[Poll] My philosophy on SPIAs

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

If you are retired, what best expresses your philosophy toward SPIAs?

I am participating in this poll. EVERYONE please check this box so we'll have a total of respondents.
185
19%
I have or plan to buy an SPIA
57
6%
I don't need one because my portfolio is adequate to meet my spending goals with a good safety margin and some left over.
65
7%
I don't mind having money left over at the end because I want to leave something to my heirs
68
7%
I don't mind having money left over at the end, period.
43
4%
I have an adequate floor from Social Security; I don't have a defined-benefit pension.
20
2%
I have an adequate floor from Social Security and a defined pension
46
5%
I have an adequate floor from a defined-benefit pension; I don't have Social Security.
4
0%
I have an adequate floor coming in part from other guaranteed income sources
9
1%
I expect to be able to adapt to the possible range of performance of my investments, even in the face of hard times.
78
8%
I feel that insurance is generally a bad deal and SPIAs are no exception
22
2%
I am concerned about the irrevocability and loss of control in an SPIA
56
6%
I am concerned about the possibility of insurance company failure
84
9%
I am concerned about buyer's remorse if interest rates rise and better SPIA deals become available
42
4%
I see benefits in SPIAs but for me they are outweighed by disadvantages
35
4%
I don't rule out an SPIA as a desperation move to be used only as a last resort, but I don't _plan_ to buy one.
43
4%
I accept the risks of my investments not performing adequately.
56
6%
I am not convinced the risks of an SPIA are really any lower than the risk of my investments.
18
2%
It's meaningless to fuss about small risks of portfolio exhaustion in the face of the big risks of ordinary life.
19
2%
Other
22
2%
 
Total votes: 972

spencer99
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Re: [Poll] My philosophy on SPIAs

Post by spencer99 »

I should be able to cover 100%+ of current expenses with pension and SS. Pension is not inflation adjusted, but the fund's approximate 60/40 mix should do a reasonably good job over the long term. My (with luck) mid-six figure 403(b) will be available for fun, gifting, and emergencies. I feel fortunate to be within reach of the above because I have an admittedly irrational objection to (mostly I think the finality of) annuities.

S

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Munir
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Re: Useless information.

Post by Munir »

Taylor Larimore wrote:Bogleheads:

Internal company commissions, earned interest rate, mortality credits, etc., are not relevant when considering the purchase of a single premium immediate annuity (SPIA).

What counts is the amount of the premium, the amount of income guaranteed, and the strength of the company-- all easily understandable and available. It is one reason why SPIAs are "good" annuities.

Best wishes.
Taylor
Well-said, as usual. Don't forget to investigate the various options availble to you at purchase and their cost.
RPS
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Re: [Poll] My philosophy on SPIAs

Post by RPS »

I expect to buy a SPIA to cover any balance of my floor "absolute must-have" income need after my SS and my wife's pension because they are cheat and efficient. I want to preclude longevity risk, sequence risk and the risk that my health precludes my ability to manage my money well and to make sure that I am not taken advantage of.
GregLee wrote:An SPIA would be a great way to spend everything without risking running out near the end, but SPIAs cost too much. It's a pity. There is also the possibility to worry about of having some unpredicted large medical expenses late in life.
As others have noted, they aren't expensive. Indeed, if you wanted to guaranty a similar outcome yourself, it would cost you between 25-40% more than a SPIA because an insurance company only needs to cover your expected lifespan while a self-insurer would have to cover all possible lifespans.
Khanmots wrote:Personally I don't see the purpose of buying a non-inflation adjusted SPIA. By purchasing a SPIA I'm trying to make sure that I will be able to maintain a minimum standard of living if I "overlive." This would seem to require a payment that is in real not nominal dollars.
Since after the first few years of retirement spending tends to decline and since some significant percentage of expenses may be fixed and not subject to inflation, I can imagine the use of a SPIA without inflation protection, especially if there are other significant assets.
yobria wrote:Yes, that's exactly my plan for my mother, now 62. Let's face it - having a big lump sum that you have complete control over and can draw down and invest flexibly is always better than being broke and hoping the insurance company sends you a check every month, and that no large expenditures pop up. We'll swap the former for the latter if there's a real need (eg she's 80, in great health, and has higher than expected expenses), but we'll prefer not to.
Let's face it - having a regular check every month to cover expenses is always better than having run out of money and relying upon the kindness and generousity of others or the state (or even one's children). I'd rather not have to rely upon luck.
yobria
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Re: [Poll] My philosophy on SPIAs

Post by yobria »

spencer99 wrote:I should be able to cover 100%+ of current expenses with pension and SS. Pension is not inflation adjusted, but the fund's approximate 60/40 mix should do a reasonably good job over the long term. My (with luck) mid-six figure 403(b) will be available for fun, gifting, and emergencies. I feel fortunate to be within reach of the above because I have an admittedly irrational objection to (mostly I think the finality of) annuities.
Yes, I hope to leave my financial legacy to a worthy cause, as opposed to the annuity industry, if at all possible. Your morality may vary.
555
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Re: [Poll] My philosophy on SPIAs

