How to Enjoy Retirement Without Going Broke

[TokyoWart]

So here's a question then. Whats a good annuity product that lowers your risk (guarantees returns) while not being extortionate? I like the idea of a secure pension-like income but I wouldn't know which one is good or bad.

A SPIA (Single Premium Immediate Annuity) is the easiest to evaluate and compare to other guaranteed return options. These currently have the disadvantages that they are about as expensive as they have ever been (meaning you get a lower annual income stream for any initial investment) because annuity rates are closely tied to the risk free rate of return and that is at historic lows and that inflation adjusted SPIA's (which adjust the yearly payment each year based on a cost of living index) have essentially disappeared.

Another possible option is a deferred guaranteed annuity (e.g. pay a sum of money when you are age 60 which guarantees annual payments from the time you turn 80 until death) as a hedge against running out funds if you live longer than you expected. This of course also suffers from inflation risk but you can buy a much higher income stream if it won't be starting for several decades and the insurance company has a reasonable chance that you will die first so they don't have to pay anything.

[mighty58]

So here's a question then. Whats a good annuity product that lowers your risk (guarantees returns) while not being extortionate? I like the idea of a secure pension-like income but I wouldn't know which one is good or bad.

A SPIA (Single Premium Immediate Annuity) is the easiest to evaluate and compare to other guaranteed return options. These currently have the disadvantages that they are about as expensive as they have ever been (meaning you get a lower annual income stream for any initial investment) because annuity rates are closely tied to the risk free rate of return and that is at historic lows and that inflation adjusted SPIA's (which adjust the yearly payment each year based on a cost of living index) have essentially disappeared.

Another possible option is a deferred guaranteed annuity (e.g. pay a sum of money when you are age 60 which guarantees annual payments from the time you turn 80 until death) as a hedge against running out funds if you live longer than you expected. This of course also suffers from inflation risk but you can buy a much higher income stream if it won't be starting for several decades and the insurance company has a reasonable chance that you will die first so they don't have to pay anything.

I was going to write a similar thing but you beat me to it. But to answer the question, there is no easy answer because annuities ARE very complex, there are several different products categorized as "annuities" which are actually quite different, and they can be customized in a million ways to mitigate whatever risk it is you’re worried about.

However, keeping it simple is the best solution. The deferred version of the plain-vanilla guaranteed annuity is what I’m thinking I might consider at some point. It basically insures against longevity risk (the risk you will outlive your money) and provides an income floor at an age when you likely won’t be travelling the world and living it up. In addition, you can spice it up a bit by getting short fixed terms (say, 5-year payout terms) that are deferred to start at whatever age (say, 75), then you can buy one of these five-year coverages each year to start at 76 for 5 years, then 77 for 5 years, etc. etc., effectively creating a laddered-bond-like structure that has virtually zero downside (the downside is if you die and can’t collect) while the cost should be significantly cheaper because it’s fixed-term and short-term, and because it’s deferred well down the road.

[Tokyo]

Okay! I think I finally get why some guys are so uptight about annuities. They are young. They only understand how saving and growing works. Spending, decumulation or whatever you call it is another animal altogether. It’s not their fault - they obviously don’t have actual experience with retirement to draw on.

This forum and blog is chock-full with info about personal finance, mostly minimizing costs and maximizing profits/savings, in great detail. Retirement may be the objective but so many here obsess with efficiency and growth. The ultimate goal should always be happiness. How do you achieve that nebulous goal?

To start with, don’t get too carried away with rationality. It’s way overrated. Everyone believes they act rationally, but when it comes to spending money (or pandemics apparently) behavioral economics demonstrates time and time again that few actually act that way. I stress that the following is about decumulation, a under appreciated skill which some Forbes writer regards as being much more complicated than accumulation.

My father-in-law taught me a lot about retirement and aging by example. Bad example mostly. As a business owner, he retired with considerable assets but very low income limited to kokumin nenkin, tiny dividends, large but irregular insurance lump sums maturing to go along with his Nomura shares and funds. Despite knowing he’d never run out of money, he continually lamented the steady one-way movement of his bank account. It made him unhappy to draw down on cash and funds to live on. As a result, he lived well below his means which is typical for those in his situation of being a middle class retiree with limited income. They are used to saving, steady income and portfolio growth so the opposite is painful. He died in his mid-80s leaving a lot of money behind despite us encouraging him to use more to enjoy life.

