Build Your Own Annuity

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Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 1:13 pm

Hi Everyone:

This Forbes column was inspired by a recent discussion on the forum about building your own annuity. I incorporated some of the ideas from that discussion and combined them with some of my own thoughts.

http://www.forbes.com/sites/theboglehea ... n-annuity/
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Re: Build Your Own Annuity

Postby Austintatious » Fri Mar 01, 2013 2:21 pm

Mel,

thanks very much for this article. Looks to me like an especially good option, offering the security of an annuity backed by the full faith and credit of the government (instead of relying on the solvency of an insco) plus having the feature of being able to pass on to one's heirs the remainder of the "corpus" in the event of the investor's death. What's not to like? I notice that you've not suggested that I Bonds for such an investment. Would you consider I Bonds a suitable vehicle for this kind of investor built "annuity" and, if not, why not? Thanks again.
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Re: Build Your Own Annuity

Postby Chan_va » Fri Mar 01, 2013 2:34 pm

Nice article Mel.

On the EE vs Ibonds to do this, the effective rate on an EE bond held to maturity is 3.5%. So your decision would be based on if you expect CPI over the next 30 years to average less or more than the EE rate.

Of course you could hedge and have a 50/50 EE Ibond spilt.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 2:39 pm

Austintatious wrote:Mel,

thanks very much for this article. Looks to me like an especially good option, offering the security of an annuity backed by the full faith and credit of the government (instead of relying on the solvency of an insco) plus having the feature of being able to pass on to one's heirs the remainder of the "corpus" in the event of the investor's death. What's not to like? I notice that you've not suggested that I Bonds for such an investment. Would you consider I Bonds a suitable vehicle for this kind of investor built "annuity" and, if not, why not? Thanks again.


As everyone knows, I've been a huge fan of I Bonds, and still am, given today's low-interest rate environment. However, they're not guaranteed to double in 20 years like the EE Bonds, so their return is unknown. However, if an investor had enough additional funds available after buying the guaranteed doubling of the EE Bonds, I Bonds might be a nice supplement. And, if conditions change to make I Bonds more favorable down the road, one can always switch to buying I Bonds instead of EE Bonds while building their annuity ladder.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 2:44 pm

Chan_va wrote:Nice article Mel.

On the EE vs Ibonds to do this, the effective rate on an EE bond held to maturity is 3.5%. So your decision would be based on if you expect CPI over the next 30 years to average less or more than the EE rate.

Of course you could hedge and have a 50/50 EE Ibond spilt.


Yes, given today's low inflation rate, and the long-term average inflation, it seems hard to beat a guaranteed 3.5%. However, things can certainly change over the 20 or 30-year period, so one could easily switch to purchasing I Bonds instead of EE Bonds as part of their annuity ladder if conditions do change to make I Bonds more attractive down the road.
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Re: Build Your Own Annuity

Postby Grt2bOutdoors » Fri Mar 01, 2013 2:52 pm

Oh, no! I'd better rush out and buy up the EE's now! Once the boy wonders over at Treasury read this, they'll likely up the number of years needed to double the bonds, thereby cutting the return! :oops:
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Re: Build Your Own Annuity

Postby bobcat2 » Fri Mar 01, 2013 2:55 pm

You cannot possibly build your own life annuity for the simple reason that it is impossible for an individual to pool mortality risk with herself, i.e. the mortality credit that annuities provide is not available to individuals on their own. Thus you will always get a higher income payout from the life annuity than from alternatives such as savings bonds.

It is true that that the individual can purchase other safe investments such as savings bonds and TIPS ladders for safe retirement income. These have their own strengths and weaknesses. You have more flexibility in how the proceeds are spent, but you lose the extra bang for the buck of the mortality credit, and you or your spouse may outlive the assets. You could purchase enough alternative safe assets to take you thru to age 95 or higher with the same amount of income as the life annuity would provide, but that will cost a lot more than the life annuity. It's that pesky mortality credit again. :)

Rather than attempting to build your own life annuity, which is impossible, a prudent policy is to provide a high reliable retirement income stream thru postponing the beginning of SS benefits to a late age and purchasing both life annuities as well as savings bonds and TIPS ladders. Since what you are actually purchasing is retirement consumption and not retirement nominal income, you want the life annuities and savings bonds to be be inflation protected, e.g. I-bonds and not EE-bonds. Should inflation accelerate when you are in your early 80s, you don't want to be holding income that has lost half or more of its purchasing power when you or your spouse are in your 90s.

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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 3:13 pm

bobcat2 wrote:You cannot possibly build your own life annuity for the simple reason that it is impossible for an individual to pool mortality risk with herself, i.e. the mortality credit that annuities provide is not available to individuals on their own. Thus you will always get a higher income payout from the life annuity than from alternatives such as savings bonds.

