Annuity w guaranteed 5-6% return [payout]?

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Ikigai
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Annuity w guaranteed 5-6% return [payout]?

Post by Ikigai » Mon Apr 02, 2018 2:27 pm

A friend told me recently he & his wife bought an annuity with a guaranteed 5-6% return. I'm not an annuity expert, but I thought if the current rates are really low, its a bad time to buy an annuity. How can the annuity company make any money and guarantee that kind of return? Did my friend pay too much? Is the annuity company starting the payout really low so the yearly 5-6% increase works out mathematically? Thanks for helping me understand this. :confused

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Re: Annuity w guaranteed 5-6% return?

Post by deltaneutral83 » Mon Apr 02, 2018 2:30 pm

Principal is probably gone.

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Re: Annuity w guaranteed 5-6% return?

Post by Sandtrap » Mon Apr 02, 2018 2:31 pm

Last edited by Sandtrap on Mon Apr 02, 2018 6:45 pm, edited 1 time in total.

Edward Joseph
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Re: Annuity w guaranteed 5-6% return?

Post by Edward Joseph » Mon Apr 02, 2018 2:36 pm

It's probably a deferred VA with an Income Rider. The 5-6% is most likely applied to their Income Base and not to the contract value. The Income Base is what their payout percentage is based off of.

If they want to walk away after the CDSC is up, they walk with whatever the contract value is. The contract value is probably just based on normal market participation. If they walk away, they surrender the Income Base value that grew by 5-6%.

wolf359
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Re: Annuity w guaranteed 5-6% return?

Post by wolf359 » Mon Apr 02, 2018 2:44 pm

Check out immediate annuities (http://immediateannuities.com) and get a price quote. Depending upon their age and terms, it is possible to get a 5-6% return.

The reason for the good return is that some of the return is return of capital, and some is in the form of "mortality credits," which is the payments of people who also bought annuities but died earlier than expected. In other words, the feature you may not like is the also the one that helps "improve" the return. The older you are when you buy it, the shorter your life expectancy, and therefore the greater your projected return.

You probably have to be in your late 60's or in your 70's to get a 5-6% return from an immediate annuity. If they're younger than that, they may have bought a variable annuity, which is loaded with commissions and fees and may not have given them what they thought they got.

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Re: Annuity w guaranteed 5-6% return?

Post by adamthesmythe » Mon Apr 02, 2018 2:47 pm

Depending on their ages, 5-6% is a possible return for a single-premium annuity.

The SPIA "yield" does increase with the prevailing interest rate. But an increase in interest rate of 1% causes an increase in payout rate of less than 1%.

https://www.forbes.com/sites/wadepfau/2 ... faf26874d2

wolf359
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Re: Annuity w guaranteed 5-6% return?

Post by wolf359 » Mon Apr 02, 2018 2:54 pm

adamthesmythe wrote:
Mon Apr 02, 2018 2:47 pm
Depending on their ages, 5-6% is a possible return for a single-premium annuity.

The SPIA "yield" does increase with the prevailing interest rate. But an increase in interest rate of 1% causes an increase in payout rate of less than 1%.

https://www.forbes.com/sites/wadepfau/2 ... faf26874d2
The immediate annuity I'm talking about, and the single-premium immediate annuity (SPIA) referenced here are the same thing. Again, it depends on their ages. There's better payout if there are higher interest rates when you buy them (because they're typically funded by long-term bonds.)

Another possible source is Vanguard themselves. They have a SPIA program that provides a good, low-cost product.

Avoid commissioned life insurance agents. They're likely to redirect you into more expensive products.

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Re: Annuity w guaranteed 5-6% return?

Post by Ron » Mon Apr 02, 2018 3:07 pm

I would say that the quoted return includes a portion of the premium paid. That means the insurance company is including the policy holders own money in the return, rather than stating an IRR without any returned premium.

As a comparison, I purchased an immediate annuity (SPIA - Single Premium Income Annuity) after I retired just over 10 years ago, at age 59. The computed IRR on the product at that time was/is 4.79%. Now consider that back in 2007, we started the drop in interest rates that until today, remained low throughout the decade.

I doubt that even today, with interest rates slightly going up, that a "pure" IRR of over 5% would be possible, unless they are quite old and are getting the advantage of mortality credits (less time for the policy to generate returns).

FWIW,

- Ron

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Re: Annuity w guaranteed 5-6% return?

Post by Ikigai » Mon Apr 02, 2018 3:12 pm

wolf359 wrote:
Mon Apr 02, 2018 2:44 pm

You probably have to be in your late 60's or in your 70's to get a 5-6% return from an immediate annuity. If they're younger than that, they may have bought a variable annuity, which is loaded with commissions and fees and may not have given them what they thought they got.
Thx for the explanation. They bought it through their advisor; they are 64.

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Re: Annuity w guaranteed 5-6% return?

Post by Ikigai » Mon Apr 02, 2018 3:13 pm

adamthesmythe wrote:
Mon Apr 02, 2018 2:47 pm
Depending on their ages, 5-6% is a possible return for a single-premium annuity.

The SPIA "yield" does increase with the prevailing interest rate. But an increase in interest rate of 1% causes an increase in payout rate of less than 1%.

https://www.forbes.com/sites/wadepfau/2 ... faf26874d2
Thx for the link - very helpful.

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Re: Annuity w guaranteed 5-6% return?