Post by 555 »

yobria wrote:``Yes, I hope to leave my financial legacy to a worthy cause, as opposed to the annuity industry, if at all possible. Your morality may vary.''
While the insurance company takes a slice (their return for taking your risk) the remaining value of your annuity goes to the surviving participants, just as you benefit (mortality credits) from those you survive.
rr2
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Re: [Poll] My philosophy on SPIAs

Post by rr2 »

yobria wrote: Yes, I hope to leave my financial legacy to a worthy cause, as opposed to the annuity industry, if at all possible. Your morality may vary.
I read the above as

"Yes, I hope to leave my financial legacy to a worthy cause, as opposed to the annuity industry, if at all possible. Your mortality may vary."
yobria
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Re: [Poll] My philosophy on SPIAs

Post by yobria »

555 wrote:
yobria wrote:``Yes, I hope to leave my financial legacy to a worthy cause, as opposed to the annuity industry, if at all possible. Your morality may vary.''
While the insurance company takes a slice (their return for taking your risk) the remaining value of your annuity goes to the surviving participants, just as you benefit (mortality credits) from those you survive.
Ok, that mitigates things a bit. I do see the benefits of this product. When the time comes, if the stars (health, marginal utility of income, interest rates, etc.) are aligned, I will consider this product as part of my retirement strategy.
Verde
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Re: [Poll] My philosophy on SPIAs

Post by Verde »

nisiprius wrote:It's not that hard to do amateur-actuary stuff and get a ballpark estimate. On SPIAs, I figure it has got to be more like a 90% benefits/premium ratio, probably a little higher because of adverse selection. It just can't be 60%.

BRK Direct EZ-Quote says, for a man born 4/1/1947 (age 65) "Your investment of $187,537 will yield 2.30% based upon our mortality assumptions and the U.S. Treasury yield curve as of April 23, 2012. This investment will provide you with $1,000 every month for as long as you live, beginning on June 1, 2012."

I get the CDC 2003 Life Table for Males. Notice that this is the general population, not the supposedly-healther adversely-selected part of the population that buys annuities.

It shows me that of an initial population of 100,000, 78,694 survive to age 65, 77,235 to age 66, etc. Let's say someone wants to pay all 78,694 of them $1,000 a month for the rest of their lives. I take those numbers and multiply each of them by 12,000. Then in the next column, I calculate the discount, based on BRK's 2.30%, for each year, as (1.0230)^(-n) where n = age-65. There are endless questions about "start-of-year-or-end-of-year" etc. but I'm just trying to get a ballpark estimate.

It will cost $13,067,294,408 to make $1,000/month payments for life to 78,694 people, or $166,052/person.

So, with no profit and no expenses, assuming a 2.3% interest rate, it would cost $166,052 to fund those payouts, i.e. $166,052 is the actuarially fair premium. BRK, which is not a particularly low-cost insurer, wants $187,537. So, that implies their payouts cost them 88.5% of the premium.

And I used the real CDC life table for the general male population. Somewhere I once found a COSM table that has what I'll call "phonied-up" life tables that supposedly represent the mortality curve of the annuity-buying population--it goes up to age 120! If I used that table I'd get a higher payout number.

The point is, I have no idea whether the benefits/premium ratio is 88.5% or 95%, but it can't as low as 60% or even 75% or 80%. It's got to be in the general ballpark of 90% unless I screwed up the calculation. I'd give more details of the calculations but I'd rather have someone do a completely independent check.

I got the life table here, table 2, page 10.

I'd hypothesize that actuarial math is so cut-and-dried that the risk is small--they can calculate very precisely how many of their annuitants will still need to be paid in 2032, and they can buy in advance the exact bonds they need to make those payments. And the information on mortality rates is not secret--they might even be required to all use the same tables--and neither is the Treasury yield curve. So it's a low-risk business and they probably don't need much profit to justify the risk, and probably can't get much because all their competitors know what they know.
I think your calculation is a good approximation. I would suggest 2 adjustments to get it a bit closer:
1. You assume that the insurer pays $12000 at the start of each year – in reality they pay $1000 per month, and earn interest in the interim – this reduces the $12000 needed at the start of each year to $11850.
2. You assume that all deaths occur at the end of the year, in reality they occur throughout the year. A better approximation of the insurer’s liability is to use the average of the lives at the beginning and end of the year for the calculation.

With these adjustments I get an actuarially fair cost of $160000 vs. your $166000 and BH’s $187537, for the average 65 yo. American male.

The life expectancy table you used represents the American male of average health. For arguments sake I assumed that a below averagely healthy male has a life expectancy 4 years less than the average, and an above averagely healthy male has a life expectance 4 years above average.
The table below shows the cost (profit for the insurer in excess of the actuarially fair charge) expressed as a front end load, expense ratio and in terms of the number of years the capital could have been guaranteed with the difference between the actuarially fair income and $1000. (If the insured dies during the guarantee period the cost of the SPIA less payments to date are repaid to the beneficiary – during the guarantee period the insured does not benefit from mortality credits, it is equivalent to a simple investment earning 2.3% interest over that period)

Image

I would argue that from a Boglehead perspective this quote offers great value for the top third of the healthiest males. It is totally inappropriate for the bottom third. I guess it is a matter of opinion for the middle third - I personally think it is too expensive.