It is true that that the individual can purchase other safe investments such as savings bonds and TIPS ladders for safe retirement income. These have their own strengths and weaknesses. You have more flexibility in how the proceeds are spent, but you lose the extra bang for the buck of the mortality credit, and you or your spouse may outlive the assets. You could purchase enough alternative safe assets to take you thru to age 95 or higher with the same amount of income as the life annuity would provide, but that will cost a lot more than the life annuity. It's that pesky mortality credit again. :)

Rather than attempting to build your own life annuity, which is impossible, a prudent policy is to provide a high reliable retirement income stream thru postponing the beginning of SS benefits to a late age and purchasing both life annuities as well as savings bonds and TIPS ladders. Since what you are actually purchasing is retirement consumption and not retirement nominal income, you want the life annuities and savings bonds to be be inflation protected, e.g. I-bonds and not EE-bonds. Should inflation accelerate when you are in your early 80s, you don't want to be holding income that has lost half or more of its purchasing power when you or your spouse are in your 90s.

BobK


Different strokes for different folks, Bob. Many Bogleheads prefer the DIY method and this is an alternative to the traditional SPIA that provides some control and predictibility.

As for the inflation concerns, I thought I covered that in my previous posts. If inflation becomes a big concern, the investor could simply switch to buying I Bonds for their ladder. And there's nothing that prevents one from using I Bonds instead of the EE Bonds for their annuity ladder from the get-go. However, doing so would be making a prediction that inflation would be higher than the guaranteed 3.5% that the EE Bonds provide over the 20-year period, and today that simply doesn't appear to be likely. However, things can change and if they do, the investor simply switches from buying EE Bonds to I Bonds for their ladder.
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Re: Build Your Own Annuity

Postby dhodson » Fri Mar 01, 2013 3:18 pm

Im not sure why we need to call these ideas build your own annuity since it doesn't have what is really the defining feature of a spia. What not just call it a better alternative
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Re: Build Your Own Annuity

Postby papito23 » Fri Mar 01, 2013 3:20 pm

bobcat2 wrote:You cannot possibly build your own life annuity for the simple reason that it is impossible for an individual to pool mortality risk with herself,


^This seems pretty self-evident to me. The savings bond plan seems to just be swapping different kinds of risks, therefore it's no longer an annuity.

No beef with the EE-bond plan (or with Mel's work with BHs - thanks!), but it appears to my untrained eyes to simple be extra savings, no matter how you spin it (if the past is any predictor, 3.5% will be, maybe, possibly, in the ballpark of inflation anyway - and it exposes the investor to events of high inflation over the course of 20-30 years EDIT: I see Mel addresses that above). Where the median household making $55K will find an additional $20K / yr in the budget on top of retirement savings is a puzzle. This sounds like good advice for the top 10-30% who are also risk-averse. EDIT: don't mean to nit-pick on Mel, exactly ... which means I guess I am being nit-picky :) Anyway...
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Re: Build Your Own Annuity

Postby Ever Ready » Fri Mar 01, 2013 3:24 pm

Thanks to Mel for a great article (as usual).

One point that is often overlooked is that the guaranteed rate on EE savings bonds can be changed for both newly issued and existing bonds.
This has happened in the past in response to changing interest rate environments. It may seem unlikely to many that rates could go lower, but for something
that one is counting on to provide retirement income, in this case, a guarantee is not a guarantee.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 3:35 pm

papito23 wrote:
bobcat2 wrote:You cannot possibly build your own life annuity for the simple reason that it is impossible for an individual to pool mortality risk with herself,


^This seems pretty self-evident to me. The savings bond plan seems to just be swapping different kinds of risks, therefore it's no longer an annuity.

No beef with the EE-bond plan (or with Mel's work with BHs - thanks!), but it appears to my untrained eyes to simple be extra savings, no matter how you spin it (if the past is any predictor, 3.5% will be, maybe, possibly, in the ballpark of inflation anyway - and it exposes the investor to events of high inflation over the course of 20-30 years EDIT: I see Mel addresses that above). Where the median household making $55K will find an additional $20K / yr in the budget on top of retirement savings is a puzzle. This sounds like good advice for the top 10-30% who are also risk-averse. EDIT: don't mean to nit-pick on Mel, exactly ... which means I guess I am being nit-picky :) Anyway...


Actually, the definition of an annuity is simply an income stream for a specific period of time. A lifetime annuity (SPIA) is simply one type of annuity, but not the only one.
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Re: Build Your Own Annuity

Postby Phineas J. Whoopee » Fri Mar 01, 2013 3:43 pm

Mel Lindauer wrote:Actually, the definition of an annuity is simply an income stream for a specific period of time. A lifetime annuity (SPIA) is simply one type of annuity, but not the only one.

