Should you use some or all of your retirement savings to buy an income annuity? That’s the question we look at in this video. Called a Single Premium Immediate Annuity, these annuities don’t come with all of the fees and complexities of other annuity products. Yet it can still be difficult to decide if you need one, when you should buy it, and how much you should invest.
In this video I’ll share annuity calculators, an annuity formula and a number of resources that can help you decide whether an income annuity is right for you in retirement.
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I’m the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I’m also the author of Retire Before Mom and Dad–The Simple Numbers Behind a Lifetime of Financial Freedom (
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LEARN MORE ABOUT: Retirement Annuities
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If they have to sell you on it. It ain’t worth it.
Thank you Sir. Just came across your vid. Excellent presentation, I have my Jackson annuity in joint survivorship that pays me 5% along with a corporate pension and SS. The goal is to cover all my living expenses with a buffer for inflation. Other monies can rest a while in a ‘safe place’ until this market sorts itself out.
I guess you can say an annuity, like social security, is supplemental income.
"Never buy something you can't auction or pawn."
My plan is to invest into a myga to a spia . Stan the annuity man gave me some good insights on this strategy. What are your thoughts on it ?
Outstanding presentation, Rob! Very well researched and with reasonable assumptions. I've been thinking about an SPIA lately — mostly due to the tanking stock market — but after viewing your video, don't believe that I need it. As you touched on in your presentation, my interest in an annuity was driven, in part, from fear. Thank you very much for the video — and for all of the great info you provide to everyone.
Rob, really good explanation regarding the target fund cap gain situation. I had a large cap gain and called VG after seeing an article in the WSJ. They had someone reach out to me. He basically scolded me for having the fund in a taxable account, but he also said the cap gains have been high in general in that fund in the past. I went back the 9 years I could go back and wrote back that his statement was false and listed the gains. My resulting cap gain amount was many times that of the previous 9 years. Ouch.
Question, as a class action attorney, does the claimant end up with less, in general, than they would if they sued on their own? Is it possible to join the original plaintiffs once the suit has been filed? Do you have any idea how many pennies on the dollar you can expect in a class action suit like this? Would the proceeds be taxable? Thank you
20:00 this begets the question in converse: if you don’t (yet) have enough money to service your retirement objectives, would an income annuity make your predicament better or worse (or it’s a wash)?
Thanks a lot
Nice content, Starting early is the best way of getting ahead to build wealth, investing remains a priority. Already making 85% profit from my current investment with a professional broker, Mrs Judith Callen.
Not sure if you read older videos comments but I have been thinking about annuities (close to retirement as such). I would love a brief follow up on this excellent video. You talked about annuities not being inflation adjusted but not about the 'admin' fees and that the monthly payout is calculated as reg. income tax and therefor how that may affect a retiree's decision whether or not to buy annuities. I much appreciate your insight.
Excellent Video!!!
I’m a few years off from retirement & at least for me, there’s definitely a lot to the notion of ‘behavioral finances’.
The FIRE movement really got me FIRE’d up about personal finance & retirement planning, but given the overvalued market, current bond environment, and muted market outlook for the next decade, I think annuities are worth a look. They offer safety & security in a turbulent time. Sure there’s a chance you’ll leave a LOT on the table, but they also remove the risk of you eating cat food in 15 years if things go sideways.
It's a bit of a gamble – but do you really want to risk your financial future? I found once I plugged some annuities into my forecasts to provide a solid income floor, I felt SOOOO much better. It removed a huge weight from my shoulders & I just felt great knowing that in a worst-case scenario, my essential expenses would be covered. Also the idea of not having to monitor my portfolio so much over the next 30 years is very appealing. Set it and forget it.
If your portfolio is large enough & your withdrawal rate is very low, annuities probably aren’t a good play. You could weather a market storm & still have enough to pay the bills. But for the rest of us, annuities definitely bring something to the table.
