Factors Suggesting One Should Buy SPIA

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David Jay
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Re: Factors Suggesting One Should Buy SPIA

Post by David Jay » Thu May 10, 2018 7:29 am

bradpevans wrote:
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...
Actually, Taylor Larimore explains that he purchased enough SPIA income to meet his needs/wants and is gifting his kids their inheritance while he is still living.

Why make your kids wait until you die?
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

The Wizard
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Re: Factors Suggesting One Should Buy SPIA

Post by The Wizard » Thu May 10, 2018 7:49 am

bradpevans wrote:
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.
I did Immediate Annuties with TIAA at start of retirement, age 63.
These are lifetime annuities with 10 year guarantee, not 20.
I'm funding seven year gap to start of SS via withdrawals from remaining portfolio.

At age 70, 21 months from now, I should no longer really need to withdraw from portfolio for expenses, just for RMDs.
So in my case, annuitizing a significant part of my original portfolio should allow the remaining part to grow without being spent down...
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bradpevans
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Re: Factors Suggesting One Should Buy SPIA

Post by bradpevans » Thu May 10, 2018 8:01 am

David Jay wrote:
Thu May 10, 2018 7:29 am
bradpevans wrote:
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...
Actually, Taylor Larimore explains that he purchased enough SPIA income to meet his needs/wants and is gifting his kids their inheritance while he is still living.

Why make your kids wait until you die?
There is passing money and then there is passing more money.
The SPIA gives guarantees on the income side, allowing the gifting
to comfortably occur while still living. Totally agree.

I guess I don't view a SPIA as a way to increase the value of one's estate,
which was the basis of my comment.

dbr
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Re: Factors Suggesting One Should Buy SPIA

Post by dbr » Thu May 10, 2018 8:48 am

bradpevans wrote:
Thu May 10, 2018 8:01 am


There is passing money and then there is passing more money.
The SPIA gives guarantees on the income side, allowing the gifting
to comfortably occur while still living. Totally agree.

I guess I don't view a SPIA as a way to increase the value of one's estate,
which was the basis of my comment.
It would have to be looked at. The SPIA might not increase the value of the estate but should increase the certainty that at least a certain amount would be passed on. That is effectively what happens in this case; the legacy is certain because it is accomplished before the giver somehow runs out of money.

Relevant to this thread, an SPIA is a tool for reducing uncertainty, aka risk, but probably not a tool to increase wealth. Any strategy designed to increase wealth also increases uncertainty in some outcomes though may reduce risk of other outcomes, depending.

GibsonL6s
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Re: Factors Suggesting One Should Buy SPIA

Post by GibsonL6s » Thu May 10, 2018 10:45 am

inbox788 wrote:
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
The guaranties are simple minimum payouts to the annuitant and its heirs. Just a way to minimize the risk of annuitizing a portion of your assets and not living long enough to have it be "worthwhile"

inbox788
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Re: Factors Suggesting One Should Buy SPIA

Post by inbox788 » Thu May 10, 2018 11:46 am

GibsonL6s wrote:
Thu May 10, 2018 10:45 am
The guaranties are simple minimum payouts to the annuitant and its heirs. Just a way to minimize the risk of annuitizing a portion of your assets and not living long enough to have it be "worthwhile"
The side options on SPIA are a form of life insurance and price/cost is a lower payout amount. [lifetime payment for limited time benefit! uncovered another hidden cost!] You can take a higher payout and pay for your own life in insurance that might better meet your needs [or choose to stop paying for it]. Are these lower payouts fixed regardless of health status like group life insurance? If so, and you're healthy, it generally means it's not going to be worth buying the option.
The Wizard wrote:
Thu May 10, 2018 7:49 am
I did Immediate Annuties with TIAA at start of retirement, age 63.
These are lifetime annuities with 10 year guarantee, not 20.
I'm funding seven year gap to start of SS via withdrawals from remaining portfolio.

