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For years, my financial trajectory was meticulously planned. I’d diligently accumulated a substantial pension pot, culminating in the recent sale of my business. The path was clear: a smooth transition into early retirement at 58, aiming for a conservative sub-3% drawdown rate. Full steam ahead, I thought, to the promised land of financial independence.
But then, something unexpected happened. In the months leading up to my planned exit, a strange attraction to Fixed-Term Immediate Annuities (FTIAs) began to grow. The allure of a guaranteed income stream, something I hadn’t seriously considered before, became increasingly powerful.
My thinking, I admit, might seem unconventional, perhaps even unorthodox, to traditional financial planners. However, if I squint through a certain lens – one that prioritizes peace of mind alongside potential growth – this strategy makes profound sense for me.
Here’s how I now see it: I’ve opted to treat a portion of my portfolio as a ten-year “collapsing bond ladder” in the form of FTIAs. This guaranteed income stream effectively acts as a solid, predictable foundation for my essential living expenses during the initial decade of my retirement.
The kicker, for me, lies in the ripple effect this creates across my remaining portfolio. By having that critical, immediate income secured, I’ve been able to confidently increase my equity allocation in the rest of my investments. This tactical shift significantly mitigates one of the most insidious risks of early retirement: Sequence of Returns Risk during those first, vulnerable ten years. With my core income assured, I can weather market downturns without the panic of needing to sell depressed assets. This, in turn, provides my higher-equity portfolio a far greater opportunity to generate superior long-term returns.
I understand that, on paper, this strategy might appear “suboptimal” to those focused purely on maximizing theoretical returns. But here’s the profound truth I’ve discovered: personal finance is, as the name unequivocally states, personal. For me, the quiet assurance of a guaranteed income stream possesses a quality all its own. It’s the silent guardian that lets me sleep soundly through market volatility, knowing my essential needs are met. It’s the trade-off I willingly make for a profound sense of security and peace of mind – and that, to me, is a return far more valuable than any percentage point on a spreadsheet.
Frankly, I could never do what you have done, due to my calculations it would cost me too much of my investments. But this is personal finance and that is what matters to you, is most important. Congrats on a plan that works for you.
I find this topic interesting but I don’t understand it. We are beginning our retirement journey and have enough income to meet all of our expenses. I am not comfortable with purchasing annuities but I am looking into how to handle inflation either through dividend investing or simply committing growth index ETF’s and using a Systematic Withdrawal Plan.
That being said, I have a question. Can anyone please mention some sights that I can trust to get information on the possibility of purchasing an annuity? It the best companies to purchase annuities from.
Might try http://www.immediateannuities.com for one.
Thank you, Mark for helping a fellow HD readers
is a ftia the same as a myga???? if so just like a cd at higher rate but not FDIC insured
nice article about avoiding SORR; something every pre-retiree has to prevent
how does a ftia work.
It’s a simple product, essentially you hand money to an insurance company and they distribute it back to you over a fixed term with a fixed return built into the returning cashflow you receive.
In these kinds of discussions, I think it is important to make sure we are all on the same page in terms of what words mean.
Anytime you are discussing any annuity payments, a portion of what you receive is not income, it is return of your principal. Income represents funds you receive that are not a part of your existing assets.
What you are trying to plan in your early retirement years, is Cash Flow; where will the cash come from to pay expenses? Cash can come from annuity payments, it can come from a savings account, or from dividends, or retirement accounts.
When you deal with annuities, the higher % they pay compared to a money market fund or CD includes giving you part of your own money back. You could do the same thing with a laddered set of CDs, spending the amount which was on deposit in addition to the interest. Annuities just make the process simpler. The annuity doesn’t pay you more income.
The only thing I would add is that annuities benefit from mortality credits which are supposed to improve returns when compared to other fixed income investments.
I know mortality credits are a big deal with lifetime income annuities. But I’m not sure they play any role in the type of annuity that Mark bought — fixed-term income annuities.
Thanks for the clarification. I was responding to the general discussion about annuities compared to CDs, … I have read that fixed term annuities benefit a small amount from mortality credits in that they help the general health of the insurer, and may lead to slightly higher rates. But it is a much bigger deal with lifetime annuities.
I had assumed that myself but I did have to complete a very comprehensive health questionnaire during the application.
That’s interesting. So, if you die before the 10 years are up, your beneficiaries won’t collect the remaining payments? If so, perhaps the income is padded by mortality credits.
No my wife gets the payments but the form was comprehensive but no medical required…. although I had to give permission for them to contact my medical practitioner
Building an income cushion is a tried-and-true method of minimizing the impact of market disruptions. I’d not be concerned about anyone criticizing your approach as being “suboptimal”. Have you decided how to continue that cushion when the FTIAs expire?
Thanks for posting a great contribution to this topic, Mark. I’m easing into retirement and not yet tapping into savings, but the best way to do so is foremost in my mind. I think you’ve chosen a great option.
Thanks Edmund I appreciate your feedback!
I’m only 7 weeks into retirement and still finding my feet.
Not sure how we take a conversation offline without putting our personal details up for every bot on the internet to scrape but if there is a means I’d appreciate a chance to exchange thinking.
Might I ask the provider you chose? 4.75% appears attractive for the shorter term. I think I’d lean towards TIPS for the longer end.
