Single Premium Immediate Annuity

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thefoggycity
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Single Premium Immediate Annuity

Post by thefoggycity »

Bogleheads,

1) What are the pros and cons to purchasing an SPIA at or near retirement?

2) Is there a rule of thumb about what percentage of one's portfolio to invest in an SPIA?

3) Would it ever make sense to purchase a single premium DEFERRED annuity to fund/supplement early retirement?

Thanks for your thoughts!
gkaplan
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Re: Single Premium Immediate Annuity

Post by gkaplan »

Everything you want to know about a Single Premium Immediate Annuity (SPIA) but were afraid to ask:


https://www.bogleheads.org/wiki/Immediate_fixed_annuity
Gordon
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Re: Single Premium Immediate Annuity

Post by Vanguard Fan 1367 »

My thoughts on SPIAs are that in this low interest rate environment the returns aren't that appealing. I took a look at what you get per 100k of investing and didn't get all that excited.

I remember reading the story of a boxer who blew all his money except for an 800k annuity a number of years ago. For this boxer it was nice to have an income stream from the annuity and I would suspect that the income you could get from an 800k annuity in say the 1980s was a bit higher than you can expect today.
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The Wizard
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Re: Single Premium Immediate Annuity

Post by The Wizard »

Vanguard Fan 1367 wrote:
...I remember reading the story of a boxer who blew all his money except for an 800k annuity a number of years ago. For this boxer it was nice to have an income stream from the annuity and I would suspect that the income you could get from an 800k annuity in say the 1980s was a bit higher than you can expect today.
Yes, but inflation was higher then, especially in the early 80s.
Nonetheless, mortality credits still make SPIAs somewhat attractive, especially in your mid 60s and beyond...
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dbr
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Re: Single Premium Immediate Annuity

Post by dbr »

Vanguard Fan 1367 wrote:My thoughts on SPIAs are that in this low interest rate environment the returns aren't that appealing. I took a look at what you get per 100k of investing and didn't get all that excited.
That is a consideration, but return is not a term that is applicable to comparing an insurance proposition to an investment proposition.

One tactic to deal with current low payout rates and also inflation is to space out annuities in pieces over time. There is an offsetting risk to how the assets to be annuitized are held in the meantime.
NiceUnparticularMan
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Re: Single Premium Immediate Annuity

Post by NiceUnparticularMan »

It is a complex topic, but I'll tell you what I plan to do.

I plan to look at annuities no earlier than a year or two into retirement. At the moment, I suspect I will be looking just at nominal immediate annuities, as the implied return on both deferral and inflation protection seem not all that competitive to me. But who knows--I will evaluate at the time. I am planning to wait a year or two into retirement to gain potentially valuable information about our real desired and required spending rates.

If things have gone well, my goal will be to purchase an annuity which when combined with no more than a 3% withdrawal from the remaining portfolio would be sufficient to cover our desired spending. I will then defer Social Security, which seems to be a much better bet than the other way around (take Social Security early, then buy deferred annuities or an annuity later).

And that might be it. However, if at some point it seems advisable to top up the annuity prior to getting Social Security, I might do that, keeping the same goal in mind.

After we get Social Security (assuming we get this far), same deal--that might be it, but I might also top up the annuity at some point.

All this is pretty conservative, in the sense I am sort of trying to keep a perpetual portfolio of some kind, which presumably will get passed on to our heirs. But I will be willing to convert some of that to annuities, so it won't be as large as it could have been.
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BL
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Re: Single Premium Immediate Annuity

Post by BL »

First, deferring SS to age 70 is the best annuity you can buy.

Waiting until your 70's may be the best time to buy SPIAs; you are looking for a minimum baseline necessary for living combined with SS and RMDs. It is important not to use up all of your money which you may need for extra spending and perhaps LTC.
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dm200
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Re: Single Premium Immediate Annuity

Post by dm200 »

BL wrote:First, deferring SS to age 70 is the best annuity you can buy.
Waiting until your 70's may be the best time to buy SPIAs; you are looking for a minimum baseline necessary for living combined with SS and RMDs. It is important not to use up all of your money which you may need for extra spending and perhaps LTC.
1. Be aware that DB pensions, Social Security, etc. are "gender neutral" which means (on average) women receive considerably more lifetime income over time than men (all other factors being equal)

2. SPIAs (as far as I know) are generally not "gender neutral". Men get more monthly income for life than women for the same purchase price.
Dottie57
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Re: Single Premium Immediate Annuity

Post by Dottie57 »