Post by ResearchMed » Mon Apr 02, 2018 3:35 pm

Ikigai wrote:
Mon Apr 02, 2018 3:12 pm
wolf359 wrote:
Mon Apr 02, 2018 2:44 pm

You probably have to be in your late 60's or in your 70's to get a 5-6% return from an immediate annuity. If they're younger than that, they may have bought a variable annuity, which is loaded with commissions and fees and may not have given them what they thought they got.
Thx for the explanation. They bought it through their advisor; they are 64.
We are a bit older, and last week we spoke with our TIAA rep to start getting ideas about retirement strategies when DH finally decides to retire in a few years. (He is one of the lucky ones who still gets great satisfaction from his job.)

IF we were to get a joint SPIA (life annuity, with 75% to survivor), starting next month, we'd get close to 8% per year.
Yes, that includes the return of principal, but we have no legacy desires, and we *do* care about the income that will last as long as we do.
And this is with "today's" low interest rates.

Once we start doing this, we'd probably end up laddering a few annuities, adding a few smaller ones in the future as an inflation adjustment.
Having this floor, plus some nice Social Security income as well, will allow us to worry less about "the rest of our money", for additional expenses such as travel or assisted living, etc.

These are sensitive to interest rates, but also very dependent upon the starting ages of the annuitants, for obvious reasons...

RM
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Re: Annuity w guaranteed 5-6% return?

Post by KSActuary » Mon Apr 02, 2018 4:36 pm

Lower interest rate structure affects all insurance company products and annuities are somewhat expensive now. I would expect that the true investment return in the 7% payout on a SPIA is 2% - 3%.

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Re: Annuity w guaranteed 5-6% return?

Post by David Jay » Mon Apr 02, 2018 6:16 pm

You are getting two “groups” of answers because there are two types of annuities, we do not know for sure which type it is.

The first is the immediate annuity, where you give an insurance chunk of money and receive a monthly payment for the rest of your life. The insurance uses an average life expectancy, so those who live longer are covered by those who pass at a younger age. This type of annuity is sometimes described as “longevity insurance”.

The second is a some form of a variable annuity. These are typically “sold” by an insurance agent because they pay the insurance agent well. The salesman will often quote an interest rate but this interest rate is not real. You can’t put money in for 10 years and get back 179% of the money you invested (that is: 6%, compounded for 10 years). The 6% only applies to the “income base”, which is to say, you only get the 6% if you annuitize with that insurance company and continue to pay the policy fees for the rest of your life. My sister was sold one of these with a quoted 6% rate.
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Re: Annuity w guaranteed 5-6% return?

Post by Dottie57 » Mon Apr 02, 2018 6:33 pm

I just found that for 100k, a 61 yo woman in mn could receive a yearly income of $5724 . This is 5.724% of the 100k.
No cola.

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Re: Annuity w guaranteed 5-6% return?

Post by Dottie57 » Mon Apr 02, 2018 6:34 pm

Dottie57 wrote:
Mon Apr 02, 2018 6:33 pm
I just found that for 100k, a 61 yo woman in mn could receive a yearly income of $5724 . This is 5.724% of the 100k.
No cola.

Every year you wait to purchase, the payout increases.

jalbert
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Re: Annuity w guaranteed 5-6% return?

Post by jalbert » Mon Apr 02, 2018 6:37 pm

Ikigai wrote:
Mon Apr 02, 2018 2:27 pm
A friend told me recently he & his wife bought an annuity with a guaranteed 5-6% return. I'm not an annuity expert, but I thought if the current rates are really low, its a bad time to buy an annuity. How can the annuity company make any money and guarantee that kind of return? Did my friend pay too much? Is the annuity company starting the payout really low so the yearly 5-6% increase works out mathematically? Thanks for helping me understand this. :confused
Be sure to distinguish return from payout rate. The payout rate includes both investment return and return of principal. If someone were 65 and life expectancy were to live to age 85, then 20 years of return of principal would contribute 5 percentage points to the payout. If the payout were 7% then the return on investment would be 2%.
Last edited by jalbert on Mon Apr 02, 2018 6:38 pm, edited 1 time in total.
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Re: Annuity w guaranteed 5-6% return?

Post by JBTX » Mon Apr 02, 2018 6:37 pm

If we are talking about immediate annuity, a 5-6% return is the annual income that is paid out, and is not adjusted for inflation. An inflation adjusted immediate annuity payout would be somewhere in the 3-4% range.

The 5-6% payout rate is not the same as a rate of return, as in an IRR, because there is no terminal value payback of principle. People get these confused and are dazzled by these payout rates, compared to lower rates they see on bonds. But with bonds you get a return of principle at the end.

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Re: Annuity w guaranteed 5-6% return?

Post by bberris » Mon Apr 02, 2018 6:54 pm

Ikigai wrote:
Mon Apr 02, 2018 2:27 pm
A friend told me recently he & his wife bought an annuity with a guaranteed 5-6% return. I'm not an annuity expert, but I thought if the current rates are really low, its a bad time to buy an annuity. How can the annuity company make any money and guarantee that kind of return? Did my friend pay too much? Is the annuity company starting the payout really low so the yearly 5-6% increase works out mathematically? Thanks for helping me understand this. :confused
I assume we are talking about a simple SPIA.