I agree Mel, and was trying to think of how best to put this.

Your comparison in the article to a life annuity is not, I think, apt. It would be better to refer to a 30-year period certain annuity with payments continuing to beneficiaries should circumstances arise. Then mortality credits exit the picture.

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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 3:47 pm

Phineas J. Whoopee wrote:
Mel Lindauer wrote:Actually, the definition of an annuity is simply an income stream for a specific period of time. A lifetime annuity (SPIA) is simply one type of annuity, but not the only one.

I agree Mel, and was trying to think of how best to put this.

Your comparison in the article to a life annuity is not, I think, apt. It would be better to refer to a 30-year period certain annuity with payments continuing to beneficiaries should circumstances arise. Then mortality credits exit the picture.

PJW


Actually, PJW, I did try to point out that it was an alternative to a SPIA and also specificially stated that the SPIA would be better if the investor outlived the 20- or 30-year Savings Bond ladder.
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Re: Build Your Own Annuity

Postby Phineas J. Whoopee » Fri Mar 01, 2013 3:52 pm

Mel Lindauer wrote:
Phineas J. Whoopee wrote:
Mel Lindauer wrote:Actually, the definition of an annuity is simply an income stream for a specific period of time. A lifetime annuity (SPIA) is simply one type of annuity, but not the only one.

I agree Mel, and was trying to think of how best to put this.

Your comparison in the article to a life annuity is not, I think, apt. It would be better to refer to a 30-year period certain annuity with payments continuing to beneficiaries should circumstances arise. Then mortality credits exit the picture.

PJW


Actually, PJW, I did try to point out that it was an alternative to a SPIA and also specificially stated that the SPIA would be better if the investor outlived the 20- or 30-year Savings Bond ladder.

I've read it again and I can see that, up at the top. I think the reason I came away with the impression I did is the second section with the bold heading and later references to SPIAs, which you had previously identified with life annuities. I won't say that you are wrong.

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Re: Build Your Own Annuity

Postby bobcat2 » Fri Mar 01, 2013 3:54 pm

Yes, given today's low inflation rate, and the long-term average inflation, it seems hard to beat a guaranteed 3.5%.
The long-term average annual inflation rate over the last 40 years (1/73-1/2013) as measured by the CPI-U is 4.3%. Since 1900 annual average inflation has averaged about 3.3% - 3.4% per year.

If you buy nominal savings bonds now and inflation accelerates say 10 years from now and stays relatively high for the retired years of your life 10-30 years from now, then those EE-bonds you have already bought, and will be buying over the next 10 years, will be practically worthless in years 20-30 of your retirement. And that is the time in your retirement when you are going to be most physically and financially vulnerable. :(

With regard to the overall point of building your own life annuity, you cannot build your own life annuity with products that lack the chief advantage of a life annuity - namely the mortality credit. Holding safe investments in retirement such as I-bonds and TIPS ladders is a good idea IMO, but they do not possess the same advantages that a life annuity possesses. In other words they complement a life annuity, but they are not substitutes for a life annuity. Only financial products that pool mortality risk such as DB pensions, SS, and GLWBs can serve as substitutes for life annuities. This is why choosing when to take SS is such an important decision. Delaying the taking of SS benefits is typically by far the best way for most people to build their own life annuity.

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Re: Build Your Own Annuity

Postby rr2 » Fri Mar 01, 2013 4:00 pm

This is an expensive alternative when compared to a SPIA maybe twice as much.
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Re: Build Your Own Annuity

Postby Chan_va » Fri Mar 01, 2013 4:06 pm

Bob, you are splitting hairs on a technicality.

What you refer to as a mortality credit is equivalently a mortality debit if you die before average.

I think Mel was just pointing out options to an SPIA, and not as a "be all end all strategy".
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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 4:11 pm

bobcat2 wrote:
Yes, given today's low inflation rate, and the long-term average inflation, it seems hard to beat a guaranteed 3.5%.
The long-term average annual inflation rate over the last 40 years (1/73-1/2013) as measured by the CPI-U is 4.3%. Since 1900 annual average inflation has averaged about 3.3% - 3.4% per year.

If you buy nominal savings bonds now and inflation accelerates say 10 years from now and stays relatively high for the retired years of your life 10-30 years from now, then those EE-bonds you have already bought, and will be buying over the next 10 years, will be practically worthless in years 20-30 of your retirement. And that is the time in your retirement when you are going to be most physically and financially vulnerable. :(

With regard to the overall point of building your own life annuity, you cannot build your own life annuity with products that lack the chief advantage of a life annuity - namely the mortality credit. Holding safe investments in retirement such as I-bonds and TIPS ladders is a good idea IMO, but they do not possess the same advantages that a life annuity possesses. In other words they complement a life annuity, but they are not substitutes for a life annuity. Only financial products that pool mortality risk such as DB pensions, SS, and GLWBs can serve as substitutes for life annuities. This is why choosing when to take SS is such an important decision. Delaying the taking of SS benefits is typically by far the best way for most people to build their own life annuity.

