Annuities?

[Melisande]

Let me preface by saying that, although I FIRE'd about 15 years ago, my husband (66) will be retiring next May -- at a normal retirement age. 

Anyway, we signed on with a financial advisor a few months ago and we are working to set things up optimally for us.

Recently, our financial advisor suggested that we invest in a fixed lifetime income annuity that would pay out $90,000/year. It seems like a great deal. We would also be receiving over $60,000 from social security. So, we would have over $150,000 guaranteed income for the rest of our lives. We would need to lay out 1.5M in one lump sum to purchase the annuity and wind up with the above-mentioned guaranteed income. There is also the option of an annuity with a 2% guaranteed inflation rider, but we would have to pay $400,000 more in our lump sum (1.9M) for the same initial $90,000 payout (this would increase 2% annually of course). This would still leave us with either 2.7M or 2.3M in investable funds -- not including our house value. (Our current net worth is around 4.8M.) 

Our financial advisor ran the numbers for us and showed us that, while in the short term we would have a slightly less income, we would break even in about three years, then have significantly more income for the rest of our lives. We would also (eventually) recoup the 1.5M invested (but this would be way down the line).

All-in-all it seems like a great deal and I really think we should go for it, but I am running up against a weird psychological barrier. It just feels scary to essentially hand over 1.5M (or 1.9M if we opt for the plan with an 2% inflation rider) in one lump sum (the way it is done). I joked to my husband that it feels like we are undergoing major surgery with a huge hunk carved out of our net worth.

Also, there is a silly element of pride involved. We will be subtracting 1.5M or 1.9M from our net worth and not getting it back in ways that do not count specifically for net worth.

Has anyone here grappled with a similar issue? Have you bitten the bullet and bought a fixed income annuity? Was it psychologically difficult to go through with the initial huge outlay? Have you regretted your choice? Or, on the contrary, believe that you did the right thing?

By the way, I realize that there are various kinds of annuities, including variable and indexed. According to our financial advisor these are complex, expensive vehicles that are (usually) not worth it. We are not talking about that kind of annuity. Just to be clear.

I realize that this might not be the right forum for this question, as we are actually at standard retirement age now. Unlike many, we will not be going back to work if there is a catastrophic downturn, so we feel that we need to play it a bit safer. That said, I really respect the opinions of many (or most) on here, so I thought I would ask anyway.

[Omy]

We put $300k into a similar product when we sold a rental a year ago. It would generate $21k annually, if we started taking the income now. The income increases by $2k for every year we wait to take it. (If we wait 5 more years, it will be worth $31k annually). The current plan is to wait until we are old enough for Medicare and no longer need to worry about MAGI for ACA subsidies.

We decided to go down this path because it more than covered the lost rental income, and I could see us doing it again when we sell our other rental in a year or two. Like you, the annuity income and our social security income (and eventual RMD income) will be more than enough.

My biggest concern would be the health of the insurer for that large a percentage of your net worth. Would it make sense to split it up between multiple companies?

[Michael in ABQ]

With people living longer and longer I though buying an annuity while young and then potentially collecting money for 100+ years would be a great idea. When I looked into it a bit, I saw that all the annuities that are "lifetime" actually stop paying out around 110 years old. I guess those actuaries they employ had the same idea as me.

Seems like a decent idea at first glance. Even if the insurer goes bankrupt a decade or two down the road you still have millions of dollars of net worth that will probably have doubled or more by then. Having that guaranteed income also frees you up to keep those other assets invested in the stock market instead of in more conservative and lower returning investments.

[bacchi]

Annuities are sold rather than purchased. Check the fees.

Also, you should run an backward inflation calculator to see what $90k fixed looks like in 20 years (I see $50k at 3%). There's a reason that inflation annuities are no longer sold.

[Melisande]

With people living longer and longer I though buying an annuity while young and then potentially collecting money for 100+ years would be a great idea. When I looked into it a bit, I saw that all the annuities that are "lifetime" actually stop paying out around 110 years old. I guess those actuaries they employ had the same idea as me.

Seems like a decent idea at first glance. Even if the insurer goes bankrupt a decade or two down the road you still have millions of dollars of net worth that will probably have doubled or more by then. Having that guaranteed income also frees you up to keep those other assets invested in the stock market instead of in more conservative and lower returning investments.

Wait? You're planning on living to more than 110?

[AccidentialMustache]

I'm pretty sure talking about annuities should generate facepunches here.

What's your annual spending? Is the 90k even relevant?

1.5m is 60k at a 4% SWR. That's less than 90k, but it also has inflation adjustments built in (at 3%, not 2% which is below long term averages). Oh and at 4% SWR you still have that initial principal value (inflation adjusted) left at the end to drop in an inheritance or giving pledge.

Put another way, 90k a year is a 6% rate on 1.5 million. So by taking the "risk" they could just drop the 1.5m in VTI and pocket the 4% spread (6% vs 10% long term).

And I quote risk because, well, what happens if the company just goes under? Maybe you can recover some, but probably not everything. So you're letting them take the profits to protect you from a black swan event... which is exactly the sort of thing that'd be likely to take them out (because 6% vs 4% the game is very much tilted in their favor).

[reeshau]

The current plan is to wait until we are old enough for Medicare and no longer need to worry about MAGI for ACA subsidies.

With Medicare, the worry becomes IRMAA.  I consider MAGI management good practice.

[reeshau]

What's your annual spending? Is the 90k even relevant?

+1

Annuities are a form of fixed income.  They can be very good for people who might outlive their savings, or otherwise have trouble hanging onto it.  With your net worth, you should have no worries.  So, what need are you addressing?

Said another way:  you yourself could generate $150k out of that same $1.5M, just index investing.  Yes, there will be volatility, but who cares?  Put 3 years of $100k spending into a CD ladder, and you get $120k a year, and have an emergency fund that can outlast double the average 18 month life of a recession.  And, you will still have that principle at the end, too.

You are paying someone $30k-$60k a year to safeguard a portion of your wealth.  It sounds like security you don't need.  It's certainly not a bargain.

If you are having trouble sleeping at night, maybe there is a psychological reason, that can't be computed.

In general, I would only consider an immediate annuity like this for "core," non discretionary spending.  Any discretionary spending could be cut back in bad times as a way to cope.

[Omy]

The current plan is to wait until we are old enough for Medicare and no longer need to worry about MAGI for ACA subsidies.

With Medicare, the worry becomes IRMAA.  I consider MAGI management good practice.

Of course. There's just a lot more flexibility at that point since it won't be an issue until income is over $200k per year.

[Melisande]

I'm pretty sure talking about annuities should generate facepunches here.

What's your annual spending? Is the 90k even relevant?

1.5m is 60k at a 4% SWR. That's less than 90k, but it also has inflation adjustments built in (at 3%, not 2% which is below long term averages). Oh and at 4% SWR you still have that initial principal value (inflation adjusted) left at the end to drop in an inheritance or giving pledge.

