social at 70, annuity does not make sense. For me, being single with no dependents I took a portion of my portfolio and purchased 2 annuities. One starting at 65 that pays till I die. And another that pays for 5 years that will help fill the income gap from 65 to 70 when I would take social security. You can get annuities that have riders for survivor benefit and cost of living increases albeit with a smaller monthly payout. In addition to these annuities I will have savings and Ira’s to draw from as well as owning my home outright. While annuities are not for everyone, they do have a place.
Very amazing info, thx
In broad brush strokes, I agree with your general overview of this couple's situation
But even in this couple's scenario, annuities should not be dismissed
Mathematical calculations show annuities are a better replacement for bonds in one's portfolio
~ they increase the percentage of success for almost all monte carlo simulations
Bonds got clobbered in 2022, along with stocks
~ if one's bond allocation was in annuities, they would have been protected
All advisors, but especially those who are Fiduciaries, should know this and promote this ~ it's math
And NO, I do not sell annuities or any financial products
~ but I do believe in and have annuities as part of my portfolio
Great video. Captured much of my experience 5 years into retirement. Particularly resonated with your insights regarding busyness snd gosld. Greetings from portugal.
An Annuity only makes money for the Insurance company.
The trick is Education on how the Market works and how withdrawal strategies work.
Most people don't put their life savings into purchasing an Annuity and can therefore realize the same return from a Portfolio at only a 1, 2 or even 3% withdrawal rate of said Portfolio.
Even if you were to take an annual distribution, on the "higher end" say 3% and such withdrawal is annually adjusted for inflation, your Portfolio is "GUARANTEED" (based on over 140 years of Historical Data!)
TO NEVER RUN OUT!
For Life and
YOUR ACCCOUNT iS Also likely to continue to grow too....FOREVER!
And if history didn’t continue like it did in the past your annuity company would be in trouble too.
Wait! That's not true that annuities don't go to your heirs. I've looked into this same strategy that your viewer asks -- take out a annuity for a given amount and leave the rest to grow/shrink with the Market. The annuities I have looked at all have a beneficiary clause: whatever amount is remaining will be dispersed to my beneficiaries. TIAA and Fidelity both have that option, if you so choose. BTW: this was all good information and new questions I will be asking/calculating for retirement when I finally retire. Thanks so much!!!
I agree that there’s much comfort to having some sort of constant income. But with a pension and SS, this couple has no need for more of that with the poor returns annuities generally provide.
Great information.
One could invest in 5 dividend paying stocks that pay 7 to 10 per cent and have another income stream. If ROTH dividends they would be tax free dividends correct? Of course, this income stream amount depends on how much one invests dividend yield etc.😊
companies paying dividends in the 7 - 10% range will likely have a depreciating or at least highly volatile share price. Loss of principle in high dividend paying stocks typically out weighs any benefit gained by the dividends paid. Dividends are also never guaranteed and can be cut or reduced at anytime.
Don't get me wrong I love dividends but there is a lot of risk and instability that should be assessed when considering them in a retirement income planning
They certainly have no where near the same stability as Social Security, Pensions, & Income Annuities
So much misinformation about annuities! Is this your specialty? They don't have to buy an income annuity, they could buy a fixed indexed annuity with no fees. They would be guaranteed to never lose money on their investment and have the whole account transfer to their heirs when they pass. Can any of the investments you recommend do that? And have zero fees? I doubt it. And almost all fixed index annuities will allow you to turn them into a lifetime income stream later on if you want to.
What is guaranteeing the income? I’d assume the financial viability of the annuity company or who they are insuring with and then ultimately the government, all of which could fail if things got bad enough.
Thank you, people need to learn 😮😊
Annuities without indexing to inflation are a total non-starter for me.
Because without inflation indexing the income stream is NOT guaranteed.
As someone who is very enthusiastic about investment opportunities, I'm constantly curious about how successful investors make millions off their portfolios. I recently came into a good amount of money through inheritance and have been interested about investing or buying stocks to potentially help overtime.
Your money in a coffee can is a 'guaranteed income stream for life' if you take out the right amount, and you'll pay no fees. Isn't an annuity just you betting against the insurance company that it'll have to keep paying long after your principal in the can is returned to you? But for how long after, and could you have done better in a basic bank account?
You have very sound info, but your scenarios are with people that have a fair amount of money. I understand that's your clientele, which makes your job pretty easy.
I'm curious, is that the majority of people in their late 60's early 70's
A $3500 per month annuity for just the years until 70 could help. It would decrease the chance of using assets that are devalued if the market tanks in the beginning of their retirement. Also by knowing their goals are met with fixed income, the remainder of the "extra" money could be invested VERY aggressively. What do you think about that? I'm interested because that is what I'm doing.
Their situation is near to mine. I have 3 retirement pensions including SS. Two are indexed to inflation. I have $250k available in my 401k. My FA wants me to spend $150k in an annuity and $50k in a conservative stocks and bonds portfolio. The annuity makes no sense to me.
"guaranteed" to the extent that the insurance company doesn't go belly up.
Most are state guaranteed for $250k
A - rated company, that's been around for 100 years
He might of missed the taxes and how annuities are taxed if not an Ira - taxed on earnings or growth at highest tax rate for the most NO to annuities and yes I’m a FA
Incorrect regarding passing any principle left upon death to heirs. It's either your personal bias as a planner or product ignorance. Maybe review some of Wade Pfau's research
FYI - your camera was continuously bouncing ever so slightly throughout the entire video, creating a mild motion sickness effect. You may want to investigate why your camera is moving during your filming and address that. Thanks for your informative videos!
It's the coffee.☕
No, it wasn’t bouncing. It was doing a slight zoom in/zoom out. Many RUclipsrs use this feature.
Must be nice to get a 4k pension with 3% inflation increases each year.
4% rule has been revised
Yes, but in the upward direction, so the “4%” direction remains a safe withdrawal rate. Some folks neglect the assumptions the funds must be properly invested and that the rule assumes 30 years of withdrawals (when retiring early).
Yep, around 5.5%
It's historical data
You can change the parameters that the study used or you can guess about the future. But 4% is what worked using large cap US stocks and bonds in the past
Jason and his wife are the worst case for needing an annuity I can imagine.
This guy only works with individuals that hand their nest egg to him. Yep, he’s selling annuities. Nope, not giving my nest egg to anyone. Yes, I hire fee based advisors every few or more years.
It would seem like an annuity would, like many insurance products, be best deployed while younger. Since you lose all of the principal upon death, it would not seem like the best way to go if you are already over 70.
For an insurance company to offer you an annuity, they MUST make money off the deal, or they would stop doing these. I can't see any reason why buying an annuity would ever make sense, except maybe to provide for a special needs child or spouse after your death. BUT, a life insurance policy paid into a trust would do the same thing. My instinct says RUN AWAY from anyone touting annuities to you.
And if you really want an annuity check out government bonds.
Create your own annuity...at least when you die, you get the keep the principle....
😂
I'll pass on purchasing an annuity as I'll be already be getting two inflation protected annuities after I retire. One is called a state gov't pension and the other is called Social Security.
Hopefully your pension isn't from Illinois as we're headed to bankruptcy as the pension debt is unsustainable and all the big taxpayers are fleeing.
I'll be fleeing also once I can get my wife to find a job out of state.
This dude already has a pension. He doesn't need an annuity.