BobK


Several points:
1. The bonds you buy over the next 10 years will not be used in years 20-30 of your retirement as you stated. Rather they would be used in years 1-10 of your retirement.
2. Lots of folks make a big deal out of mortality credits and being part of a "pool". However, many investors don't want to be part of a pool and "gamble" that they'll outlive the other members of the pool. The "winners" (those who live longer) are being funded by the "losers" (those who die younger than the pool expectancy). Just as there are winners and losers in Vegas, many prudent folks don't like to gamble, since they don't want to be "losers".
3. I pointed out how this strategy could, indeed, help an investor delay taking SS until age 70, thus maximizing thier lifetime payments.

Again, as I said, whatever works for you is fine with me. I simply offered an alternative.
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Re: Build Your Own Annuity

Postby bobcat2 » Fri Mar 01, 2013 4:26 pm

Mel in a furious debate with himself. Who will win? :D

Mel in this thread.
The bonds you buy over the next 10 years will not be used in years 20-30 of your retirement as you stated. Rather they would be used in years 1-10 of your retirement.


Mel in the article.
Since EE Savings Bonds are guaranteed to at least double if held for 20 years, a couple could start investing $20,000 per year in EE Bonds starting at age 35 and continue to do so for the next 30 years until retirement at age 65. That would assure the couple an income stream of more than $40,000 per year for the next 30 years, or until they reached age 95.


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Re: Build Your Own Annuity

Postby Leif » Fri Mar 01, 2013 4:28 pm

Grt2bOutdoors wrote:Oh, no! I'd better rush out and buy up the EE's now! Once the boy wonders over at Treasury read this, they'll likely up the number of years needed to double the bonds, thereby cutting the return! :oops:


Not only can they, they have. Back in the day the EE bonds I bought had a 17 year doubling period. Those were the good old days when you could buy an EE bond with a credit card and pocket the immediate rebate reward. Now there are so many restrictions.
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Re: Build Your Own Annuity

Postby Levett » Fri Mar 01, 2013 5:15 pm

I see two familiar but different positions taken:

1. Many Bogleheads prefer the DIY method and this is an alternative to the traditional SPIA that provides some control and predictibility. (Mel)

2. With regard to the overall point of building your own life annuity, you cannot build your own life annuity with products that lack the chief advantage of a life annuity - namely the mortality credit. Holding safe investments in retirement such as I-bonds and TIPS ladders is a good idea IMO, but they do not possess the same advantages that a life annuity possesses. In other words they complement a life annuity, but they are not substitutes for a life annuity. Only financial products that pool mortality risk such as DB pensions, SS, and GLWBs can serve as substitutes for life annuities. This is why choosing when to take SS is such an important decision. Delaying the taking of SS benefits is typically by far the best way for most people to build their own life annuity. (Bobcat)

Bogleheads do appear to have a preference for DIY, as Mel says.

For some few of us, however, Bobcat's statement above rings true and carries considerable weight in the economic literature.

You pays your money and you takes your chance. :wink:

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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 6:03 pm

bobcat2 wrote:Mel in a furious debate with himself. Who will win? :D

Mel in this thread.
The bonds you buy over the next 10 years will not be used in years 20-30 of your retirement as you stated. Rather they would be used in years 1-10 of your retirement.


Mel in the article.
Since EE Savings Bonds are guaranteed to at least double if held for 20 years, a couple could start investing $20,000 per year in EE Bonds starting at age 35 and continue to do so for the next 30 years until retirement at age 65. That would assure the couple an income stream of more than $40,000 per year for the next 30 years, or until they reached age 95.


BobK


Hardly arguing with myself, Bob. Rather, I'm responding to your statement which said:

If you buy nominal savings bonds now and inflation accelerates say 10 years from now and stays relatively high for the retired years of your life 10-30 years from now, then those EE-bonds you have already bought, and will be buying over the next 10 years, will be practically worthless in years 20-30 of your retirement. And that is the time in your retirement when you are going to be most physically and financially vulnerable


My point was that the bonds you're buying in the next 10 years will be used in years 1-10 of your retirement, not in years 20-30 as you stated. And the bonds you buy in years 10-20 will fund years 10-20 of your retirement, etc.
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Re: Build Your Own Annuity

Postby umfundi » Fri Mar 01, 2013 6:26 pm

Lev wrote:
namely the mortality credit

And, this is insurance, not an investment.

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Re: Build Your Own Annuity

Postby Levett » Fri Mar 01, 2013 6:31 pm

Proper credit should go to bobcat for focusing on mortality credits.

