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Old 04-22-2016, 05:20 PM
 
Location: Eastern Washington
14,272 posts, read 44,972,066 times
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Quote:
Originally Posted by DaveinMtAiry View Post
I know there are a lot of threads over the years about annuities and after seeing many it's clear that like every other investment question the answer is always "it depends on your situation". Well here is our situation:

No kids, no reason to preserve our estate. Part of our retirement planning is to downsize and move to a less expensive area. I had always planned on using the proceeds of this downsize to fund our big out of pocket costs such as taxes, home insurance, medical out of pockets, car repairs etc. Money for 2 new cars has already been set aside in 2 Roths. The plan was to invest in equities/bonds etc with an anticipated withdraw rate of 4%.

Now I'm thinking about taking say $100,000 of this money and purchasing a fixed rate annuity that will transfer to the surviving spouse when one of us dies. This will produce a much higher return, today it's looking at 5.65% or so, which again could be funneled into an account specifically to help pay for the big ticket items described above without the worry of a market downturn effecting this money. I would take the balance of the money realized, maybe $50,000-$100,000 depending on a lot of things, and put that with our existing brokerage account and invest this semi-conservatively.

Does this plan make sense? Thanks for your input.
I just don't like the idea of selling what I consider "strategic" assets like a house, then turn around and pay ordinary expenses like taxes, food, etc. with the proceeds.

But selling an appreciating or at least stable asset to buy a new car- not CPO, but brand damn new - is just nuts. You might as well be mugged of say $3000 to $5000 or more when you drive off the lot.

Most financial advisors anymore think 4% is too high a rate to sustain.

Even though I understand you don't have any need to preserve wealth for heirs, but, the thing is, you don't know how long either you or DW will live.

I don't think you presented enough information to say if an annuity is right for you or not. Do you have a pension, what do you know about your SS payments, both as a couple and as the survivor?
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Old 04-22-2016, 05:28 PM
 
296 posts, read 174,451 times
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Dave, I think the best advice is to see a fee only planner, but also go with what feels right for you. We are in a very similar situation (even in the same state). I never realized there would be so much research in retirement with everything. From moving to a new state to investing...you really have to research everything. Being in Maryland, we realize we are not in a good tax state, so that's one thing we have to think about. Recently, our financial planner suggested Prudential Highest Daily Lifetime Annuity. We considered it and tried to learn as much about it as possible. In the end, we just didn't feel right about it. Seemed there were too many fees. And when we couldn't truly understand it decided to decline. I think many things are just a personal choice. We both worked until retirement and decided to take our SS at 66. We're good with that, but it was also based on a personal issue. In the past 5 years, we have lost 4 close friends to cancer who never lived to collect a SS check. We're comfortable with our decision, have saved over the years and hopefully we will enjoy a nice retirement. I'm sure you will too! For us, the people on city-data have been a wonderful resource!
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Old 04-22-2016, 05:29 PM
 
11 posts, read 7,790 times
Reputation: 17
I made a retirement calculator (I like making calculators as you see, haha) a few months ago. I plugged your numbers into it but made some assumptions:

You are 65 years old and are retiring now.
You currently have a $200,000 house, fully paid.
You have $50,000 in investments/savings (I didn't include taxes when making withdrawals).
The interest rate on your investments/savings is 5%
You have $2,500/month in monthly expenditures.
Your expenditures increase by 3% per year.
Your SS benefits do not increase (I was not aware of COLA when I made the calculator).

Plan A:
Sell your $200,000 house. Buy a $100,000 house with cash.
Buy a $100,000 annuity with the remaining $100,000. It pays $500/month for life.
Claim SS benefits at 65.

Plan B:
Sell your $200,000 house. Buy a $100,000 house with cash.
Invest your remaining $100,000 and make withdrawals as needed to meet expenditures.
Claim SS benefits at 70.

Plan C:
Sell your $200,000 house. Buy a $100,000 house with a HECM and put a down payment of $50,000.
Invest your remaining $150,000 and make withdrawals as needed to meet expenditures.
Claim SS benefits at 70.