Words are being used loosely. The payout from an annuity is not the same as an investment return. When you buy a bond yielding 5 % for 1,000, you get your 1000 back when the bond matures. When you buy an annuity for $1000, you get a check every month until you die or until a future date, but you don't get your original principal back. So of course an annuity has a higher monthly payout (not a return) than a bond.

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Re: Annuity w guaranteed 5-6% return?

Post by dwickenh » Mon Apr 02, 2018 7:02 pm

Ron wrote:
Mon Apr 02, 2018 3:07 pm
I would say that the quoted return includes a portion of the premium paid. That means the insurance company is including the policy holders own money in the return, rather than stating an IRR without any returned premium.

As a comparison, I purchased an immediate annuity (SPIA - Single Premium Income Annuity) after I retired just over 10 years ago, at age 59. The computed IRR on the product at that time was/is 4.79%. Now consider that back in 2007, we started the drop in interest rates that until today, remained low throughout the decade.

I doubt that even today, with interest rates slightly going up, that a "pure" IRR of over 5% would be possible, unless they are quite old and are getting the advantage of mortality credits (less time for the policy to generate returns).

FWIW,

- Ron
+1
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Re: Annuity w guaranteed 5-6% return?

Post by Shikoku » Mon Apr 02, 2018 8:17 pm

ResearchMed wrote:
Mon Apr 02, 2018 3:35 pm
We are a bit older, and last week we spoke with our TIAA rep to start getting ideas about retirement strategies when DH finally decides to retire in a few years. (He is one of the lucky ones who still gets great satisfaction from his job.)

IF we were to get a joint SPIA (life annuity, with 75% to survivor), starting next month, we'd get close to 8% per year.
Yes, that includes the return of principal, but we have no legacy desires, and we *do* care about the income that will last as long as we do.
And this is with "today's" low interest rates.
ResearchMed,
That is an excellent rate. I am wondering if you could possibly share the age of the two members. Many thanks.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

ResearchMed
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Re: Annuity w guaranteed 5-6% return?

Post by ResearchMed » Mon Apr 02, 2018 8:33 pm

Shikoku wrote:
Mon Apr 02, 2018 8:17 pm
ResearchMed wrote:
Mon Apr 02, 2018 3:35 pm
We are a bit older, and last week we spoke with our TIAA rep to start getting ideas about retirement strategies when DH finally decides to retire in a few years. (He is one of the lucky ones who still gets great satisfaction from his job.)

IF we were to get a joint SPIA (life annuity, with 75% to survivor), starting next month, we'd get close to 8% per year.
Yes, that includes the return of principal, but we have no legacy desires, and we *do* care about the income that will last as long as we do.
And this is with "today's" low interest rates.
ResearchMed,
That is an excellent rate. I am wondering if you could possibly share the age of the two members. Many thanks.
Sure... vague range of early 70's and mid 70's.
(And keep in mind, interest rates are low just now, which would be reflected in the current quote.)

IIRC, there are a few "survivor" choices, and the choice isn't just "percentage", but whether *either* annuitant or just the secondary gets less - or "something like that"...

I'm also not sure if there are "additional extra amounts" after annuitizing, but I think so.
(TIAA has a sort of "black box" model of modest extra payments when TiAA returns allow. In the accumulation stage, this has been a "useful" extra amount each year. It adds up.)

They also tend to pay more for older vintages (the year each amount was added during the accumulation stages), separate from the actual interest rate of each vintage.
NOTE: There are others here on BH who are much more familiar with TIAA annuities, and how they work when they are annuitized, than we are.

RM
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Re: Annuity w guaranteed 5-6% return?

Post by Shikoku » Mon Apr 02, 2018 8:42 pm

ResearchMed wrote:
Mon Apr 02, 2018 8:33 pm
Shikoku wrote:
Mon Apr 02, 2018 8:17 pm
ResearchMed wrote:
Mon Apr 02, 2018 3:35 pm
We are a bit older, and last week we spoke with our TIAA rep to start getting ideas about retirement strategies when DH finally decides to retire in a few years. (He is one of the lucky ones who still gets great satisfaction from his job.)

IF we were to get a joint SPIA (life annuity, with 75% to survivor), starting next month, we'd get close to 8% per year.
Yes, that includes the return of principal, but we have no legacy desires, and we *do* care about the income that will last as long as we do.
And this is with "today's" low interest rates.
ResearchMed,
That is an excellent rate. I am wondering if you could possibly share the age of the two members. Many thanks.
Sure... vague range of early 70's and mid 70's.
(And keep in mind, interest rates are low just now, which would be reflected in the current quote.)

IIRC, there are a few "survivor" choices, and the choice isn't just "percentage", but whether *either* annuitant or just the secondary gets less - or "something like that"...

I'm also not sure if there are "additional extra amounts" after annuitizing, but I think so.
(TIAA has a sort of "black box" model of modest extra payments when TiAA returns allow. In the accumulation stage, this has been a "useful" extra amount each year. It adds up.)

They also tend to pay more for older vintages (the year each amount was added during the accumulation stages), separate from the actual interest rate of each vintage.
NOTE: There are others here on BH who are much more familiar with TIAA annuities, and how they work when they are annuitized, than we are.

RM
Thank you, ResearchMed. I have fund with TIAA and am in my early 50s. So I am keeping an open mind to consider SPIA down the road. Until then, I will continue learning.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

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Re: Annuity w guaranteed 5-6% return?

