SPIA Return  Am I calculating this correctly?
SPIA Return  Am I calculating this correctly?
Was thinking about retiring at 55 and taking SS at 70. SS + COLA Pension covers all my base expenses. So, why not try a 15 year certain annuity to cover me from 55 to 70? Went to immediate annuity and got the following info:
Period 15
Cost of Annuity 587,518
Monthly/Annual/Total Payout 4,000 48,000 720,000
Total Gain 132,482
Annual Gain 8,832.13
Annual Return 1.50%
Wouldn't I be in the same spot if I put $587,518 into a high yield savings account with 1.5% interest? If so, it seems the annuity is not the best approach to bridge me to SS.
Appreciate your thoughts.
Period 15
Cost of Annuity 587,518
Monthly/Annual/Total Payout 4,000 48,000 720,000
Total Gain 132,482
Annual Gain 8,832.13
Annual Return 1.50%
Wouldn't I be in the same spot if I put $587,518 into a high yield savings account with 1.5% interest? If so, it seems the annuity is not the best approach to bridge me to SS.
Appreciate your thoughts.
Re: SPIA Return  Am I calculating this correctly?
This method is not covering a longevity risk so there are no mortality credits to boost the return over time. I would take 650,000 and put it into a lifestrategy fund with 40 stocks/60 bonds and draw the 4000 per month from that. You would very likely end up with money left over when you started SS at 70. 15 years is a long enough horizon to take some risk.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” 
— Warren Buffett
Re: SPIA Return  Am I calculating this correctly?
The annuity protects against the risk that you would earn a lower rate of return.
The cost of the annuity would be less (in other words, you would get the "mortality credits") if the annuity payments were to end at your death if you were to die before the end of the 15 years.
The cost of the annuity would be less (in other words, you would get the "mortality credits") if the annuity payments were to end at your death if you were to die before the end of the 15 years.
Re: SPIA Return  Am I calculating this correctly?
I don't think you are calculating this correctly. You are calculating like the $587,518 is being invested the whole time. But the invested balance will be declining as the payments are being made. Towards the end, there'd be a much smaller amount left in the account earning interest.corn18 wrote: ↑Tue Apr 10, 2018 2:46 pmWas thinking about retiring at 55 and taking SS at 70. SS + COLA Pension covers all my base expenses. So, why not try a 15 year certain annuity to cover me from 55 to 70? Went to immediate annuity and got the following info:
Period 15
Cost of Annuity 587,518
Monthly/Annual/Total Payout 4,000 48,000 720,000
Total Gain 132,482
Annual Gain 8,832.13
Annual Return 1.50%
Wouldn't I be in the same spot if I put $587,518 into a high yield savings account with 1.5% interest? If so, it seems the annuity is not the best approach to bridge me to SS.
Appreciate your thoughts.
Re: SPIA Return  Am I calculating this correctly?
This is ~2.8% return over the 15 years.
The calculation is similar to "at what mortgage interest would the monthly payment on a 15 year, $587,518 loan be $4000/mo?"
One can use the Excel "Rate" function. E.g., see cells 'Misc. calcs'!G17:G23 in the personal finance toolbox spreadsheet.

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Re: SPIA Return  Am I calculating this correctly?
15 years represents 180 months. So, using my financial calculator:
n = 180, PV = 587518, FV = 0, PMT = 4000 => i = 0.233030566
i is a monthly yield. Annualized, it becomes: (1+ 0.233030566%)^12  1 = 2.8%.
This stream of payment has an average 7.5 years duration. The 2.8% yield could be compared with the yield on a nominal bond of similar duration (duration is shorter than maturity).
Edited: I see that FiveK provided the answer just above my post.
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Re: SPIA Return  Am I calculating this correctly?
Coolio. Thanks for the formula. That will help me fish.

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Re: SPIA Return  Am I calculating this correctly?
I think that 15 years is a longenough time to consider the impact of inflation on the payment stream. At an average 2% inflation rate, the fixed payment will have lost near 25% of its value in the 15th year. In other words, the inflationadjusted value of the $4,000 payment will be $3,000 when expressed in 2018 dollars.
Assuming the same nominal yield as in my previous post, the cost of a termcertain 15year SPIA with a monthly $4,000 payment that increases by 2% each year should be approximately $677,607. This is 15% more expensive, but it eliminate the 25% real reduction in payments in a 2% inflation environment.
Inflation could turn out higher or lower than 2%, but the inflation risk of a 2%indexed stream of payment is minimal over a 15year period.
This is why I selected a 2% annual increment: FRB: What is an acceptable level of inflation?
Assuming the same nominal yield as in my previous post, the cost of a termcertain 15year SPIA with a monthly $4,000 payment that increases by 2% each year should be approximately $677,607. This is 15% more expensive, but it eliminate the 25% real reduction in payments in a 2% inflation environment.
Inflation could turn out higher or lower than 2%, but the inflation risk of a 2%indexed stream of payment is minimal over a 15year period.
This is why I selected a 2% annual increment: FRB: What is an acceptable level of inflation?
Last edited by longinvest on Tue Apr 10, 2018 9:38 pm, edited 1 time in total.
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Re: SPIA Return  Am I calculating this correctly?
A 15 year bond with a 2.8% coupon has a duration a little above 12 years. Where do those 7.5 years come from ?
Also, to get a 2.8% interest today you have to buy a 10year treasury, or something else with more risk, or later maturity.
