Factors Suggesting One Should Buy SPIA

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antiqueman
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Factors Suggesting One Should Buy SPIA

Post by antiqueman » Sun May 06, 2018 9:10 pm

What are the factors that should be considered in deciding if a person should purchase a SPIA. I am not asking about what age one should purchase an annuity.

I am interested in what should be considered in deciding IF an annuity should be purchased ? I have read some articles that state if one "believes" they have sufficient assets without an annuity then one should not been purchased. I have read other articles that state that even if you have enough assets to cover your expenses for 30 years in retirement you should still consider purchasing a SPIA because you can likely leave more to your heirs and hold more stocks.

So , if a person believes they would have enough for a 30 year retirement by withdrawing from their 401ks, IRA , etc. what should they consider in deciding if they should annuitize some of their assets?

Thanks.

CurlyDave
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Re: Factors Suggesting One Should Buy SPIA

Post by CurlyDave » Sun May 06, 2018 9:53 pm

IMHO one should step back and look at the annuity industry on a macro level first.

Annuities are sold by insurance companies, and they are always a profitable product. If they were not profitable, the insurance companies would not sell them. In addition to profits, annuities have costs to the companies that sell them. Employees: accountants, secretaries, salespeople, actuaries, etc. There are the costs of advertising, and of the buildings that house the employees.

Where do these profits and costs come from? Well, right out of the payments people make to buy annuities and the returns on investments the insurance companies make.

So, realize from the start that the annuity company is going to take some of your money and some of the return on the money. On average, annuities must return less to the purchasers than they would have realized on their own.

But there are situations where annuities do make sense. They provide longevity insurance. They provide a guaranteed return.

To me, the biggest point is that if I put all my money into SPIAs, I am guaranteed to almost spend my last dollar with my last breath. There will be very little money left over for any heirs. There may be property, but there won't be much money. Of course if I put less than all of my money in, there may be some left over. Or, I take the chance of running out of money.

In my situation, I have heirs that I would like to leave a legacy. So I have made the active choice that they are going to take their chances with me being able to manage my money in such a way that I can spend what the insurance company would take(both costs and profit) in addition to the return the insurance company would give me, and still come out ahead. The guaranteed return is just not worth its cost in my situation.

For other people the choices might be different.

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wjo
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Re: Factors Suggesting One Should Buy SPIA

Post by wjo » Sun May 06, 2018 9:54 pm

I am planning to purchase an annuity for us, mostly b/c we do not have children and I like the idea of steady income when we may have less mental capacity. The purchase will come from the fixed income side of our portfolio, leaving the equity side to grow and provide inflation protection. I do believe the models that purchasing an annuity, due to the mortality credits and thus a higher payout rate, provides more income per dollar of fixed income than just investment return alone. This results in less stress on the remaining portfolio (provided one doesn't just spend more), increasing the likelihood of portfolio longevity and final wealth. I'm interested in the final wealth aspect both for bequest motives and the possible stress of expensive care for nursing homes, etc. At the moment, I plan to self-insure for that as I am not certain the value of long-term care policies.

kenoryan
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Re: Factors Suggesting One Should Buy SPIA

Post by kenoryan » Sun May 06, 2018 10:01 pm

Give us some numbers. I’m interested too. What sort of income would you get from like say a million dollars? I mean, nobody’s going to put all their money into an spia, right?

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Taylor Larimore
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Re: Factors Suggesting One Should Buy SPIA

Post by Taylor Larimore » Sun May 06, 2018 10:20 pm

antiqueman:

At the age of 80 my wife and I bought a joint single premium immediate annuity (SPIA), the only good annuity). The annuity was simple to understand and very competitive in price. It paid about 10% (including principal) We were happy with our choice and bought another a year later.

"What did it accomplish?"

It gave us the largest guaranteed lifetime income of any investment.

With our life income guaranteed (like a pension) we were able to start giving our children (our only heirs) their inheritance when their needs are greatest. They are very appreciative.

My wife died 4 years ago. I am 94 with never a worry about running out of money!

It is a very good feeling.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

gotester2000
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Re: Factors Suggesting One Should Buy SPIA

Post by gotester2000 » Sun May 06, 2018 11:44 pm

Few reasons to purchase SPIA:-

1. You may have money to last for 30 years but may lose the ability to manage it in old age.
2. You may last more than 30 years in retirement.
3. Psychological edge that you will never run out of money.

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Re: Factors Suggesting One Should Buy SPIA

Post by AlohaJoe » Mon May 07, 2018 12:59 am

antiqueman wrote:
Sun May 06, 2018 9:10 pm
What are the factors that should be considered in deciding if a person should purchase a SPIA.
Do you have heirs? If not, then an annuity becomes a lot more attractive.

Does your family have a history of health issues? Keeping large liquid reserves for "health shocks" is one reason to eschew an annuity.

Does your family have a history of cognitive decline? Buying an annuity is (kinda sorta) like hiring a financial advisor who will send you a check every month. Less worries about being scammed out of $100,000 when you are old and your mind is going.

Does your family have a history of longevity? If no one in your family has ever lived past 70, then an annuity is less attractive for you. On the other hand, a deferred immediate annuity might be a better fit if all you're really worried about is longevity.

If you are in a relationship, is the woman uninterested in financial matters? Again, an annuity acts as a kind of financial advisor and is much more like a monthly paycheck. (Of course, there are other ways to achieve the same result, this is just a consideration.)

Are you especially anxious at the thought of your monthly income disappearing in retirement? A monthly annuity payment can feel a lot like a paycheck.

Are you especially anxious at the thought of your "income" in retirement changing every month? An annuity can help reduce these worries.

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Re: Factors Suggesting One Should Buy SPIA

Post by dcabler » Mon May 07, 2018 6:04 am

kenoryan wrote:
Sun May 06, 2018 10:01 pm
Give us some numbers. I’m interested too. What sort of income would you get from like say a million dollars? I mean, nobody’s going to put all their money into an spia, right?
immediateannuities.com

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Re: Factors Suggesting One Should Buy SPIA

Post by z3r0c00l » Mon May 07, 2018 6:43 am

My biggest reason for not planning on using an annuity is a strong pension starting at 55 which, with SS later in life, should cover most expenses. These monthly checks will cover everyday expenses, with 401k and other savings serving to pay for all the good things in retirement.

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Re: Factors Suggesting One Should Buy SPIA

Post by AlohaJoe » Mon May 07, 2018 7:30 am

kenoryan wrote:
Sun May 06, 2018 10:01 pm
I mean, nobody’s going to put all their money into an spia, right?
That's exactly what people with pensions have done. They put 100% into a (deferred immediate) annuity. Just because the annuity is run by a public company or a government instead of an insurance company doesn't make it not an annuity. ERISA actually explicitly defines a pension as an annuity, just to remove any question.

It is one of the mysteries of finance that people love pensions but hate annuities when they're actually the same thing. Well, not exactly the same thing, the lump sum payment on a SPIA is painful whereas a monthly payment plan over decades to a deferred annuity is easier to swallow. Since those have only been around for about 13 years and QLACs for only 3 or 4, maybe eventually they'll become more popular.

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Re: Factors Suggesting One Should Buy SPIA

Post by goingup » Mon May 07, 2018 7:58 am

I expect we'll buy a SPIA or 2, using less than 25% of assets. The idea that appeals is having another income stream. This will ease decumulation worries and give us "permission to spend". After decades of saving I know that drawing down assets will feel unnatural.