Post by Valuethinker » Tue Apr 03, 2018 5:35 am

ResearchMed wrote:
Mon Apr 02, 2018 3:35 pm
Ikigai wrote:
Mon Apr 02, 2018 3:12 pm
wolf359 wrote:
Mon Apr 02, 2018 2:44 pm

You probably have to be in your late 60's or in your 70's to get a 5-6% return from an immediate annuity. If they're younger than that, they may have bought a variable annuity, which is loaded with commissions and fees and may not have given them what they thought they got.
Thx for the explanation. They bought it through their advisor; they are 64.
We are a bit older, and last week we spoke with our TIAA rep to start getting ideas about retirement strategies when DH finally decides to retire in a few years. (He is one of the lucky ones who still gets great satisfaction from his job.)

IF we were to get a joint SPIA (life annuity, with 75% to survivor), starting next month, we'd get close to 8% per year.
Yes, that includes the return of principal, but we have no legacy desires, and we *do* care about the income that will last as long as we do.
And this is with "today's" low interest rates.

Once we start doing this, we'd probably end up laddering a few annuities, adding a few smaller ones in the future as an inflation adjustment.
Having this floor, plus some nice Social Security income as well, will allow us to worry less about "the rest of our money", for additional expenses such as travel or assisted living, etc.

These are sensitive to interest rates, but also very dependent upon the starting ages of the annuitants, for obvious reasons...

RM
Unfortunately in the US market inflation indexed SPIAs are rare.

So your big risk remains inflation. It appears that out of Medicare coverage healthcare costs also rise faster than inflation. So do property taxes and the cost of maintenance and upkeep for houses, it appears.

The inflation hedges available to an American retiree are:

- final salary/ Defined Benefit pension schemes which are indexed to CPI (usually public sector, state and local finances in many jurisdictions will require benefit cuts in future)

- Social Security - delaying SS as long as possible increases inflation protection (higher base benefit to index) - that is not always the best strategy for an individual or couple

- TIPS bonds & ibonds. One can build up a decent portfolio of ibonds, despite annual limits, if one is diligent. TIPS bonds and funds tend to be volatile. A TIPS ladder overcomes this, and there are also short term TIPS funds that tend to track inflation better than all TIPS bonds (but pay significantly lower returns)

- Commercial Real Estate - in the long run, rents and property values tend to rise with inflation. Unfortunately, CRE is also quite a volatile market-- there are busts which take place every about 15 years which crash values. And there is significant structural change going on - most retail CRE is now toxic waste, as malls close (retreat of anchor tenants ie department stores). Who knows what happens to office space (we have moved to a "hot desking" mode which cuts space needs by c. 33% I believe; that's not uncommon in professional services these days).

A REIT index fund (or the TIAA RE Annuity) offers a degree of inflation protection at the cost of volatility (less so with TIAA RE Annuity). Also there are problems with using up tax exempt space

- there is a case for Gold, commodities, etc. but we've hashed this one so many times in this Forum. Suffice it to say they are more for the specialists

So I encourage you to consider annuitization/ SPIA especially if it allows you to delay taking Social Security. SS will provide a baseline of income, inflation indexed. You could also consider adding to TIPS in your fixed income space-- particularly if you have purchased level payment annuities, this is a worthwhile diversification (trading the fixed, nominal returns of straight bonds for the inflation protection of TIPS). And buy ibonds.

It is often said that equities provide inflation protection. The actual record is very mixed on this. Periods of accelerating inflation (and rising interest rates) don't seem to be that good for equities. Although equities are a real asset (one whose returns stem from real cash flows; vs a nominal cash flow return instrument like a bond or fixed annuity) their correlation with inflation is not perfect by any means.

The actual truth of equities is they pay high returns (real, after inflation) and the holder pays for that with the volatility that equities show. You cannot assert, for any given period (10, 20, 30 years) that equities will beat inflation-- in the 1970s they lost around 40% to inflation (and the UK market 1972-74 dropped c. 80% on a total return basis, with no war or revolution).

All the empirical evidence suggests that a 20% equities/ 80% nominal bonds portfolio gives a higher return and a lower volatility (risk) than a 100% fixed income/ bonds portfolio. My preference for someone in that situation would be something like 20% Equities, 30% TIPS, 50% nominal bonds in any case. And there's a case for 40% TIPS. Fixed payment annuities are very similar to nominal bonds in that scenario.

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Re: Annuity w guaranteed 5-6% return?

Post by The Wizard » Tue Apr 03, 2018 6:56 am

As noted, TIAA tends to have better lifetime immediate annuity payout rates than most other insurance companies, for those of us who have access to it.
I annuitized an additional amount one year ago at age 67 and got a 7.04% payout rate, with 10year guarantee. This was a combination of TIAA Traditional and TREA, so my monthly payout varies depending on the commercial real estate market.

My income from immediate annuities is high enough that when I start SS at age 70, I'll be reinvesting excess income most months.
Thus my remaining portfolio will be growing nicely, unless I decide to buy a boat or similar...
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Re: Annuity w guaranteed 5-6% return?

Post by dbr » Tue Apr 03, 2018 11:10 am

It might be the thread title should be edited to change the word "return" to "payout." It would seem replies eventually appeared pointing out the difference, but it is a point sometimes badly misunderstood.

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Re: Annuity w guaranteed 5-6% return?