None of those would be good for you, since you need a stream of payments larger than the interest payout starting on day 1 of your preretirement.
Also, to get a 2.8% interest today you have to buy a 10year treasury, or something else with more risk, or later maturity.
None of those would be good for you, since you need a stream of payments larger than the interest payout starting on day 1 of your preretirement.

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Re: SPIA Return  Am I calculating this correctly?
If anyone is curious, here's how I got the $677,607 estimate.
In a fixed 2% inflation environment, a 2.8% nominal yield is equivalent to a (1 + 2.8%) / (1 + 2%)  1 = .78% real yield.
I did the exact calculation using the monthly yield (instead of the rounded annual yield), which gave me:
((1+ 0.233030566%)^12 / 1.02)^(1 / 12)  1 = 0.067760515%
n = 180, i = 0.067760515, FV = 0, PMT = 4000 => PV = 677607
In a fixed 2% inflation environment, a 2.8% nominal yield is equivalent to a (1 + 2.8%) / (1 + 2%)  1 = .78% real yield.
I did the exact calculation using the monthly yield (instead of the rounded annual yield), which gave me:
((1+ 0.233030566%)^12 / 1.02)^(1 / 12)  1 = 0.067760515%
n = 180, i = 0.067760515, FV = 0, PMT = 4000 => PV = 677607
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Re: SPIA Return  Am I calculating this correctly?
It's a stream of 180 equal payments.Thesaints wrote: ↑Tue Apr 10, 2018 6:07 pmA 15 year bond with a 2.8% coupon has a duration a little above 12 years. Where do those 7.5 years come from ?
Also, to get a 2.8% interest today you have to buy a 10year treasury, or something else with more risk, or later maturity.
None of those would be good for you, since you need a stream of payments larger than the interest payout starting on day 1 of your preretirement.
The first payment has a duration of 1 month.
The second payment has a duration of 2 months.
The third payment has a duration of 3 months.
...
The 180th payment has a duration of 180 months.
The average duration of this stream of payment is equal to the sum of the durations of the 180 payments divided by 180.
This is: ((1 + 2 + 3 + ... + 180) / 180)
1 + ... + 180 is called an Arithmetic Series (Wikipedia).
1 + ... + 180 = (180 X 181) / 2 = 16,290
The average duration is thus: 16,290 / 180 = 90.5 months
Translated in years: 90.5 / 12 = 7.5 years
Last edited by longinvest on Tue Apr 10, 2018 6:53 pm, edited 1 time in total.
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Re: SPIA Return  Am I calculating this correctly?
Alternatively, the total payout is 720k. Let's say you receive half now and half after 15 years.
The 588k investment becomes a 588360=228k investment which nets 360k after 15 years, i.e. 3.09% compounded yearly, which is quite close to the "exact" value of 2.84% calculated with monthly returns.
The 588k investment becomes a 588360=228k investment which nets 360k after 15 years, i.e. 3.09% compounded yearly, which is quite close to the "exact" value of 2.84% calculated with monthly returns.
Last edited by Thesaints on Tue Apr 10, 2018 6:25 pm, edited 1 time in total.
Re: SPIA Return  Am I calculating this correctly?
Certainly you mean "maturity". "Duration" is another thing entirely.longinvest wrote: ↑Tue Apr 10, 2018 6:21 pmIt's a stream of 180 equal payments.
The first payment has a duration of 1 month.
Re: SPIA Return  Am I calculating this correctly?
If this is a 15 year certain annuity the return is 2.8%. This is done using a financial calculator and is not taking into account the tax consequences.corn18 wrote: ↑Tue Apr 10, 2018 2:46 pmWas thinking about retiring at 55 and taking SS at 70. SS + COLA Pension covers all my base expenses. So, why not try a 15 year certain annuity to cover me from 55 to 70? Went to immediate annuity and got the following info:
Period 15
Cost of Annuity 587,518
Monthly/Annual/Total Payout 4,000 48,000 720,000
Total Gain 132,482
Annual Gain 8,832.13
Annual Return 1.50%
Wouldn't I be in the same spot if I put $587,518 into a high yield savings account with 1.5% interest? If so, it seems the annuity is not the best approach to bridge me to SS.
Appreciate your thoughts.

 Posts: 3205
 Joined: Sat Aug 11, 2012 8:44 am
Re: SPIA Return  Am I calculating this correctly?
Each payment has no coupon. Duration and maturity are thus equal (for each payment).Thesaints wrote: ↑Tue Apr 10, 2018 6:25 pmCertainly you mean "maturity". "Duration" is another thing entirely.longinvest wrote: ↑Tue Apr 10, 2018 6:21 pmIt's a stream of 180 equal payments.
The first payment has a duration of 1 month.
Edited to add:
Here's what our Wiki says about it:
Zerocoupon bond
...
Zeros have the unique property of having a duration equal to their maturity. ...
Last edited by longinvest on Tue Apr 10, 2018 6:43 pm, edited 1 time in total.
Bogleheads investment philosophy 
Lifelong Portfolio: 25% each of (domestic / international) stocks / (nominal / inflationindexed) bonds 
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Re: SPIA Return  Am I calculating this correctly?
Yep. And the conclusion is that the OP has no way to get that kind of return on his whole capital, without incurring risks which he may find not suited to his situation.
Re: SPIA Return  Am I calculating this correctly?