At age 70, 21 months from now, I should no longer really need to withdraw from portfolio for expenses, just for RMDs.
So in my case, annuitizing a significant part of my original portfolio should allow the remaining part to grow without being spent down...
Interesting way to deal with sequence of return risk. What was your AA right before your early retirement? What percentage of your investments did you annuitize? And was is the AA for the remaining portfolio [did it or does it change]?

rgs92
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Re: Factors Suggesting One Should Buy SPIA

Post by rgs92 » Thu May 10, 2018 12:15 pm

As a side issue, does anyone think SPIAs with an annual fixed bump of 1 or 2% (not COLA (inflation) based) are worth it? I know Fidelity has these.
I somehow think the reduced payment in these low-interest environments argues against this and you would be better off re-investing the extra amount each month in some stock-based or balanced account.

Leesbro63
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Re: Factors Suggesting One Should Buy SPIA

Post by Leesbro63 » Thu May 10, 2018 12:56 pm

rgs92 wrote:
Thu May 10, 2018 12:15 pm
As a side issue, does anyone think SPIAs with an annual fixed bump of 1 or 2% (not COLA (inflation) based) are worth it? I know Fidelity has these.
I somehow think the reduced payment in these low-interest environments argues against this and you would be better off re-investing the extra amount each month in some stock-based or balanced account.
Depends on the cost. A 2% bump doesn't really protect against the major risk, which is big inflation.

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Re: Factors Suggesting One Should Buy SPIA

Post by ReadyToRetire » Thu May 10, 2018 1:16 pm

DW has a pension, however it is not COLA adjusted. The rule has since changed at her company, but it used to be that retirees could take a lump sum in lieu of the pension. DW cannot do this. She can take a portion that was grandfathered when the rule was changed as a lump sum, but the majority will be paid out in a non-COLA annuity. She can pass on the cash portion and get a larger annuity, but we are leaning toward taking the cash and the smaller annuity. Our thought was that we could invest the cash portion and 10 to 20 years down the road we could take those funds and at that point purchase a SPIA to augment what by then will be a monthly pension that has been worn away a bit by a couple of decades of inflation.

Of course, as another poster mentioned, by the time 2 decades has passed, we will have been receiving something from Social Security for at least several years. My hope is that the SS pmts will then supplement the now inflation dimished pension payments. But if we need/want a boost to a monthly income, we might purchase a SPIA.

I know next to nothing about them, but has anyone considered a single premium deferred annuity. Fork over the money to an insurance company when you are around 55 - 60 and ask that payments begin when you are 75 - 80? Anyone had any experience? What do you think of these?

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Re: Factors Suggesting One Should Buy SPIA

Post by The Wizard » Thu May 10, 2018 3:59 pm

ReadyToRetire wrote:
Thu May 10, 2018 1:16 pm

...I know next to nothing about them, but has anyone considered a single premium deferred annuity. Fork over the money to an insurance company when you are around 55 - 60 and ask that payments begin when you are 75 - 80? Anyone had any experience? What do you think of these?
I would not do one of those deferred annuities.
I would just just invest that particular money at age 55 at least 50% in stock funds and let it double, triple, or more over the next 20 years.
Then if I wanted more income at age 75 and was in decent health, I would annuitize a portion for lifetime income starting the following month...
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gilgamesh
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Re: Factors Suggesting One Should Buy SPIA

Post by gilgamesh » Thu May 10, 2018 7:51 pm

The Wizard wrote:
Thu May 10, 2018 7:49 am
bradpevans wrote:
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.
I did Immediate Annuties with TIAA at start of retirement, age 63.
These are lifetime annuities with 10 year guarantee, not 20.
I'm funding seven year gap to start of SS via withdrawals from remaining portfolio.

At age 70, 21 months from now, I should no longer really need to withdraw from portfolio for expenses, just for RMDs.
So in my case, annuitizing a significant part of my original portfolio should allow the remaining part to grow without being spent down...
Question,...when you annutize at a young age like 63, shouldn’t one consider inflation risks? In 15-20 years annuity payments may not be sufficient. Are you planning to use your portfolio for the extra funds or an SPIA ladder purchased later, or something else?