Post by Dottie57 » Tue Apr 03, 2018 11:18 am

Just a note about inflation. Maybe purchasing smaller SPIA's several years apart would help with inflation considerations.

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Re: Annuity w guaranteed 5-6% return?

Post by The Wizard » Tue Apr 03, 2018 11:57 am

Dottie57 wrote:
Tue Apr 03, 2018 11:18 am
Just a note about inflation. Maybe purchasing smaller SPIA's several years apart would help with inflation considerations.
Yes, it's better (cheaper) to do it yourself this way rather than paying the insurance company to cover this risk...
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Re: Annuity w guaranteed 5-6% return [payout]?

Post by CWRadio » Tue Apr 03, 2018 1:58 pm

At what age is mortality credit more important then the current interest rates of Treasuries for purchasing a SPIA?
Paul

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Re: Annuity w guaranteed 5-6% return [payout]?

Post by adamthesmythe » Tue Apr 03, 2018 2:16 pm

CWRadio wrote:
Tue Apr 03, 2018 1:58 pm
At what age is mortality credit more important then the current interest rates of Treasuries for purchasing a SPIA?
Paul
I think that would be pretty (very?) hard to work out.

You would need to know the mortality assumptions made by the insurance company. (Not the same as the average, because those with disease expectations do not buy annuities). You would need to know how the insurance company invests (probably not treasuries, probably high-quality bonds). And you would need to make a guess for their expected profit.

A better idea might be to buy annuities before declines in the mental ability to manage investments.

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Re: Annuity w guaranteed 5-6% return?

Post by Shikoku » Tue Apr 03, 2018 2:28 pm

The Wizard wrote:
Tue Apr 03, 2018 6:56 am
As noted, TIAA tends to have better lifetime immediate annuity payout rates than most other insurance companies, for those of us who have access to it.
I annuitized an additional amount one year ago at age 67 and got a 7.04% payout rate, with 10year guarantee. This was a combination of TIAA Traditional and TREA, so my monthly payout varies depending on the commercial real estate market.
The Wizard,
I am wondering if you could possibly elaborate a little bit on the '10 year guarantee' part. How will the annuity pay you after 10 years?
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

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Re: Annuity w guaranteed 5-6% return [payout]?

Post by ResearchMed » Tue Apr 03, 2018 2:32 pm

CWRadio wrote:
Tue Apr 03, 2018 1:58 pm
At what age is mortality credit more important then the current interest rates of Treasuries for purchasing a SPIA?
Paul
You could perhaps (?) try to get a feel for this by playing with
www.immediateannuities.com

and plugging in different start ages, for the same starting date, the latter to try to vaguely rule out fluctuations in the interest rates.

You might find that while at first the changes in the payout don't increase much from one age to the next, as the ages get higher, you might start to see that change accelerate.
Or use 5 year intervals to get a more general feel, and if you find an interval where payout seems to be increasing "more", then look at the years/ages within.

There's probably something very wrong with this exercise, but I know that when we've been exploring, we've put in various starting dates and manipulated the ages, too, in trying to get a feel for "what's going on".
That's probably similar to what you are wondering.

We also looked a what happened in terms of payouts if we deferred the start for 1, 5, 10 years, etc.
I don't think we'd get a deferred life annuity (especially with interest rates so low), but we'd handle that by adding, later, smaller SPIA's every few years, by way of our own little inflation adjustments.

If I understand TheWizard's "guarantee", it just that IF he were to pass within 10 years, there would still be something paid to beneficiaries.
There is a slight reduction in the payout when there are guarantees, no surprise.
Immediate Annuities lets you play around with that type of factor, too.
Take a look, and get a feel for what is "out there".

RM
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HomerJ
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Re: Annuity w guaranteed 5-6% return [payout]?

Post by HomerJ » Tue Apr 03, 2018 2:44 pm

CWRadio wrote:
Tue Apr 03, 2018 1:58 pm
At what age is mortality credit more important then the current interest rates of Treasuries for purchasing a SPIA?
Paul
Around 70, the payout starts getting pretty good. Because the odds are good you're going to die sooner than latter.

I definitely plan to look into SPIAs around 70-75, if I'm still healthy. Great longevity insurance, and lets you spend more today.

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Re: Annuity w guaranteed 5-6% return?

Post by The Wizard » Tue Apr 03, 2018 3:00 pm

Shikoku wrote:
Tue Apr 03, 2018 2:28 pm
The Wizard wrote:
Tue Apr 03, 2018 6:56 am
As noted, TIAA tends to have better lifetime immediate annuity payout rates than most other insurance companies, for those of us who have access to it.
I annuitized an additional amount one year ago at age 67 and got a 7.04% payout rate, with 10year guarantee. This was a combination of TIAA Traditional and TREA, so my monthly payout varies depending on the commercial real estate market.
The Wizard,
I am wondering if you could possibly elaborate a little bit on the '10 year guarantee' part. How will the annuity pay you after 10 years?
That simply means if I pass away sooner than ten years after starting the lifetime annuity, TIAA will continue monthly payments to my estate until 120 months from inception.
For people in their 60s, a ten year guarantee doesn't cost much in reduced monthly payout compared to no guarantee.
Longer guarantee periods (15 or 20 years) start to throw away mortality credits, especially if you're 70 older at the start...
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Re: Annuity w guaranteed 5-6% return?