Put another way, 90k a year is a 6% rate on 1.5 million. So by taking the "risk" they could just drop the 1.5m in VTI and pocket the 4% spread (6% vs 10% long term).

And I quote risk because, well, what happens if the company just goes under? Maybe you can recover some, but probably not everything. So you're letting them take the profits to protect you from a black swan event... which is exactly the sort of thing that'd be likely to take them out (because 6% vs 4% the game is very much tilted in their favor).

We had a discussion about "what if the company does out of business?" And our advisor said that that is why you don't just go with the "best deals," but you go for good deals with very solid companies. She is recommending NY Life or MA Life. They are both rated superior. I do get what you are saying though as that is why I asked her that question in the first place.

However, at the moment, we have almost all our assets in TIAA funds (my husband's retirement account). What if TIAA went under? Wouldn't we be in the same situation?

She also explained that these insurance companies have an semi-independent presence in every state, so if they went bankrupt in one state, the state agencies would step in to backstop the losses. Also, if they should fail, they would most likely be bought by another company. We might risk delays in payouts, or less return, but it is highly unlikely we would simply lose everything.


So, yes, we would be trading potential upside for security. But I am not sure we need more upside. If we didn't go the annuity route, we would go the "bucket" route -- with a safe 5-year bucket, a slightly more risky 5-15 year bucket and a much riskier 15+ year bucket. So we wouldn't be using a straight 4% withdrawal rule anyway.

She modelled the outcomes for us using the 4% withdrawal rule and if we had a bear market for the first 3 years of our retirement, we would run out of money by the time we were 85 or so. I'm not sure if it was exactly 3 years of bear market, but it looked like if we followed the 4% rule, we would have about a 85% chance of it all working out and a 15% chance of running into trouble. With the buckets or annuities and reduced buckets, we have a close to 0% chance of running dry.

There may be something wrong with this analysis though. I supposed one thing we could do is if there were a bear market at the moment we retire and years/months beyond, we could just reign in our spending for a few years. But those are also the years we want to travel the most and at a certain age, you can no longer indefinitely postpone the fun (yet taxing) things you want to do.

Please feel free to argue against this. It's why I'm posting ... to get different opinions.

ETA: I did a little research and the annuity company that is being recommended is New York LIfe: It has been in business since 1841 and survey the stock market crash in 1929. It is also not a publicly-traded company, so there are free to be conservative in their decision-making. Pretty secure it seems.

[Melisande]

What's your annual spending? Is the 90k even relevant?

+1

Annuities are a form of fixed income.  They can be very good for people who might outlive their savings, or otherwise have trouble hanging onto it.  With your net worth, you should have no worries.  So, what need are you addressing?

Said another way:  you yourself could generate $150k out of that same $1.5M, just index investing.  Yes, there will be volatility, but who cares?  Put 3 years of $100k spending into a CD ladder, and you get $120k a year, and have an emergency fund that can outlast double the average 18 month life of a recession.  And, you will still have that principle at the end, too.

You are paying someone $30k-$60k a year to safeguard a portion of your wealth.  It sounds like security you don't need.  It's certainly not a bargain.

If you are having trouble sleeping at night, maybe there is a psychological reason, that can't be computed.

In general, I would only consider an immediate annuity like this for "core," non discretionary spending.  Any discretionary spending could be cut back in bad times as a way to cope.

I think you hit the nail on the head with your discretionary vs non-discretionary spending. I mentioned our ages because at a certain point in your life (not when you are in your 40s or 50s, but when you are older), your discretionary spending becomes non-discretionary in a sense. If God forbid, there is a huge market crash just when my husband retires (let's imagine it was Fall of 2008), sure we could simply stick to the minimum for a few years until the market recovers. That works just fine when you are 30, 40, 50 years old, as you can simply postpone all those amazing things you are hoping to do. It no longer works so well when you are in your mid 60s and beyond. Why? Because you NEED (ha ha) to taken the dream vacations you are going to take NOW and not later. I am already starting to have problems travelling. It is no longer as easy as it once was to do adventure travel on the other side of the world. It is very likely that there are trips will be able to manage next year that we will absolutely not be able to manage 3 years later.

What do you think of this argument?

[Financial.Velociraptor]

When my father retired he wanted to do something with his 401k money.  His only criteria for investing it was "It can never go down.  Ever.  It is everything I have worked for all my life!"  That is, he has ZERO risk tolerance.  We put him in SPIA with 7 year term and have rolled it twice to a different providers with a better interest rate at the time.  That is, we shop around we when are eligible for a new term.

The note above about the product being SOLD rather than BOUGHT is important.  There are plenty of free services (Google is your friend here) that will shop the universe of annuities to find your best rate.  E.g. an annuities broker.  Most of the annuities sold as a commodity type product through brokers have 7 year terms.  Exceptions apply.  don't get sucked into anything exotic like the new "equity linked" annuities.  That is taking something is supposed to be bond like and amping up the risk for trivial extra return and paying high fees for doing so.

I think the best way to consider this is it is a fixed income allocation that replaces some or all of your bonds.  It is very close to putting it in bank CDs, but can have a perpetual term and pays a better interest rate (and can have an inflation adjustment).  It DOES NOT have a guarantee by FDIC or any other government insurance.  That said, in my understanding no insurance company rated as A by AM Best has gone defaulted in over 100 years.  The actuarial science is very advanced and these companies are regulated such that they must be quite conservative.  They also use reinsurance to hedge themselves.

If you want an annuity, shop around.  But it sounds like you might prefer some extra flexibility and a government guarantee of bank CDs?  You might also consider taxes.  You would be putting enough away that any large bank will advise you in how to build a municipal bond ladder that is super safe against default, and have coupons that are federal tax exempt.  The same bank will then let you use that investment as collateral if you need short term loans.  You'd be one of their private wealth clients and get a favorable rate plus every perk the bank can offer.  If it were me, that would be more than plenty money and I'd be looking for greater security instead of extra return.  YMMV if you want to leave a large inheritance to family or charity.

[MustacheAndaHalf]

If you bought 20-year U.S. Treasury Bonds, they pay 4.2% per year - and you get your money back.
You're considering an annuity that pays 6%, so let me compare these two.

Trading $1.5M for an annuity paying 6% gives you $90k/year, or $1.8M over the next 20 years.
Buying $1.5M of U.S. Treasuries pays 4.2% or $63k/year, or $1.26M over 20 years...
...but then you get your original $1.5M back, for a total of $2.76M.

Right now, U.S. Treasuries give you +50% more money - and treasuries can be sold before maturity.  For U.S. Treasuries to give you less money than this offer, they would need to pay less than 1%.  Except for 2020, Treasuries always paid more than that - and it was rare even in 2020.

[reeshau]

I think the best way to consider this is it is a fixed income allocation that replaces some or all of your bonds.

It is, literally, a private pension.

[Financial.Velociraptor]

I think the best way to consider this is it is a fixed income allocation that replaces some or all of your bonds.

It is, literally, a private pension.