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Re: Build Your Own Annuity

Postby dkturner » Fri Mar 01, 2013 6:32 pm

Mel Lindauer wrote:
bobcat2 wrote:Mel in a furious debate with himself. Who will win? :D

Mel in this thread.
The bonds you buy over the next 10 years will not be used in years 20-30 of your retirement as you stated. Rather they would be used in years 1-10 of your retirement.


Mel in the article.
Since EE Savings Bonds are guaranteed to at least double if held for 20 years, a couple could start investing $20,000 per year in EE Bonds starting at age 35 and continue to do so for the next 30 years until retirement at age 65. That would assure the couple an income stream of more than $40,000 per year for the next 30 years, or until they reached age 95.


BobK


Hardly arguing with myself, Bob. Rather, I'm responding to your statement which said:

If you buy nominal savings bonds now and inflation accelerates say 10 years from now and stays relatively high for


the retired years of your life 10-30 years from now, then those EE-bonds you have already bought, and will be buying over the next 10 years, will be practically worthless in years 20-30 of your retirement. And that is the time in your retirement when you are going to be most physically and financially vulnerable


My point was that the bonds you're buying in the next 10 years will be used in years 1-10 of your retirement, not in years 20-30 as you stated. And the bonds you buy in years 10-20 will fund years 10-20 of your retirement, etc.


Help me out here boys. The Forbes article written by Mel talks about buying 20 year EE bonds starting at age 35. Won't "the bonds you buy over the next 10 years" mature 1 to 10 years BEFORE retirement? Or are we now talking about taking early retirement, commencing at age 55?
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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 6:36 pm

dkturner wrote:
Mel Lindauer wrote:
bobcat2 wrote:Mel in a furious debate with himself. Who will win? :D

Mel in this thread.
The bonds you buy over the next 10 years will not be used in years 20-30 of your retirement as you stated. Rather they would be used in years 1-10 of your retirement.


Mel in the article.
Since EE Savings Bonds are guaranteed to at least double if held for 20 years, a couple could start investing $20,000 per year in EE Bonds starting at age 35 and continue to do so for the next 30 years until retirement at age 65. That would assure the couple an income stream of more than $40,000 per year for the next 30 years, or until they reached age 95.


BobK


Hardly arguing with myself, Bob. Rather, I'm responding to your statement which said:

If you buy nominal savings bonds now and inflation accelerates say 10 years from now and stays relatively high for


the retired years of your life 10-30 years from now, then those EE-bonds you have already bought, and will be buying over the next 10 years, will be practically worthless in years 20-30 of your retirement. And that is the time in your retirement when you are going to be most physically and financially vulnerable


My point was that the bonds you're buying in the next 10 years will be used in years 1-10 of your retirement, not in years 20-30 as you stated. And the bonds you buy in years 10-20 will fund years 10-20 of your retirement, etc.


Help me out here boys. The Forbes article written by Mel talks about buying 20 year EE bonds starting at age 35. Won't "the bonds you buy over the next 10 years" mature 1 to 10 years BEFORE retirement? Or are we now talking about taking early retirement, commencing at age 55?


No, the column talks about starting buying the bonds at age 35 and starting to redeem them at age 65 (EE Bonds DOUBLE in 20 years, but continue earning interest until their final maturity, which is 30 years). I also mentioned one suggestion that was made here on the forum in a previous discussion to start buying the bonds at age 60 and start redeeming them at age 80 (the age when some folks, such as Taylor, buy SPIAs). That would cover the investor from age 80 to 100.
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Re: Build Your Own Annuity

Postby Gill » Fri Mar 01, 2013 6:45 pm

At the risk of sounding uninformed or a bit naive, aren't we really discussing two different things? Mel's E-Bond idea is simply an investment strategy whereas a SPIA is a form of insurance guaranteeing the insured won't outlive his money. To call Mel's investment plan a form of self-created annuity is fine if one wishes to look at it that way, but it is not insurance and will never fully offer the benefit provided by an insurance company through a SPIA.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 7:02 pm

MBMiner wrote:At the risk of sounding uninformed or a bit naive, aren't we really discussing two different things? Mel's E-Bond idea is simply an investment strategy whereas a SPIA is a form of insurance guaranteeing the insured won't outlive his money. To call Mel's investment plan a form of self-created annuity is fine if one wishes to look at it that way, but it is not insurance and will never fully offer the benefit provided by an insurance company through a SPIA.
Bruce


The only benefit the insurance company would provide is the lifetime benefit. I stated clearly in my column that if the investor lived past age 95 or 100, then the SPIA would have been the better choice. I also stated that the EE Bond's guaranteed stream of income that would take the investor to age 95 or 100 would probably be considered more than adequate for many investors, given that it provided the added the benefit of leaving any unused portion of the EE Bond ladder to their heirs.
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Re: Build Your Own Annuity