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Taylor Larimore
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Re: Factors Suggesting One Should Buy SPIA

Post by Taylor Larimore » Thu May 10, 2018 9:18 pm

Question,...when you annuitize at a young age like 63, shouldn’t one consider inflation risks? In 15-20 years annuity payments may not be sufficient. Are you planning to use your portfolio for the extra funds or an SPIA ladder purchased later, or something else?
gilgamesh:

In my view, it is best to wait until around age 80 before purchasing an Single Premium Immediate Annuity (SPIA) for these reasons:

* You might need the cash for an emergency.
* If your health deteriorates an annuity is usually a bad choice.
* Life income is larger or premium less.
* Inflation is less of a factor which allows an expensive "inflation rider" to be avoided.
* Current low interest rates may become higher which will make payments higher.
* If you wait, your portfolio becomes larger and you might not want or need an annuity.

This study concludes it is better to wait until the mid-70s or mid-80s before purchasing a SPIA:

https://papers.ssrn.com/sol3/papers.cfm ... _id=289548

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

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Taylor Larimore
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Re: Factors Suggesting One Should Buy SPIA

Post by Taylor Larimore » Thu May 10, 2018 9:22 pm

Taylor Larimore wrote:
Thu May 10, 2018 9:18 pm
Question,...when you annuitize at a young age like 63, shouldn’t one consider inflation risks? In 15-20 years annuity payments may not be sufficient. Are you planning to use your portfolio for the extra funds or an SPIA ladder purchased later, or something else?
gilgamesh:

In my view, it is best to wait until around age 80 before purchasing an Single Premium Immediate Annuity (SPIA) for these reasons:

* You might die within the next 17 years.
* You might need the cash for an emergency.
* If your health deteriorates an annuity is usually a bad choice.
* Life income is larger or premium less.
* Inflation is less of a factor which allows an expensive "inflation rider" to be avoided.
* Current low interest rates may become higher which will make payments higher.
* If you wait, your portfolio becomes larger and you might not want or need an annuity.

This study concludes it is better to wait until the mid-70s or mid-80s before purchasing a SPIA:

https://papers.ssrn.com/sol3/papers.cfm ... _id=289548

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

gilgamesh
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Re: Factors Suggesting One Should Buy SPIA

Post by gilgamesh » Fri May 11, 2018 6:29 am

Taylor Larimore wrote:
Thu May 10, 2018 9:18 pm
Question,...when you annuitize at a young age like 63, shouldn’t one consider inflation risks? In 15-20 years annuity payments may not be sufficient. Are you planning to use your portfolio for the extra funds or an SPIA ladder purchased later, or something else?
gilgamesh:

In my view, it is best to wait until around age 80 before purchasing an Single Premium Immediate Annuity (SPIA) for these reasons:

* You might need the cash for an emergency.
* If your health deteriorates an annuity is usually a bad choice.
* Life income is larger or premium less.
* Inflation is less of a factor which allows an expensive "inflation rider" to be avoided.
* Current low interest rates may become higher which will make payments higher.
* If you wait, your portfolio becomes larger and you might not want or need an annuity.

This study concludes it is better to wait until the mid-70s or mid-80s before purchasing a SPIA:

https://papers.ssrn.com/sol3/papers.cfm ... _id=289548

Best wishes.
Taylor
Taylor, thank you for the response.

My written plan involves a possible SPIA purchase at age 80. I'm glad you agree with that. I was just curious what the poster who purchased one at age 63 will do at age 80.

My future retirement income stream involves a floor income for basic needs and a side portfolio. After age 80 SPIA will replace TIPS/CD (until age 80 I would value the liquidity of these over mortality credit of an SPIA) as a floor on top of SS.

That paper was too complicated, even though the abstract and conclusions were easy to comprehend. Age 80 just made sense to me for many of the reasons you cited.