But can have additional features.  Sometimes,  you can withdraw a percentage per year above and beyond  your interest without penalty.  Some times  you can take a fixed interest loan against your balance.  There are a lot of wrinkles. 

Advice above to consider Treasuries also very strong.  Especially with FFR about to fall which will send the value of the bonds soaring.

[reeshau]

What do you think of this argument?

You have a mountain of cash.  You could say "I'm going to Vegas, betting $1.5M on black, and just getting my risk all out at once!"  We would call you stupid, but you could survive the move.

I don't put much stock into Mandatory Fun, but there is the concept of "go-go, slow-go, and no-go" years, where your second childhood eventually gets replaced by long-term nursing care.

One other question: do you have any heirs or charities that you want to give significant help to, either when you're gone or while you are living?  Since you have enough for a household of 12 Mustachians to live on, this is probably the biggest impact I could think of, if you are going to hand your cash over for a paycheck.

Also, do consider the prior advice about splitting your annuity among multiple companies (diversification, in this space) and getting a second opinion.  Your "Financial advisor" (are they a Certified Financial Planner?  If not, run away) is almost certainly being paid for signing you up.  Ask them what their commission is for this.

[chasingthegoodlife]

I’ve been doing a little reading on annuities recently, and most sources I’ve seen advocate for an inflation linked product. Which makes sense in that a common reason for buying an annuity is pooling longevity risk - being confident you can meet your spending needs if you live to 100, in return for giving up the remaining capital you would have had if you died at 80.

Why has your financial advisor steered you towards a non inflation linked product? Have they modelled for you how that 90k will look in ‘todays dollars’ when you are 95?

If your goal is to make sure you don’t have to cut back in your travel years at the start of retirement if there is a market downturn, have they discussed other strategies that might meet this? Perhaps a shorter term product that returns your capital?

(I don’t have expertise in this area, just my thoughts on your post)

In Australia annuities receive favourable treatment compared with other assets in calculating government benefits (pension, age care funding) so they can be a good option in some circumstances, especially if there is no bequest motive.

[GilesMM]

 The time to buy an annuity is when you need it for longevity risk which is when you are old because a) that is when longevity risk comes, b) the rates are marvelous, c) inflation risks are reduced because the payment period is reduced, and d) payor bankruptcy risk reduced along with a shorter payout period.


For example, if you were 79 today and on your last million, you could buy a lifetime annuity starting at age 80 which would pay 12.6% ($126,000/yr) for life.  No inflation adjustment and probably none needed.  If you need inflation protection buy a ladder of annuities.


Why are you using a financial advisor? Do you really need one? How is he compensated? Does he get a cut on the annuity sale?

[Telecaster]

Also, you should run an backward inflation calculator to see what $90k fixed looks like in 20 years (I see $50k at 3%). There's a reason that inflation annuities are no longer sold.

The long term power and risk of inflation cannot be emphasized enough.   The long term inflation rate is about 3.5%.    It isn't prudent to assume lower inflation than that.   It might be lower, but it could be higher too. 

If we do the same exercise with 3.5% inflation, that $90K becomes $60K (the 4% SWR amount) in only 12 years.   And if you live to be 90, it will be worth a mere $40K.   

You could argue that $90K/year early in retirement is more valuable than $60K/year at age 78.  I'm just pointing out the financial advantage of an annuity is fleeting.  And remember, if you go the SWR route you still have your remaining portfolio balance too.   Which in most cases will end up much higher than the initial balance. 

[AccidentialMustache]

However, at the moment, we have almost all our assets in TIAA funds (my husband's retirement account). What if TIAA went under? Wouldn't we be in the same situation?

She also explained that these insurance companies have an semi-independent presence in every state, so if they went bankrupt in one state, the state agencies would step in to backstop the losses. Also, if they should fail, they would most likely be bought by another company. We might risk delays in payouts, or less return, but it is highly unlikely we would simply lose everything.

TIAA holds it for your husband. They don't own the funds. There would be a big todo as the sharks ate TIAA if it went under but someone would emerge as the winner and the stocks (with possibly some cash where numbers don't divide evenly) would end up in your husband's account elsewhere.

On the insurance -- yes there is a backstop in each state, but it might be low. Like 100k total. If you were counting on 10+ years of 90k a year that's quite the haircut there.

Also, there's the little matter of insurance. If you have not paid attention to the data, it turns out that we're having way more billion dollar insurance disasters in the last 5-10 years, almost like climate change is driving them or something. Crazy, I know. Those disasters are hammering the home/auto/crop insurance companies... do you know those companies you're being steered to aren't also home/auto/crop insurers and thus exposed to all that risk?

[Melisande]

What do you think of this argument?

You have a mountain of cash.  You could say "I'm going to Vegas, betting $1.5M on black, and just getting my risk all out at once!"  We would call you stupid, but you could survive the move.

I don't put much stock into Mandatory Fun, but there is the concept of "go-go, slow-go, and no-go" years, where your second childhood eventually gets replaced by long-term nursing care.

One other question: do you have any heirs or charities that you want to give significant help to, either when you're gone or while you are living?  Since you have enough for a household of 12 Mustachians to live on, this is probably the biggest impact I could think of, if you are going to hand your cash over for a paycheck.

Also, do consider the prior advice about splitting your annuity among multiple companies (diversification, in this space) and getting a second opinion.  Your "Financial advisor" (are they a Certified Financial Planner?  If not, run away) is almost certainly being paid for signing you up.  Ask them what their commission is for this.

Our financial advisor was recommended to us by some close friends whom we trust. They, in turn, got their recommendation from one of their families who have been with her for some time. Our friends are some of the smartest people we have ever met and I am assuming that their family members are no slouches either.

Also, I have double-checked her credentials. She is a licensed Chartered Life Underwriter (CLU); Chartered Financial Consultant (ChFC) and a Life and Annuity Certified Professional (LACP). We are hiring her - to the tune of $3,500/year for advice -- so she is working for us, although I know she also receives commissions.

We have discussed other strateties, like a CD-ladder, but she says that now is the time to buy annuities because we can still take advantage of relatively high interest rates, while also getting a monthly pay-out. The problem with a CD ladder is that you can't lock in high (or high-ish) interest rates. Or if you do with a long-term CD, then you have a liquidity problem.

[Melisande]

If you bought 20-year U.S. Treasury Bonds, they pay 4.2% per year - and you get your money back.
You're considering an annuity that pays 6%, so let me compare these two.

Trading $1.5M for an annuity paying 6% gives you $90k/year, or $1.8M over the next 20 years.
Buying $1.5M of U.S. Treasuries pays 4.2% or $63k/year, or $1.26M over 20 years...
...but then you get your original $1.5M back, for a total of $2.76M.

Right now, U.S. Treasuries give you +50% more money - and treasuries can be sold before maturity.  For U.S. Treasuries to give you less money than this offer, they would need to pay less than 1%.  Except for 2020, Treasuries always paid more than that - and it was rare even in 2020.

This is really interesting. Thanks for this analysis.

