Does anyone have any good or bad thoughts on annuities for a 52yr old who wants to stop working at 60. I have $225,000 in 401K and another 500,000 in schwab accts. full SS benefits at 69yrs, how can I make this work when everything is so crazy right now with markets. Is there a safe way to move on this right now or wait it out, buy more Guns and see what happens ?
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Markets are always crazy. They only make sense on a long-term view when you look at the averages.
The S&P 500, historically, returns 9% a year. At that rate, you double your money every 8 years. If you follow the investing system preached here, on this board, I believe you can average 15% return annually. At that pace, you double your money every 5 years.
Let’s assume 9% annual return to err on the side of caution. You have $725K right now, so at age 60 you will have $1.5M.
A safe withdrawal rate is 4% per year. That gives you $60K/year + whatever you get from SS. Can you live on that?
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how can I make this work when everything is so crazy right now with markets.
When you say crazy, I’m not sure if you’re referring to volatility, or to what some people claims are high valuations. Regarding valuations, even if you believe the market is optimistically valued, if you’re investing in individual businesses (which most everyone here is) then you have full control over the valuations you’re allocating capital towards. The market valuation only matters if you’re buying the whole market.
Regarding volatility, that’s what creates opportunity for future returns. If the market was always priced correctly, returns would be relatively poor. In fact, one famous study done by Raj Mehra and Edward Prescott in 1985 showed that from 1889-1978, stock markets – after adjusting for risk – should only have returned 0.35% per year more than treasury bills if they had been properly priced, but in fact they returned 6% more than treasuries per year. Volatility and opportunity go hand in hand. You need to look at volatility as your friend, and put it to work for you.
Imagine a real-estate development with tens of thousands of identical homes where, each morning, there’s an auction at the front office where people can show up at random and buy or sell homes. Some days more buyers are going to show up and compete for the available homes being sold, driving up prices; other days, more sellers will show up and compete for the available buyers, driving down prices. Sometimes there will be more motivated sellers will have to sell that morning and take what they can get, other times there will be more patient sellers who are willing to wait for their price (and vice versa for buyers). Occasionally rumors will drive prices: maybe a large local business is rumored to be moving, so lots of people suddenly sell because they think house prices will drop (which turns into a self-enforcing feedback loop as owners see prices dropping and want to quickly sell before they drop further, which adds more downward pressure to prices, panicking more people to sell, and so on). If you’re looking to buy a house to flip next month, that might be concerning; but if the neighborhood is wonderful, with great schools and amenities, and you’re looking to buy a home for the next decade, then those irrationally low prices are a wonderful opportunity for you.
The stock market is just a daily auction, like the example above. And it tends to be driven a lot by short-term rumor and speculation. Just like that person looking to buy a great home in a great neighborhood for the next decade, you’re looking to buy part of a great business with great attributes that will compound your capital over the long term. If the market is offering you that business on the cheap, that’s an opportunity! It doesn’t matter if the price might be lower next week or next month: your timeline is measured in years. Irrationally negative markets are wonderful things. Sure, the value of your portfolio today drops when the market falls, and that might not feel good, but you don’t need the value of your portfolio today (even if you’re retired): you won’t need the vast majority of that capital for many years, and many years from now the value is likely to be meaningfully higher if you’re taking advantage of great market opportunities today. Just like the person who isn’t planning on selling their house for 5 or 10 (or more) years, it doesn’t matter what the sale value is today.
One last note: the financial media makes its money by selling your eyeballs to advertisers, and they discovered a long time ago that fear, emotion, and hyperbole attract a lot more eyeballs than calm, reasoned analysis. It’s to their financial advantage to spread fear: people pay attention when they’re afraid. I personally would recommend turning off the TV and ignoring the financial media and the talking heads, and stop worrying about all the short-term bumps in the road. Remember, we’ve been through two world wars, numerous other wars, disease epidemics, oil shocks, natural disasters, financial crises, terrorist attacks, low inflation, high inflation, low debt, high debt, massive technological disruption, booms, busts, recessions and depressions, and course leadership all over the political spectrum, and the market has always come out ahead over the long run. We do need to watch our businesses, of course, but try to keep things in context and focus on what really matters to their long term success.
Neil
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Remember, we’ve been through two world wars, numerous other wars, disease epidemics, oil shocks, natural disasters, financial crises, terrorist attacks, low inflation, high inflation, low debt, high debt, massive technological disruption, booms, busts, recessions and depressions, and leadership all over the political spectrum, and the market has always come out ahead over the long run. We do need to watch the businesses we invest in, but try to keep things in context, and focus on what really matters to the long term success of each business.
Neil, everyone should print this out and put it on the wall over their computer, or wherever they sit to do their investing. A great message! Thanks!
Saul
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Sinner, this is a bad board for asking that question, we look for investible growth stocks for capital returns. I recommend you consider joining the “Rule your Retirement” service, they probably have specific boards for that and knowledgeable people.
Also please check out Vanguard, they would be who I put at the top of my trust list for smallest commission on an annuity. (Most sold have large commissions to the salespeople, thus reducing the value to you. The farm them out to strong insurance companies, so you can feel safe about counterparty risk.
Keep more for retirement because the annuity’s average annual costs are more than 70% lower than the industry average,* and you have guaranteed income options too.**
The Vanguard Variable Annuity has an average expense ratio of 0.56%, versus the annuity industry average of 2.25%
https://personal.vanguard.com/us/funds/annuities
Income annuity info
https://investor.vanguard.com/annuity/fixed
For income annuity, they have a example, if you want $1000 a month here is what it will cost now:
$167K if you want the income to start now…
$119K if you want it to start in 5 years…
$77K if you want it to start in 10 years…
Note that annuities are primarily based on interest rates, so with low rates now, you will not be getting a “good deal”. If you wait 5 years, you might get a better deal.
You might consider joining the MF Income Investor service, you might be better off with reinvesting dividends in safe companies. Note that my understanding is that annuity income is taxed as regular income where as stock gains and dividends are tax advantage.
Also, there is a very nice Knowledge Base link over to your right and it describes the scope of this board. That said, if you have further questions, you can direct message me, but we would like to limit this thread to this last message.
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Neil,
I just had to recommend the post.
Thank you for your calming words, Erik
Sinner,
Annuities have several components that serve to reduce the effectiveness of your investment. For starters they generally have high commissions, high administrative fees, and they will generally charge something for an insurance component. You are buying some security by paying those fees, but all of that takes away from your investments.
YMMV
4wheel.
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I’ve never really liked them. They tie up a lot of capital (low liquidity), and they make up for the selling point of low risk of losing money by maxing out at relatively low returns. There is a good bit of risk that returns wont keep pace with what you want.
That said, it may make sense to have a portion of your assets structured that way, but that is a personal choice depending on your situation.
Personally I’d rather have the cash in my pocket.