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Re: Factors Suggesting One Should Buy SPIA

Post by The Wizard » Fri May 11, 2018 7:41 am

gilgamesh wrote:
Thu May 10, 2018 7:51 pm
Question,...when you annutize at a young age like 63, shouldn’t one consider inflation risks? In 15-20 years annuity payments may not be sufficient. Are you planning to use your portfolio for the extra funds or an SPIA ladder purchased later, or something else?
Good question.
It turns out that only part of my immediate annuities with TIAA are the "fixed" type comparable to an SPIA, meaning TIAA Traditional.
The majority of my annuity income is variable and based on either commercial real estate or the broad stock market, both of which are "likely" to provide some inflation protection over the long run.

Right now, I'm looking at a significant increase in safe income when age 70 SS starts in 22 months, so inflation will be a non issue for the next few years.
Beyond that, I have the option of annuitizing an additional increment from my portfolio or simply spending part of my RMDs rather than reinvesting them, as I presently plan to.

A more general reply, for people who don't have access to TIAA and/or are averse to "good" variable annuities, is that one can "ladder" SPIAs.
Start with $2M, say.
Annuitize $500k at age 65.
Annuitize an additional $100k every five years, so long as your health is reasonably good.
Something like this should work, adjusted to your particular cash flow needs...
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Tal-
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Re: Factors Suggesting One Should Buy SPIA

Post by Tal- » Fri May 11, 2018 8:08 am

dbr wrote:
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.
I haven't read the book, but I'm interested in this logic. Consider an easy example: A 62 year old male with 1M in assets and 40K income needs.

In theory, he could generate inflation-adjusted income for life using the 4% rule with a stock/bond allocation. And, in theory, a SPIA will produce less lifetime income than a stock/bond allocation. So, wouldn't taking part of the $1M and buying a SPIA put additional strain on the remaining stock/bond allocation, and create a higher probability of failure over his lifetime?

I had always thought that a SPIA made sense when you had moderately over-saved - where you had enough money that you didn't need to be fully efficient with your assets, but not so much that you felt 100% psychologically secure in your finances. But, it sounds like Jim Otar would disagree, and I'm curious as to the logic.
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Re: Factors Suggesting One Should Buy SPIA

Post by dbr » Fri May 11, 2018 8:20 am

Tal- wrote:
Fri May 11, 2018 8:08 am
dbr wrote:
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.
I haven't read the book, but I'm interested in this logic. Consider an easy example: A 62 year old male with 1M in assets and 40K income needs.

In theory, he could generate inflation-adjusted income for life using the 4% rule with a stock/bond allocation. And, in theory, a SPIA will produce less lifetime income than a stock/bond allocation. So, wouldn't taking part of the $1M and buying a SPIA put additional strain on the remaining stock/bond allocation, and create a higher probability of failure over his lifetime?

I had always thought that a SPIA made sense when you had moderately over-saved - where you had enough money that you didn't need to be fully efficient with your assets, but not so much that you felt 100% psychologically secure in your finances. But, it sounds like Jim Otar would disagree, and I'm curious as to the logic.
Presumably the math is that the SPIA produces more than 4% and lasts for the actual lifetime for sure. An SPIA today for a 62 year old pays out 6% and at age 70, if the investors waits a bit, pays out over 7%. And that is at today's rather poor interest rates. I think the real dilemma is inflation because at this time inflation indexed SPIAs probably can't be had that produce more than 4% inflation indexed, which is the comparison you want to make. The other issue is when to buy the SPIA or to buy more than one over time. Wade Pfau also wrote an article on that.

But I will grant you trying to compare the merits of plans that are very different in a lot of basic properties is hard to do.

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Re: Factors Suggesting One Should Buy SPIA

Post by naha66 » Fri May 11, 2018 8:31 am

The Wizard wrote:
Thu May 10, 2018 7:49 am
bradpevans wrote:
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.
I did Immediate Annuties with TIAA at start of retirement, age 63.
These are lifetime annuities with 10 year guarantee, not 20.
I'm funding seven year gap to start of SS via withdrawals from remaining portfolio.