How does one actually go about buying U.S. Treasuries? Do you need a broker?

There is another issue. Our financial advisor told us that the $90,000 per year we would get would be counted towards our Required Minimum Distribution (so we would be required to withdraw less from our tax-deferred funds). Would the 4.2% we got from treasuries also count towards the RMD? Or would we take an additional tax hit?

[Melisande]

I’ve been doing a little reading on annuities recently, and most sources I’ve seen advocate for an inflation linked product. Which makes sense in that a common reason for buying an annuity is pooling longevity risk - being confident you can meet your spending needs if you live to 100, in return for giving up the remaining capital you would have had if you died at 80.

Why has your financial advisor steered you towards a non inflation linked product? Have they modelled for you how that 90k will look in ‘todays dollars’ when you are 95?

If your goal is to make sure you don’t have to cut back in your travel years at the start of retirement if there is a market downturn, have they discussed other strategies that might meet this? Perhaps a shorter term product that returns your capital?

(I don’t have expertise in this area, just my thoughts on your post)

In Australia annuities receive favourable treatment compared with other assets in calculating government benefits (pension, age care funding) so they can be a good option in some circumstances, especially if there is no bequest motive.

She is actually steering us towards a policy with a 2% inflation rider. In fact, she said that she thinks that would be our best option. We mentioned getting a 3% or 4% inflation rider and she told us that she would only recommend that for ultra-high-net-worth investors (she actually said that if we had 50M instead of 5M, she would certainly consider that higher inflation rider a viable option, but she said that was too conservative for us.

Also, she did mention that the payout from the annuity would count towards our Required Minimum Distribution from our tax deferred accounts, so we would either be getting a tax break or not increasing our tax burden. I forget which, but it was good for taxes.

[Melisande]

However, at the moment, we have almost all our assets in TIAA funds (my husband's retirement account). What if TIAA went under? Wouldn't we be in the same situation?

She also explained that these insurance companies have an semi-independent presence in every state, so if they went bankrupt in one state, the state agencies would step in to backstop the losses. Also, if they should fail, they would most likely be bought by another company. We might risk delays in payouts, or less return, but it is highly unlikely we would simply lose everything.

TIAA holds it for your husband. They don't own the funds. There would be a big todo as the sharks ate TIAA if it went under but someone would emerge as the winner and the stocks (with possibly some cash where numbers don't divide evenly) would end up in your husband's account elsewhere.

On the insurance -- yes there is a backstop in each state, but it might be low. Like 100k total. If you were counting on 10+ years of 90k a year that's quite the haircut there.

Also, there's the little matter of insurance. If you have not paid attention to the data, it turns out that we're having way more billion dollar insurance disasters in the last 5-10 years, almost like climate change is driving them or something. Crazy, I know. Those disasters are hammering the home/auto/crop insurance companies... do you know those companies you're being steered to aren't also home/auto/crop insurers and thus exposed to all that risk?

I certainly see what you are talking about in your last paragraph. We are in FL and my husband is actually involved in the state's regulation of Homeowner's Insurance here (he is a volunteer on the state's oversight commission), so we are aware. However, the company that is being recommended to us -- New York Life -- seems not to be involved in these other forms of insurace, but rather are in mutual funds. See: https://en.wikipedia.org/wiki/New_York_Life_Insurance_Company

[beee]

90k for 1.9M is 4.7% return with 2% inflation.
For this you give out the principal and flexibility.
The math is not that great, imho.

Ask your advisor how much commission will they make on this $1.9M sale.
Just so you know their incentive of recommending you this product.

[Telecaster]

We are hiring her - to the tune of $3,500/year for advice -- so she is working for us, although I know she also receives commissions.

Holy shit that's expensive!   I humbly submit that if a financial advisor can't figure a plan for you in less than a couple hours your finances are way, way too complicated.   Or they are ripping you off.

We just did our estate planning and there was some back and forth with the estate attorneys but that was way less than $3500.   And that's something most people only have to do once.  You can hire a tax account for an hour or two and go over planning strategies (a big key in retirement) for a few hundred bucks.  That's something you only have to do occasionally, not every year.

The fees your planner is charging for the amount of work is bonkers.   

We have discussed other strateties, like a CD-ladder, but she says that now is the time to buy annuities because we can still take advantage of relatively high interest rates, while also getting a monthly pay-out. The problem with a CD ladder is that you can't lock in high (or high-ish) interest rates. Or if you do with a long-term CD, then you have a liquidity problem.

At least you know she is completely full of shit.    Right now, interest rates are relatively low.   Higher than the recent past, but lower than most of the last 70 or so years.   And how can she possibly know what interest rates will be five or ten years from now?   Are you locking in high rates or are you locking in low rates?   Anyone who claims to know something like that is a charlatan.   

The scheme your advisor is proposing appears to high risk and low reward.   That's usually the opposite of how you want to do it.   

This one has been answered, but I just want to add a couple things:

However, at the moment, we have almost all our assets in TIAA funds (my husband's retirement account). What if TIAA went under? Wouldn't we be in the same situation?

She also explained that these insurance companies have an semi-independent presence in every state, so if they went bankrupt in one state, the state agencies would step in to backstop the losses. Also, if they should fail, they would most likely be bought by another company. We might risk delays in payouts, or less return, but it is highly unlikely we would simply lose everything.

It wouldn't be the same situation. Brokerages are required to segregate their assets.  That is, your mutual funds and other investments are held separately from the brokerage's assets, protecting them in case of the firm's bankruptcy.  Additionally brokerages have SPIC insurance for up to $500,000 and most have additional insurance beyond that.   I keep my assets in two different brokerages in off chance something goes bad at one of them I still have access to money while it gets sorted out.  The risk is low, but it isn't hard to do so I don't mind the slight amount of extra work.

I think your biggest risk isn't the insurance company going out of business (could happen, but chances are low), instead it is you are buying an extremely expensive financial product that provides very little benefit.    It seems safe on the surface but in reality it is an enormous gamble.    I'm far too risk averse to do something like this.   

[FLBiker]

Our financial advisor ... is a licensed Chartered Life Underwriter (CLU); Chartered Financial Consultant (ChFC) and a Life and Annuity Certified Professional (LACP). We are hiring her - to the tune of $3,500/year for advice -- so she is working for us, although I know she also receives commissions.

I don't have experience myself with financial advisors, but I don't think any of those qualifications include a fiduciary responsibility (meaning she is required to act in your best financial interest).  A quick conversation with ChatGPT makes it sound like the first has to do with insurance and estate planning, the second financial planning (but w/o the fiduciary requirement) and the third with insurance and annuities.  Thus, it seems reasonable that this person would recommend an annuity because 1) they get a commission and 2) one of their qualifications is a license to sell annuities.

Personally, if I were to work with a financial advisor I'd want someone whose license included a fiduciary responsibility, and I'd want them to be fee-only and advice-only.  Commissions, for me, are an absolute deal-breaker.