Post by AllieTB1323 » Tue Apr 03, 2018 3:02 pm

Dottie57 wrote:
Mon Apr 02, 2018 6:33 pm
I just found that for 100k, a 61 yo woman in mn could receive a yearly income of $5724 . This is 5.724% of the 100k.
No cola.
I would argue for the first 17 1/2 years she is receiving her own money. The average life expectancy of a female in her sixties the USA is about 85 years. That doesn't work out to a 5.724% yield.

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Re: Annuity w guaranteed 5-6% return [payout]?

Post by HomerJ » Tue Apr 03, 2018 3:15 pm

Ikigai wrote:
Mon Apr 02, 2018 2:27 pm
A friend told me recently he & his wife bought an annuity with a guaranteed 5-6% return. I'm not an annuity expert, but I thought if the current rates are really low, its a bad time to buy an annuity. How can the annuity company make any money and guarantee that kind of return? Did my friend pay too much? Is the annuity company starting the payout really low so the yearly 5-6% increase works out mathematically? Thanks for helping me understand this. :confused
Okay two possibilities here...

(1) They bought a SPIA (Single Premium Immediate Annuity).

It's not a return, it's a payout. For example, they give the insurance company $100,000 and the insurance company gives them $6000 a year for life. But the $100,000 is gone. For the first 16 years, all they are getting is their own money back. After that, the insurance company has to keep paying them the $6000 a year. If they die in 10 years, the insurance company keeps their money... if they die in 30 years, they got a good deal.

The main advantage of this is you can spend $6000 a year without ever having to worry about running out of money. If you had $100,000 invested and you pulled out $6000 a year, it's quite possible the balance would go to zero before you died, and what's just as bad, you'd be WORRYING about it for 10 years as the principal dwindled lower and lower.

The disadvantage is that your heirs get nothing. The $100,000 is gone, no matter what.

(2) They bought a variable annuity, and the salesman was a slimy weasel who lied to them and convinced them there were getting a 6% return on their actual money when they aren't.

Variable annuities have TWO numbers.. A "guaranteed return" on the "income account", and a payout percentage.

See, you give them $100,000, and they invest it for you for a while, and then sometime in the future, they turn it into a SPIA like above, with a annual payout for life.

They take the $100,000, and send you a statement each year showing how the $100,000 has grown by at least the "guaranteed" 6% (But that isn't cash value, you can't cash out the annuity for that amount - it's just a number on your statement to make you feel good)

So say after 10 years, the $100,000 has "grown" to $179,000. Pretty good, right?

How they trick you is they pay less than the market value when you go to convert it into a SPIA. If you could get a 6% SPIA on the open market, like the example above, the variable annuity might only pay 4.5%.

So when you go to cash in, the $179,000 pays out $8000 a year. But you could buy a $8000 a year SPIA on the open market for only $133,000.

So even though the insurance company told you your money grew 6% a year to $179,000, it really only grew to the equivalent of $133,000. Which is a 3% return.

It really should be against the law for insurance companies to promise a "guaranteed 6% return", when all they really give you is 3%.

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Re: Annuity w guaranteed 5-6% return [payout]?

Post by The Wizard » Tue Apr 03, 2018 3:17 pm

ResearchMed wrote:
Tue Apr 03, 2018 2:32 pm
CWRadio wrote:
Tue Apr 03, 2018 1:58 pm
At what age is mortality credit more important then the current interest rates of Treasuries for purchasing a SPIA?
Paul
You could perhaps (?) try to get a feel for this by playing with
www.immediateannuities.com

and plugging in different start ages, for the same starting date, the latter to try to vaguely rule out fluctuations in the interest rates.

You might find that while at first the changes in the payout don't increase much from one age to the next, as the ages get higher, you might start to see that change accelerate.
Or use 5 year intervals to get a more general feel, and if you find an interval where payout seems to be increasing "more", then look at the years/ages within...
This is correct, in that there no magic age where immediate annuity payouts suddenly jump significantly and now become a Great Buy.
And while interest rates (and anticipated interest rates for the next decade+) are low historically, something else is low also and that is INFLATION.
I, for one, am not looking for a return to the high interest rates and high inflation of the mid 1970s.

There was a paper written a decade or more ago on When To Annuitize. By Milevsky perhaps.
Finding was: generally better to annuitize a portion of your holdings earlier (at start of retirement) vs paying first decade from portfolio withdrawals and then annuitizing a portion later...
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Re: Annuity w guaranteed 5-6% return?

Post by HomerJ » Tue Apr 03, 2018 3:20 pm

AllieTB1323 wrote:
Tue Apr 03, 2018 3:02 pm
Dottie57 wrote:
Mon Apr 02, 2018 6:33 pm
I just found that for 100k, a 61 yo woman in mn could receive a yearly income of $5724 . This is 5.724% of the 100k.
No cola.
I would argue for the first 17 1/2 years she is receiving her own money. The average life expectancy of a female in her sixties the USA is about 85 years. That doesn't work out to a 5.724% yield.
You are 100% right. It's a not 5.724% yield or return. But it DOES allow you spend 5.724% without worry. More than the standard 3%-4% we recommend around here.

I can totally see myself buying a SPIA at 70, that along with SS covers all my base expenses.

Say I need $40,000 from my investments. I could put aside $1 million in a conservative stock/bond portfolio, and pull 4% for life. I have to be careful, and not pull too much to make sure my money lasts.

