Annuity or Stache?

[wageslave23]

Normally I would say annuities are a rip-off.  But I was messing around with an annuity calculator and realized that if you are normal retirement age then an annuity would lower the amount you need saved up.  In my case I just used 20k in annual expenses.  I would need $500k with the 4% rule.  Assuming I'm 65, I would have to plan for living 30+ more yrs.  The annuity calculator assumes that I would live 19 more years so only costs 275k.  Obviously the trade-off is I'm probably losing a lot of money I could have left to my heirs, but if you're not worried about that then the annuity seems to be the best choice.  Anybody else think about this? Am I missing anything?

[sokoloff]

The nothing for heirs is the largest downside of annuities; the large sales commissions and expenses are another, but they do provide a cheaper means of guaranteed income. The other thing to pay attention to is the financial security/soundness of the annuity company. $275K for $20K/yr is a little over 7.25% per year. That seems achievable while consuming principal, but if the annuity company goes bankrupt then you're out of luck...

You also need to consider social security. If you only need $20K in annual expenses, social security is likely to cover well over half of that.

For us, we've got heirs, so we're going the self-funding route rather than use annuities.

[DreamFIRE]

Here's a thread from a while back you might be interested in:

https://forum.mrmoneymustache.com/investor-alley/why-you-should-never-buy-an-annuity!/

[Kay-Ell]

A 4% SWR assumes you’ll be drawing against your stash into perpetuity (or at least for a very long, undetermined number of decades). It makes sense for early retirees but if you’re of traditional retirement age, most calculators assume you’ll be withdrawing principal in which case you wouldn’t need 509k

[DreamFIRE]

A 4% SWR assumes you’ll be drawing against your stash into perpetuity (or at least for a very long, undetermined number of decades). It makes sense for early retirees but if you’re of traditional retirement age, most calculators assume you’ll be withdrawing principal in which case you wouldn’t need 509k

He stated, "Assuming I'm 65, I would have to plan for living 30+ more yrs," so that's the timeline the 4% rule is based on, and yes, it involves the possibility of drawing down the principal in many cases, while in other cases, principal will actually increase.

[Cranky]

What kind of COL increases are built into an annuity?

My grandfather left money to my grandmother in the form of annuities (and I know nothing else about this set up - it was a long time ago) and when inflation was high in the 70's and 80's I remember a lot of handwringing about the annuity not keeping up.