Postby mephistophles » Fri Mar 01, 2013 7:11 pm

The SPIA or self-constructed versions of it spend your original principal down to zero (excluding any refund features). That said, I have long been of the opinion that maintaining principal and living off its investment income is, by far, the preferred choice, if one can do so.
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Re: Build Your Own Annuity

Postby rr2 » Fri Mar 01, 2013 7:20 pm

Mel Lindauer wrote:2. Lots of folks make a big deal out of mortality credits and being part of a "pool". However, many investors don't want to be part of a pool and "gamble" that they'll outlive the other members of the pool. The "winners" (those who live longer) are being funded by the "losers" (those who die younger than the pool expectancy). Just as there are winners and losers in Vegas, many prudent folks don't like to gamble, since they don't want to be "losers".

With all due respect, this is backwards IMO. In your approach, you are gambling that you will not outlive your savings.
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Re: Build Your Own Annuity

Postby umfundi » Fri Mar 01, 2013 7:32 pm

rr2 wrote:
Mel Lindauer wrote:2. Lots of folks make a big deal out of mortality credits and being part of a "pool". However, many investors don't want to be part of a pool and "gamble" that they'll outlive the other members of the pool. The "winners" (those who live longer) are being funded by the "losers" (those who die younger than the pool expectancy). Just as there are winners and losers in Vegas, many prudent folks don't like to gamble, since they don't want to be "losers".

With all due respect, this is backwards IMO. In your approach, you are gambling that you will not outlive your savings.

Yes,

As Mike Piper says, insurance should stink:

http://www.obliviousinvestor.com/insura ... uld-stink/

The winners (those whose houses burn down) are being funded by the losers (those whose houses don't burn down).

That you are possibly (or even probably) not going to collect is not a reason to forgo insurance.

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Re: Build Your Own Annuity

Postby Austintatious » Fri Mar 01, 2013 7:55 pm

I like the concept of a guaranteed retirement income stream for life but I've never been able to get past the plain truth that insurance companies just don't give a damn about you and me. I just don't trust them, a perspective that I think is well founded. I'm wondering what would have happened to those counting on lifetime annuities provided by AIG, had that company not been determined to be too big to fail. The AIG website has annuities in second place on its list of the fine insurance products they make available to individuals. No, thanks. The potential for insco's selling annuities to fail has just been demonstrated to be quite real. IMO, that's one very good reason to consider other approaches like, maybe, the Lindauer DIY approach. Another is the government guarantee backing the EE Bonds making up the "corpus". Ain't no better guarantee on the planet. Isn't that why bobcat was touting SS as being such a reliable retirement income stream? And the ability to leave something to the kiddies or one's favorite charity with the DIY approach is nothing to sneeze at. I just think I'd feel a lot safer relying on an income stream from the DIY approach Mel discusses than I would relying on an the solvency and integrity of an insurance company. Wouldn't you?
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Re: Build Your Own Annuity

Postby crowd79 » Fri Mar 01, 2013 7:57 pm

Austintatious wrote:I like the concept of a guaranteed retirement income stream for life but I've never been able to get past the plain truth that insurance companies just don't give a damn about you and me. I just don't trust them, a perspective that I think is well founded. I'm wondering what would have happened to those counting on lifetime annuities provided by AIG, had that company not been determined to be too big to fail. The AIG website has annuities in second place on its list of the fine insurance products they make available to individuals. No, thanks. The potential for insco's selling annuities to fail has just been demonstrated to be quite real. IMO, that's one very good reason to consider other approaches like, maybe, the Lindauer DIY approach. Another is the government guarantee backing the EE Bonds making up the "corpus". Ain't no better guarantee on the planet. Isn't that why bobcat was touting SS as being such a reliable retirement income stream? And the ability to leave something to the kiddies or one's favorite charity with the DIY approach is nothing to sneeze at. I just think I'd feel a lot safer relying on an income stream from the DIY approach Mel discusses than I would relying on an the solvency and integrity of an insurance company. Wouldn't you?


+1. Exactly how I feel.
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Re: Build Your Own Annuity

Postby rr2 » Fri Mar 01, 2013 8:00 pm

Austintatious wrote:I like the concept of a guaranteed retirement income stream for life but I've never been able to get past the plain truth that insurance companies just don't give a damn about you and me. I just don't trust them, a perspective that I think is well founded. I'm wondering what would have happened to those counting on lifetime annuities provided by AIG, had that company not been determined to be too big to fail. The AIG website has annuities in second place on its list of the fine insurance products they make available to individuals. No, thanks. The potential for insco's selling annuities to fail has just been demonstrated to be quite real. IMO, that's one very good reason to consider other approaches like, maybe, the Lindauer DIY approach. Another is the government guarantee backing the EE Bonds making up the "corpus". Ain't no better guarantee on the planet. Isn't that why bobcat was touting SS as being such a reliable retirement income stream? And the ability to leave something to the kiddies or one's favorite charity with the DIY approach is nothing to sneeze at. I just think I'd feel a lot safer relying on an income stream from the DIY approach Mel discusses than I would relying on an the solvency and integrity of an insurance company. Wouldn't you?