So who gives the OP the 132k he is missing ?longinvest wrote: ↑Tue Apr 10, 2018 6:38 pmEach payment has no coupon. Duration and maturity are thus equal (for each payment).
Re: SPIA Return  Am I calculating this correctly?
The insurance company gives him a total of $720K, $132k is the return on his money, the difference is the return of his money. So again he is yielding 2.8%. I am not sure how taxes work, but maybe someone else can explain it, thanksThesaints wrote: ↑Tue Apr 10, 2018 6:40 pmSo who gives the OP the 132k he is missing ?longinvest wrote: ↑Tue Apr 10, 2018 6:38 pmEach payment has no coupon. Duration and maturity are thus equal (for each payment).
Re: SPIA Return  Am I calculating this correctly?
So there is a yield after all! That 7.5 year duration calculated at zero yield still looks mysterious...
Re: SPIA Return  Am I calculating this correctly?
My understanding is that taxes are paid on the 132k . No taxes on the rest since that is return of OP's money.

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Re: SPIA Return  Am I calculating this correctly?
It isn't calculated at zero yield. Each payment is $4,000, which sums up to more than the buying price of the SPIA. The yield is 2.8%.
It isn't mysterious, either. Unlike a bond, a termcertain SPIA doesn't have a principal. The termcertain SPIA's payments are evenly spread across the entire period. The duration, which represents the average maturity of all payments, can be intuitively approximated by simply dividing the term by two.
I've provided, in my previous post, the exact duration calculation, which is 90.5/12 = 7.541666... years. Rounded, we get 7.5 years.
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Re: SPIA Return  Am I calculating this correctly?
Unless the premium is paid with qualified funds, such as from a TIRA or 401(K). In that case, all payouts will become taxable, in the year they are paid.
A plus for an SPIA funded with qualified funds is that the value of those funds are removed from RMD consideration.
 Ron
Last edited by Ron on Tue Apr 10, 2018 7:49 pm, edited 1 time in total.
Re: SPIA Return  Am I calculating this correctly?
What's the meaning of this "duration" ?longinvest wrote: ↑Tue Apr 10, 2018 7:44 pmIt isn't. Unlike a bond, a termcertain SPIA doesn't have a principal. The SPIA's payments are evenly spread across the entire period. The duration, which represents the average maturity of all payments, can be approximated by simply dividing the term by two.
I've provided, in my previous post, the exact duration calculation, which is 90.5/12 = 7.541666... years. Rounded, we get 7.5 years.
What I can understand is calculating a bond equivalent to the annuity and its duration. A 15year bond with a 2.8% YTM has a duration a little above 12 years, for instance.
Although that wouldn't be strictly equivalent to the necessary annuity because the coupon payment does not generate sufficient income. One could buy 15 separate 15year bonds and sell one each year, but that would expose you to market risk.

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Re: SPIA Return  Am I calculating this correctly?
One definition of duration is the weightedaverage maturity of all payments.Thesaints wrote: ↑Tue Apr 10, 2018 7:48 pmWhat's the meaning of this "duration" ?longinvest wrote: ↑Tue Apr 10, 2018 7:44 pmIt isn't. Unlike a bond, a termcertain SPIA doesn't have a principal. The SPIA's payments are evenly spread across the entire period. The duration, which represents the average maturity of all payments, can be approximated by simply dividing the term by two.
I've provided, in my previous post, the exact duration calculation, which is 90.5/12 = 7.541666... years. Rounded, we get 7.5 years.
What I can understand is calculating a bond equivalent to the annuity and its duration. A 15year bond with a 2.8% YTM has a duration a little above 12 years, for instance.
Although that wouldn't be strictly equivalent to the necessary annuity because the coupon payment does not generate sufficient income. One could buy 15 separate 15year bonds and sell one each year, but that would expose you to market risk.
I would think of it this way. I could selfbuild a 15year annual SPIA by buying 15 zerocoupon bonds. One bond of a 1year maturity, one of a 2year maturity, and so on. What would be the weightedaverage maturity of the 15 bonds? It would be approximately 7.5 years.
Now, of course, we could try to be even more precise and calculate a weightedaverage using the presentvalue of each payment. If we used the same 2.8% yield for all 15 zerocoupon bonds, we would get a somewhat lower duration, because longer bonds would have a smaller present value than shorter bonds. Yet, one could argue that it would be unfair for the yield on a 1year bond to equal the yield of a 15year bond, when the market provides higher yields for longerterm bonds. So, maybe the present value of longerterm bonds would get further discounted relative to shorterterm bonds, making the duration even shorter.
In other words, what I am saying is that my 7.5 year duration calculation actually overestimates the duration of the termcertain SPIA.
Note that we know that the overall yield, for all payments, has to equal 2.8%, so if we use a lower yield for shortterm bonds, we have to use a higher one for longer ones. Unfortunately, the SPIA doesn't advertise the actual yield of each of its payments; we can only calculate the overall yield using a financial calculator.
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Re: SPIA Return  Am I calculating this correctly?
What does it tell you ? You are not selling those bonds. How they respond to interest rates changes does not matter.longinvest wrote: ↑Tue Apr 10, 2018 8:06 pmI would think of it this way. I could selfbuild a 15year annual SPIA by buying 15 zerocoupon bonds. One bond of a 1year maturity, one of a 2year maturity, and so on. What would be the weightedaverage maturity of the 15 bonds? It would be approximately 7.5 years.