None of that is to say that you should or shouldn't get an annuity.  For some people, I think they can make sense.  I'd do the math on what you're giving up by not investing that lump sum, and I'd also consider waiting until you're older and the price comes down.  I'm not particularly motivated by salespeople who tell me that "now is a great time to buy".  And I'd definitely shop around, whatever you decide.

Our financial advisor was recommended to us by some close friends whom we trust. They, in turn, got their recommendation from one of their families who have been with her for some time. Our friends are some of the smartest people we have ever met and I am assuming that their family members are no slouches either.

With respect, this is not a good way to pick a financial advisor.  I worked for many years in higher education and I always reached out to new (and smart) colleagues to help them set up their retirement plans.  We had three primary options -- a pension, a state-owned investment fund, and a personally-owned investment fund, and then investment choices within those latter two options.  Most (if not all) of the smart people that I worked with were pretty dumb about money.

A few weeks ago, I was on vacation with my sister and her husband, and she was explaining to me that they invest in actively managed funds through Edward Jones.  My sister is a doctor.  She does this because 1) her husband's family has a guy they like and 2) "as a big company, they have access to investment vehicles that you can't get as an individual."  She's very smart, but not in this area.

[reeshau]

Our financial advisor was recommended to us by some close friends whom we trust. They, in turn, got their recommendation from one of their families who have been with her for some time. Our friends are some of the smartest people we have ever met and I am assuming that their family members are no slouches either.

Others have touched on this, but I will be blunt about it.  Smart about money, specifically?  Or smart about other things?   Transference of credibility from one domain to another is an example of the halo effect.

Also, I have double-checked her credentials. She is a licensed Chartered Life Underwriter (CLU); Chartered Financial Consultant (ChFC) and a Life and Annuity Certified Professional (LACP). We are hiring her - to the tune of $3,500/year for advice -- so she is working for us, although I know she also receives commissions.

There is literally an alphabet soup of designations out there.  Some are very solid, and some are marketing tools.  For me, it's CFP or nothing.  But, I did poke around at Finra.

I did find that ChFC does fulfill the education requirement to go for a CFP.  But, as @FLBiker points out, they have no fiduciary duty.  That's a very important distinction, if the shit hits the fan.

Here is the Professional Pledge from the American College of Financial Sevices, who sponsors the ChFC designation and oversees its ethics:

"In all my professional relationships, I pledge myself to the following rule of ethical conduct: I shall, in light of all conditions surrounding those I serve, which I shall make every conscientious effort to ascertain and understand, render that service which, in the same circumstances, I would apply to myself."

Sounds nice, right?  But here is the first duty owed to clients, from the CFP Board:

Duties Owed To Clients
 
Fiduciary Duty
At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled:

Fiduciary Duty is a specific legal term.  Spelling it put has specific legal consequences for those who practice it.  Lots of nice words that sound like it, but don't say it outright, mean only as much as that person wants them to mean.  So, they could mean nothing.

Ask the person if they are a fiduciary.  If they don't plainly say "yes," In writing, walk away.  Anything else that happens if based on your judgment, and that alone.

[Melisande]

I would like to point out that in the contract we signed, it did in fact say that she had a fiduciary duty and she has mentioned this several times.

But thanks for all the comments. Now we are seriously thinking about treasuries instead (of the annuity). The analysis that at least one person made up-thread makes a lot of sense.

Also, you are making me re-think what I said about our friends being really smart. They are pretty involved in crypto (but they have not invested so much that it would be a disaster to lose everything), so maybe not so smart?

I think part of our problem is just anxiety about striking out on our own. For years, now all we have done is invest in funds in our TIAA and Vanguard accounts. End of story. Well, aside from some bank accounts.

We have never bought treasuries or other bonds, or individual stocks, or CDs. So maybe I have to overcome my anxiety about all of this. Part of my anxiety stems from the fact that I have basically sole responsibility for setting up our retirement finances as my husband is just not financially savvy or apparently interested in becoming so (although he has a gazillion other wonderful qualities).

[Melisande]

If you bought 20-year U.S. Treasury Bonds, they pay 4.2% per year - and you get your money back.
You're considering an annuity that pays 6%, so let me compare these two.

Trading $1.5M for an annuity paying 6% gives you $90k/year, or $1.8M over the next 20 years.
Buying $1.5M of U.S. Treasuries pays 4.2% or $63k/year, or $1.26M over 20 years...
...but then you get your original $1.5M back, for a total of $2.76M.

Right now, U.S. Treasuries give you +50% more money - and treasuries can be sold before maturity.  For U.S. Treasuries to give you less money than this offer, they would need to pay less than 1%.  Except for 2020, Treasuries always paid more than that - and it was rare even in 2020.

Ok, but beyond the tax issue which I mentioned in an above response, here is another issue.

Let's say that we wanted to make sure we had $150,000/year income guaranteed from the beginning of our retirement. If we only had $60,000 from SS and $63,000 from the T-bills, that would mean only $123,000/year. We would need to set aside an additional $27,000 per year in very secure, low risk, low reward vehicle every year to make up that difference. If we didn't need to do that, we could very aggressively invest that same $27,000. So, if we got the annuity, then aggressively invested, the $27,000 that we weren't using to supplement our income, we would wind up with an additional 1.532M (what you get with a 9% return on $27,000 over 20 years adding another $27,000 every year).

So, that means that in 20 years, with the annuity, we would have 1.8M + 1.5M vs 1.26M + 1.5M with the T-bills. So, looks like the annuity is better after all, no?

[reeshau]

I would like to point out that in the contract we signed, it did in fact say that she had a fiduciary duty and she has mentioned this several times.

In writing is perfect.  If she was a CFP, it would be in effect in any interaction, not otherwise disclaimed.

Part of my anxiety stems from the fact that I have basically sole responsibility for setting up our retirement finances as my husband is just not financially savvy or apparently interested in becoming so (although he has a gazillion other wonderful qualities).

Well, here's yet another angle.  If you set up your retirement finances, what would your husband do if you predecease him?  You might establish a relationship, not because they could do it better, but because someone you trust knows what's going on, and can help him.

I do invest primarily in individual stocks.  My wife has very little interest,  it is on my mind that she is, statistically, likely to outlive me. (She is one year younger)  We had a fee-only planner in Michigan that we did a one-time plan with, when our son was born.  I was happy to be in charge of our fate as a couple, but adding a new life freaked me out, just a bit.

I most certainly would not hand my finances over to someone else for this reason, but sitting down for a plan again, with someone local, is on the agenda.  It wouldn't totally be for this reason; it could be useful as Medicare and Social Security approach.  But, for me it would be discussion of *my* plan, which *I* will execute.  It could be something more if I am gone, and she chooses it.

I also think that, somewhere down the line, I may revert to my working balance of funds being mainly indexes, so that she wouldn't have to make complicated decisions.

[reeshau]

We would need to set aside an additional $27,000 per year in very secure, low risk, low reward vehicle every year to make up that difference.

VTSAX yields 1.34%.  $2.3M of it yields $30K a year.