Fine by me. As long as you are ok moving in with your kiddies when you run out of money at age 95.

PS: do your self insure life, home, auto insurance?
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Re: Build Your Own Annuity

Postby Austintatious » Fri Mar 01, 2013 8:18 pm

rr2 wrote:

Fine by me. As long as you are ok moving in with your kiddies when you run out of money at age 95.

PS: do your self insure life, home, auto insurance?


Hey, by then, we'll be raking in all that dough from those deferred SS income streams. And we'll have saved a lot of that EE Bond money left over, which we'll actually leave the kiddies, if only to surprise the h___ out of them.
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Re: Build Your Own Annuity

Postby rr2 » Fri Mar 01, 2013 8:27 pm

Austintatious wrote:
rr2 wrote:

Fine by me. As long as you are ok moving in with your kiddies when you run out of money at age 95.

PS: do your self insure life, home, auto insurance?


Hey, by then, we'll be raking in all that dough from those deferred SS income streams. And we'll have saved a lot of that EE Bond money left over, which we'll actually leave the kiddies, if only to surprise the h___ out of them.

If, at retirement, your expected withdrawal rate is small, such as 1-2%, then a SPIA is probably not needed by you. If however, the withdrawal rate is approaching 5%, then getting a SPIA may be a good choice.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 8:39 pm

Some additional thoughts:

1. There's no iron-clad guarantee that insurance companies will even be offering Immediatete Annuities for sale in 30 or so years. Using my plan guarantees the income stream for a known period of time.
2. While my plan used $20,000 annual EE Bond purchases (that's the annual purchase limit for a couple), it will work with any dollar amount.
3. There's no guarantee that future SPIA payout rates won't be even lower than they are today. Remember, Americans are living longer and medical advances are likely to continue to advance that trend. That means that insurance companies know there are going to be more and more folks that they'll have to pay for a longer period of time, which will obviously equal lower payouts.
4. It was suggested that I should just compare my plan to a period certain annuity. I did, and here's what I found.
a. For a 20-year period certain, the payout is 6.56% per year with the insurance company vs 10% per year payout for the 20-year EE Bond plan.
b. For a 30-year period certain, the payout is 5.47% per year with the insurance company vs 6.67% per year payout for the 30-year EE Bond plan.
So in both cases, the EE Bond plan wins in either a 20-year or 30-year term certain payout. The obvious reason for this is that with the insurance product, the insurance company takes their cut out of the pie, while with my plan, the investors doesn't have to pay the croupier.
5. Finally, if inflation ramps up, I've pointed out several times in this thread that if I Bonds become a better option, the investor can simply start purchasing I Bonds instead of the EE Bonds. However, at today's rates, the EE Bond guaranteed doubling is the better option, but that doesn't mean it can't change in the future.
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Re: Build Your Own Annuity

Postby rr2 » Fri Mar 01, 2013 8:46 pm

Mel Lindauer wrote:Some additional thoughts:

1. There's no iron-clad guarantee that insurance companies will even be offering Immediatete Annuities for sale in 30 or so years. Using my plan guarantees the income stream for a known period of time.

Similarly, there are no guarantees the EE bonds will continue to be offered at such rates. The doubling period might be extended. EE bond rules may change.
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Re: Build Your Own Annuity

Postby KarlJ » Fri Mar 01, 2013 8:48 pm

I found the article very thought-provoking. The example of the 60 year old starting to buy EE bonds to cover spending needs in 20 years is especially interesting to me as it may be a strategy I could apply.
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Re: Build Your Own Annuity

Postby Austintatious » Fri Mar 01, 2013 8:54 pm

rr2 wrote:

If, at retirement, your expected withdrawal rate is small, such as 1-2%, then a SPIA is probably not needed by you. If however, the withdrawal rate is approaching 5%, then getting a SPIA may be a good choice.