At age 70, 21 months from now, I should no longer really need to withdraw from portfolio for expenses, just for RMDs.
So in my case, annuitizing a significant part of my original portfolio should allow the remaining part to grow without being spent down...
Maybe TIAA doesn't have life with 20 year certain, Immediate annuities does give quotes for life plus 20 certain.

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Re: Factors Suggesting One Should Buy SPIA

Post by The Wizard » Fri May 11, 2018 8:32 am

Tal- wrote:
Fri May 11, 2018 8:08 am

...I had always thought that a SPIA made sense when you had moderately over-saved - where you had enough money that you didn't need to be fully efficient with your assets, but not so much that you felt 100% psychologically secure in your finances. But, it sounds like Jim Otar would disagree, and I'm curious as to the logic.
You can probably read his theory on his website, with the colored chart of green, gray, and red financial situations.

I don't totally agree with Otar's logic either, specifically as regards the "need" to annuitize. I was definitely in his green zone at start of retirement, but I focused more on my "desired" income rather than just enough income to cover expenses.

So by annuitizing a significant portion of my tax sheltered portfolio, I'm able to achieve somewhat higher net income in retirement than when working without needing to withdraw from remaining portfolio. In fact, I have excess income most months piling up in my taxable account, but much of that is targeted for my next new car.

Now I could ramp up expenses more by flying business class and buying new cars sooner, but I'm still okay with flying coach and keeping cars 10+ years...
Last edited by The Wizard on Fri May 11, 2018 8:39 am, edited 1 time in total.
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Re: Factors Suggesting One Should Buy SPIA

Post by The Wizard » Fri May 11, 2018 8:38 am

naha66 wrote:
Fri May 11, 2018 8:31 am

Maybe TIAA doesn't have life with 20 year certain, Immediate annuities does give quotes for life plus 20 certain.
TIAA does have a 20-year guarantee option, but I don't really recommend it, especially for older annuitants. You lose a fair amount of monthly income going out that far, essentially losing most of the mortality credits...
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Taylor Larimore
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History of Lifetime Annuities

Post by Taylor Larimore » Fri May 11, 2018 8:39 am

Bogleheads:

The theory behind a lifetime income annuity (SPIA) is simple and makes sense: The savings from those who die early is used to supplement the savings of those who die late.

According to Investopedia, the annuity's evolution has been long and continues as part of actuarial science. Ulpian is credited with generating an actuarial life annuity table between AD 211 and 222.[2] Medieval German and Dutch cities and monasteries raised money by the sale of life annuities.

Best wishes.
Taylor
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Re: Factors Suggesting One Should Buy SPIA

Post by CWRadio » Fri May 11, 2018 9:27 am

I just came across this article I would like to share with the group. It is about how Annuities Can Help or Harm Medicaid Eligibility.
https://www.fa-mag.com/news/annuities-c ... 38629.html

Paul

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Re: Factors Suggesting One Should Buy SPIA

Post by The Wizard » Fri May 11, 2018 9:47 am

CWRadio wrote:
Fri May 11, 2018 9:27 am
I just came across this article I would like to share with the group. It is about how Annuities Can Help or Harm Medicaid Eligibility.
https://www.fa-mag.com/news/annuities-c ... 38629.html

Paul
Interesting article, but probably 90%+ of the forum members are likely to be nowhere close to low income Medicaid qualification.
But some might have relatives to whom this info would apply...
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Re: Factors Suggesting One Should Buy SPIA

Post by Leesbro63 » Fri May 11, 2018 10:02 am

If annuity income limits or prevents Medicaid, so what? The person or nursing home will just get income from the annuity instead of Medicaid.

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Re: Factors Suggesting One Should Buy SPIA

Post by Nate79 » Fri May 11, 2018 10:14 am

I disagree with the general statement that SPIA is "longevity insurance". While it certainly assures that you will have some money coming in every month but it doesn't guarantee at all that that money will actually buy anything. Inflation is the enemy. A long enough period of inflation and your so called insurance could be worthless. Same for "income floor". Now if they actually sold inflation adjusted SPIA it would be another story.