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Re: Factors Suggesting One Should Buy SPIA

Post by smitcat » Mon May 07, 2018 8:34 am

"So , if a person believes they would have enough for a 30 year retirement by withdrawing from their 401ks, IRA , etc. what should they consider in deciding if they should annuitize some of their assets?"

- Have you considered Roth conversions first?
- Will you have sufficient flexible funds left?
- What will the tax ramifications be with and without the SPIA?
- What will the outcome be with one or the other spouse greatly outliving the other?
- What happens with mediocre or strong inflation 20 years out?
- What is the value of spendable dollars with either choice?
- What is the potential value for heirs with either choice?

The hardest part is to view the SPIA in 10 or 20 or even 30 years down the road and what it will represent at the time for income , with inflation and taxes and flexibility.
I have had some value putting variations of SPIA's into calculators and comparing that to a baseline without the SPIA's.
Utilizing both the IORP and the RPM spreadsheet calculator it can provide some numbers (dependent upon input) that you can compare with.

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Re: Factors Suggesting One Should Buy SPIA

Post by dbr » Mon May 07, 2018 8:37 am

Jim Otar discusses that in his book. Basically the conclusion is that annuities are most applicable in the "gray" area where withdrawals from portfolio are just able to cover expenses, say right at the infamous 4% rule. People withdrawing less don't need an SPIA and people trying to withdraw more are not going to fix the problem with an SPIA.

Without a doubt one must consider the balance of income streams. One does not annuitize all of one's money, and it doesn't make a lot of sense to add an unneeded annuity when pension and SS income already exist. As mentioned above inflation and survivor benefit are important considerations. It is hard to get inflation indexed annuities except at high cost, aka low payout. The most effective annuity purchase that can be made is to delay SS to age 70.

Also retirees who want money to go to heirs would not annuitize all those assets but they might annuitize part of the assets to live on and leave the rest untouched for heirs.

The annuity calculation must consider that the older the annuitant the higher the payout at the time and that one does not evade luck of history as annuity payouts depend on interest rates available at the time the annuity is bought.

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Re: Factors Suggesting One Should Buy SPIA

Post by wolf359 » Mon May 07, 2018 8:48 am

antiqueman wrote:
Sun May 06, 2018 9:10 pm
What are the factors that should be considered in deciding if a person should purchase a SPIA. I am not asking about what age one should purchase an annuity.

I am interested in what should be considered in deciding IF an annuity should be purchased ? I have read some articles that state if one "believes" they have sufficient assets without an annuity then one should not been purchased. I have read other articles that state that even if you have enough assets to cover your expenses for 30 years in retirement you should still consider purchasing a SPIA because you can likely leave more to your heirs and hold more stocks.

So , if a person believes they would have enough for a 30 year retirement by withdrawing from their 401ks, IRA , etc. what should they consider in deciding if they should annuitize some of their assets?

Thanks.
I am 50, and will not be buying a SPIA any time soon. However, I keep getting drawn to them, and am considering buying one in multiple forms over the next few decades. I have years to change my mind, so I may fail to implement at the last minute. These are the reasons that keep bringing me back to SPIAs:

1) Longevity Insurance -- I intend to wait until 70 to claim Social Security. This is the cheapest inflation-adjusted longevity annuity I can purchase. I will have retirement well so Social Security won't be necessary. However, if I get a bad sequence of returns, this is my primary longevity annuity, to insure against outliving my money. It's insurance in case your 30 year retirement actually lasts 40 years instead.

2) Longevity insurance part II - I intend to buy a QLAC annuity for whatever the limit is around that time when I turn 65-70. This takes some money out of my traditional IRAs and turns it into a deferred annuity until age 80-85. My consideration for this is that Social Security may get cut by about 25% by the time I claim it. A QLAC lets me boost it back up pretty inexpensively, without using funds needed for retirement. It would also reduce RMDs initially. (A QLAC in one retirement account actually allows coverage of both spouse lifetimes.)

3) Longevity insurance reason 3 - An annuity is also a safeguard against impaired mental judgement in older age. If I am not around, this provides a minimum base income that my wife would not have to figure out how to manage in an advanced age. Longevity insurance is in the form of QLAC and SS because they are judgement proof and can't be transferred to third parties. (If the worst happens to my primary Also, it is not money I will need for my primary retirement plan. Obviously, I will change my plan for longevity insurance if a health issue pops up to indicate there won't be longevity.

4) Better return for permanent bond position - If I intend to maintain a permanent bond position, I will consider a SPIA for half of it. Partial annuitization lets me tap mortality credits, giving me a better return than a bond does. Limits: I wouldn't buy any one SPIA that exceeds my state guarantee limits. Interest rates are low - I wouldn't buy until rates are better, and I would stagger purchases as retirement progresses to time diversify the returns. I wouldn't exceed half of the bond allocation because I want to still be able to rebalance, and to have liquidity.

5) Sequence of Risks protection - I have no pension or guaranteed income. I may purchase a SPIA to provide a core minimum income. I can cut back on all discretionary expenses if returns are bad. A SPIA sets a lower limit that I don't have to worry about. The lack of inflation protection isn't a problem -- this is primarily an issue for the first ten years of retirement. This is just a different reason -- it's the same SPIA as in #4. It just adds the limitation that the amount of the SPIA wouldn't exceed what is necessary to cover minimal acceptable living expenses.

6) Investment Simplification - If I pass before my wife, the SPIA would provide core living expenses for her, and a simple flat 4%/year from the investment portfolio would provide a Sequence of Returns Risk - proof amount for discretionary expenses that should last the rest of her lifetime.

7) Permission to spend - I already know I'm going to be obsessive about savings and paranoid about outliving assets. I already am. Putting some amount in annuities lets me spend some amount without worrying.

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Re: Factors Suggesting One Should Buy SPIA

Post by Ron » Mon May 07, 2018 9:00 am

z3r0c00l wrote:
Mon May 07, 2018 6:43 am
My biggest reason for not planning on using an annuity is a strong pension starting at 55 which, with SS later in life, should cover most expenses. These monthly checks will cover everyday expenses, with 401k and other savings serving to pay for all the good things in retirement.
And I purchased an SPIA upon retirement (at age 59 - 11 years ago) for the opposite reason - I had no pension. My retirement income was solely based upon spending from my retirement portfolio until I was able to claim SS at the planned age of 66 (my FRA).

As it turned out the SPIA along with portfolio withdraws (in a strong market) resulted in my delaying SS until this year - at age 70.

Today, that SPIA is just the topping on the sundae of my income provided by SS and RMD's, giving me much more income than I forecast at this time of life, over a decade ago.

BTW, the SPIA was purchased with (then) 10% of my/wife's joint portfolio value and has an IRR of 4.79% which does not include return of premium paid.

FWIW,

- Ron

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Re: Factors Suggesting One Should Buy SPIA

Post by CWRadio » Mon May 07, 2018 2:32 pm

Little off subject.
Once you decided to buy a SPIA how do you shop for one?
Lowest price?
What options (cash back,etc)?

Does it make sense to buy from a insurance company with poor credit ratings since the state may protect you?
Thanks Paul

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Re: Factors Suggesting One Should Buy SPIA

Post by Gill » Mon May 07, 2018 3:07 pm

CWRadio wrote:
Mon May 07, 2018 2:32 pm
Little off subject.
Once you decided to buy a SPIA how do you shop for one?
Lowest price?
What options (cash back,etc)?