And the results were,

Plan A: Bankrupt at age 77.
Plan B: Bankrupt at age 75.
Plan C: Bankrupt at age 83.

I decided to change the growth rate of expenditures to 0% to account for COLA. Not accurate, but I wanted to see what would happen...

Plan A: Never go bankrupt. $231,688 in investments/savings by age 100.
Plan B: Never go bankrupt. $327,814 in investments/savings by age 100.
Plan C: Never go bankrupt. $603,615 in investments/savings by age 100.

In conclusion it looks like Plan A is safer in the short-term, but plan B is better long-term. Plan C is better than both Plan A and Plan B in both short and long-term.


I just did this out of curiosity. I am not a financial planner and it's probably not very accurate. I just enjoy trying to figure things like this out. Let me know if you want more detailed numbers.
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Old 04-22-2016, 05:40 PM
 
Location: Idaho
4,639 posts, read 4,482,074 times
Reputation: 9101
Thank you all, everyone, for contributing to this discussion. I'm going through the same decision process as Dave, and your input is giving me important things to consider before making any decisions.

All valuable, except for the reverse mortgage idea. That ain't going to happen with me. You all know the cliché, "If it is too good to be true . . .".
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Old 04-22-2016, 05:51 PM
 
11 posts, read 7,790 times
Reputation: 17
When dealing with such an important life event as retirement I don't think it's a good idea to casually dismiss options just because you believe they are too good to be true or because you have heard bad rumors. All viable options should be given consideration. These decisions will affect you for the rest of your life.

It is best to talk to a financial planner who is knowledgeable about annuities, reverse mortgages, SS, etc and work together to find the best path for your particular situation. Annuities aren't a good option for everybody and reverse mortgages aren't a good option for everybody, but they are options that should at least be given some thought.
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Old 04-22-2016, 06:10 PM
 
Location: Idaho
4,639 posts, read 4,482,074 times
Reputation: 9101
Did discuss the issue with my fee-only financial adviser just this past December. While he says that reverse mortgages are better than in the past, he agreed that they are not the best for my individual situation. But, I do thank you bringing up the subject so that other can consider the option. It just does not fit into my plans.
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Old 04-22-2016, 09:04 PM
 
11 posts, read 7,790 times
Reputation: 17
Oh I see. Good to see that you are already talking to a financial advisor . What plan of action are you leaning towards?
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Old 04-23-2016, 03:16 AM
 
71,811 posts, read 71,896,917 times
Reputation: 49370
Quote:
Originally Posted by TysonL View Post
I made a retirement calculator (I like making calculators as you see, haha) a few months ago. I plugged your numbers into it but made some assumptions:

You are 65 years old and are retiring now.
You currently have a $200,000 house, fully paid.
You have $50,000 in investments/savings (I didn't include taxes when making withdrawals).
The interest rate on your investments/savings is 5%
You have $2,500/month in monthly expenditures.
Your expenditures increase by 3% per year.
Your SS benefits do not increase (I was not aware of COLA when I made the calculator).

Plan A:
Sell your $200,000 house. Buy a $100,000 house with cash.
Buy a $100,000 annuity with the remaining $100,000. It pays $500/month for life.
Claim SS benefits at 65.

Plan B:
Sell your $200,000 house. Buy a $100,000 house with cash.
Invest your remaining $100,000 and make withdrawals as needed to meet expenditures.
Claim SS benefits at 70.

Plan C:
Sell your $200,000 house. Buy a $100,000 house with a HECM and put a down payment of $50,000.
Invest your remaining $150,000 and make withdrawals as needed to meet expenditures.
Claim SS benefits at 70.

And the results were,

Plan A: Bankrupt at age 77.
Plan B: Bankrupt at age 75.
Plan C: Bankrupt at age 83.

I decided to change the growth rate of expenditures to 0% to account for COLA. Not accurate, but I wanted to see what would happen...

Plan A: Never go bankrupt. $231,688 in investments/savings by age 100.
Plan B: Never go bankrupt. $327,814 in investments/savings by age 100.
Plan C: Never go bankrupt. $603,615 in investments/savings by age 100.