Or, at 70, I could probably get a 8% SPIA. Then I only need $500,000 to generate that $40,000 for life. The other $500,000, I can put in that conservative stock/bond portfolio, and pull ANOTHER $20,000 a year (4%) from it.

That gives $60,000 a year from my $1 million.

The downside is my kids get half as much as they would in inheritance. Because $500k is just GONE. But I get to spend more now (maybe even on the kids!) while still alive.

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Re: Annuity w guaranteed 5-6% return?

Post by The Wizard » Tue Apr 03, 2018 3:25 pm

HomerJ wrote:
Tue Apr 03, 2018 3:20 pm

...The downside is my kids get half as much as they would in inheritance. Because $500k is just GONE. But I get to spend more now (maybe even on the kids!) while still alive.
I have adult kids as well.
But they are not Number One.
Somebody else is...
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Re: Annuity w guaranteed 5-6% return?

Post by Shikoku » Tue Apr 03, 2018 3:30 pm

The Wizard wrote:
Tue Apr 03, 2018 3:00 pm
Shikoku wrote:
Tue Apr 03, 2018 2:28 pm
The Wizard wrote:
Tue Apr 03, 2018 6:56 am
As noted, TIAA tends to have better lifetime immediate annuity payout rates than most other insurance companies, for those of us who have access to it.
I annuitized an additional amount one year ago at age 67 and got a 7.04% payout rate, with 10year guarantee. This was a combination of TIAA Traditional and TREA, so my monthly payout varies depending on the commercial real estate market.
The Wizard,
I am wondering if you could possibly elaborate a little bit on the '10 year guarantee' part. How will the annuity pay you after 10 years?
That simply means if I pass away sooner than ten years after starting the lifetime annuity, TIAA will continue monthly payments to my estate until 120 months from inception.
For people in their 60s, a ten year guarantee doesn't cost much in reduced monthly payout compared to no guarantee.
Longer guarantee periods (15 or 20 years) start to throw away mortality credits, especially if you're 70 older at the start...
The Wizard,
Thank you for the clarification. That makes sense.
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Re: Annuity w guaranteed 5-6% return [payout]?

Post by Dale_G » Tue Apr 03, 2018 3:31 pm

CWRadio wrote:
Tue Apr 03, 2018 1:58 pm
At what age is mortality credit more important then the current interest rates of Treasuries for purchasing a SPIA?
Paul
The concept of "mortality credits" is misunderstood. The payments of an non-inflation adjusted immediate annuity are fixed at the time of issue. A still living annuitant doesn't get any increase in payout even if everyone else in the cohort dies "unexpectedly" at a much earlier date than expected by the insurance company.

To the extent that there is anything that might be called a mortality credit, it is built into the initial cost cost of the annuity based on the expected distribution of deaths in the cohort. If the death rate is lower than the insurance company expects, their profits are lower. If there are a large number of "unexpected" deaths, their profits will be higher. The annuitants don't benefit from these "unexpected" deaths.

That said, the insurance company can be pretty sure about the distribution of deaths among those annuitizing at 85 years old. Due to possible medical advances, the distribution of deaths among those annuitizing at 50 years old is probably less certain. The insurance company would probably build a little less in the way of "mortality credit" into annuities for younger folks than would be indicated in their mortality tables.

Dale
Last edited by Dale_G on Tue Apr 03, 2018 4:26 pm, edited 1 time in total.
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Re: Annuity w guaranteed 5-6% return [payout]?

Post by The Wizard » Tue Apr 03, 2018 3:43 pm

Dale_G wrote:
Tue Apr 03, 2018 3:31 pm
CWRadio wrote:
Tue Apr 03, 2018 1:58 pm
At what age is mortality credit more important then the current interest rates of Treasuries for purchasing a SPIA?
Paul
The concept of "mortality credits" is misunderstood. The payments of an non-inflation adjusted immediate annuity are fixed at the time of issue. A still living annuitant doesn't get any increase in payout even if everyone else in the cohort dies "unexpectedly" at a much earlier date than expected by the insurance company...
Oddly enough, for TIAA annuitants invested in CREF Stock or TREA, we do get ad hoc annual annuity payout adjustments based on ACTUAL mortality experience over the past year.
But I don't expect this is true for most insurance companies where small benefits of this sort just roll to their bottom line as increased profit...
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Re: Annuity w guaranteed 5-6% return [payout]?

Post by jpsc » Tue Apr 03, 2018 4:20 pm

I was in similar situation, looking at a bunch of Annuity.
did you look at MFTA (maximum funded indexed universal life insurance) vs term life ?
there are a bunch of video on Youtube (Search for MFTA).

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Re: Annuity w guaranteed 5-6% return [payout]?

Post by BL » Tue Apr 03, 2018 5:15 pm

Ikigai wrote:
Mon Apr 02, 2018 2:27 pm
A friend told me recently he & his wife bought an annuity with a guaranteed 5-6% return. I'm not an annuity expert, but I thought if the current rates are really low, its a bad time to buy an annuity. How can the annuity company make any money and guarantee that kind of return? Did my friend pay too much? Is the annuity company starting the payout really low so the yearly 5-6% increase works out mathematically? Thanks for helping me understand this. :confused
I suspect this is not a SPIA, but one sold by an insurance salesperson to gain a huge commission. Did you hear what the name of the policy or at least the company was? They like to throw a lot of numbers around, but they don't necessarily mean what we think they mean, and deliberately so. They may have the word "index" in them and relate to stock market funds.I believe they changed name from "equity" when that got a bad name.