Research shows this unfortunate tendency is not unusual. See <https://www.marketwatch.com/story/retir ... 1628192718
Also https://www.wsj.com/articles/SB112241804795796704 Finally, an excellent academic view on annuities as well as retirement happiness, the 4% rule fallacy, and other matters https://www.morningstar.com/articles/94 ... rees-happy

Psychologically, it’s perfectly understandable to want to defend your nest egg from disappearing but what is the point of working for many years, becoming quite wealthy and yet feeling financially anxious in your few remaining years?

As a result of his example, my wife and I aimed to avoid financial anxiety by replacing as much of our working income as possible with regular income streams. So now in retirement, we are covering our living costs with monthly and bi-monthly income flowing into our accounts. We can spend it all knowing more comes in next month. I just love, adore and worship at the altar of regular income. We can both have advanced Alzheimer’s and still be sure of this income. And don’t forget this section is called Retire Japan for Dummies. Annuities, pensions, income-generating insurance plans are for dummies - absolutely no thinking required. No effort. No financial anxiety. No chance of ever going broke if you only spend what comes in. If you can do better with funds providing you with steady income then more power to you. (Not sure what happens if the market tanks just as you retire though.)

We are retired, we are happy, actually, far beyond happy. If that’s not good enough, then you have really missed the point. Did I mention that we are happy?

[AreTheyTheLemmings?]

Thumbs up to that.

[RetireJapan]

Definitely something to think about in a few decades' time.

Another one is the 'buckets' approach (Kitces talks about this) where you move assets from long term to medium and short term investments.

Seems to help with the psychological and practical aspects of spending down.

[Wales4rugbyWC23]

Okay! I think I finally get why some guys are so uptight about annuities. They are young. They only understand how saving and growing works. Spending, decumulation or whatever you call it is another animal altogether. It’s not their fault - they obviously don’t have actual experience with retirement to draw on.

This forum and blog is chock-full with info about personal finance, mostly minimizing costs and maximizing profits/savings, in great detail. Retirement may be the objective but so many here obsess with efficiency and growth. The ultimate goal should always be happiness. How do you achieve that nebulous goal?

To start with, don’t get too carried away with rationality. It’s way overrated. Everyone believes they act rationally, but when it comes to spending money (or pandemics apparently) behavioral economics demonstrates time and time again that few actually act that way. I stress that the following is about decumulation, a under appreciated skill which some Forbes writer regards as being much more complicated than accumulation.

My father-in-law taught me a lot about retirement and aging by example. Bad example mostly. As a business owner, he retired with considerable assets but very low income limited to kokumin nenkin, tiny dividends, large but irregular insurance lump sums maturing to go along with his Nomura shares and funds. Despite knowing he’d never run out of money, he continually lamented the steady one-way movement of his bank account. It made him unhappy to draw down on cash and funds to live on. As a result, he lived well below his means which is typical for those in his situation of being a middle class retiree with limited income. They are used to saving, steady income and portfolio growth so the opposite is painful. He died in his mid-80s leaving a lot of money behind despite us encouraging him to use more to enjoy life.

Research shows this unfortunate tendency is not unusual. See <https://www.marketwatch.com/story/retir ... 1628192718
Also https://www.wsj.com/articles/SB112241804795796704 Finally, an excellent academic view on annuities as well as retirement happiness, the 4% rule fallacy, and other matters https://www.morningstar.com/articles/94 ... rees-happy

Psychologically, it’s perfectly understandable to want to defend your nest egg from disappearing but what is the point of working for many years, becoming quite wealthy and yet feeling financially anxious in your few remaining years?

As a result of his example, my wife and I aimed to avoid financial anxiety by replacing as much of our working income as possible with regular income streams. So now in retirement, we are covering our living costs with monthly and bi-monthly income flowing into our accounts. We can spend it all knowing more comes in next month. I just love, adore and worship at the altar of regular income. We can both have advanced Alzheimer’s and still be sure of this income. And don’t forget this section is called Retire Japan for Dummies. Annuities, pensions, income-generating insurance plans are for dummies - absolutely no thinking required. No effort. No financial anxiety. No chance of ever going broke if you only spend what comes in. If you can do better with funds providing you with steady income then more power to you. (Not sure what happens if the market tanks just as you retire though.)