Does it make sense to buy from a insurance company with poor credit ratings since the state may protect you?
Thanks Paul
Shopping for an annuity is a very transparent process. I have diversified over a number of insurance carriers with strong balance sheets and have purchased SPIA's over a period of about eight years. At each purchase I've simply looked for the best payout offered by the companies in that category. For a pure SPIA there are no options that interest me. It is simply a single life payout. In recent years the best prices have been available through Vanguard. I am one of probably a small minority here who have invested seven figure in pure SPIA's and am happy I've done so.
Gill

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Re: Factors Suggesting One Should Buy SPIA

Post by inbox788 » Mon May 07, 2018 4:08 pm

CurlyDave wrote:
Sun May 06, 2018 9:53 pm
IMHO one should step back and look at the annuity industry on a macro level first.
...
In my situation, I have heirs that I would like to leave a legacy. So I have made the active choice that they are going to take their chances with me being able to manage my money in such a way that I can spend what the insurance company would take(both costs and profit) in addition to the return the insurance company would give me, and still come out ahead. The guaranteed return is just not worth its cost in my situation.
How do you manage to achieve this goal?

Looking at just the SPIA, the heirs lose if the buyer dies early and come out ahead if the buyer lives a long time. Imagine a non-profit company that sold SPIA without costs, returning 100% to policy holders, there would be a break even age. By adding in costs, that break even age is shifted later. On average, heirs might do better, but how do you manage to average your one sample?

Go back to that non-profit company, and see that they can average out longevity variables and returns so that at expiration of their policy holders, the expected funds remaining is zero. The individual investor needs to manage so that they are positive at expected longevity and high probability that they won't be negative at some later variance, which may be simulated with FireCalc. This substantially changes the estimated monthly expenditures. A $1M SPIA isn't comparable to $1M invested and spent with 2-4% SWR. How would a 50 year old vs. 90 year old with $9M other cash equalize these comparisons, leaving the remainder to their heirs?

Without doing any calculations, I think you'd need to spend a bit more with the SWR plan to assure it doesn't wind up zero, but average return will exceed the initial cost. On average, the heirs might benefit, but they don't always come out ahead (which could be good news to you).

Stop Spending My Inheritance
https://www.nytimes.com/2006/07/30/fash ... 30AGE.html

Code: Select all

Looked up the cost of an SPIA and Firecalc equivalent spending odds:
50 male	
Life (?)
$4,168 = $50,016/year

FIRECalc looked at the 97 possible 50 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 97 cycles. The lowest and highest portfolio balance at the end of your retirement was $-5,538,074 to $14,328,487, with an average at the end of $918,573. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 50 cycles failed, for a success rate of 48.5%.


90 male	
Life (?)
$17,079 = $204,948/year

FIRECalc looked at the 137 possible 10 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 137 cycles. The lowest and highest portfolio balance at the end of your retirement was $-2,453,100 to $1,000,000, with an average at the end of $-1,132,027. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 10 years. FIRECalc found that 137 cycles failed, for a success rate of 0.0%.


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Re: Factors Suggesting One Should Buy SPIA

Post by CurlyDave » Tue May 08, 2018 1:18 am

inbox788 wrote:
Mon May 07, 2018 4:08 pm
CurlyDave wrote:
Sun May 06, 2018 9:53 pm
IMHO one should step back and look at the annuity industry on a macro level first.
...
In my situation, I have heirs that I would like to leave a legacy. So I have made the active choice that they are going to take their chances with me being able to manage my money in such a way that I can spend what the insurance company would take(both costs and profit) in addition to the return the insurance company would give me, and still come out ahead. The guaranteed return is just not worth its cost in my situation.
How do you manage to achieve this goal?

Looking at just the SPIA, the heirs lose if the buyer dies early and come out ahead if the buyer lives a long time. Imagine a non-profit company that sold SPIA without costs, returning 100% to policy holders, there would be a break even age. By adding in costs, that break even age is shifted later. On average, heirs might do better, but how do you manage to average your one sample?...
A. I don't average a sample of one. "I have made the active choice that they are going to take their chances with me being able to manage my money..." I am making a bet with my money that I think will benefit my heirs.

I know going in that my choice will benefit them more than 50% of the time. How much more than 50% depends on the cost structure of the insurance company and their profit. My best guess, and it is only a guess, is that it is likely 75+% of the time.

But there is a second factor. I think I can achieve a greater return on invested money than the insurance company. Insurance companies have massive reserves which they invest, and I think index fund investing will do better, just like it does for individuals.

antiqueman
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Re: Factors Suggesting One Should Buy SPIA

Post by antiqueman » Tue May 08, 2018 3:42 am

I am the original poster.

Thank you to all who responded. I hope others will provide their input on the issue.

SGM
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Re: Factors Suggesting One Should Buy SPIA

Post by SGM » Tue May 08, 2018 4:47 am

Joe Tomlinson shows how delaying SS and adding a SPIA will positively affect a portfolio during retirement. I have been introduced to Joe at several SS research symposia. More recently I have been reading his research and am impressed. He also looks at going from 50 to 75% stock allocation and a reverse mortgage affect retirement fund longevity. I will not be getting a reverse mortgage but it may be necessary for some. I have delayed SS and will likely buy a ladder of SPIAs which both will increase the final size of my portfolio. I am also more likely to spend more money in retirement when the funds are coming from these sources. Additional regular deposits to my checking account will likely increase my happiness.

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Re: Factors Suggesting One Should Buy SPIA

Post by Watty » Tue May 08, 2018 5:44 am

antiqueman wrote:
Sun May 06, 2018 9:10 pm
What are the factors that should be considered in deciding if a person should purchase a SPIA. I am not asking about what age one should purchase an annuity.
Age is the biggest factor but that aside your health is very important I have suggest that people get a very good physical before buying a SPIA to know the most possible about your health. It would also be good to ask your doctor if there are any tests that they would recommend even if the insurance company would not pay for them.

Current interest rates are also critical since few SPIAs are fully indexed for inflation. I don't have a crystal ball but just like it is reasonable to say that a low 4% mortgage rate makes it a favorable time to get a 30 year mortgage if you will live in the house for 30 years, the same logic would suggest that it is not a great time to buy a SPIA.

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Re: Factors Suggesting One Should Buy SPIA

Post by randomguy » Tue May 08, 2018 7:39 am

AlohaJoe wrote:
Mon May 07, 2018 7:30 am
kenoryan wrote:
Sun May 06, 2018 10:01 pm
I mean, nobody’s going to put all their money into an spia, right?
That's exactly what people with pensions have done. They put 100% into a (deferred immediate) annuity. Just because the annuity is run by a public company or a government instead of an insurance company doesn't make it not an annuity. ERISA actually explicitly defines a pension as an annuity, just to remove any question.

It is one of the mysteries of finance that people love pensions but hate annuities when they're actually the same thing. Well, not exactly the same thing, the lump sum payment on a SPIA is painful whereas a monthly payment plan over decades to a deferred annuity is easier to swallow. Since those have only been around for about 13 years and QLACs for only 3 or 4, maybe eventually they'll become more popular.
They both might be annuities but compare the returns and you will see most pensions are a much better deal. Most give you a guaranteed (well until the company goes bankrupt) 6-8% compared to the 2-4% of a deferred SPIA you can buy on the open market. Look at all the lump sum versus pension questions and notice how often taking the lump sum and buying an annuity works out. Some of that is population bias but a lot is the pensions are just willing to take on more risk.

And yes a lot of it is a sunk cost issue. GIving up a 4k/month income stream is hard. So is giving up a 1 million dollars to buy a 4k/month income stream.