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SPIAs and inflation?

Post by Taylor Larimore » Fri May 11, 2018 10:31 am

Nate79 wrote:
Fri May 11, 2018 10:14 am
I disagree with the general statement that SPIA is "longevity insurance". While it certainly assures that you will have some money coming in every month but it doesn't guarantee at all that that money will actually buy anything. Inflation is the enemy. A long enough period of inflation and your so called insurance could be worthless. Same for "income floor". Now if they actually sold inflation adjusted SPIA it would be another story.
Nate79:

You are right, "inflation is the enemy." It is also the "enemy" of any investment portfolio.

We can, of course, buy inflation-adjusted annuities, but I think the increased premium is not worth it. This is the primary reason I believe we should wait until around 80 years old before purchasing a SPIA (the only good annuity).

Read my last post above.

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

dbr
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Re: Factors Suggesting One Should Buy SPIA

Post by dbr » Fri May 11, 2018 2:52 pm

Nate79 wrote:
Fri May 11, 2018 10:14 am
I disagree with the general statement that SPIA is "longevity insurance". While it certainly assures that you will have some money coming in every month but it doesn't guarantee at all that that money will actually buy anything. Inflation is the enemy. A long enough period of inflation and your so called insurance could be worthless. Same for "income floor". Now if they actually sold inflation adjusted SPIA it would be another story.
It is very important to consider the system as a whole. Taylor has mentioned the purchase of more than one annuity and at different ages, typically fairly advanced. It is still true that an SPIA itself has a longevity insurance characteristic. Another way of mentioning that is to understand pooled risk or what are called mortality credits. Against that inflation is a risk. However, the proposition that a fixed annuity might buy nothing is hyperbole as is using terminology such as "worthless." There is such a thing as an inflation indexed SPIA and the problem is that the pricing is not favorable. Of course the one inflation indexed annuity that does exist is SS, and one can maximize that by delaying as long as possible to start collecting benefits. In some instances people have fixed annuities willy-nilly, such as a fixed pension. A fixed pension is not "worthless" but it does impose a problem on the system that as time goes on income from other sources must increase faster than inflation to keep the total on line.

gilgamesh
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Re: Factors Suggesting One Should Buy SPIA

Post by gilgamesh » Fri May 11, 2018 3:04 pm

Nate79 wrote:
Fri May 11, 2018 10:14 am
I disagree with the general statement that SPIA is "longevity insurance". While it certainly assures that you will have some money coming in every month but it doesn't guarantee at all that that money will actually buy anything. Inflation is the enemy. A long enough period of inflation and your so called insurance could be worthless. Same for "income floor". Now if they actually sold inflation adjusted SPIA it would be another story.
Not true...TIPS are inflation protected. You can argue about the nuances in the definition of inflation, but by defintion it’s an inflation protected USA treasury security.

There are inflation protected SPIA’s too, although their cost typically doesn’t warrant their purchase. A SPIA ladder is probably more prudent - but with higher inflation risk, of course.

Salaries and pensions don’t necessarily adjust to outrageous inflation either...there is comfort in defined benefit plans (pension) and a “stable jobs”, even though they don’t always adjust to outrageous inflation.

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Re: Factors Suggesting One Should Buy SPIA

Post by Leesbro63 » Fri May 11, 2018 3:19 pm

gilgamesh wrote:
Fri May 11, 2018 3:04 pm
Not true...TIPS are inflation protected. You can argue about the nuances in the definition of inflation, but by defintion it’s an inflation protected USA treasury security.
But for taxable accounts, even TIPS are subject to "taxflation" if the very thing TIPS insures against ever comes rip-roaring back.