[daverobev]

1.5m is 60k at a 4% SWR. That's less than 90k, but it also has inflation adjustments built in (at 3%, not 2% which is below long term averages). Oh and at 4% SWR you still have that initial principal value (inflation adjusted) left at the end to drop in an inheritance or giving pledge.

4% SWR assumes worst case $0 after 30 years. It certainly does not assume the principal will remain.

@Melisande you can certainly buy a Treasury ladder just like you can a CD ladder (though over a longer period!). For myself I've bought various maturity British Gilts, which are the UK equivalent of Treasuries. If you need more than the Treasuries throw off in interest, you can just reinvest a portion each time one issue matures.

[MustacheAndaHalf]

If you bought 20-year U.S. Treasury Bonds, they pay 4.2% per year - and you get your money back.
You're considering an annuity that pays 6%, so let me compare these two.

Trading $1.5M for an annuity paying 6% gives you $90k/year, or $1.8M over the next 20 years.
Buying $1.5M of U.S. Treasuries pays 4.2% or $63k/year, or $1.26M over 20 years...
...but then you get your original $1.5M back, for a total of $2.76M.

Right now, U.S. Treasuries give you +50% more money - and treasuries can be sold before maturity.  For U.S. Treasuries to give you less money than this offer, they would need to pay less than 1%.  Except for 2020, Treasuries always paid more than that - and it was rare even in 2020.

Ok, but beyond the tax issue which I mentioned in an above response, here is another issue.

Let's say that we wanted to make sure we had $150,000/year income guaranteed from the beginning of our retirement. If we only had $60,000 from SS and $63,000 from the T-bills, that would mean only $123,000/year. We would need to set aside an additional $27,000 per year in very secure, low risk, low reward vehicle every year to make up that difference. If we didn't need to do that, we could very aggressively invest that same $27,000. So, if we got the annuity, then aggressively invested, the $27,000 that we weren't using to supplement our income, we would wind up with an additional 1.532M (what you get with a 9% return on $27,000 over 20 years adding another $27,000 every year).

So, that means that in 20 years, with the annuity, we would have 1.8M + 1.5M vs 1.26M + 1.5M with the T-bills. So, looks like the annuity is better after all, no?

That's a good point.  You could also downsize the annuity to $63k/year (6% of $1.05M), and invest the other $450k in stocks for 20 years, turning it into $2.5M.  Which is my way of agreeing that your spending needs seem to be better met by an annuity.

Speaking of downsizing, studies of retirees show a spike in travel - and expenses - followed by a much lower rate of spending.  If your $150k aims at the travel phase of retirement, the annuity might be oversized.

Just to answer the earlier reply, I didn't know you were buying an annuity using assets from a (Traditional) IRA.  U.S. Treasuries are unrelated to IRAs, but do benefit from being exempt from state taxes.

[MustacheAndaHalf]

We have never bought treasuries or other bonds, or individual stocks, or CDs. So maybe I have to overcome my anxiety about all of this. Part of my anxiety stems from the fact that I have basically sole responsibility for setting up our retirement finances as my husband is just not financially savvy or apparently interested in becoming so (although he has a gazillion other wonderful qualities).

Individual bonds can have complex clauses in their contracts, which I prefer to avoid.  I've read a few books on bonds, and my conclusion was to stick with treasury and bond ETFs.  If you want to see if you would arrive at a different conclusion, a good overview is "The Bond Book" by Annette Thau.

After $60k in social security, you need another $90k/year, which is under 2% of your portfolio.  Every retirement simulation I've run with that low a withdrawal rate comes up as almost certain success (99% on Vanguard's Monte Carlo simulation of random, historical gains/losses - but that was removed a few years back).  It is actually quite difficult to screw up a 2% withdrawal rate.

Another consideration for retirement needs: once neither of you are working, will you move?  Moving somewhere with a lower cost of living can lower your withdrawal rate even further.

[Melisande]

We have never bought treasuries or other bonds, or individual stocks, or CDs. So maybe I have to overcome my anxiety about all of this. Part of my anxiety stems from the fact that I have basically sole responsibility for setting up our retirement finances as my husband is just not financially savvy or apparently interested in becoming so (although he has a gazillion other wonderful qualities).

Individual bonds can have complex clauses in their contracts, which I prefer to avoid.  I've read a few books on bonds, and my conclusion was to stick with treasury and bond ETFs.  If you want to see if you would arrive at a different conclusion, a good overview is "The Bond Book" by Annette Thau.

After $60k in social security, you need another $90k/year, which is under 2% of your portfolio.  Every retirement simulation I've run with that low a withdrawal rate comes up as almost certain success (99% on Vanguard's Monte Carlo simulation of random, historical gains/losses - but that was removed a few years back).  It is actually quite difficult to screw up a 2% withdrawal rate.

Another consideration for retirement needs: once neither of you are working, will you move?  Moving somewhere with a lower cost of living can lower your withdrawal rate even further.

Thanks.

No, we aren't planning on moving. We're already in a fairly low COL area. At least not high. And, we don't want to move ...

Actually, the situation is a little more complex. We were advised not to start drawing SS until my husband is 70, and I will not be receiving any SS for at least 5 years. So, if we wait until 70 to start SS for me husband -- so we can actually receive $58,000/year (which will increase to $89,000/year in six years when I start drawing SS), then we will have 2.5 years with no SS and only living off of our investments. This first early period is also the riskiest in terms of sequence of return risk -- the risk of drawing down our principle substantially at the very beginning.

One solution would be to live very frugally for the 2.5 years before my husband turns 70, but we don't want to live frugally during those years.

[Sandi_k]

@Melisande - if you're a member of the Boglehead forums, they have an annuity expert there. His logon ID is Stinky.

He has been extraordinarily helpful to posters who are trying to assess the value of an annuity. In general, he recommends SPIAs or MYGAs only. He has also noted that you can ladder the SPIAs - buy one at age 70, period 10 year certain, and then another at age 80, with another period 10 year certain, for much less cost than a 20 year period certain.

IIWY, I'd go read his posts. In general, I am not persuaded by your financial advisor. They can be fiduciaries in some aspects of the relationship, and then sell you an annuity with a 10% commission and huge surrender charges. Nope, nope, nope.

[Melisande]

If you bought 20-year U.S. Treasury Bonds, they pay 4.2% per year - and you get your money back.
You're considering an annuity that pays 6%, so let me compare these two.

Trading $1.5M for an annuity paying 6% gives you $90k/year, or $1.8M over the next 20 years.
Buying $1.5M of U.S. Treasuries pays 4.2% or $63k/year, or $1.26M over 20 years...
...but then you get your original $1.5M back, for a total of $2.76M.

Right now, U.S. Treasuries give you +50% more money - and treasuries can be sold before maturity.  For U.S. Treasuries to give you less money than this offer, they would need to pay less than 1%.  Except for 2020, Treasuries always paid more than that - and it was rare even in 2020.

Ok, but beyond the tax issue which I mentioned in an above response, here is another issue.

