Annuitize all assets at 75, takes care of the problem. Make sure you tell your family and watch their faces when they hear the news, priceless.
Great idea, but I don't know much about this subject.
Is there an quick and easy way to estimate how much you would get paid if you were to buy an annuity depending on the age and other factors? What kind of annuity is it? Is it inflation-adjusted as well?
My concern is that buying an annuity doesn't make sense financially even at age 75. For example, if you manage your own longevity risk and pay yourself using minimum required distributions from a balanced portfolio instead of buying an annuity, are you likely to get paid more or less?
If interested in actually getting an annuity, you would contact Fidelity or Vanguard to get a quote. It could be indexed for inflation or not. It could be immediate or deferred. Whether you're better off with an annuity or managing your own portfolio depends on when you end up dying. I think that at 75 you'd get more than 4% a year of your original principle because they keep whatever is left when you die.
8.94% payment for a 75 yo male, based on a popular annuity web site.
I ran a couple of very quick scenarios in Excel trying to compare buying an annuity vs using RMD for withdrawals. The idea behind using RMD numbers for comparison came from the Hebler Autopilot article mentioned by jamesplease earlier in this thread. Basically, I am using RMD as a proxy for a withdrawal rate safe enough to not deplete one's portfolio but aggressive enough to not leave too much money "on the table".
Link to the article:
https://www.marketwatch.com/story/put-retirement-savings-withdrawals-on-autopilot-2013-07-24 For my comparison I used an example of a 70 year old male who can either buy an annuity for $100K or invest it and use RMD for withdrawals. $100K is just used for simplicity.
I used CNN money for an annuity quote
http://money.cnn.com/tools/annuities/ The quote for a 100K life annuity, not inflation adjusted: $622/month or 7.46% payout.
For RMD distributions, I used the Charles Schwab calculator
https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/ira_calculators/rmdAll calculations do not take into account inflation (still a valid like to like comparison IMO). Also, rate of return assumptions for investing and RMD distributions do not account for market fluctuations, just assume a certain rate of return on a portfolio as per Schwab calculator. This is something I need to look into if I study this in more detail, but for now I just ran two simple scenarios based on 6% and 8% rates of return.
Scenario 1: 6% expected return on 100K investments in case of RMD calculations vs 100K annuity paying 7.46% per year.
Total payout from RMD distributions exceeds life insurance payout in 30 years or by age 100. The total nominal payout (ignoring inflation) by age 100 is $232K and you would still have $56K left in the portfolio.
Scenario 2: 8% expected return on 100K investments for RMD calculations vs 100K annuity paying 7.46% per year.
Total payout from RMD distributions exceeds life insurance payout in 18 years or by age 88. The total nominal payout (ignoring inflation) by age 88 would is $147K and still $163K left in the portfolio.
Based on this very quick comparison, it probably makes sense to buy an annuity if you don't expect a high rate of return on your portfolio. Based on my examples, at 6% expected return, chances are you'll get more money from an annuity over your lifetime unless you live over 100 years. At 8%, you'll probably get more if you keep the portfolio and use RMD unless you die before you reach age 88.
This comparison doesn't account for sequence of returns or inflation. Also, an annuity is a stable source of income. However, keeping your investments gives you more flexibility in case of unexpected expenses, e.g. healthcare. Also, if you use RMDs you'll still have some money left after you die which you can will to family or charity.
Please let me know there are any errors or logical flaws in this comparison, particularly regarding using RMDs as a withdrawal strategy Alternatively, perhaps I'll try to use use a combination of RMDs and the 4% rule as per Hebler Autopilot from the linked article. The withdrawal rate in this case would be calculated as 0.5 x (Last year's withdrawal amount x (1 + Inflation %) + Last year's ending balance / RMD). However, if using this formula results in lower withdrawal amounts, RMD formula will still have to be used for tax advantaged accounts which are subject to RMDs after age 70.
Another aspect I haven't taken into consideration is tax treatment of annuities vs investments and whether that would tip the scale either way.
Also, I can post the calculation tables from Excel, not sure how to quote tables in forum messages.
So far the conclusion is that an annuity is worth considering at an older age. I wouldn't annuitize my entire porfrolio though, would probably go with a combination, for example 50% annuities / 50% balanced portfolio.