Your points re the benefits of having an SPIA (or two) are well taken; still, I don't consider relying on insurance companies for something as important as crucial income streams to be the best approach. I should make it clear that I am anything but an expert on just what the best approach is for assuring such an income stream but, as with all investing ( and I do consider the concept of providing for future income streams to an investment), one has to be comfortable with the risk element. Thanks for responding.
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Re: Build Your Own Annuity

Postby dhodson » Fri Mar 01, 2013 9:01 pm

i really think if we just changed the title of these threads to alternatives to an annuity or something to that effect that much of the criticism would disappear. i think most posters recognize the strengths and limitations of these approaches.
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Re: Build Your Own Annuity

Postby rr2 » Fri Mar 01, 2013 9:01 pm

Austintatious wrote:
rr2 wrote:

If, at retirement, your expected withdrawal rate is small, such as 1-2%, then a SPIA is probably not needed by you. If however, the withdrawal rate is approaching 5%, then getting a SPIA may be a good choice.


Your points re the benefits of having an SPIA (or two) are well taken; still, I don't consider relying on insurance companies for something as important as crucial income streams to be the best approach. I should make it clear that I am anything but an expert on just what the best approach is for assuring such an income stream but, as with all investing ( and I do consider the concept of providing for future income streams to an investment), one has to be comfortable with the risk element. Thanks for responding.

Thanks. In a situation where the withdrawal rate that is required approaches 5%, what would you do? What other options are available? If you distrust insurance companies this much, then do you self insure as I asked earlier.
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Re: Build Your Own Annuity

Postby dhodson » Fri Mar 01, 2013 9:13 pm

if you are talking about vs a SPIA then im not sure it matters since with a SPIA the return is fixed. You cant increase it for an emergency. If you dont use a SPIA but use an alternative non annuity procedure for income then you can take out more money but of course at the risk of reducing the length of the income stream.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 9:51 pm

dhodson wrote:i really think if we just changed the title of these threads to alternatives to an annuity or something to that effect that much of the criticism would disappear. i think most posters recognize the strengths and limitations of these approaches.


Perhaps you missed my post above explaining that an annuity is defined as an income stream, and thus this plan is, by definition, an annuity. A SPIA is simply a type of annuity that's known as a "lifetime annuity".

I'd also point you to this bolded sub-heading part of my column:

A Savings Bond Annuity Alternative
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Re: Build Your Own Annuity

Postby JamesSFO » Fri Mar 01, 2013 10:03 pm

I like the concept.
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Re: Build Your Own Annuity

Postby Gill » Fri Mar 01, 2013 10:15 pm

Mel Lindauer wrote:Perhaps you missed my post above explaining that an annuity is defined as an income stream, and thus this plan is, by definition, an annuity. A SPIA is simply a type of annuity that's known as a "lifetime annuity".

Yes, most of us know the generic definition of an annuity as a stream of payments, but most of us also think of an annuity as a guaranteed stream of income for life.
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Re: Build Your Own Annuity

Postby dhodson » Fri Mar 01, 2013 10:18 pm

i didnt miss any of that. As you mentioned, its a SPIA that is being compared to here and a lifetime SPIA at that. So it just isnt an income stream in the discussion.

one reason im no fan of insurance products is that many times what information is provided leads one to a conclusion different than if someone had all the information or completely understood the subject.

I feel like this borders on calling it a do it yourself lifetime SPIA given the multiple references and it isnt. Since you wrote the article, i imagine you dont feel that way. My post isnt meant to be offensive.
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Re: Build Your Own Annuity

Postby Epsilon Delta » Fri Mar 01, 2013 10:43 pm

Mel Lindauer wrote:a. For a 20-year period certain, the payout is 6.56% per year with the insurance company vs 10% per year payout for the 20-year EE Bond plan.

I think you're comparing apples and oranges here. The EE bonds are bought over a 20 year period, while the annuity is bought at the end of the period. You need to discount later payments, on average the annuity is bought over 10 years later.

The exact result will depend on how you choose to discount, but if you choose a 3.52% discount rate the payout rates are fairly close.
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Re: Build Your Own Annuity

Postby Mel Lindauer » Fri Mar 01, 2013 11:58 pm

Epsilon Delta wrote:
Mel Lindauer wrote:a. For a 20-year period certain, the payout is 6.56% per year with the insurance company vs 10% per year payout for the 20-year EE Bond plan.

I think you're comparing apples and oranges here. The EE bonds are bought over a 20 year period, while the annuity is bought at the end of the period. You need to discount later payments, on average the annuity is bought over 10 years later.

The exact result will depend on how you choose to discount, but if you choose a 3.52% discount rate the payout rates are fairly close.


Obviously one of us isn't looking at this correctly. The money needed to purchase the SPIA didn't just fall out of the sky at the time of purchase. It would have been accumulated over the same period of time as the EE Bonds, so I fail to see any reason to discount it now. The EE Bonds were an investment over time as was the accumulation of the money needed to purchase the SPIA. Now at retirement, one can choose to redeem and spend the EE Bonds or use them as an annuity. Likewise, the accumulator can choose to spend the accumulated money or buy a SPIA. No discounting needed to make things equal.
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