Let's say that we wanted to make sure we had $150,000/year income guaranteed from the beginning of our retirement. If we only had $60,000 from SS and $63,000 from the T-bills, that would mean only $123,000/year. We would need to set aside an additional $27,000 per year in very secure, low risk, low reward vehicle every year to make up that difference. If we didn't need to do that, we could very aggressively invest that same $27,000. So, if we got the annuity, then aggressively invested, the $27,000 that we weren't using to supplement our income, we would wind up with an additional 1.532M (what you get with a 9% return on $27,000 over 20 years adding another $27,000 every year).

So, that means that in 20 years, with the annuity, we would have 1.8M + 1.5M vs 1.26M + 1.5M with the T-bills. So, looks like the annuity is better after all, no?

That's a good point.  You could also downsize the annuity to $63k/year (6% of $1.05M), and invest the other $450k in stocks for 20 years, turning it into $2.5M.  Which is my way of agreeing that your spending needs seem to be better met by an annuity.

Speaking of downsizing, studies of retirees show a spike in travel - and expenses - followed by a much lower rate of spending.  If your $150k aims at the travel phase of retirement, the annuity might be oversized.

Just to answer the earlier reply, I didn't know you were buying an annuity using assets from a (Traditional) IRA.  U.S. Treasuries are unrelated to IRAs, but do benefit from being exempt from state taxes.

Thanks! In FL, we don't have any state taxes, so there goes that advantage ...

[AccidentialMustache]

1.5m is 60k at a 4% SWR. That's less than 90k, but it also has inflation adjustments built in (at 3%, not 2% which is below long term averages). Oh and at 4% SWR you still have that initial principal value (inflation adjusted) left at the end to drop in an inheritance or giving pledge.

4% SWR assumes worst case $0 after 30 years. It certainly does not assume the principal will remain.

What forums are we on again? https://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

The 4% was to make an example of how weak the annuity offer is. I'd trust the market not to zero a 4% SWR (according to MMM's definition above) over an annuity business not going under in the same conditions. I mean, the company can't just pare back payments like an individual can choose to withdraw less in a bad year/years. The annuity company is into mutual funds, which is essentially the same risk category as failed-at-SWR.

As far as I noticed, the spending wasn't ever answered, which is the real question. If spending means the withdrawal rate is 2%, why is anyone wasting time with this conversation. Put a few years worth in bonds or a CD ladder, dump the rest into VTI and friends and don't even think about it.

If 2% isn't safe, then there is no safety because something went so black swan that you're not going to derisk it with an annuity anyway (or potentially generic-you won't survive the event in the first place).

[Telecaster]

What forums are we on again? https://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

The 4% was to make an example of how weak the annuity offer is. I'd trust the market not to zero a 4% SWR (according to MMM's definition above) over an annuity business not going under in the same conditions. I mean, the company can't just pare back payments like an individual can choose to withdraw less in a bad year/years. The annuity company is into mutual funds, which is essentially the same risk category as failed-at-SWR.

As far as I noticed, the spending wasn't ever answered, which is the real question. If spending means the withdrawal rate is 2%, why is anyone wasting time with this conversation. Put a few years worth in bonds or a CD ladder, dump the rest into VTI and friends and don't even think about it.

If 2% isn't safe, then there is no safety because something went so black swan that you're not going to derisk it with an annuity anyway (or potentially generic-you won't survive the event in the first place).

I think you answered your question in your first post.  There were two terrible challenges for the 4% rule.  One was in 1929.  We all know what happened there.  Stocks crashed and remained in the doldrums for years.  That in turn crashed the banking and insurance industries. Insurance companies collapsed in droves.  Relying on an insurance company would not have been a good strategy at that time.

The second great challenge was in the mid to late 1960s.   There was a period of poor stock returns combined with 15+ year period of high inflation.  If you had an annuity with only a 2% increase your goose would have been cooked.  And in fairly short order.

These are not hypotheticals.  They actually happened, and the latter happened in living memory of many people in this board. 

None of us know the future.  But betting your retirement on the notion that the fairly recent past can't happen again seems extraordinarily risky.   I have no problem with risk, but in this case there is almost no upside as well.  It is like you are betting against yourself. 

[vand]

Annuities are definitely underappreciated on this board, and over the last year have been a pretty attractive proposition.  However, I with the downward path in rates going forward I feel they're probably going to swing back to being less attractive.

It's important to understand them well and the increasingly attractive proposition they represent as you get older.  I wouldn't consider an annuity at 55yo, but at 65-75 they are more attractive, especially if leaving an inheritance isn't important to you.

[Must_ache]

She modelled the outcomes for us using the 4% withdrawal rule and if we had a bear market for the first 3 years of our retirement, we would run out of money by the time we were 85 or so. I'm not sure if it was exactly 3 years of bear market, but it looked like if we followed the 4% rule, we would have about a 85% chance of it all working out and a 15% chance of running into trouble. With the buckets or annuities and reduced buckets, we have a close to 0% chance of running dry.

There may be something wrong with this analysis though. I supposed one thing we could do is if there were a bear market at the moment we retire and years/months beyond, we could just reign in our spending for a few years. But those are also the years we want to travel the most and at a certain age, you can no longer indefinitely postpone the fun (yet taxing) things you want to do.

You have $4.2M in investable assets and I find this result quite suspicious.  OK, if a bear market came and the amount of money was cut in half to $2.1M now the chance of withdrawing $90k per year would lessen.  But you don't need to take those risks.  Right now you have enough money to give yourself $90,000 per year 46.7 times over.  That should cover you until age 112.  All you really need to do is invest in Treasuries if you want to be really safe. 

For simplicity let's just give you $100k/yr:
$400,000 in liquid savings (in a high yield account or short-term CD's that currently get 4.5% but that will go down soon.  Covers 2025-26 and an extra $200K)
$300,000 in a 2-yr note (3.75%) covers 2027-29
$200,000 in a 5-yr note (3.625%) covers 2030-31
$300,000 in a 7-yr note (3.75%) covers 2032-34
$1M in a 10-yr note (3.875%) covers 2035-2044
$1M in a 20-yr bond (4.125%) covers 2045-2054
$1M in a 30-yr bond (4.25%) covers 2055-2064

There's your $4.2M invested.  When the 2-yr note comes due it will be three years of money so from there you put it in savings or short-term CDs or whatever.  Anything you don't spend could be put in the stock market.  Likewise when the 2035 rolls around you will have to park $1M (which has grown to $1.46M) into short-term term stuff (1-yr, 2-yr, 5-yr, etc) so you can use it over the that decade. 

When you invest $1.2M in a 30-yr 4.25% note, that compounds your money by a factor of 1.0425^30=3.49x.  So you would spend $1.2M but it will tell you that upon maturity you will collect $4.18M 30 years from now.       