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Re: Factors Suggesting One Should Buy SPIA

Post by bradpevans » Tue May 08, 2018 10:10 am

SGM wrote:
Tue May 08, 2018 4:47 am
Joe Tomlinson shows how delaying SS and adding a SPIA will positively affect a portfolio during retirement. I have been introduced to Joe at several SS research symposia. More recently I have been reading his research and am impressed. He also looks at going from 50 to 75% stock allocation and a reverse mortgage affect retirement fund longevity. I will not be getting a reverse mortgage but it may be necessary for some. I have delayed SS and will likely buy a ladder of SPIAs which both will increase the final size of my portfolio. I am also more likely to spend more money in retirement when the funds are coming from these sources. Additional regular deposits to my checking account will likely increase my happiness.

https://www.advisorperspectives.com/art ... n-pictures
I attended several hours of a seminar from some retirement planners (Fee based on AUM).
While every case is different, many of their examples included these elements:
SPIA - income stream, stability, longevity insurance, cognitive decline concerns
Charitable deductions in parallel with Roth conversions before 70.5 (see: https://www.fidelity.com/viewpoints/ret ... onversions)
QLAC as another option.

IF one can keep AGI low enough, then LTCG = 0. This can be HUGE (if you can/want to live below that threshold
and have substantial capital gains.

Once RMDs start and/or loss of spouse, very good odds to have tax bracket move up.

Their "sweet spot" seemed to be: Age (55-65) with assets in the 1-5 Million.
Too close to 70.5 ==> not enough time to massively move asset *location* (Roth vs 401 vs Traditional vs SPIA)
Assets < 1 million ==> not enough taxes to be saved under different scenarios
Assets > 5 million ==> high taxes (and high income!) are inevitable

Their focus was on the taxes paid on outgoing funds (not asset accumulation), and their
software would run thousands of scenarios focused on:
how much do i withdraw?
from what account(s)?
in what order?

This would account for pensions, SS, SS start date, etc.

In many cases their simulations suggested that the "traditional order" of asset depletion was NOT optimal.
Last edited by bradpevans on Tue May 08, 2018 10:32 am, edited 1 time in total.

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Re: Factors Suggesting One Should Buy SPIA

Post by David Jay » Tue May 08, 2018 10:22 am

bradpevans wrote:
Tue May 08, 2018 10:10 am
QCD to allow (even) more Roth conversions before 70.5
Just for clarification (because these threads have a lot of readers), the impact of future QCDs after 70.5 can allow one to make bigger Roth conversions before 70.5.

A QCD can only be made after age 70.5.
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Re: Factors Suggesting One Should Buy SPIA

Post by bradpevans » Tue May 08, 2018 10:33 am

David Jay wrote:
Tue May 08, 2018 10:22 am
bradpevans wrote:
Tue May 08, 2018 10:10 am
QCD to allow (even) more Roth conversions before 70.5
Just for clarification (because these threads have a lot of readers), the impact of future QCDs after 70.5 can allow one to make bigger Roth conversions before 70.5.

A QCD can only be made after age 70.5.
Thanks for catching this. It should have been simply charitable deduction (and i corrected the original post)

NotWhoYouThink
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Re: Factors Suggesting One Should Buy SPIA

Post by NotWhoYouThink » Tue May 08, 2018 10:35 am

AlohaJoe wrote:
Mon May 07, 2018 7:30 am
kenoryan wrote:
Sun May 06, 2018 10:01 pm
I mean, nobody’s going to put all their money into an spia, right?
That's exactly what people with pensions have done. They put 100% into a (deferred immediate) annuity. Just because the annuity is run by a public company or a government instead of an insurance company doesn't make it not an annuity. ERISA actually explicitly defines a pension as an annuity, just to remove any question.

It is one of the mysteries of finance that people love pensions but hate annuities when they're actually the same thing. Well, not exactly the same thing, the lump sum payment on a SPIA is painful whereas a monthly payment plan over decades to a deferred annuity is easier to swallow. Since those have only been around for about 13 years and QLACs for only 3 or 4, maybe eventually they'll become more popular.
I knew a guy who worked for 40 years at Megacorp and never saved a dime, just counted on his pension and SS. That's the only guy I ever talked to who had all his eggs in the pension basket. Many people with pensions also have savings. For my family, pensions and SS will provide a nice base income, and our investment will provide additional funds for retirement living expenses. Luxurious living, if possible. So we won't buy a SPIA because we already have annuities in the form of pensions, but the pensions are not 100% of our retirement funding, not by a long shot.

SGM
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Re: Factors Suggesting One Should Buy SPIA

Post by SGM » Tue May 08, 2018 11:29 am

bradpevans wrote:
Tue May 08, 2018 10:10 am
SGM wrote:
Tue May 08, 2018 4:47 am
Joe Tomlinson shows how delaying SS and adding a SPIA will positively affect a portfolio during retirement. I have been introduced to Joe at several SS research symposia. More recently I have been reading his research and am impressed. He also looks at going from 50 to 75% stock allocation and a reverse mortgage affect retirement fund longevity. I will not be getting a reverse mortgage but it may be necessary for some. I have delayed SS and will likely buy a ladder of SPIAs which both will increase the final size of my portfolio. I am also more likely to spend more money in retirement when the funds are coming from these sources. Additional regular deposits to my checking account will likely increase my happiness.

https://www.advisorperspectives.com/art ... n-pictures
I attended several hours of a seminar from some retirement planners (Fee based on AUM).
While every case is different, many of their examples included these elements:
SPIA - income stream, stability, longevity insurance, cognitive decline concerns
Charitable deductions in parallel with Roth conversions before 70.5 (see: https://www.fidelity.com/viewpoints/ret ... onversions)
QLAC as another option.

IF one can keep AGI low enough, then LTCG = 0. This can be HUGE (if you can/want to live below that threshold
and have substantial capital gains.

Once RMDs start and/or loss of spouse, very good odds to have tax bracket move up.

Their "sweet spot" seemed to be: Age (55-65) with assets in the 1-5 Million.
Too close to 70.5 ==> not enough time to massively move asset *location* (Roth vs 401 vs Traditional vs SPIA)
Assets < 1 million ==> not enough taxes to be saved under different scenarios
Assets > 5 million ==> high taxes (and high income!) are inevitable

Their focus was on the taxes paid on outgoing funds (not asset accumulation), and their
software would run thousands of scenarios focused on:
how much do i withdraw?
from what account(s)?
in what order?

This would account for pensions, SS, SS start date, etc.

In many cases their simulations suggested that the "traditional order" of asset depletion was NOT optimal.
Thanks for the reference.

I have converted all my tax deferred accounts to Roth accounts over a period of about 5 years. This was done while I was either working part-time and still making solo 401k deposits and while retired before taking delayed SS. I don't think I will ever be in a low tax bracket. We have multiple income streams in retirement and have no desire to stop those streams. I have cut way back on taking LT capital gains. After a lifetime of investing these can be rather large. If we spend a lot maybe someday we will take money out of the Roth accounts. Projections with large withdrawal rates show that we won't likely spend from the Roth accounts in my lifetime.

I am happy that I will not have to take out RMDs after age 70 1/2. With delayed SS and other income streams we would certainly be taxed at much higher rates. This is before my proposed ladder of SPIAs. Initially not all of the SPIA payouts will be taxable because some of the payout will be my own money. When one of us is widowed then the tax rates will be higher and it might be better to start to tap the Roth accounts and leave taxable accounts with large capital gains to the next generation. Although inheriting a Roth is a good thing too.

We do have a charitable investment account. I am in the process of educating one of my adult children who will be attending the BH national meeting for the first time this year. :D
Last edited by SGM on Thu May 10, 2018 4:14 am, edited 1 time in total.