We are retired, we are happy, actually, far beyond happy. If that’s not good enough, then you have really missed the point. Did I mention that we are happy?

It might surprise a few people on this thread that up until a few years ago in the UK because of the tax advantageous status of saving for a pension that once you reached retirement you had to by law purchase an annuity. Admittedly, this has changed with more pension freedoms. Continual low interest rates in the UK as we have had in Japan for the last 30 years led to a feeling that annuities were not good value for money for some people, but not for all. However, it has resulted in some retiree's loosing all their pension pots to con artists.

[AreTheyTheLemmings?]

because of the tax advantageous status of saving for a pension[,] once you reached retirement you had to by law purchase an annuity.

I don't get the connection. "There are tax advantages, therefore you must buy an annuity"? What was the rationale behind that requirement?

[Wales4rugbyWC23]

because of the tax advantageous status of saving for a pension[,] once you reached retirement you had to by law purchase an annuity.

I don't get the connection. "There are tax advantages, therefore you must buy an annuity"? What was the rationale behind that requirement?

If you were a higher rate tax payer of 40% you would get tax relief of 40% on your contributions. Also all dividends were tax free. However, for these benefits you had to buy an annuity with your pension pot when you were about to retire. As I said the laws have changed about a decade ago. You no longer need to buy an annuity with your pension pot.

[beanhead]

beanhead -> I linked the plan OP mentioned above, check my previous posting

Here->https://www.pgf-life.co.jp/st/products/ ... /pdf/1.pdf

Lots of warnings about fees included

Yeah, sorry, I saw that and looked at the Prudential/Gibraltar product as well.

[Bubblegun]

This forum and blog is chock-full with info about personal finance, mostly minimizing costs and maximizing profits/savings, in great detail. Retirement may be the objective but so many here obsess with efficiency and growth. The ultimate goal should always be happiness. How do you achieve that nebulous goal?

To start with, don’t get too carried away with rationality. It’s way overrated. Everyone believes they act rationally, but when it comes to spending money (or pandemics apparently) behavioral economics demonstrates time and time again that few actually act that way. I stress that the following is about decumulation, a under appreciated skill which some Forbes writer regards as being much more complicated than accumulation.


As a result of his example, my wife and I aimed to avoid financial anxiety by replacing as much of our working income as possible with regular income streams. So now in retirement, we are covering our living costs with monthly and bi-monthly income flowing into our accounts. We can spend it all knowing more comes in next month. I just love, adore and worship at the altar of regular income. We can both have advanced Alzheimer’s and still be sure of this income. And don’t forget this section is called Retire Japan for Dummies. Annuities, pensions, income-generating insurance plans are for dummies - absolutely no thinking required. No effort. No financial anxiety. No chance of ever going broke if you only spend what comes in. If you can do better with funds providing you with steady income then more power to you. (Not sure what happens if the market tanks just as you retire though.)

We are retired, we are happy, actually, far beyond happy. If that’s not good enough, then you have really missed the point. Did I mention that we are happy?

I think that's the important thing we forget, HAPPINESS, and there is no investment that can produce that rate of return.
I’ve financially poor people who are happy as Larry.( don't know who Larry was) and I've met rich people who are just depressed.

Anyway we have thought about an annuity and
for me, reducing the anxiety, and increasing our happiness has to be number one, but I don't think I will go down the annuity road.Mainly because, I have been bitten by some of the services some of these companies have pushed on some unsuspecting customers. Which I have to say has made me Angry, Distrustful, and unhappy. So for me, if I take my own advice, and cock things up a bit, I probably won't be UNHAPPY. I maybe disappointed, but I won't be bitter and angry. Whereas, if I feel I am being short changed by company A salesman, I am going to be a grumpy bitter, unhappy old man, and angry at myself for being conned. Just like TAM Mullen from Just game.

So,I'm steering away from an annuity, at this time, maybe that is my HAPPINESS, just to draw down 500 dollars a month. If I pop my clogs early, I know my wife and kids aren't going to be arguing with some "F" wit in an office trolling small print to deny paying my wife or kids something. I know what's in the bank,investment will go to them. However, if my health changes I might just change my mind,especially if I get some chronic illness.

But you’re spot on about HAPPINESS being number one, and we all have a different definition of what that means.
For me the math just doesn't work...AT THE MOMENT.