All those zeroes have a face value of 48k. Naturally the 15year ZC will be valued differently (likely less) than the 1year ZC, that much is obvious.Now, of course, we could try to be even more precise and calculate a weightedaverage using the presentvalue of each payment. If we used the same 2.8% yield for all 15 zerocoupon bonds, we would get a somewhat lower duration, because longer bonds would have a smaller present value than shorter bonds. Yet, one could argue that it would be unfair for the yield on a 1year bond to equal the yield of a 15year bond, when the market provides higher yields for longerterm bonds. So, maybe the present value of longerterm bonds would get further discounted relative to shorterterm bonds, making the duration even shorter.
Then again, the correctly weighted duration might be 4 years, or 10 years. So what ? You are still carrying all 15 of them to maturity.

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Re: SPIA Return  Am I calculating this correctly?
The weightedaverage maturity of 15 equalvalue zerocoupon bonds* with respective maturities of 1, 2, 3, ..., 15 years is:Thesaints wrote: ↑Tue Apr 10, 2018 8:15 pmAll those zeroes have a face value of 48k. Naturally the 15year ZC will be valued differently (likely less) than the 1year ZC, that much is obvious.
Then again, the correctly weighted duration might be 4 years, or 10 years. So what ? You are still carrying all 15 of them to maturity.
(1 year + 2 years + 3 years + ... + 15 years) / 15 = 8 years.
* As I wrote earlier, if instead of being equal value, they are discounted to provide equal payments, longerterm bonds will have smaller values and their longer maturity will have less weight in the weighted average, leading to a smaller length than 8 years.
This tells me that I'll get my payments in 8 years, on average. This makes sense, because I'll get my first payment is 1 year and the last payment in 15 years. The average is (1 + 15) / 2 = 8 years. That's what "duration" is about.
Last edited by longinvest on Tue Apr 10, 2018 8:28 pm, edited 1 time in total.
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Re: SPIA Return  Am I calculating this correctly?
FWIW, I get a duration of 84 months.
http://www.wolframalpha.com/input/?i=(4 ... )%5E(i1)
Or maybe 84.2 months.
http://www.wolframalpha.com/input/?i=(4 ... +1)%5E(i)
Ron
http://www.wolframalpha.com/input/?i=(4 ... )%5E(i1)
Or maybe 84.2 months.
http://www.wolframalpha.com/input/?i=(4 ... +1)%5E(i)
Ron
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Abbreviations and Acronyms

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Re: SPIA Return  Am I calculating this correctly?
Here's a detailed calculation, using the 2.8% annual yield (or 0.23% monthly yield) for all 180 payments in a spreadsheet:Oicuryy wrote: ↑Tue Apr 10, 2018 8:27 pmFWIW, I get a duration of 84 months.
http://www.wolframalpha.com/input/?i=(4 ... )%5E(i1)
Or maybe 84.2 months.
http://www.wolframalpha.com/input/?i=(4 ... +1)%5E(i)
Ron
Code: Select all
SPIA monthly yield 0.2330305702%
Payment # Present value Weighted maturity
1 $3 990,70 0.0067924735
2 $3 981,42 0.0135533635
3 $3 972,17 0.0202827802
4 $3 962,93 0.0269808334
5 $3 953,72 0.0336476324
6 $3 944,53 0.0402832865
7 $3 935,36 0.0468879045
8 $3 926,21 0.0534615947
9 $3 917,08 0.0600044653
10 $3 907,97 0.0665166240
11 $3 898,89 0.0729981784
12 $3 889,82 0.0794492354
13 $3 880,78 0.0858699019
14 $3 871,76 0.0922602843
15 $3 862,75 0.0986204887
16 $3 853,77 0.1049506209
17 $3 844,81 0.1112507864
18 $3 835,88 0.1175210902
19 $3 826,96 0.1237616372
20 $3 818,06 0.1299725319
21 $3 809,18 0.1361538783
22 $3 800,33 0.1423057803
23 $3 791,49 0.1484283415
24 $3 782,68 0.1545216649
25 $3 773,88 0.1605858535
26 $3 765,11 0.1666210098
27 $3 756,36 0.1726272359
28 $3 747,62 0.1786046338
29 $3 738,91 0.1845533051
30 $3 730,22 0.1904733511
31 $3 721,55 0.1963648726
32 $3 712,89 0.2022279703
33 $3 704,26 0.2080627446
34 $3 695,65 0.2138692954
35 $3 687,06 0.2196477225
36 $3 678,48 0.2253981252
37 $3 669,93 0.2311206025
38 $3 661,40 0.2368152534
39 $3 652,89 0.2424821761
40 $3 644,40 0.2481214689
41 $3 635,92 0.2537332297
42 $3 627,47 0.2593175558
43 $3 619,04 0.2648745447
44 $3 610,62 0.2704042932