Research tells us you are better off having some amount of stock.  You can be cautious, since you like the idea of an annuity maybe only 25% of your assets go in boring stock market ETFs and the remaining 75% is invested as outlined above (guaranteeing you $67,500 plus whatever the stock market returns, instead of $90,000).  Your real worry is inflation over 4% and that the US debt and the financial condition of the country and purchasing power eroding over time but that isn't anything you can do much about.  You also won't have to worry about paying commissions or will my insurance company be solvent.  They aren't sexy returns but the point is you DON'T NEED a sexy return.

There is a lot of information about all recent auctions at Treasury Direct about auctions and yields. 
https://www.treasurydirect.gov/auctions/announcements-data-results/

We were advised not to start drawing SS until my husband is 70, and I will not be receiving any SS for at least 5 years. So, if we wait until 70 to start SS for me husband -- so we can actually receive $58,000/year (which will increase to $89,000/year in six years when I start drawing SS), then we will have 2.5 years with no SS and only living off of our investments. This first early period is also the riskiest in terms of sequence of return risk -- the risk of drawing down our principle substantially at the very beginning.

One solution would be to live very frugally for the 2.5 years before my husband turns 70, but we don't want to live frugally during those years.

You are swimming in money.  It's going to make little or no difference if you take it at 66 or 70.  Let's say you wait and get $90K in social security.  Now you only need $60K from your assets.  Let's say you spend $150K/yr for five years, now you're down to about $3.5M if you got no investment return.  That will get you $60k for almost 60 years.

It sounds like your biggest worry is early sequence of returns risk.  I don't think there is anything wrong taking your $4.2M and pulling most or all of it out of the stock market and taking something with less or zero risk, which is how the annuity question came to us in the first place.   

Your other big risk could be hurricanes, rising insurance costs, and the real estate market.
 

[Must_ache]

4% SWR assumes worst case $0 after 30 years. It certainly does not assume the principal will remain.

If we're talking about the original Trinity study, then we are talking about a 5% probability of $0 before 30 years is up.  The problem is people assume something different than that.

[reeshau]

4% SWR assumes worst case $0 after 30 years. It certainly does not assume the principal will remain.

If we're talking about the original Trinity study, then we are talking about a 5% probability of $0 before 30 years is up.  The problem is people assume something different than that.

That's not actually true.  First of all, the Trinity Study expands Bengen's original 50/50 split into a number of scenarios--so there is not a single number.  But also, there are a number of scenarios with 100% historical success, even beyond 4%.

This is the table from their paper.

[Must_ache]

You picked the wrong table. 
This table factors in the ability to make inflation-adjusted withdrawals.
A 30-yr time horizon with 100% stocks or 50% stocks was only successful 95% of the time.  75% is a bit better, while less than 50% is considerably worse. 
At a 5% withdrawal rate your probability ruin jumps to about 1 in 6.

[Melisande]

Annuities are definitely underappreciated on this board, and over the last year have been a pretty attractive proposition.  However, I with the downward path in rates going forward I feel they're probably going to swing back to being less attractive.

It's important to understand them well and the increasingly attractive proposition they represent as you get older.  I wouldn't consider an annuity at 55yo, but at 65-75 they are more attractive, especially if leaving an inheritance isn't important to you.

Yes, we aren't interested in leaving an inheritance. However, the idea of signing over so much of our nest egg at once is still giving me pause.

I understand what you mean about the interest rate. Our advisor mentioned that if we want to get the best deal we should try to act before the next Fed meeting when they will most likely lower interest rates. This makes sense. Still, it felt a bit like a high pressure sales tactic (Act Now!) and is making me leary.

[Melisande]

@Melisande - if you're a member of the Boglehead forums, they have an annuity expert there. His logon ID is Stinky.

He has been extraordinarily helpful to posters who are trying to assess the value of an annuity. In general, he recommends SPIAs or MYGAs only. He has also noted that you can ladder the SPIAs - buy one at age 70, period 10 year certain, and then another at age 80, with another period 10 year certain, for much less cost than a 20 year period certain.

IIWY, I'd go read his posts. In general, I am not persuaded by your financial advisor. They can be fiduciaries in some aspects of the relationship, and then sell you an annuity with a 10% commission and huge surrender charges. Nope, nope, nope.

Thanks, I will try to get on Bogleheads.

About the laddering of annuities, would there be interest rate risk? Interest rates now are not historically high, but they are decent. Let's say that our annuity runs out in 10 years and at that point interest rates are super low, wouldn't it be hard to get an annuity that would be worth it? At the same time, it would be hard to generate income from bonds and CDs too.

I am liking the laddering idea, but worried about this particular contingency.

[reeshau]

You picked the wrong table. 
This table factors in the ability to make inflation-adjusted withdrawals.
A 30-yr time horizon with 100% stocks or 50% stocks was only successful 95% of the time.  75% is a bit better, while less than 50% is considerably worse. 
At a 5% withdrawal rate your probability ruin jumps to about 1 in 6.

Fair enough.

Wade Pfau updated the study with data through 2014.  Interestingly, the data adjusted, but not all in the same direction.  The new data does give 50/50 a 100% shot, although I would expect the following decade to reduce the effectiveness of high bond allocations.

[MustacheAndaHalf]

Yes, we aren't interested in leaving an inheritance. However, the idea of signing over so much of our nest egg at once is still giving me pause.

I understand what you mean about the interest rate. Our advisor mentioned that if we want to get the best deal we should try to act before the next Fed meeting when they will most likely lower interest rates. This makes sense. Still, it felt a bit like a high pressure sales tactic (Act Now!) and is making me leary.

You should always be leery of pressure, but in this case official websites back up your financial advisor.  The next Fed meeting is Sept 17-18, after which they are expected to cut rates by either 0.50% (3 in 10 chance) or by 0.25% (7 in 10 chance).  The market leaves no possibility of rates remaining the same after the Sept 17-18 FOMC meeting.

https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

That said, you do not have to invest $0 or $1.5M in an annuity - you can meet some future expenses with an annuity, and the rest from your portfolio.  Giving up $900k permanently for an inflation-adjusted annuity that pays $45k/year initially would give you $105k/year of inflation-adjusted income, and leave about $3.9M of your portfolio to handle the rest.  Bonds and international stocks generally have higher payouts than U.S. stocks, which have 1.25% dividends right now.  For $3.9M that would be at least $50k/year you need to reinvest or spend, and probably more if your portfolio is diversified.

Personally I've been investing since before the dot-com crash, and have built up experience with crashes and recoveries.  I'm comfortable relying on my portfolio for retirement expenses.  Without that experience, and with a spouse lacking a desire to invest, I can see how an annuity can fill a need.  If people question your decision later, you can point to buying when rates were at their peak, before the Fed lowered them.

[Telecaster]

You should always be leery of pressure, but in this case official websites back up your financial advisor.  The next Fed meeting is Sept 17-18, after which they are expected to cut rates by either 0.50% (3 in 10 chance) or by 0.25% (7 in 10 chance).  The market leaves no possibility of rates remaining the same after the Sept 17-18 FOMC meeting.

What will inflation and interest rates be five years from now?  How about ten years?  Those are the questions you need to answer, not next month.