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Taylor Larimore
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Educating an adult child about investing

Post by Taylor Larimore » Tue May 08, 2018 11:42 am

I am in the process of educating one of my adult children who will be attending the BH national meeting for the first time this year.
SGM:

In my opinion, this is one of the best things you can do to start an adult child on the road to investment success.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

ralph124cf
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Re: Factors Suggesting One Should Buy SPIA

Post by ralph124cf » Tue May 08, 2018 1:25 pm

randomguy wrote:
Tue May 08, 2018 7:39 am
AlohaJoe wrote:
Mon May 07, 2018 7:30 am
kenoryan wrote:
Sun May 06, 2018 10:01 pm
I mean, nobody’s going to put all their money into an spia, right?
That's exactly what people with pensions have done. They put 100% into a (deferred immediate) annuity. Just because the annuity is run by a public company or a government instead of an insurance company doesn't make it not an annuity. ERISA actually explicitly defines a pension as an annuity, just to remove any question.

It is one of the mysteries of finance that people love pensions but hate annuities when they're actually the same thing. Well, not exactly the same thing, the lump sum payment on a SPIA is painful whereas a monthly payment plan over decades to a deferred annuity is easier to swallow. Since those have only been around for about 13 years and QLACs for only 3 or 4, maybe eventually they'll become more popular.
They both might be annuities but compare the returns and you will see most pensions are a much better deal. Most give you a guaranteed (well until the company goes bankrupt) 6-8% compared to the 2-4% of a deferred SPIA you can buy on the open market. Look at all the lump sum versus pension questions and notice how often taking the lump sum and buying an annuity works out. Some of that is population bias but a lot is the pensions are just willing to take on more risk.

And yes a lot of it is a sunk cost issue. GIving up a 4k/month income stream is hard. So is giving up a 1 million dollars to buy a 4k/month income stream.
Pensions and annuities are different population pools.

People who buy SPIAs are self selected from a pool of people who believe (rightly or wrongly) that they will have a longer than average life. People with pensions are not self selected in this way.

It is to be expected that the people in the self selected pool cannot get as good a deal as the people from a more random pool.

Ralph

wolf359
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Re: Factors Suggesting One Should Buy SPIA

Post by wolf359 » Tue May 08, 2018 1:53 pm

randomguy wrote:
Tue May 08, 2018 7:39 am
AlohaJoe wrote:
Mon May 07, 2018 7:30 am
kenoryan wrote:
Sun May 06, 2018 10:01 pm
I mean, nobody’s going to put all their money into an spia, right?
That's exactly what people with pensions have done. They put 100% into a (deferred immediate) annuity. Just because the annuity is run by a public company or a government instead of an insurance company doesn't make it not an annuity. ERISA actually explicitly defines a pension as an annuity, just to remove any question.

It is one of the mysteries of finance that people love pensions but hate annuities when they're actually the same thing. Well, not exactly the same thing, the lump sum payment on a SPIA is painful whereas a monthly payment plan over decades to a deferred annuity is easier to swallow. Since those have only been around for about 13 years and QLACs for only 3 or 4, maybe eventually they'll become more popular.
They both might be annuities but compare the returns and you will see most pensions are a much better deal. Most give you a guaranteed (well until the company goes bankrupt) 6-8% compared to the 2-4% of a deferred SPIA you can buy on the open market. Look at all the lump sum versus pension questions and notice how often taking the lump sum and buying an annuity works out. Some of that is population bias but a lot is the pensions are just willing to take on more risk.

And yes a lot of it is a sunk cost issue. GIving up a 4k/month income stream is hard. So is giving up a 1 million dollars to buy a 4k/month income stream.
Pensions might be a better deal, but you usually don't get to choose between buying a pension and buying an annuity. I can choose to buy an annuity. The only way to "buy" a pension is to work at a place that offers one. These days, that is usually working for a long time at a government job or at a utility.

In fact, one of the factors as to why to buy a SPIA in the first place for some is because they may lack a pension, and want a predictable income stream independent of market conditions.

bradpevans
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Re: Factors Suggesting One Should Buy SPIA

Post by bradpevans » Tue May 08, 2018 1:59 pm

ralph124cf wrote:
Tue May 08, 2018 1:25 pm
randomguy wrote:
Tue May 08, 2018 7:39 am
AlohaJoe wrote:
Mon May 07, 2018 7:30 am
kenoryan wrote:
Sun May 06, 2018 10:01 pm
I mean, nobody’s going to put all their money into an spia, right?
That's exactly what people with pensions have done. They put 100% into a (deferred immediate) annuity. Just because the annuity is run by a public company or a government instead of an insurance company doesn't make it not an annuity. ERISA actually explicitly defines a pension as an annuity, just to remove any question.

It is one of the mysteries of finance that people love pensions but hate annuities when they're actually the same thing. Well, not exactly the same thing, the lump sum payment on a SPIA is painful whereas a monthly payment plan over decades to a deferred annuity is easier to swallow. Since those have only been around for about 13 years and QLACs for only 3 or 4, maybe eventually they'll become more popular.
They both might be annuities but compare the returns and you will see most pensions are a much better deal. Most give you a guaranteed (well until the company goes bankrupt) 6-8% compared to the 2-4% of a deferred SPIA you can buy on the open market. Look at all the lump sum versus pension questions and notice how often taking the lump sum and buying an annuity works out. Some of that is population bias but a lot is the pensions are just willing to take on more risk.

And yes a lot of it is a sunk cost issue. GIving up a 4k/month income stream is hard. So is giving up a 1 million dollars to buy a 4k/month income stream.
Pensions and annuities are different population pools.

People who buy SPIAs are self selected from a pool of people who believe (rightly or wrongly) that they will have a longer than average life. People with pensions are not self selected in this way.

It is to be expected that the people in the self selected pool cannot get as good a deal as the people from a more random pool.

Ralph
Besides the distinction above, a pension (typically) comes from employer as part of your benefits, while a SPIA is purchased by you for you. A workplace pension is based on contributions over many years as well as employer generosity, while a SPIA is typically purchased at a point in time. They also may have different tax implications, as part of the SPIA payback is in fact "your money".

While one could purchase a SPIA because they believe they will beat the actuarial odds, I suspect in fact most people buy them to provide a guaranteed income stream over the rest of their lifetime.

inbox788
Posts: 5023
Joined: Thu Mar 15, 2012 5:24 pm

Re: Factors Suggesting One Should Buy SPIA

Post by inbox788 » Wed May 09, 2018 12:33 am

SGM wrote:
Tue May 08, 2018 4:47 am
Joe Tomlinson shows how delaying SS and adding a SPIA will positively affect a portfolio during retirement. I have been introduced to Joe at several SS research symposia. More recently I have been reading his research and am impressed. He also looks at going from 50 to 75% stock allocation and a reverse mortgage affect retirement fund longevity. I will not be getting a reverse mortgage but it may be necessary for some. I have delayed SS and will likely buy a ladder of SPIAs which both will increase the final size of my portfolio. I am also more likely to spend more money in retirement when the funds are coming from these sources. Additional regular deposits to my checking account will likely increase my happiness.

https://www.advisorperspectives.com/art ... n-pictures
The "Purchasing a SPIA" graph didn't make sense to me. If one dies the day after they buy the SPIA, isn't the SPIA much worse off? Yet the green graph is above, which doesn't seem to take into account "The current payout rate for a joint-life SPIA for this couple is 4.00%, so they would need to spend $780,000 of their remaining $1,513,000 of savings to purchase the SPIA, leaving $733,000 of savings invested in stocks and bonds." and "The bequest drops from $908,000 to $674,000, because the SPIA does not leave a bequest value. The bequest includes $450,000 that is recovered home value, so the savings portion of the expected bequest drops a lot." It's not clear how these amounts change over age, but to me is a significant drawback and invalidates the comparison IMO. Unless I'm totally misunderstanding something, I suspect the reverse mortgage also ends up in different endpoints. "Consumption volatility drops slightly, but the big impact is on the bequest, which drops substantially below the remaining home value."
Caution because just looking at the graphs give a misleading impression looking just at spending rates.

inbox788
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Re: Factors Suggesting One Should Buy SPIA

Post by inbox788 » Wed May 09, 2018 12:40 am

CurlyDave wrote:
Tue May 08, 2018 1:18 am
A. I don't average a sample of one. "I have made the active choice that they are going to take their chances with me being able to manage my money..." I am making a bet with my money that I think will benefit my heirs.