45 $3 602,23 0.2759068979
46 $3 593,85 0.2813824551
47 $3 585,50 0.2868310610
48 $3 577,16 0.2922528111
49 $3 568,85 0.2976478010
50 $3 560,55 0.3030161257
51 $3 552,27 0.3083578801
52 $3 544,01 0.3136731587
53 $3 535,77 0.3189620557
54 $3 527,55 0.3242246651
55 $3 519,35 0.3294610805
56 $3 511,17 0.3346713953
57 $3 503,01 0.3398557026
58 $3 494,86 0.3450140950
59 $3 486,74 0.3501466651
60 $3 478,63 0.3552535051
61 $3 470,54 0.3603347068
62 $3 462,47 0.3653903619
63 $3 454,42 0.3704205617
64 $3 446,39 0.3754253972
65 $3 438,38 0.3804049592
66 $3 430,39 0.3853593381
67 $3 422,41 0.3902886242
68 $3 414,46 0.3951929072
69 $3 406,52 0.4000722769
70 $3 398,60 0.4049268226
71 $3 390,70 0.4097566332
72 $3 382,81 0.4145617977
73 $3 374,95 0.4193424045
74 $3 367,10 0.4240985417
75 $3 359,27 0.4288302974
76 $3 351,46 0.4335377592
77 $3 343,67 0.4382210145
78 $3 335,90 0.4428801503
79 $3 328,14 0.4475152536
80 $3 320,41 0.4521264109
81 $3 312,69 0.4567137085
82 $3 304,98 0.4612772324
83 $3 297,30 0.4658170683
84 $3 289,63 0.4703333018
85 $3 281,99 0.4748260180
86 $3 274,36 0.4792953018
87 $3 266,74 0.4837412380
88 $3 259,15 0.4881639110
89 $3 251,57 0.4925634049
90 $3 244,01 0.4969398035
91 $3 236,47 0.5012931905
92 $3 228,95 0.5056236492
93 $3 221,44 0.5099312627
94 $3 213,95 0.5142161138
95 $3 206,48 0.5184782851
96 $3 199,02 0.5227178588
97 $3 191,59 0.5269349171
98 $3 184,16 0.5311295416
99 $3 176,76 0.5353018140
100 $3 169,38 0.5394518154
101 $3 162,01 0.5435796268
102 $3 154,66 0.5476853291
103 $3 147,32 0.5517690026
104 $3 140,01 0.5558307277
105 $3 132,71 0.5598705843
106 $3 125,42 0.5638886522
107 $3 118,16 0.5678850108
108 $3 110,91 0.5718597393
109 $3 103,67 0.5758129168
110 $3 096,46 0.5797446219
111 $3 089,26 0.5836549331
112 $3 082,08 0.5875439287
113 $3 074,91 0.5914116866
114 $3 067,76 0.5952582846
115 $3 060,63 0.5990838001
116 $3 053,51 0.6028883104
117 $3 046,42 0.6066718924
118 $3 039,33 0.6104346230
119 $3 032,27 0.6141765786
120 $3 025,22 0.6178978354
121 $3 018,18 0.6215984696
122 $3 011,17 0.6252785569
123 $3 004,17 0.6289381727
124 $2 997,18 0.6325773925
125 $2 990,21 0.6361962912
126 $2 983,26 0.6397949438
127 $2 976,33 0.6433734247
128 $2 969,41 0.6469318082
129 $2 962,50 0.6504701687
130 $2 955,62 0.6539885797
131 $2 948,74 0.6574871152
132 $2 941,89 0.6609658483
133 $2 935,05 0.6644248523
134 $2 928,23 0.6678642001
135 $2 921,42 0.6712839645
136 $2 914,63 0.6746842178
137 $2 907,85 0.6780650324
138 $2 901,09 0.6814264801
139 $2 894,34 0.6847686329
140 $2 887,62 0.6880915623
141 $2 880,90 0.6913953395
142 $2 874,20 0.6946800357
143 $2 867,52 0.6979457217
144 $2 860,86 0.7011924682
145 $2 854,20 0.7044203456
146 $2 847,57 0.7076294241
147 $2 840,95 0.7108197736
148 $2 834,34 0.7139914639
149 $2 827,75 0.7171445645
150 $2 821,18 0.7202791446
151 $2 814,62 0.7233952735
152 $2 808,08 0.7264930198
153 $2 801,55 0.7295724523
154 $2 795,04 0.7326336394
155 $2 788,54 0.7356766492
156 $2 782,05 0.7387015497
157 $2 775,59 0.7417084087
158 $2 769,13 0.7446972938
159 $2 762,70 0.7476682721
160 $2 756,27 0.7506214110
161 $2 749,86 0.7535567771
162 $2 743,47 0.7564744373
163 $2 737,09 0.7593744580
164 $2 730,73 0.7622569054
165 $2 724,38 0.7651218455
166 $2 718,05 0.7679693443
167 $2 711,73 0.7707994672
168 $2 705,42 0.7736122798
169 $2 699,13 0.7764078472
170 $2 692,86 0.7791862343
171 $2 686,60 0.7819475060
172 $2 680,35 0.7846917268
173 $2 674,12 0.7874189611
174 $2 667,90 0.7901292731
175 $2 661,70 0.7928227266
176 $2 655,51 0.7954993854
177 $2 649,34 0.7981593131
178 $2 643,18 0.8008025729
179 $2 637,03 0.8034292281
180 $2 630,90 0.8060393415
Total $587 518,00 84.2339973123
Last edited by longinvest on Tue Apr 10, 2018 10:10 pm, edited 2 times in total.
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Re: SPIA Return  Am I calculating this correctly?
Thesaints,
The reason I mentioned duration, in my initial calculation post, was for comparing the 2.8% yield with market yields. One should only compare an average 2.8% yield on a 7year duration stream of payments with the yield on a bond (or average yield on a collection of bonds) of similar duration.
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Re: SPIA Return  Am I calculating this correctly?
