38 yr Old Wants Fixed Indexed Annuity

[LostDollar]

I'm thinking the basic advice from 401K people at my last work involved dealing with market risk and timing risk by either you choosing, or hiring them to choose, allocations between stocks, bonds and cash in core groups of 6-8 different funds.

It sounds like the realities, at least for people with maybe 500K and up at stake, is much more complex.

 

[DHK]

They often have either target-date funds or asset allocations that would rebalance quarterly back to their original allocations - so you can "sell high and buy low". It's not "market timing" but regular automatic rebalancing.

Strangely enough, the dollar amount isn't as important as the time horizon and when you plan to use the money. The 5 years before and after retirement are the most critical as a severe downturn in the portfolio could either delay retirement for a few years, or cause the portfolio to never recover.

We can easily understand how a down portfolio can delay retirement, but let's look at what it would do when you're ALREADY retired.

Let me put some numbers in perspective.

In a given year: $100,000 - 50% correction = $50,000 (such as in 2008)
Also a $5,000 withdrawal at the end of year 1: $50,000 - $5,000 = $45,000.
(That $5,000 withdrawal was originally going to be a 5% distribution, but is now a 10% distribution due to the loss and quite frankly too high to be sustainable.)

Now, what % return would you need in the NEXT YEAR from $45,000 to rebound BACK to $100,000?

133% in the next year.

That return obviously won't happen. But taking income from a down portfolio would almost guarantee that the portfolio would never 'bounce back'. This is called Sequence of Returns risk and Reverse Dollar Cost Averaging.


I often wonder if "fans of the market" take these kinds of ideas into account in their portfolio retirement planning? Most usually don't because of how much they are saving over the cost of hiring an advisor. But I bet there's a thread or two on the boglehead forums.

 

[scagnt83]

This may be a dumb question, but...

Don't the companies offering annuities depend on a reasonably healthy stock market underlying their business procedures? Aren't they just offering to remove someone's risk of cash flow variation due to market fluctuations in exchange for a fee? If so, that would seem to make the idea of equity investment make sense for a younger person when their concern is building a resource rather than using it.

Insurers mainly rely on interest rates to make their profits (along with new sales). Mainly US Treasury Rates and Corporate AAA Rates.

Index Annuities are not invested directly in the market. That is why they are able to have a 0% Annual Floor. It is also why the returns are capped.

But the return credited to the product, is tied to a market index of some type. Generally speaking, you will average around 3%-5% with most Index Annuities. That is with zero risk of loss.

That being said, I have certainly had some policies perform well above those amounts. Especially in the current bull market.

And the "Income Riders" they offer, guarantee a set increase for the amount your retirement income is based off of. That yearly increase is in the 7%-10% range depending on the product/carrier. It guarantees what people hope the market will do.


This is not a product that is designed to be an alternative to investing in stocks. This is a product that is designed to be an alternative to Bonds, CDs, and other "guaranteed" low-risk investments.

The appeal, is it provides a higher return than most other Low-Risk investments. Which is why many savvy investors will utilize an Index Annuity in place of Bond Funds within their overall portfolio.

 

[scagnt83]

I'm thinking the basic advice from 401K people at my last work involved dealing with market risk and timing risk by either you choosing, or hiring them to choose, allocations between stocks, bonds and cash in core groups of 6-8 different funds.

It sounds like the realities, at least for people with maybe 500K and up at stake, is much more complex.

The options in 401k plans can vary a good bit. But most all do have "Target Date" Funds. Which allow you to pick a fund based on your retirement year. Some do a better job than others. And the internal mechanics can vary. But generally speaking, this is not a terrible option.

Risk Based funds, such as Vanguards "Conservative Growth" Fund, are common as well. And are a perfectly good option for someone who does not want to become an expert at asset allocation.

Some 401k Plans are starting to offer "active management" in some form or fashion. This varies greatly. Some are great, others not so much imo.

---

The closer you get to retirement, the more you need to pay attention to how much market risk you take on. You also need to start figuring out how much you will have, and how much it will provide you. Using a professional for this part is useful, but not required, there are lots of online calculators. Most 401k plans have online tools for this.

If you are 10 years out, you need to know how much you will need, how much you will have, and how likely you are to have it when you need it.

This is the most common time to start considering an annuity. Either to reduce risk, or increase retirement income via an Income Rider (which can provide 50% more retirement income vs. an equity portfolio).

 

[timeflies]

I really see the value in FIAs. Would it be more fair to show those funds invested in a Bond fund, like Pimco, instead of showing the loss of being fully invested in the S & P 500 right before they are ready to retire?

 

[Tahoe Ray]

I really see the value in FIAs. Would it be more fair to show those funds invested in a Bond fund, like Pimco, instead of showing the loss of being fully invested in the S & P 500 right before they are ready to retire?

It would be fair if you had a securities license.