The Wizard wrote:
Vanguard Fan 1367 wrote:
...I remember reading the story of a boxer who blew all his money except for an 800k annuity a number of years ago. For this boxer it was nice to have an income stream from the annuity and I would suspect that the income you could get from an 800k annuity in say the 1980s was a bit higher than you can expect today.
Yes, but inflation was higher then, especially in the early 80s.
Nonetheless, mortality credits still make SPIAs somewhat attractive, especially in your mid 60s and beyond...
SPIA is attractive from the point of insurance. It should not be thought of as an investment but as a guarantee of income till end of life or a given period of time.
The Wizard
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Re: Single Premium Immediate Annuity

Post by The Wizard »

Sometimes in the evening, after consuming a fine IPA, I sometimes think that the Government is holding my tax-deferred accounts hostage. (Ha ha...JOKE, not political...)
I can have the money therein so long as I pay a 33% combined ransom. This is my marginal rate, not my effective average rate on my present income.

By annuitizing more of those tax-deferred funds as time goes on, I am able to get roughly double the monthly cash flow from those funds compared to a SWR approach.
And I'm starting to reinvest more of those funds in my taxable account where taxation is less, so I'm happy about that...
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The Wizard
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Re: Single Premium Immediate Annuity

Post by The Wizard »

dm200 wrote: 2. SPIAs (as far as I know) are generally not "gender neutral". Men get more monthly income for life than women for the same purchase price.
Some are, TIAA in particular...
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TIAX
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Re: Single Premium Immediate Annuity

Post by TIAX »

The Wizard wrote:
dm200 wrote: 2. SPIAs (as far as I know) are generally not "gender neutral". Men get more monthly income for life than women for the same purchase price.
Some are, TIAA in particular...
Would this mean that men should avoid TIAA?
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dm200
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Re: Single Premium Immediate Annuity

Post by dm200 »

TIAX wrote:
The Wizard wrote:
dm200 wrote: 2. SPIAs (as far as I know) are generally not "gender neutral". Men get more monthly income for life than women for the same purchase price.
Some are, TIAA in particular...
Would this mean that men should avoid TIAA?
Good question!
Jack FFR1846
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Re: Single Premium Immediate Annuity

Post by Jack FFR1846 »

I was just reading through this and went to one of the quote websites and read some of their information. I came away thinking.....a DIA might be a way to shelter large amounts of money from consideration by FAFSA. Has anyone considered doing this? Yes....I know that once the money has been turned over, it's no longer available to pay for college expenses. With a large amount in savings bonds, I'm thinking that with my second son, this could be a way to get potential eligibility for aid (I will have stopped working by then).
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The Wizard
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Re: Single Premium Immediate Annuity

Post by The Wizard »

dm200 wrote:
TIAX wrote:
The Wizard wrote:
dm200 wrote: 2. SPIAs (as far as I know) are generally not "gender neutral". Men get more monthly income for life than women for the same purchase price.
Some are, TIAA in particular...
Would this mean that men should avoid TIAA?
Good question!
Not especially.
TIAA's payout was still better than those from immediateannuities.com...
http://socialize.morningstar.com/NewSoc ... px#3820308
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Lynette
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Re: Single Premium Immediate Annuity

Post by Lynette »

.....
Last edited by Lynette on Wed Jan 09, 2019 8:44 am, edited 1 time in total.
Gill
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Re: Single Premium Immediate Annuity

Post by Gill »

Lynette wrote:How much tax does one pay on a SPIA? I am particularly interested if one pays for it from:

1. Taxable - I assume that only the interest is taxable.

2. IRA - I assume that both the payment and interest are taxable.

3. Taken as a QLAC (?) instead of a RMD from an IRA? I assume as in No 2 that both the pay and interest are taxable?
Your understanding is essentially correct. When purchased with after tax funds there is an exclusion ratio which is tax free until fully recovered at which time the entire payment is taxable.
Gill
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mikefixac
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Re: Single Premium Immediate Annuity

Post by mikefixac »

The following states impose a premium tax on immediate annuities:


States With A Premium Tax on VA Investment
State Qualifying Non-Qualifying
Maine 0.00% 2.00%
South Dakota 0.00% 1.25%
Wyoming 0.00% 1.00%
California 0.50% 2.35%
Nevada 0.00% 3.50%
West Virginia 1.00% 1.00%
Texas 0.40% 0.40%

From this link: https://www.bogleheads.org/wiki/Vanguar ... ram_-_SPIA

I live in CA. According to this, CA tax on a Non-qualifying SPIA is 2.35%. Is that 2.35% of the total monies received from the SPIA? If that's the case, at least in CA, purchasing a SPIA doesn't make sense.

And why would states charge less tax with a Qualifying SPIA vs Non qualifying? Isn't Non-qualifying after tax dollars?
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Cyclesafe
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Re: Single Premium Immediate Annuity

Post by Cyclesafe »

The premium tax is paid only on the initial amount annuitized. Get your annuity while a resident of a state that does not charge a premium tax.