It would be a mistake, for example, to compare the 2.8% SPIA yield with the yield on a 15year Treasury because its duration would be much higher than 7 years.
Looking at FRED's constantmaturity rates, I get:
7Year Treasury Constant Maturity Rate  FRED  St. Louis Fed: 2.72% (20180409)
10Year Treasury Constant Maturity Rate  FRED  St. Louis Fed: 2.78% (20180409)
A 7year Treasury has a lower duration than 7 years. A 10year duration Treasury has a longer duration than 7 years. This tells me that the SPIA's yield is a few basis points higher than the yield on a similarduration Treasury.
In other words, the 15year termcertain SPIA's pricing seems fair, in the current market.
Looking at FRED's constantmaturity rates, I get:
7Year Treasury Constant Maturity Rate  FRED  St. Louis Fed: 2.72% (20180409)
10Year Treasury Constant Maturity Rate  FRED  St. Louis Fed: 2.78% (20180409)
A 7year Treasury has a lower duration than 7 years. A 10year duration Treasury has a longer duration than 7 years. This tells me that the SPIA's yield is a few basis points higher than the yield on a similarduration Treasury.
In other words, the 15year termcertain SPIA's pricing seems fair, in the current market.
Last edited by longinvest on Tue Apr 10, 2018 9:50 pm, edited 1 time in total.
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Re: SPIA Return  Am I calculating this correctly?
Corn,
Second, just in case you missed it, please read this post, where I discuss the use of a 2%indexed 15year termcertain SPIA, instead of a flatpayment one.
First, I apologize for all the complex details about duration; you don't need to worry about them. It is sufficient to know that the 2.8% yield goes along a 7year duration, and that this seems like a fair yield, in the current market.
Second, just in case you missed it, please read this post, where I discuss the use of a 2%indexed 15year termcertain SPIA, instead of a flatpayment one.
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Re: SPIA Return  Am I calculating this correctly?
Thank you for the patient explanation. Now I understand and, yes, I think you are absolutely right,longinvest wrote: ↑Tue Apr 10, 2018 9:19 pmIt would be a mistake, for example, to compare the 2.8% SPIA yield with the yield on a 15year Treasury because its duration would be much higher than 7 years.
Looking at FRED's constantmaturity rates, I get:
7Year Treasury Constant Maturity Rate  FRED  St. Louis Fed: 2.72% (20180409)
10Year Treasury Constant Maturity Rate  FRED  St. Louis Fed: 2.78% (20180409)
A 7year Treasury has a lower duration than 7 years. A 10year duration Treasury has a longer duration than 7 years. This tells me that the SPIA's yield is a few basis points higher than the yield on a similarduration Treasury.
In other words, the 15year termcertain SPIA's pricing seems fair, in the current market.
Re: SPIA Return  Am I calculating this correctly?
At the OP:
With all that distant certainty, why do you need so much certainty for the first 15 years of retirement? For most of us, the distant years are when the uncertainty occurs. Have you looked at just spending from bonds first (for your first 15 years) as suggested by Michael H. McClung, to let the equity portion grow longer? That bypasses sequence risk that some mention to scare retirees into asking them to manage their assets.
Another option is to first use a lower or a variable withdrawal(WD) rate on the portfolio, than the historical optimal one. The variable WD is a fixed % of each, most recent annual portfolio balance for the first 15 years, so that portion of your retirement income changes some each year. That may sound bad, but inflation does the same, first to your annuity, then to your pension. The nominal payments stay the same, but the value of each payment is slowly shrinking by inflation.
Yes, there is risk in every method, but you have less long term risk than most others here.
With all that distant certainty, why do you need so much certainty for the first 15 years of retirement? For most of us, the distant years are when the uncertainty occurs. Have you looked at just spending from bonds first (for your first 15 years) as suggested by Michael H. McClung, to let the equity portion grow longer? That bypasses sequence risk that some mention to scare retirees into asking them to manage their assets.
Another option is to first use a lower or a variable withdrawal(WD) rate on the portfolio, than the historical optimal one. The variable WD is a fixed % of each, most recent annual portfolio balance for the first 15 years, so that portion of your retirement income changes some each year. That may sound bad, but inflation does the same, first to your annuity, then to your pension. The nominal payments stay the same, but the value of each payment is slowly shrinking by inflation.
Yes, there is risk in every method, but you have less long term risk than most others here.
Re: SPIA Return  Am I calculating this correctly?
Thanks for addressing how to get to 70. That's the part I am exploring right now and just looking at different options. My pension and SS are both COLAd, so I am covered for longevity vs. inflation. Just need to make it to SS.heyyou wrote: ↑Wed Apr 11, 2018 12:59 amAt the OP:
With all that distant certainty, why do you need so much certainty for the first 15 years of retirement? For most of us, the distant years are when the uncertainty occurs. Have you looked at just spending from bonds first (for your first 15 years) as suggested by Michael H. McClung, to let the equity portion grow longer? That bypasses sequence risk that some mention to scare retirees into asking them to manage their assets.
Another option is to first use a lower or a variable withdrawal(WD) rate on the portfolio, than the historical optimal one. The variable WD is a fixed % of each, most recent annual portfolio balance for the first 15 years, so that portion of your retirement income changes some each year. That may sound bad, but inflation does the same, first to your annuity, then to your pension. The nominal payments stay the same, but the value of each payment is slowly shrinking by inflation.
Yes, there is risk in every method, but you have less long term risk than most others here.