Rick I’m UK based and doubt they operate in your market but the provider is Legal & General
I’m probably missing something, but haven’t you just deferred the SORR problem rather than eliminated it? I retired in 2000 into a bad market, but thanks to a pension, a little part-time work, SS and a cash buffer I only really started decumulation last year. So I didn’t worry about SORR in 2000, but I do now.
I think most studies show that SORR only really bites when you need to make equity disposals in a down market in the the first 10 years i.e. you don’t get the full bounce back because you’ve had to live off it. Past that time then further market returns and rebalancing should make the impact much less severe.
Yes, but I didn’t live off it for the first 24 years, and it sounds like Mark won’t be living off it for the first ten, or not entirely. My financial plan runs another 22 years, and I am starting draw down.
I think you’re fine. You’ve a very low drawdown rate and a contractual backstop/promise re living situation. Of course SORR seems to be an issue from whenever you start counting but look on it like this you’ve had 24 years during reach you’ve enjoyed bounceback from dotcom bust and the global financial crisis and a pretty bullish market since. So if you do get some down years it’s probably only to be expected.
It’s very interesting – certainly in the UK when I recently looked a single life annuity with RPI indexing but no guarantee was edging up towards 5% at age 60. Possibly some medical issues might push it over. At which point it might provide an acceptable income floor to enable one to be more phlegmatic about SORR in the first 10 years. Maybe with about 15-20% of the portfolio.
The real value being in the RPI indexing. Had previously thought annuities probably shouldn’t be worried about too much until 65 or 70 in an effort to simplify because of the generally poor rates available.
Absolutely agree that personal finance is indeed personal. We can take in what we can from what others do but ultimately we all live our own lives, and there is non-financial value certainly in being able to sleep well or shrug when another political binfire triggers market chaos.
For the Yanks in the group, RPI = Retail Prices Index. It appears to the UK version of CPI (Consumer Price Index).
Do I conclude that UK annuities, like UK DB pensions, come with COLAs? If so, wonder whether I can buy one…
Assuming you’d have to buy one in British pounds, it seems like the currency rate volatility would make this a bit of a gamble. The British pound is down about 7% YTD against the dollar.
Not automatically – you can buy flat, defined escalation, RPI with/without guarantees (if you die in first few years) etc
https://www.hl.co.uk/retirement/annuities/best-buy-rates?
Fixed annuities typically pay better interest than bank CDs. Bonds might work, but risk adverse peeps freak out when they see their values fluctuate. I believe your thinking is sound on the use of annuities.
You could buy additional annuities annually to maintain your 10 year plan.
Mark, thanks for this an interesting and thoughtful article. I look at Fixed term annuities a while ago as a bridge to delaying SS until I turn 70. At the time interest rates were still fairly low and the annuities offered were not attractive. I chose to build a cash / low risk bucket into our savings instead. But the concept intrigued me.
Your strategy of using guaranteed income to allow a higher risk / higher return (one hopes!) asset allocation has been extensively analyzed by many in the US’ retirement research community, especially Wade Pfau. The paper recently referenced by David Lancaster also supports this strategy and attempts to provide guidance on how to structure the remaining portfolio once a retiree has made the decision to annuitize a portion of their assets.
Have you developed your plan after the initial 10 years of annuities runs out?
I have to admit I’m still thinking through a longer term strategy but my initial feeling is to treat every 10 year period as separate standalone funding problems to solve.
My idea is to have a loose idea of a long term strategy but to get through the early period 5 years at a time provided I’m not overdrawing on a prudent SWR.
I think actual spending “wants” and growth/fall in the overall principal will then dictate how I feel after that initial period.
Hardest call will be liquidating equity to replenish cash equivalent assets (the short term pot) if the market is down but running too conservatively for more than 5 years seems equally to have a high opportunity cost.
All of which is subject to behavioural change such as winding “wants” in in times of turbulence.
I think breaking your spending needs into 5 year blocks within an overall framework is a good idea. Bear markets lasting longer than five years are a rare beast indeed. I’m fortunate that my deccumulation plan was always based solely on my portfolio, proceeds from the business sale are an additional safety net.
I have TIAA as the primary ‘guardian’ of my retirement funds. When I first started investing money with them (in 1998), I put all my funds into their “Traditional” account. It comes with a guaranteed rate of return and was designed to be annualized. I was financially naive back then, so it just seemed like the easiest investment to make.
Eventually I educated myself and started to diversify my investments, but I always contributed some portion of my funds into the Traditional account. Even though many of my co-workers said they would never invest in that particular account, I felt confident about my decision. Seeing that one portion of my funds continually growing made it much easier for me to stomach the various stock market crashes that have occurred over the past three decades.
When I do finally start drawing from my Traditional account, I’ll likely receive about $100-$130/month more than someone who hadn’t been a long-term contributor to the account. Knowing that I’ll have a lifelong stream of income will no doubt make me feel more secure about my future.
This is good, Kristine. It reminds me of deciding to take the small pensions we had instead of rolling them over. Every little bit helps. Chris
Right on! My view exactly. Nothing is as secure and steady as an income stream in retirement. I say it’s optimal.
Very interesting concept Mark. I can’t wait to read the responses from our esteemed community.
What is the interest rate the payments are based on?
Hi David
If I include fees a rate of 4.75% would be required for cash to equal the annuity rate