In conclusion it looks like Plan A is safer in the short-term, but plan B is better long-term. Plan C is better than both Plan A and Plan B in both short and long-term.


I just did this out of curiosity. I am not a financial planner and it's probably not very accurate. I just enjoy trying to figure things like this out. Let me know if you want more detailed numbers.
how did you allow for sequence risk in your gains and losses ? the difference between some average return vs actual sequences of gains and losses where you are spending down in down years can be a 15 year difference .

if you just threw in some average returns then your numbers are very skewed . when you calculate you always should be figuring worst case scenario outcomes and in retirement when spending down the worst case is not just a lower average return . it is the combination of rates , market returns and inflation vs draw rate and what orders all the above happen in

it is the worst combination of sequences of those gains and losses that is used and their effect over a 30 year period . .

just using an average is way off in the decumulation stage .

being up 100% one year and down 50% the next year is a 25% average return . in reality you gained zero and if spending down at the same time you are burning up principal while your average return still shows nicely up 25%

Last edited by mathjak107; 04-23-2016 at 04:32 AM..
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Old 04-23-2016, 04:06 AM
 
71,811 posts, read 71,896,917 times
Reputation: 49370
Quote:
Originally Posted by volosong View Post
Thank you all, everyone, for contributing to this discussion. I'm going through the same decision process as Dave, and your input is giving me important things to consider before making any decisions.

All valuable, except for the reverse mortgage idea. That ain't going to happen with me. You all know the cliché, "If it is too good to be true . . .".
the problem is they are not to good . in fact many folks are shocked at how little the equity in their home actually gives them .

they take about 1/2 the equity in your home and divide it by age 100 if you elect to take payments .

that may not be nearly enough .

on the other hand many take lump sum and they end up shocked by the effect reverse compounding interest and fees has on that money .

even here in long island with the typical home worth more than 500k it can be quite painful.

On a $250,000 lump-sum in ten years the balance will climb to $465,841. Assuming 3% home price appreciation, that would leave about $72,000 in equity based on a home's $537,566 value. In 20 years, the loan balance would reach $868,031, exceeding the home's $722,444 value.

having to relocate can be a real issue . don't forget eventually many who live out of state want to move closer to kids and family if they need care.

or if they can't drive need a place with public transportation . it can suck having no money and no house if you need to relocate .

widowers remarrying and having spouses not on the original deal for that loan can leave them stranded if you die .

there are just so many negatives to using your home as a piggy bank that we all could make a never ending list as life plays out. many who took these loans just have not reached the point where their location has been a problem health wise or family wise yet..

Last edited by mathjak107; 04-23-2016 at 04:40 AM..
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Old 04-23-2016, 05:30 AM
 
Location: Mount Airy, Maryland
10,484 posts, read 5,944,584 times
Reputation: 16194
Thanks again everyone. I have talked to a fee only financial planner but as we are seeing many do not take their advice. While I am not asking strangers on the internet to make life changing decisions for us this is a very knowledgable group that we can all learn from.

A few thoughts. To clarify Tysons numbers we have a $400,000 house. After budgeting $50,000 for moving costs and upgrades after moving and purchasing a $150,000 home we will clear, in theory, $150,000. As for Perryinva's comment no I would not be able to retain this money should I retire and delay. If I delay I will be forced to draw down. But this poster is right, I can certainly park it somewhere and get some sort of return. But let's be honest, cash is not going to pay much even in 8 years. And as this will be a big part of my income I won't put it at risk.

Someone posted that planners today are saying even 4% withdraw may be high for investment withdraws. So that means this money, if invested, will not realize the 5.65% payout the annuity will. I am very familiar with the term dollar cost ravaging which work the exact opposite of the benefits dollar cost averaging works.

So yeah, a big risk that my other money will run out while an annuity never will. But then again neither will a SS check and yes COLA and survivor benefits should be considered. I kind of like the Plan C that was suggested. I need to look at the numbers but maybe spend it down for 3.3 years, then file at 68/3.

Last edited by DaveinMtAiry; 04-23-2016 at 06:59 AM..
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