I know going in that my choice will benefit them more than 50% of the time. How much more than 50% depends on the cost structure of the insurance company and their profit. My best guess, and it is only a guess, is that it is likely 75+% of the time.

But there is a second factor. I think I can achieve a greater return on invested money than the insurance company. Insurance companies have massive reserves which they invest, and I think index fund investing will do better, just like it does for individuals.
Thanks for the clarification. I was afraid I was overlooking some investment strategy that was universally better than SPIA. SPIA is an insurance that alters the risk portfolio giving up funds in the early years for benefits in later years, but for a cost. So AFAIK, there is no free lunch SPIA, and for some situations, flattening the risk profile is worth paying a small price.

randomguy
Posts: 5540
Joined: Wed Sep 17, 2014 9:00 am

Re: Factors Suggesting One Should Buy SPIA

Post by randomguy » Wed May 09, 2018 1:59 am

bradpevans wrote:
Tue May 08, 2018 1:59 pm
ralph124cf wrote:
Tue May 08, 2018 1:25 pm
randomguy wrote:
Tue May 08, 2018 7:39 am
AlohaJoe wrote:
Mon May 07, 2018 7:30 am
kenoryan wrote:
Sun May 06, 2018 10:01 pm
I mean, nobody’s going to put all their money into an spia, right?
That's exactly what people with pensions have done. They put 100% into a (deferred immediate) annuity. Just because the annuity is run by a public company or a government instead of an insurance company doesn't make it not an annuity. ERISA actually explicitly defines a pension as an annuity, just to remove any question.

It is one of the mysteries of finance that people love pensions but hate annuities when they're actually the same thing. Well, not exactly the same thing, the lump sum payment on a SPIA is painful whereas a monthly payment plan over decades to a deferred annuity is easier to swallow. Since those have only been around for about 13 years and QLACs for only 3 or 4, maybe eventually they'll become more popular.
They both might be annuities but compare the returns and you will see most pensions are a much better deal. Most give you a guaranteed (well until the company goes bankrupt) 6-8% compared to the 2-4% of a deferred SPIA you can buy on the open market. Look at all the lump sum versus pension questions and notice how often taking the lump sum and buying an annuity works out. Some of that is population bias but a lot is the pensions are just willing to take on more risk.

And yes a lot of it is a sunk cost issue. GIving up a 4k/month income stream is hard. So is giving up a 1 million dollars to buy a 4k/month income stream.
Pensions and annuities are different population pools.

People who buy SPIAs are self selected from a pool of people who believe (rightly or wrongly) that they will have a longer than average life. People with pensions are not self selected in this way.

It is to be expected that the people in the self selected pool cannot get as good a deal as the people from a more random pool.

Ralph
Besides the distinction above, a pension (typically) comes from employer as part of your benefits, while a SPIA is purchased by you for you. A workplace pension is based on contributions over many years as well as employer generosity, while a SPIA is typically purchased at a point in time. They also may have different tax implications, as part of the SPIA payback is in fact "your money".

While one could purchase a SPIA because they believe they will beat the actuarial odds, I suspect in fact most people buy them to provide a guaranteed income stream over the rest of their lifetime.
The pension is being funded by your compensation. You just don't have the choice in the matter. The issue is that you as consumer can't buy into an a pension with a defined benefit. You can't off load market risk onto the corporation (who may or may not be in a better place to handle it).ow

Yes as I said some of the issue is population bias (i.e. overweight smokers aren't lining up to buy annuities). A lot is investment. There is no product that I can buy today that will guarantee a future income with a 7% return (i.e. what something like CalPers does). Instead I get to buy an investment that will give long bond returns and some trading off of mortality risks with my pool members.

I am betting most people buy SPIA because they read the brochure and attend the dinner party and think they are making 7% on their money:) There are definitely some niches where they work out. And of course the only people that post about how great they are will be the lucky ones:)

NotWhoYouThink
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Re: Factors Suggesting One Should Buy SPIA

Post by NotWhoYouThink » Wed May 09, 2018 7:35 am

Many employers offer retirees the option of taking a lump sum instead of a pension. We're taking our pensions, but know people taking the lump sum. In one of those cases the reason is that the retiree has a degenerative disease and does not have a long life expectancy. Other cases we expect to turn out poorly, but people are allowed to make bad decisions.

gilgamesh
Posts: 1001
Joined: Sun Jan 10, 2016 9:29 am

Re: Factors Suggesting One Should Buy SPIA

Post by gilgamesh » Wed May 09, 2018 7:58 am

CurlyDave wrote:
Tue May 08, 2018 1:18 am
inbox788 wrote:
Mon May 07, 2018 4:08 pm
CurlyDave wrote:
Sun May 06, 2018 9:53 pm
IMHO one should step back and look at the annuity industry on a macro level first.
...
In my situation, I have heirs that I would like to leave a legacy. So I have made the active choice that they are going to take their chances with me being able to manage my money in such a way that I can spend what the insurance company would take(both costs and profit) in addition to the return the insurance company would give me, and still come out ahead. The guaranteed return is just not worth its cost in my situation.
How do you manage to achieve this goal?

Looking at just the SPIA, the heirs lose if the buyer dies early and come out ahead if the buyer lives a long time. Imagine a non-profit company that sold SPIA without costs, returning 100% to policy holders, there would be a break even age. By adding in costs, that break even age is shifted later. On average, heirs might do better, but how do you manage to average your one sample?...
A. I don't average a sample of one. "I have made the active choice that they are going to take their chances with me being able to manage my money..." I am making a bet with my money that I think will benefit my heirs.

I know going in that my choice will benefit them more than 50% of the time. How much more than 50% depends on the cost structure of the insurance company and their profit. My best guess, and it is only a guess, is that it is likely 75+% of the time.

But there is a second factor. I think I can achieve a greater return on invested money than the insurance company. Insurance companies have massive reserves which they invest, and I think index fund investing will do better, just like it does for individuals.
Mortality credit - after a certain age this becomes significant....you cannot replicate mortality credit keeping risk the same.

SGM
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Joined: Wed Mar 23, 2011 4:46 am

Re: Educating an adult child about investing

Post by SGM » Wed May 09, 2018 8:08 am

Taylor Larimore wrote:
Tue May 08, 2018 11:42 am
I am in the process of educating one of my adult children who will be attending the BH national meeting for the first time this year.
SGM:

In my opinion, this is one of the best things you can do to start an adult child on the road to investment success.

Best wishes
Taylor
Thank you Taylor. A trip to the national BH meeting 5 years ago was very helpful to my brother and his wife as they closed in on retirement.