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Re: SPIA Return  Am I calculating this correctly?
Corn,
If my objective was to replace missing delayed Social Security payments between age 55 and 70, I would seriously consider a fairlypriced 2%indexed 15year termcertain SPIA with payments equal to future Social Security payments.
Personally, I would never adopt McClung's approach. I've provided a few comments about it across multiple posts in another topic.
If my objective was to replace missing delayed Social Security payments between age 55 and 70, I would seriously consider a fairlypriced 2%indexed 15year termcertain SPIA with payments equal to future Social Security payments.
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Re: SPIA Return  Am I calculating this correctly?
The other option which may make sense is to draw SS at 62 and buy a life annuity for the difference between SS at 70 and SS at 62. A quick review of the annuity sites shows the premium about the same as a 8 year bridge to full SS. It may give some peace of mind to collect SS now as protection against future changes, which is of course speculative.
Re: SPIA Return  Am I calculating this correctly?
Take a look here https://annuities.blueprintincome.com/l ... /#taxationRon wrote: ↑Tue Apr 10, 2018 7:48 pmUnless the premium is paid with qualified funds, such as from a TIRA or 401(K). In that case, all payouts will become taxable, in the year they are paid.
A plus for an SPIA funded with qualified funds is that the value of those funds are removed from RMD consideration.
 Ron
"The taxation of annuities depends first and foremost on whether the annuity was purchased with pretax or posttax money. If the premium was paid with posttax money, as with a nonqualified annuity, the portion of any income payments that constitutes a return of that premium will not be taxable. On the other hand, qualified annuities are purchased with pretax retirement savings. Because the money used to fund the annuity has never been taxed, all distributions from the annuity will be fully taxable. In either case, ordinary income tax rates will apply."
Re: SPIA Return  Am I calculating this correctly?
I've gone through same analysis. I would rather keep control of my money since there isn't a real financial benefi.corn18 wrote: ↑Tue Apr 10, 2018 2:46 pmWas thinking about retiring at 55 and taking SS at 70. SS + COLA Pension covers all my base expenses. So, why not try a 15 year certain annuity to cover me from 55 to 70? Went to immediate annuity and got the following info:
Period 15
Cost of Annuity 587,518
Monthly/Annual/Total Payout 4,000 48,000 720,000
Total Gain 132,482
Annual Gain 8,832.13
Annual Return 1.50%
Wouldn't I be in the same spot if I put $587,518 into a high yield savings account with 1.5% interest? If so, it seems the annuity is not the best approach to bridge me to SS.
Appreciate your thoughts.
I wish I had been smart enough to put money into a deferred annuity 5 years ago. The payout would be better.

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Re: SPIA Return  Am I calculating this correctly?
Now that the OP's question has been explained properly, the issue of whether to go through with it can be addressed.
If the OP has sufficient investment assets, it might work better over the 15 years just to withdraw $4000 per month from a 50/50 (or thereabouts) portfolio.
I'd recommend at least a 25X portfolio for confidence, meaning at least $1.2M for this case.
This is the approach I'm taking for a shorter 7year bridge to age 70...
If the OP has sufficient investment assets, it might work better over the 15 years just to withdraw $4000 per month from a 50/50 (or thereabouts) portfolio.
I'd recommend at least a 25X portfolio for confidence, meaning at least $1.2M for this case.
This is the approach I'm taking for a shorter 7year bridge to age 70...
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Re: SPIA Return  Am I calculating this correctly?
This is called a "constantdollar withdrawal" approach (many call it SWR as in "safe withdrawal rate"). It is one of the worst approaches to taking money out of a portfolio. This has been extensively discussed in this forum. (See the collection of posts I made in the Michael Kitces 4% rule podcast on Madfientist topic).The Wizard wrote: ↑Wed Apr 11, 2018 11:21 amIf the OP has sufficient investment assets, it might work better over the 15 years just to withdraw $4000 per month from a 50/50 (or thereabouts) portfolio.
I think that the original poster (OP) has a good plan, in wanting to provide for a robust replacement for Social Security payments during the age 55 to 70 gap before receiving delayed Social Security payments. This can be achieved in many ways.
Using a 2%indexed 15year termcertain SPIA with payments equal to future delayed Social Security payments is a simple approach.
Another approach would be to build a nonrolling TIPS ladder which delivers, each year, coupons and maturing principals equal to 12months of future delayed Social Security payments. Forum member #Cruncher has developed an awesome tool for this; the link is at the end of the following post: Re: How should I build a TIPS income ladder?.
Yet another, but riskier in face of inflation, approach would be to use a CD ladder or a simple highinterest savings account as has been suggested in Delay Social Security to age 70 and Spend more money at 62.
The idea, here, is to construct a robust lifelong inflationindexed base income which is not exposed to market risk. This base income consists of Social Security (SS) delayed to age 70 (to maximize it) and of a 15year payment stream (equal to future SS payments) between retirement at age 55 and age 70 (selfconstructed using TIPS, CDs, or a savings account, or bought from an insurance company as a 2%indexed 15year termcertain SPIA).
Then, the remaining balanced portfolio would be used for withdrawals taken using a sensible approach, such as our wiki's variablepercentage withdrawal (VPW) method.
Last edited by longinvest on Wed Apr 11, 2018 12:11 pm, edited 9 times in total.
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Re: SPIA Return  Am I calculating this correctly?