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Re: Annuity w guaranteed 5-6% return?

Post by Phineas J. Whoopee » Tue Apr 03, 2018 6:27 pm

Valuethinker wrote:
Tue Apr 03, 2018 5:35 am
...
- TIPS bonds & ibonds. One can build up a decent portfolio of ibonds, despite annual limits, if one is diligent. TIPS bonds and funds tend to be volatile. A TIPS ladder overcomes this, and there are also short term TIPS funds that tend to track inflation better than all TIPS bonds (but pay significantly lower returns)
...
I'm sorry Valuethinker, but a portfolio of directly-held TIPS fluctuates in value exactly as a fund of the same securities in the same proportions would.

The only difference which could come in is if one managed their individual ladder to have a decreasing duration, but that's not comparing a portfolio of directly-held fixed income, inflation-protected or otherwise, to similar securities held via a fund that maintains a constant duration.

Why do you think the present market value of a portfolio of TIPS should track inflation, regardless of how held? All TIPS receive the same principal adjustments on the same days. The short-term TIPS are indeed less volatile than longer-term ones, but that's true of all types of bonds.

PJW

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Re: Annuity w guaranteed 5-6% return [payout]?

Post by HomerJ » Tue Apr 03, 2018 8:02 pm

jpsc wrote:
Tue Apr 03, 2018 4:20 pm
I was in similar situation, looking at a bunch of Annuity.
did you look at MFTA (maximum funded indexed universal life insurance) vs term life ?
there are a bunch of video on Youtube (Search for MFTA).
Stay away from all annuities except SPIAs.

Stay away from universal or whole life insurance.

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Re: Annuity w guaranteed 5-6% return [payout]?

Post by jpsc » Tue Apr 03, 2018 9:46 pm

I can't seem to find SPIA in Fidelity - does Fidelity has a different name?

Any opinion on Fidelity annuities ?

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Re: Annuity w guaranteed 5-6% return [payout]?

Post by Ron » Tue Apr 03, 2018 9:51 pm

jpsc wrote:
Tue Apr 03, 2018 9:46 pm
I can't seem to find SPIA in Fidelity - does Fidelity has a different name?
https://www.fidelity.com/annuities/imme ... es/compare

- Ron

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Re: Annuity w guaranteed 5-6% return?

Post by Valuethinker » Wed Apr 04, 2018 3:37 am

Phineas J. Whoopee wrote:
Tue Apr 03, 2018 6:27 pm
Valuethinker wrote:
Tue Apr 03, 2018 5:35 am
...
- TIPS bonds & ibonds. One can build up a decent portfolio of ibonds, despite annual limits, if one is diligent. TIPS bonds and funds tend to be volatile. A TIPS ladder overcomes this, and there are also short term TIPS funds that tend to track inflation better than all TIPS bonds (but pay significantly lower returns)
...
I'm sorry Valuethinker, but a portfolio of directly-held TIPS fluctuates in value exactly as a fund of the same securities in the same proportions would.

The only difference which could come in is if one managed their individual ladder to have a decreasing duration, but that's not comparing a portfolio of directly-held fixed income, inflation-protected or otherwise, to similar securities held via a fund that maintains a constant duration.
As a strategy it is an immunized one-- you've matched the portfolio to your need for cash. That's what I meant-- if not clear. So yes it would have decreasing duration (for a non-immortal person ;-)).

Why do you think the present market value of a portfolio of TIPS should track inflation, regardless of how held? All TIPS receive the same principal adjustments on the same days. The short-term TIPS are indeed less volatile than longer-term ones, but that's true of all types of bonds.

PJW
VG had a paper that there was a higher correlation between ST TIPS and inflation than TIPS bonds in general. That is what I was referring to.

If the goal is inflation hedging, a portfolio of ST TIPS is superior to just a general portfolio. Unfortunately the real returns are also lower (and were negative).

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Re: Annuity w guaranteed 5-6% return [payout]?

Post by SGM » Wed Apr 04, 2018 4:20 am

Delay of SS until 70, plus a TIAA-CREF annuity, and a ladder of SPIAs is part of our retirement strategy. Currently getting 7.3% payout from T-C. We will continue to receive monthly direct deposits as we did when working.

I would not buy an annuity from an advisor as it would likely be expensive with hidden fees.

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Re: Annuity w guaranteed 5-6% return?

Post by dbr » Wed Apr 04, 2018 1:26 pm

Valuethinker wrote:
Wed Apr 04, 2018 3:37 am
Why do you think the present market value of a portfolio of TIPS should track inflation, regardless of how held? All TIPS receive the same principal adjustments on the same days. The short-term TIPS are indeed less volatile than longer-term ones, but that's true of all types of bonds.

PJW
VG had a paper that there was a higher correlation between ST TIPS and inflation than TIPS bonds in general. That is what I was referring to.
Which begs the question why correlation with inflation has anything to do with offsetting inflation risk, which is the objective in buying TIPS. If one also does not want real interest risk, then one buys short TIPS just as one goes short in any bond if one does not want volatility associated with changing interest rates. I think that that Vanguard paper is ill-conceived on that point.

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