SGM
Posts: 2590
Joined: Wed Mar 23, 2011 4:46 am

Re: Factors Suggesting One Should Buy SPIA

Post by SGM » Wed May 09, 2018 8:19 am

inbox788 wrote:
Wed May 09, 2018 12:33 am
SGM wrote:
Tue May 08, 2018 4:47 am
Joe Tomlinson shows how delaying SS and adding a SPIA will positively affect a portfolio during retirement. I have been introduced to Joe at several SS research symposia. More recently I have been reading his research and am impressed. He also looks at going from 50 to 75% stock allocation and a reverse mortgage affect retirement fund longevity. I will not be getting a reverse mortgage but it may be necessary for some. I have delayed SS and will likely buy a ladder of SPIAs which both will increase the final size of my portfolio. I am also more likely to spend more money in retirement when the funds are coming from these sources. Additional regular deposits to my checking account will likely increase my happiness.

https://www.advisorperspectives.com/art ... n-pictures
The "Purchasing a SPIA" graph didn't make sense to me. If one dies the day after they buy the SPIA, isn't the SPIA much worse off? Yet the green graph is above, which doesn't seem to take into account "The current payout rate for a joint-life SPIA for this couple is 4.00%, so they would need to spend $780,000 of their remaining $1,513,000 of savings to purchase the SPIA, leaving $733,000 of savings invested in stocks and bonds." and "The bequest drops from $908,000 to $674,000, because the SPIA does not leave a bequest value. The bequest includes $450,000 that is recovered home value, so the savings portion of the expected bequest drops a lot." It's not clear how these amounts change over age, but to me is a significant drawback and invalidates the comparison IMO. Unless I'm totally misunderstanding something, I suspect the reverse mortgage also ends up in different endpoints. "Consumption volatility drops slightly, but the big impact is on the bequest, which drops substantially below the remaining home value."
Caution because just looking at the graphs give a misleading impression looking just at spending rates.
I don't have time to go into details about Joe Tomlinson's article. People with no pension or annuity with a conservative portfolio have a 67.4% probability of running out of money in a 30 year retirement using a 4.5% inflation adjusted withdrawal rate. The probability of running out of money drops considerably if half the portfolio is annuitized. See details about this in Meir Statman's book Finance for Normal People. Also it is easier to visualize all the ways you can meet your demise just after you sign an annuity contract. It is also easy to visualize how your heirs will be left with pennies after you die immediately after paying for an annuity. "Annuities emit the smell of death". It is called the annuity puzzle, also why annuities are so unpopular. Please note the only annuities to buy are SPIAs.

inbox788
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Re: Factors Suggesting One Should Buy SPIA

Post by inbox788 » Wed May 09, 2018 11:29 am

SGM wrote:
Wed May 09, 2018 8:19 am
I don't have time to go into details about Joe Tomlinson's article. People with no pension or annuity with a conservative portfolio have a 67.4% probability of running out of money in a 30 year retirement using a 4.5% inflation adjusted withdrawal rate. The probability of running out of money drops considerably if half the portfolio is annuitized. See details about this in Meir Statman's book Finance for Normal People. Also it is easier to visualize all the ways you can meet your demise just after you sign an annuity contract. It is also easy to visualize how your heirs will be left with pennies after you die immediately after paying for an annuity. "Annuities emit the smell of death". It is called the annuity puzzle, also why annuities are so unpopular. Please note the only annuities to buy are SPIAs.
For an article titled "Retirement Strategies in Pictures", I'm not sure the pictures are helping. At least they're not helping me. I just see a bunch of green lines above red lines that try to prove something I don't think is taking everything into account. Except, there is the "Purchasing a SPIA" graph where the red line is above the green line in the middle, and if this surrounds the likely longevity age, then it suggest most folks would do better choosing the red graph (no SPIA). And if you chose the red graph, you'd have an extra $234,000 emergency fund that hasn't been tapped ("The bequest drops from $908,000 to $674,000, because the SPIA does not leave a bequest value."). In my view, they're making a better case against SPIA, even though initially, I thought they were trying to illustrate the advantage.

GibsonL6s
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Re: Factors Suggesting One Should Buy SPIA

Post by GibsonL6s » Wed May 09, 2018 11:47 am

I can never understand why anyone would purchase a SPIA without a return of premium or 20 year period certain. The little bit of extra income lost to insure your heirs receive something in the event of an early post purchase demise seem very worth it.

Dottie57
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Re: Factors Suggesting One Should Buy SPIA

Post by Dottie57 » Wed May 09, 2018 12:15 pm

kenoryan wrote:
Sun May 06, 2018 10:01 pm
Give us some numbers. I’m interested too. What sort of income would you get from like say a million dollars? I mean, nobody’s going to put all their money into an spia, right?

Numbers depend on age, gender and amount of money in SPIA.

The older you are the larger the payout.

SGM
Posts: 2590
Joined: Wed Mar 23, 2011 4:46 am

Re: Factors Suggesting One Should Buy SPIA

Post by SGM » Wed May 09, 2018 3:20 pm

inbox788 wrote:
Wed May 09, 2018 11:29 am
SGM wrote:
Wed May 09, 2018 8:19 am
I don't have time to go into details about Joe Tomlinson's article. People with no pension or annuity with a conservative portfolio have a 67.4% probability of running out of money in a 30 year retirement using a 4.5% inflation adjusted withdrawal rate. The probability of running out of money drops considerably if half the portfolio is annuitized. See details about this in Meir Statman's book Finance for Normal People. Also it is easier to visualize all the ways you can meet your demise just after you sign an annuity contract. It is also easy to visualize how your heirs will be left with pennies after you die immediately after paying for an annuity. "Annuities emit the smell of death". It is called the annuity puzzle, also why annuities are so unpopular. Please note the only annuities to buy are SPIAs.
For an article titled "Retirement Strategies in Pictures", I'm not sure the pictures are helping. At least they're not helping me. I just see a bunch of green lines above red lines that try to prove something I don't think is taking everything into account. Except, there is the "Purchasing a SPIA" graph where the red line is above the green line in the middle, and if this surrounds the likely longevity age, then it suggest most folks would do better choosing the red graph (no SPIA). And if you chose the red graph, you'd have an extra $234,000 emergency fund that hasn't been tapped ("The bequest drops from $908,000 to $674,000, because the SPIA does not leave a bequest value."). In my view, they're making a better case against SPIA, even though initially, I thought they were trying to illustrate the advantage.
The article is by an advisor written for advisors so that is why it is a little harder to understand than an article directed at the individual investor. SS delay is the new base case with SS delay + SPIA is new case.The SPIA adds little difference to the expected spending, also the solid lines. The five percent low level lines or the dotted lines which show better results for the SPIA+ SS delay vs. SS delay alone. The dotted lines are for worst cases as determined by Monte Carlo simulations. He is using 5% lowest levels. The longer one lives the better the dotted green line looks, also the computed 5% worse Monte Carlo simulation.


He is also stating that this may be a technique that advisors can use while sitting across from the investor to explain these type of questions. This coincides with other research I have seen on the subject. I hope that is helpful.

