SPIA quotes from Vanguard

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bill88
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Location: Virginia

SPIA quotes from Vanguard

Post by bill88 »

If anyone is considering a SPIA annuity, I thought I'd share the quote I got, and part of the following explanatory email to my aunt from my recent chat with Vanguard's Annuity Dept. The annuity would be for my 79 yr. old aunt in NC. (See original post http://www.bogleheads.org/forum/viewtop ... &p=1913368 about boosting her income.) Rates vary some from state to state, apparently.

FYI, the Vanguard rep was very helpful. Mentioned that the SPIA payout rates had gone down over the past six months. He also said that the rates tended to adjust pretty quickly with changes in interest rates (up or down). I'm not sure if he said almost immediately, but I got the impression there wasn't much of a lag.

Also, fwiw, I've talked to the annuity dept. twice. Both times, the rep suggested the GLWB variable annuity product. Each staffer was concerned about my aunt tying up assets in a SPIA. This time, the rep mentioned that if Aunt A. waited 1 year, she'd be 80, and the GLWB's MAWA (Maximum Annual Withdrawal Amount) would bump up from 5% to 6%.


EMAIL to AUNT A.:

"I asked them for price quotes for purchasing a $100,000 annuity on July 8, 2014. (Rates can change periodically.)

These are all price quotes based on your age/gender/location. And all are quotes for FIXED annuities.

The best rate, of course, is with no riders. The rider options pay you less, but ensure that something goes to beneficiaries if you pass on sooner than you'd like. :-))

But if you live longer than, say, 10 or 11 more years, then the riders were an unneeded expense -- but that's insurance. You buy house insurance, but you're just as happy if your house doesn't burn down.


IMMEDIATE FIXED ANNUITY QUOTES:

=========================================
SINGLE LIFE ANNUITY — no riders; you pay a lump sum of $100k and get a monthly payment for life.
$796.11/mo. x 12 = $9,553.32/yr. (9.5%)


=========================================
SINGLE LIFE ANNUITY WITH A FIXED PERIOD RIDER [10 years in this quote]
$739.27/mo. x 12 = $8,871.24/yr. (8.8%)

This rider adds a guarantee to the single life annuity so that you’ll receive payments for no less than a fixed period (10 years in this case). If you die before the period ends, remaining payments (up to 10 years in this case) go to your beneficiaries.


=========================================
SINGLE LIFE ANNUITY WITH A REFUND RIDER
$676.74/mo. x 12 = $8,120.88/yr. (8.1%)

If payments over your lifetime total less than the amount of your annuity purchase, your beneficiaries get the remaining amount (of your original annuity purchase) paid in a lump sum.


=========================================
NOTE: An inflation rider also MAY be available with some of the above fixed annuities. Of course, an inflation rider will reduce the payout amount. (I didn't get quotes for the inflation rider options if available; don't know if the inflation rider is an okay deal, or not.)"

Cheers,
Bill
Bill | | (Formerly bill99)
Ron
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Re: SPIA quotes from Vanguard

Post by Ron »

Two things:

1. Your return calculations include the return of your own money, over time. Take for instance the 10 year term quote. You can use a calculator (or Excel) to compute the (IRR) return based upon the initial "investment" and the total annual return, over 10 years. What you are stating is not a true "return" of 8.8%. If you go for this option and the insured dies at the 10 year period (meeting the contract), the actual return is -2.12%, (in negative territory, not even considering inflation). However, each month payments continue, the return will eventually be at 0% and will be in positive territory after a period of time, assuming the insured lives to a very old age.

2. Yes, rates change on SPIA's just as quickly as for home mortgage/notes. When I purchased my SPIA in mid-2007, the paperwork was to be completed via overnight Fedex. BTW, by the time I received the paperwork for the original SPIA (via Fidelity), they contacted me not to sign, since a better rate was available that day. We completed the paperwork in two days.

- Ron
Topic Author
bill88
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Re: SPIA quotes from Vanguard

Post by bill88 »

Ron wrote:Two things:

What you are stating is not a true "return" of 8.8%. If you go for this option and the insured dies at the 10 year period (meeting the contract), the actual return is -2.12%, (in negative territory, not even considering inflation). However, each month payments continue, the return will eventually be at 0% and will be in positive territory after a period of time, assuming the insured lives to a very old age.
- Ron
Hi, Ron. Good point. Clearly, the insurance company has these instruments calculated to the penny. I just can't come up with any other way to get a fixed payout (for life) that's even close.

Cheers,
Bill | | (Formerly bill99)
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Taylor Larimore
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SPIAs

Post by Taylor Larimore »

Bill:

Thank you for this important information. Three important facts to consider:

* The internal rate of return of a SPIA is meaningless.