In my view - SPIA's need a John Bogle!
jbaron
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Re: [Poll] My philosophy on SPIAs

Post by jbaron »

GregLee wrote:I think that the annuity decision is inherently quantitative and cannot reasonably be treated by comparing advantages with disadvantages. How much does it cost, and how much can you expect to get back?
An SPIA is insurance, just like homeowner's insurance. Most people don't ask how much they "expect to get back" from their homeowner's insurance because the answer is simply not known. The analysis of whether or not to get an SPIA is 100% qualitative, not quantitative, because most people don't know exactly how long they are going to live, and a random variable with only one instance - the age of your death - is not a useful expression of risk that can be mitigated by other means. If you are going to go broke if you are 80 and you live longer than 10 more years, I'd suggest that an SPIA might be part of a good plan.

Jeff
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nisiprius
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Re: [Poll] My philosophy on SPIAs

Post by nisiprius »

Verde wrote:Image
Thank you very much for the interesting analysis, and for confirming the rough accuracy of my own work. (In another post I recently said the effect of an expense ratio was $500 a year when it was really $5,000). What I find interesting is the extremely high sensitivity of the result to the assumed health of the policyholder.

Maybe you can answer two questions I'm not clear on. 1) The life table used for annuity calculations, I forget what it's called but it goes up to age 120! Is it equivalent to the best possible research by a disinterested party on the actual mortality experience of actual annuity policyholders? Or is it just a convenient convention fiction, agreed to by insurers as a common benchmark for pricing products? To put it another way, what checks and balances are there to ensure that the tables used are fair to consumers?

2) I naturally treat life tables as if they were forward-looking, but of course they aren't. What are they actually based on? Is the survival rate for 50, 51, 52-year-olds in a 2003 table the actual percentage of survivors from a population born in 1953, 1952, 1951, etc? That is, do the mortality figures for older people reflect a population that has benefited less from medical progress? (But if so, why doesn't it the life table for the U. S. male population show lumps and bumps reflecting wars the U. S. participated in?)
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GregLee
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Re: [Poll] My philosophy on SPIAs

Post by GregLee »

jbaron wrote:
GregLee wrote:I think that the annuity decision is inherently quantitative and cannot reasonably be treated by comparing advantages with disadvantages. How much does it cost, and how much can you expect to get back?
An SPIA is insurance, just like homeowner's insurance. Most people don't ask how much they "expect to get back" from their homeowner's insurance because the answer is simply not known.
So, since you don't know exactly when you're going to die, you should be willing to pay any amount at all for an annuity, whatever is asked. Uncertainty results in infinite value.
Greg, retired 8/10.
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LH
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Re: [Poll] My philosophy on SPIAs

Post by LH »

wow. This is the most involved poll I have seen.

54 have or plan to get an IRA.

176 total respondants.

So so far, 30 percent of Boglehead retirees plan to get an SPIA or already have one, which means 70 percent will not get a SPIA.

Interesting
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LH
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Re: [Poll] My philosophy on SPIAs

Post by LH »

GregLee wrote:
jbaron wrote:
GregLee wrote:I think that the annuity decision is inherently quantitative and cannot reasonably be treated by comparing advantages with disadvantages. How much does it cost, and how much can you expect to get back?
An SPIA is insurance, just like homeowner's insurance. Most people don't ask how much they "expect to get back" from their homeowner's insurance because the answer is simply not known.
So, since you don't know exactly when you're going to die, you should be willing to pay any amount at all for an annuity, whatever is asked. Uncertainty results in infinite value.
: P

Yes, You are correct. Absolutely correct.

Ergo, I offer the following bargain, which is much much less than infinity:

1 penny annuity a year from for however long you live going forward, in return for 1 million from you now : )

PT Barnum would be Post-Humously very pleased : )
yobria
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Re: [Poll] My philosophy on SPIAs

Post by yobria »

LH wrote:So so far, 30 percent of Boglehead retirees plan to get an SPIA or already have one, which means 70 percent will not get a SPIA.
My mother is 62. We have no concrete plans to get her an SPIA, but won't be able to answer this poll for another 15 years. I certainly have no idea if one's in my future. I won't be undersaving and relying on them to bail me out, however.
555
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Re: [Poll] My philosophy on SPIAs

Post by 555 »

LH wrote:``wow. This is the most involved poll I have seen.
54 have or plan to get an IRA.
176 total respondants.
So so far, 30 percent of Boglehead retirees plan to get an SPIA or already have one, which means 70 percent will not get a SPIA.
Interesting''
If someone retires with >50 (or 40 or maybe 30) years expenses (e.g. frugal with large portfolio, like many around here) they just don't need an SPIA. That certainly accounts for a big part of that 70 percent
gkaplan
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Re: [Poll] My philosophy on SPIAs

Post by gkaplan »

Am I right in assuming that one can only participate in this poll if he or she is retired?
Gordon
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