The Wizard
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Location: Reading, MA

Re: Factors Suggesting One Should Buy SPIA

Post by The Wizard » Wed May 09, 2018 4:25 pm

SGM wrote:
Tue May 08, 2018 11:29 am

...I have converted all my tax deferred accounts to RMDs over a period of about 5 years. This was done while I was either working part-time and still making solo 401k deposits and while retired before taking delayed SS...
Perhaps you meant all tax deferred accounts to Roth IRAs?
Attempted new signature...

inbox788
Posts: 5023
Joined: Thu Mar 15, 2012 5:24 pm

Re: Factors Suggesting One Should Buy SPIA

Post by inbox788 » Wed May 09, 2018 5:20 pm

GibsonL6s wrote:
Wed May 09, 2018 11:47 am
I can never understand why anyone would purchase a SPIA without a return of premium or 20 year period certain. The little bit of extra income lost to insure your heirs receive something in the event of an early post purchase demise seem very worth it.
You could compare the reduction in annuity to a term life policy to see which would be more cost effective and better match the desired legacy. However, the whole point of purchasing an SPIA is longevity insurance. Usually, buying insurance comes at a cost. And while I can see the desire to protect against an untimely unexpected early death, buying another policy, whether it's a return of premium, 20 year certain or term life insurance, again at additional cost. So you pay 2 costs to assure your heirs receive some flatter average more predictable amount. If it were only so simple to figure out the needed amount and timing.

GibsonL6s
Posts: 199
Joined: Tue Aug 29, 2017 12:17 pm

Re: Factors Suggesting One Should Buy SPIA

Post by GibsonL6s » Wed May 09, 2018 6:14 pm

inbox788 wrote:
Wed May 09, 2018 5:20 pm
GibsonL6s wrote:
Wed May 09, 2018 11:47 am
I can never understand why anyone would purchase a SPIA without a return of premium or 20 year period certain. The little bit of extra income lost to insure your heirs receive something in the event of an early post purchase demise seem very worth it.
You could compare the reduction in annuity to a term life policy to see which would be more cost effective and better match the desired legacy. However, the whole point of purchasing an SPIA is longevity insurance. Usually, buying insurance comes at a cost. And while I can see the desire to protect against an untimely unexpected early death, buying another policy, whether it's a return of premium, 20 year certain or term life insurance, again at additional cost. So you pay 2 costs to assure your heirs receive some flatter average more predictable amount. If it were only so simple to figure out the needed amount and timing.
I was simply referring to the payment. immediate annuities quote for a $500,000 immediate annuity for a male 65 the following monthly payments

Life only $2,691

Life with cash refund $2,490. This insures you and if you pass early the beneficiaries get at least the premium less what you received in monthly payments.

Life 20 years certain $2,438. So a minimum of $585K is paid out.

I agree if one was insurable, they could buy say a 20 year term to replenish some of the premium.

Masterblaster
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Re: Factors Suggesting One Should Buy SPIA

Post by Masterblaster » Wed May 09, 2018 6:39 pm

Here's the case for SPIA annuities. Using SPIAs, those that die young end up subsidizing payments to those that live to be really old. That's the so called mortality credit of SPIAs.

When you fund your retirement entirely out of your nest-egg all by yourself you need plan for a very long life else you die homeless, cold, and broke. That inevitably means that you must ever so carefully spend small amounts from the nest-egg else bad things happen. With a SPIA you have a backstop and can more aggressively spend down that remaining nest-egg. The thinking goes that you'll have more spendable cash with a SPIA than were you to self fund everything yourself.

The goal isn't to go out with some huge unspent portfolio because it need be savored just in case. The goal should be to have more spendable income while you are alive and have a backstop to never go broke.

Some advisors believe that about 25% of your portfolio should be (SPIA) annuitized for just these reasons.

Michael Kites writes about this much better than I ever could: https://www.kitces.com/blog/understandi ... nt-income/

inbox788
Posts: 5023
Joined: Thu Mar 15, 2012 5:24 pm

Re: Factors Suggesting One Should Buy SPIA

Post by inbox788 » Wed May 09, 2018 7:46 pm

GibsonL6s wrote:
Wed May 09, 2018 6:14 pm
I was simply referring to the payment. immediate annuities quote for a $500,000 immediate annuity for a male 65 the following monthly payments

Life only $2,691

Life with cash refund $2,490. This insures you and if you pass early the beneficiaries get at least the premium less what you received in monthly payments.

Life 20 years certain $2,438. So a minimum of $585K is paid out.

I agree if one was insurable, they could buy say a 20 year term to replenish some of the premium.
Are these annuity guarantees dependent on health status? If someone had a terminal cancer, could they still get cash refund or 20 year certain for same payment? If terms were the same, those with shorter expected survival would gravitate towards the guarantees while those most healthy may want to choose the maximum payment for life.

These guarantees are all the same thing, just variations on life insurance. Just like mortgage protection insurance. But they hide factors that can make them more expensive than simple term life insurance. Let's say you could buy $500k life insurance for $200 and you could also buy $500k mortgage protection insurance that pays off your mortgage if you died for $200. The risk event is the same, and the payout looks similar. But 10 or 20 years later, you're still paying $200 for same life insurance $500k, but your mortgage might only be $400k or less. The life annuity with cash refund is a shrinking payout like the mortgage protection insurance, and you're paying $2691-2490=$201/month for it. If you could get a $500k life insurance policy for $201 $253 or less, you're better off with the simple life insurance policy over annuity guarantees. The 20 year certain costs even more, $2691 - 2438 = $253, and pays out less than the $500k term policy unless the annuitant died in the first 3 years.

The cost of 20 year term life insurance is higher than I had expected. For perfect health, it's around $400/month for $500k and $500/month for good health. So it seems the annuity is giving you a fairly good rate on the life insurance component, though I think it's still higher COI/coverage than term life. It's not the same coverage over time and layering 10 and 20 year terms more closely approximates the coverage in the annuity. You can get 10 year term coverage of $500k for under $200/month.
https://www.term4sale.com/cgi-bin/cqsl.cgi

The needs for life insurance generally decrease over time. Some folks advocate increasing life insurance with increasing income, spending and wealth, but that is still countered with generally reduced needs (e.g. kids grow up and get jobs, so no longer need any financial support). With regards to bequest, I have no idea how that should vary with time. Go up? Go down? Stay flat? Go up and down based on some life factors? If someone won't be running out of money, SPIA isn't needed, but can modify the bequest lifetime curve (as can life insurance). Just be sure the costs of the insurance are worth the desired outcomes and that they're being modified in desired ways. I'm not clear on the desired outcomes myself and haven't gotten to a point to worry about it yet.

Are You Worth More Dead Than Alive?
https://www.nytimes.com/2012/08/12/maga ... alive.html

SGM
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Re: Factors Suggesting One Should Buy SPIA

Post by SGM » Thu May 10, 2018 4:18 am

The Wizard wrote:
Wed May 09, 2018 4:25 pm
SGM wrote:
Tue May 08, 2018 11:29 am

...I have converted all my tax deferred accounts to RMDs over a period of about 5 years. This was done while I was either working part-time and still making solo 401k deposits and while retired before taking delayed SS...
Perhaps you meant all tax deferred accounts to Roth IRAs?
Oops. Thank you Wizard. I did mean to write that i converted all tax deferred accounts to Roth IRAs. I corrected my previous post.

bradpevans
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Re: Factors Suggesting One Should Buy SPIA

Post by bradpevans » Thu May 10, 2018 7:09 am

GibsonL6s wrote:
Wed May 09, 2018 11:47 am
I can never understand why anyone would purchase a SPIA without a return of premium or 20 year period certain. The little bit of extra income lost to insure your heirs receive something in the event of an early post purchase demise seem very worth it.
I suspect the SPIA purchase is NOT motivated by the desire to pass money to heirs, but rather:
income smoothing
longevity insurance
and for some, a 'bridge' between early retirement and 70.5/SS/RMDs/Pension start

There would be specific terms in the event of an early demise;
there are also tax implications as early on most of the money
being returned is in fact *your* money.

Tangentially, a SPIA or other annuity doesn't truly have a "rate of return" the way an equity does.

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