Should You Buy An Annuity At Retirement, Or Wait?

[Liz]

This author argues that inflation is a risk to annuitants. Here's his argument for why retirees should wait to move their portfolios to an annuity.


Should You Buy An Annuity At Retirement, Or Wait? - Forbes

 

[LGilmore]

Well first off, why would a person put "everything" into "anything"? He's off on the wrong foot. There is no rule that requires a person's retirement funds to be placed in any one choice. The guy loses me with his first couple sentences.

Then he does not mention that some immediate annuities now offer an inflation rider to raise the payout over time as the annuity pays out, which would address his concern.

As to the issue of "if the person waited" and the market went up, they lost some money. Would the same be true if the person waited and the market went down while they were waiting. Would they lose money too?

Trying to predict the future is a investment risk in itself. If you create some flexibility in the portfolio, you might be able to react to changes or survive changes better.

 

[Liz]

well said! I agree 100%. He sets up a bit of a false dichotomy.

 

[Norwayguy]

There is always more than 1 way to skin a cat. The author is correct using the 2 year period and the fact that interest rates rose during that time that you could now purchase the same annuity and earn a higher lifetime income. There are a couple issues with this.

1. What if interest rates had dropped instead of risen, we now have the ability to say that rates rose and this might have helped the client.

2. Following his advice that the client could have instead withdrawn $30,000 per year over those 2 years and only need to return a 2% rate of return to be
no worse off". However he admits:

While there was no short-term way to a “safe” 2% return over the last few years, 2% or greater is not an unrealistic hurdle to overcome. An investment in the DFA Investment Grade Bond fund (DFAPX) would have returned 1.92% on an annualized basis over this time frame. Including equities that number could increase substantially. By moving 20% of the portfolio to the DFA US Vector Equity fund (DFVEX), a diversified US total market portfolio, the annual rate of return increased to 6.37%, while a 50% stake returned 13.26%.

So his solution is to compare a very safe product that returns a guaranteed income stream to having to invest the funds in a bond fund that in the end fell a little short of the mark and could have actually lost money which would have affected the clients principal.