QYLD and forget it
Hello like your blogs, very informative. Here's a kind long question. 1. Want to see what u think? . Annuity question. Have $300K, want a fixed immediate @5% annually. for 10,15 or 20 years Is that doable ? 5% of $300K is $15,000. If so, how does that work? If no, why not? 2. What are the fees or service charges for this kind of annuity? Are fee/service charge monthly/annually? Will fees increase over time and by what percentage? Looking for feeedback from all sources. Thanks in advance.
impressive list of resources in the episode notes — thank you for putting together that list for us spectators
29:40 hey, "you and I are not a study!" remember? lol — I think re-saving some of the guaranteed income each month allows one to accumulate a cash bucket with the objective of using it to rebalance into one's equity allocation (addresses a point you made earlier in the episode re: annuitization giving up rebalancing from fixed income to equity)
I have a pension and looking at taking it as an annuity vs the lump sum payout. I think taking the annuity and taking Social Security at 67 or 70, I would only have to take out about 2% of my portfolio to help with the upkeep of inflation.
Enjoy your vids. Very informative plus unedited delivery adds so much. Thank you.
Rob, what are your thoughts on TIAA's traditional fixed annuity? Pays minimum 3% up to 4%.
The formula dictates that the better annuity is, that is the bigger AR it pays, the less of it I should buy. It doesn't make sense.
If we were in a time with historically high interest rates would it make sense to lock in a annuity rate? Depending on your age, etc.
P.S. I love this channel, thanks.
I’m writing from Ontario Canada and I really enjoyed the episode and am interested. In about a decade, I will have a defined benefit pensions which will be taxed as income. I see the annuity as basically the same in that it would be a second guaranteed form of income. Am I correct in that there will be similar tax implications as well he monthly deposit will be treated as income without the benefits of increasing the RSP contribution room? Thanks!
I've got a Jackson national flexible premium fixed annuity that was issued in 1991 and is based on 1971 mortality tables. It pays 3% guaranteed and the pay table is amazing. I can put up to five million into it with additional contributions having no surrender fees. Only the first contribution back in 1991 was subject to surrender charges. If annuitized the payback is 11.3 years and the payout rate (Which goes up a little each year) is currently 8.3% at age 61. With this set of circumstances I'm thinking putting more in above the $300,000 state guarantee is a good bet. Opinions?
Rob — This is an excellent video, full of very good information. Please allow me to add a couple of comments. (FYI: I'm a CPA who specializes in advising on personal finances.) First, a potential advantage of income annuities is the 'bonus' return provided by mortality supported distributions. That is, as you pointed out, if an annuitant were to die soon after purchasing an annuity, the insurance company would receive a windfall. Instead of paying some 25 years worth of monthly payments, the insurance company would only have to make, say, 5 payments! In the case of that particular annuitant, the insurance company would be left with a lot of 'excess premium'. Yet, insurance companies do NOT keep most of this windfall as profit for themselves. Instead, they use it to enhance the amount they pay to the remaining annuitants. This is how they can afford to pay a 65 year-old man close to 6% of his investment each year — even though fixed income returns are well under that amount. Part of what the annuitant receives each month is investment return (next to nothing in today's low interest rate environment). Part is a return of the annuitant's invested capital. And, part is from the invested capital of other annuitants who have died. That is, an income annuity allows an annuitant to receive MORE than he or she would have received had they simply invested the money themselves (as long as they would have invested in bonds and as long as interest rates do not go up).
Second, you called annuities a form of longevity insurance. They are that. They are also a form of portfolio insurance. The 4% rule 'works' in almost every situation. I've run hundreds of Monte Carlo projections for my clients over the last 30 years. If we can keep client spending at or below 4%, the projection will almost always have a very high projected success rate (that is, the client's portfolio outlasts the client's life expectancy). But, if you take a look at each of the iterations that 'failed', you will see a consistent pattern: in almost every iteration that fails, the randomized returns used for that iteration contained a bear market early in retirement. That can devastate a retirement portfolio!
Say someone has a portfolio of $2 million and expects to withdraw $80,000 (adjusted for inflation) each year. Let's say the market falls substantially and the portfolio, before the $80,000 withdrawal, is down 30%. After the withdrawal, the portfolio would be down to $1,320,000. The following year, the market recovers somewhat and the portfolio grows by 10% (before the $83,000, inflation adjusted distribution). The $83,000 distribution is much more than the 4% 'safe distribution rate'. As long as the portfolio continues to produce double digit returns, it will eventually recover. But, if the market has a couple of bad years in a row, the portfolio is apt to crater.
Which, is where an income annuity can provide some protection against these potential adverse returns. To the extent some portion of the $80,000 distribution is covered by the annuity, there is less pressure on the portfolio to produce cash flow.