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If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.

Wednesday, September 12, 2018

An annuity worth looking at (part 2)

In the last post we looked at the basics of the longevity annuity. Simply, give an insurance company money today and at a specified time in the future it pays you until you die. It is like Social Security - a simple product that avoids the number 1 fear of retirees - running out of money.

The longevity annuity can be held in an IRA up to $130,000 and reduce required minimum distributions at age 70 and a half.

So, although I am against insurance products that are used as investment products (which includes most annuities) this is one that can be a good fit for many investors.

The last time we looked at 

Here is another 

As you can see I put in data for a 55 year old purchasing a $130,000 longevity annuity to begin paying in 20 years at age 75. 

The result would be a monthly payment of $2,353/month beginning in 20 years. This equals $28,236/year.

Here's where a little bit of math starts to come in. If we apply the Bengen 4% rule whereby retirees can withdraw 4%/year and have a low probability of running out of money we can divide $28,236 by .04 to get $705,900. Thus, a portfolio of $705,900 would be required to satisfy the Bengen rule and provide an income of $28,236/year.

Now divide $705,900 by $130,000 and get 5.43. Finally, take the .05 root (1/20) of 5.43 to get 1.088.
So, to get a portfolio that generates $28,236/year would mean the $130,000 would have to achieve an annual annualized return of 8.88%/year. 

To be clear the investor would prefer to have a portfolio that grows at  8.88%/year to reach $705,900 20 years from now versus a contract that pays $28,236/year simply because the portfolio is available for heirs, provides more choices etc. 

Still the annuity is a good fit for some. One important consideration is that it can free up assets to take more risk and thereby generate a higher return over the longer term.

Wednesday, September 5, 2018

An annuity worth looking at (part 1)

Let me say at the outset that I am not a fan of annuities. I've seen too many that are impossible to understand even by those who sell them, involve egregious commissions and do not deliver what customers expect.

That said, there is one that I present to clients that is worth looking at. It can enable an investor to take more risk by increasing the allocation to stocks and at the same time reduce required minimum distributions at the age of 70 and a half. It is the "longevity annuity".

The longevity annuity is basically insurance against living a long time. Living a long time  is something we all want but it increases the probability that we run out of money. The annuity works like this: give an insurance company money today and the insurance company pays you an agreed upon sum in the future. Now go ahead and live to 110!

Here is a simple calculator provided online by immediate annuities that gives a simple example. You see I assumed 52 years of age, payout to start in 10 years, and a payment amount today of $130,000.

Hit the "Get My Quote" button and you find that the payout is, on average, $979/month.

You may be wondering why I chose $130,000. Simply this is the amount you can hold in an IRA and use to reduce required minimum distributions at age 70 and one half. Clearly those who are very risk averse and afraid of stocks can invest much more in this type of annuity.

So basically, this is very similar to social security and as such it enables you to take more risk, i.e. allocate more to stocks ( the third bucket for those using a bucket approach).

The usual caveats occur: check out the credit quality of the insurance company, look into insurance against bankruptcy provided by the state etc. As usual diversification may be in order depending on the commitment.

The next post will look at another example and look at a bit of basic math.