With regard to qualifying v. non-qualifying? States do what states do.
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strafe
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Re: Single Premium Immediate Annuity

Post by strafe »

The Wizard wrote: Tue Apr 25, 2017 10:19 am Sometimes in the evening, after consuming a fine IPA, I sometimes think that the Government is holding my tax-deferred accounts hostage. (Ha ha...JOKE, not political...)
I can have the money therein so long as I pay a 33% combined ransom. This is my marginal rate, not my effective average rate on my present income.

By annuitizing more of those tax-deferred funds as time goes on, I am able to get roughly double the monthly cash flow from those funds compared to a SWR approach.
And I'm starting to reinvest more of those funds in my taxable account where taxation is less, so I'm happy about that...
IPAs can lead you astray on tax matters!

Taxation is more in a taxable account, not less.

Tax deferred accounts are only subject to income tax — at the time of entry with a Roth or at the time of exit, with a traditional IRA/401k. Pre/post taxation are mathematically equivalent assuming the rates are the same.

Money placed in taxable accounts is subject to both income tax (at the time of entry, like a Roth account) AND capital gains (at exit).
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Sandtrap
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Re: Single Premium Immediate Annuity

Post by Sandtrap »

The Wizard wrote: Tue Apr 25, 2017 1:04 pm
dm200 wrote:
TIAX wrote:
The Wizard wrote:
dm200 wrote: 2. SPIAs (as far as I know) are generally not "gender neutral". Men get more monthly income for life than women for the same purchase price.
Some are, TIAA in particular...
Would this mean that men should avoid TIAA?
Good question!
Not especially.
TIAA's payout was still better than those from immediateannuities.com...
http://socialize.morningstar.com/NewSoc ... px#3820308
Interesting point.
A long time elderly friend (retired university prof.) derives all of his baseline expenses from a substantial TIAA deferred annuity. And, through the decades thereafter has added SPIA's via TIAA. He has done very well. And, at his age, the mortality credits are fully kicking in. Excess funds are now used to purchase newer SPIA's for his DW (younger than he). And, yes, the monthly payout, per dollar spent, is less for DW. However, this is just one person's scenario that may or may not work well for others.
In this case, he is maximizing his retirement dollars this way. (which can be a good SPIA strategy)
Those with substantial portfolio's may not have to. I depends.
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JoMoney
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Re: Single Premium Immediate Annuity

Post by JoMoney »

As far as I can tell, SPIAs are quite competitive with bonds and other fixed-income products. They are generally actuarialy fair, in that if you looked at a portfolio of bonds at current interest rates, and worked out an amortization schedule to pay all of it out to you over your expected remaining lifespan, it should be very close to what a SPIA would offer. The advantage with a SPIA is that you get the "insurance" that if you live longer than what would be expected the SPIA will continue to pay, if you lived a shorter period of time the advantage would go to bonds where you could have either spent more or left a larger estate. Since nobody knows how long they will leave, the assurance offered by a SPIA may allow some to sleep better and spend more knowing they won't run out of money.

Some of the downsides of a SPIA, are that you may have some regret if interest rates rise, and there is some credit risk in that they are usually tied to a single insurance company. Your state may offer some guaranty if the insurance company fails, but there is still more risk involved then U.S. Treasuries and it's less diversified than a portfolio of multiple different corporate bonds.
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DebiT
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Re: Single Premium Immediate Annuity

Post by DebiT »

I often see it written that an SPiA is good to have if SS and any pension doesn't meet "necessary" expenses, as opposed to "desirable".

How would one look at this situation? If both DH and I are alive, SS (we have no pension) more than meets the necessary expenses. Once one of us dies, the amount we're short on necessary is about 1.5% of 401K. Obviously desirable expenses represent more than that, but still no more than 4% if my figures are right.

So, if my bias is to not give up control of money if possible, would it make sense to not buy an SPIA and wait and see what the situation is once one of passes? The way the math works, the longer the first spouse to go lives, the less need for SPIA there would be.
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catdoctor
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Re: Single Premium Immediate Annuity

Post by catdoctor »

With all the deaths from COVID, will they affect the mortality tables, and thus change the SPIA payouts?
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Re: Single Premium Immediate Annuity

Post by Stinky »

catdoctor wrote: Wed Nov 18, 2020 6:01 pm With all the deaths from COVID, will they affect the mortality tables, and thus change the SPIA payouts?
If there was to be a permanent increase in mortality, then the SPIA payout tables would adjust over time.

But I don’t expect the excess mortality from COVID to be permanent. Vaccines and other treatments are just around the corner, and I expect that mortality will get back to “normal” levels within the next year. No permanent increase in mortality rates.
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