* It is the monthly/yearly guaranteed lifetime income that's important.

* A SPIA provides the largest guaranteed lifetime income of any security.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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prudent
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Re: SPIA quotes from Vanguard

Post by prudent »

Ron wrote: 1. Your return calculations include the return of your own money, over time. Take for instance the 10 year term quote. You can use a calculator (or Excel) to compute the (IRR) return based upon the initial "investment" and the total annual return, over 10 years. What you are stating is not a true "return" of 8.8%.
There's a financial advisor in town that advertises on the radio and their ad says "...how would you like to receive 7%? Yes, 7% for income purposes..."

I wondered for a while why they added that odd phrase "for income purposes" then it hit me - it was an annuity. It does make it sound like you're "earning" that rate on your money.
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Frugal Al
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Re: SPIA quotes from Vanguard

Post by Frugal Al »

With caveats:
* The internal rate of return of a SPIA is meaningless.
In the context that we don't know when we might pass on, thus making the time element rather nebulous.
* It is the monthly/yearly guaranteed lifetime income that's important.
Guaranteed up to the given state's solvency fund, usually $100k.
* A SPIA provides the largest guaranteed lifetime income of any security.
Beware the high cost of guarantees; SPIA payouts today come at some of the highest prices in history.
Last edited by Frugal Al on Sun Jul 20, 2014 12:55 pm, edited 1 time in total.
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Aptenodytes
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Re: SPIA quotes from Vanguard

Post by Aptenodytes »

Frugal Al wrote:
With caveats:
* The internal rate of return of a SPIA is meaningless.
In the context that we don't know when we might pass on, thus making the time element rather nebulous.
* It is the monthly/yearly guaranteed lifetime income that's important.
Guaranteed up to the given state's solvency fund, usually $100k.
* A SPIA provides the largest guaranteed lifetime income of any security.
Beware the high cost of guarantees.
For my taste, Taylor's original message is more accurate and helpful without these caveats.

1) The time element is nebulous -- exactly, that's precisely what makes a lifetime guarantee attractive as an element in a portfolio. If you knew exactly when you were going to die, you could do other things.

2) That's just false. "Guaranteed" is a word that has meaning beyond the regulations of the solvency fund. It doesn't mean there's zero chance of losing money, to 20 decimals, but it certainly doesn't mean nothing. It doesn't put a SPIA in the same category as a stock market mutual fund.

3) This has no meaning in the absence of a comparative context. It is equally valid to say "Take joy in the low cost of guarantees."
Ron
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Re: SPIAs

Post by Ron »

Taylor Larimore wrote:<snip>

* The internal rate of return of a SPIA is meaningless.
Sorry to disagree, but it is a valid measurement when deciding if an SPIA (under various options) is a good "deal" for your situation, and if other options (such as a CD ladder or just market investments, based upon your own long term returns history) might be better suited to your needs.

For instance, our SPIA has a computed IRR of 4.79% for the 28-certain term period. It has the option (insurance on insurance) to pay for that period of time, and to continue to pay (at 100%) if either/both of us survive longer than that computed life term. In that case, all "excess payments" will increase that IRR beyond the 4.79% initial calculation.

If we both pass before the end of the term, payments continue (at 100%) to our named estate beneficiary (discounted as a lump sum, or normal payments to term on a monthly basis).

As you said, the power of an annuity (e.g. an SPIA) remains in the fact of a constant stream of income for you (and your spouse/partner) until end of life. It is much like a standard non-COLA pension that most non-governmental retirees get (if they get them at all).

In 2007 (at my retirement age of 59), I/we looked for options related to a matching instrument that acted like a pension, which I did not have. At the time, the SPIA seemed like the solution to my/our situation. I did have concerns about the calculated minimum rate of return because "everybody knew" that interest rates were about to go up :oops: ...

Sometimes dumb luck trumps perfect planning.

- Ron
Last edited by Ron on Sun Jul 20, 2014 1:02 pm, edited 1 time in total.
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Frugal Al
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Re: SPIA quotes from Vanguard

Post by Frugal Al »

Aptenodytes wrote:3) This has no meaning in the absence of a comparative context. It is equally valid to say "Take joy in the low cost of guarantees."
I actually agree somewhat with this point (see my edit). My point is that all guarantees come with a price, and often it's quite high. Today, over an average lifespan for a 65 year old, all that guarantee consists of is taking one's money, and sending it back to them in monthly increments, at a return that is about equal to the historical inflation rate. No wonder insurance companies don't want to talk about IRR. Still, if one needs the income insurance and is willing to pay that price, then so be it. Regardless, let's not sing the praises of SPIA products and ignore their negatives. The real strength of an SPIA is at older ages when the mortality credit can offer a real benefit.
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