Without knowing your details  I would guess you did just fine with that money over these past 5 years of growth.Dottie57 wrote: ↑Wed Apr 11, 2018 10:58 amI've gone through same analysis. I would rather keep control of my money since there isn't a real financial benefi.corn18 wrote: ↑Tue Apr 10, 2018 2:46 pmWas thinking about retiring at 55 and taking SS at 70. SS + COLA Pension covers all my base expenses. So, why not try a 15 year certain annuity to cover me from 55 to 70? Went to immediate annuity and got the following info:
Period 15
Cost of Annuity 587,518
Monthly/Annual/Total Payout 4,000 48,000 720,000
Total Gain 132,482
Annual Gain 8,832.13
Annual Return 1.50%
Wouldn't I be in the same spot if I put $587,518 into a high yield savings account with 1.5% interest? If so, it seems the annuity is not the best approach to bridge me to SS.
Appreciate your thoughts.
I wish I had been smart enough to put money into a deferred annuity 5 years ago. The payout would be better.
FWIW  every time I look back to see whether I did something that could have been done better I find that I have.
Rear veiwing vision is always 20/20.
Re: SPIA Return  Am I calculating this correctly?
That does not look much different from a 44/56 portfolio consisting of $525k in a TSM fund and $675k in a 15year immediate annuity yielding 2.8%.The Wizard wrote: ↑Wed Apr 11, 2018 11:21 amIf the OP has sufficient investment assets, it might work better over the 15 years just to withdraw $4000 per month from a 50/50 (or thereabouts) portfolio.
I'd recommend at least a 25X portfolio for confidence, meaning at least $1.2M for this case.
Ron
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Abbreviations and Acronyms
Re: SPIA Return  Am I calculating this correctly?
I just went to Vanguard and bashed together a ladder of 15 zerocoupon treasuries between 2019 and 2033. The cost came out to $580,620.96. So you could save ~$7000 and do that. (Incidentally, it reported the average duration of the ladder at 7.32 years.)
Re: SPIA Return  Am I calculating this correctly?
And here is a ladder of zerocoupon treasuries with a rough 2% annual increase (rounded to the nearest bond) for expected inflation. It costs about $662K.
Code: Select all
Maturity Qty Cost
2019 48 47,229.60
2020 49 47,034.61
2021 50 46,758.00
2022 51 46,261.59
2023 52 45,928.48
2024 53 45,351.57
2025 54 43,809.66
2026 55 44,285.45
2027 56 44,092.72
2028 57 42,755.70
2029 59 42,633.40
2030 60 42,702.00
2031 61 41,087.16
2032 62 41,461.26
2033 63 40,544.91
TOTAL 661,936.11
Re: SPIA Return  Am I calculating this correctly?
Coolio, thanks for this. I priced a SPIA with a 2% annual increase and it came out to right at $667,000. Looks like the SPIA is a good value.Chuck wrote: ↑Wed Apr 11, 2018 2:19 pmAnd here is a ladder of zerocoupon treasuries with a rough 2% annual increase (rounded to the nearest bond) for expected inflation. It costs about $662K.Code: Select all
Maturity Qty Cost 2019 48 47,229.60 2020 49 47,034.61 2021 50 46,758.00 2022 51 46,261.59 2023 52 45,928.48 2024 53 45,351.57 2025 54 43,809.66 2026 55 44,285.45 2027 56 44,092.72 2028 57 42,755.70 2029 59 42,633.40 2030 60 42,702.00 2031 61 41,087.16 2032 62 41,461.26 2033 63 40,544.91 TOTAL 661,936.11
Re: SPIA Return  Am I calculating this correctly?
That wasn't my takeaway at all. The treasury ladder is $5,000 cheaper, and you can change your mind at any time. (If you need cash, you can still sell some of the bonds.) So, I was trying to point out that the SPIA, being more expensive, and limiting your options, is not a good value at all.
Re: SPIA Return  Am I calculating this correctly?
And since I'm enjoying the exercise...
If you make a ladder of treasuries for years 15, and CD's for years 615, you can generate $48,000 per year spending only $545,000, so about $40,000 less. I could have done a better job with filtering out callable CD's, but now I'm more sure that I wouldn't want a SPIA in your situation.
If you make a ladder of treasuries for years 15, and CD's for years 615, you can generate $48,000 per year spending only $545,000, so about $40,000 less. I could have done a better job with filtering out callable CD's, but now I'm more sure that I wouldn't want a SPIA in your situation.
Re: SPIA Return  Am I calculating this correctly?
Complexity plays a role in my decision, too. SPIA=simple. Ladders=more complex.
Re: SPIA Return  Am I calculating this correctly?
Of course. I only make about $100K per year, so a $40K savings is worth it if I spend less than 5 months on it. (It might take 23 days to set up the ladder.) But it sounds like you're doing a little better than I am.

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Re: SPIA Return  Am I calculating this correctly?
I guess that "CDs for years 15 and treasuries for years 615" was meant, instead.Chuck wrote: ↑Wed Apr 11, 2018 3:17 pmIf you make a ladder of treasuries for years 15, and CD's for years 615, you can generate $48,000 per year spending only $545,000, so about $40,000 less. I could have done a better job with filtering out callable CD's, but now I'm more sure that I wouldn't want a SPIA in your situation.
I'd like to see the detailed pricing for the 15 securities. The $40,000 estimate seems to imply a significant difference in yields of the 15 year securities.
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