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Re: Factors Suggesting One Should Buy SPIA

Post by Nate79 » Fri May 11, 2018 4:38 pm

gilgamesh wrote:
Fri May 11, 2018 3:04 pm
Nate79 wrote:
Fri May 11, 2018 10:14 am
I disagree with the general statement that SPIA is "longevity insurance". While it certainly assures that you will have some money coming in every month but it doesn't guarantee at all that that money will actually buy anything. Inflation is the enemy. A long enough period of inflation and your so called insurance could be worthless. Same for "income floor". Now if they actually sold inflation adjusted SPIA it would be another story.
Not true...TIPS are inflation protected. You can argue about the nuances in the definition of inflation, but by defintion it’s an inflation protected USA treasury security.

There are inflation protected SPIA’s too, although their cost typically doesn’t warrant their purchase. A SPIA ladder is probably more prudent - but with higher inflation risk, of course.

Salaries and pensions don’t necessarily adjust to outrageous inflation either...there is comfort in defined benefit plans (pension) and a “stable jobs”, even though they don’t always adjust to outrageous inflation.
The reference to "income floor" was calling an SPIA an income floor which is dubious considering your floor is sinking below your feet as inflation slowly takes your spending power away.

The point of the statement saying "longevity insurance" is to provide a way to not run out of money. The problem is this statement glosses over the fact that the purchasing power near the end may be 1/2 to 1/4th of the initial based on historical average inflation rates (using CPI historical rates).

That's some pretty poor "insurance." As an example suppose you purchased $1000/month of SPIA by 30 years it could be worth anywhere from $250-500/month based on typical historical inflation rates over 30 years periods. And this is based on historical average inflation rates, it says nothing about what could happen as worst case. If worst case happens the "insurance" you purchased could be worth even less.

99% of the talk about SPIA's on here are not inflation protected which is why I bring up this risk and point out the poor choice of wording that goes to describe these products.

How is this protecting anything????

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Re: SPIAs and inflation?

Post by Nate79 » Fri May 11, 2018 4:44 pm

Taylor Larimore wrote:
Fri May 11, 2018 10:31 am
Nate79 wrote:
Fri May 11, 2018 10:14 am
I disagree with the general statement that SPIA is "longevity insurance". While it certainly assures that you will have some money coming in every month but it doesn't guarantee at all that that money will actually buy anything. Inflation is the enemy. A long enough period of inflation and your so called insurance could be worthless. Same for "income floor". Now if they actually sold inflation adjusted SPIA it would be another story.
Nate79:

You are right, "inflation is the enemy." It is also the "enemy" of any investment portfolio.

We can, of course, buy inflation-adjusted annuities, but I think the increased premium is not worth it. This is the primary reason I believe we should wait until around 80 years old before purchasing a SPIA (the only good annuity).

Read my last post above.

Best wishes
Taylor
Certainly it is true that the less number of years that your SPIA is subjected to inflation the less it will be deflated. However, that is still rolling the dice. As an example, the average CPI for 1960-1965 was very low, about ~1.3% You would have been thinking, man, inflation is really low so no worries. You turn 80 and buy an SPIA in 1966. Average inflation for 1966-1975 was ~5.8%.

(These are just illustrative of inflation numbers per year. I have no idea how much an SPIA would have returned over those periods of time or if they were even available then.)

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Re: Factors Suggesting One Should Buy SPIA

Post by dbr » Fri May 11, 2018 4:45 pm

Nate79 wrote:
Fri May 11, 2018 4:38 pm
gilgamesh wrote:
Fri May 11, 2018 3:04 pm
Nate79 wrote:
Fri May 11, 2018 10:14 am
I disagree with the general statement that SPIA is "longevity insurance". While it certainly assures that you will have some money coming in every month but it doesn't guarantee at all that that money will actually buy anything. Inflation is the enemy. A long enough period of inflation and your so called insurance could be worthless. Same for "income floor". Now if they actually sold inflation adjusted SPIA it would be another story.
Not true...TIPS are inflation protected. You can argue about the nuances in the definition of inflation, but by defintion it’s an inflation protected USA treasury security.

There are inflation protected SPIA’s too, although their cost typically doesn’t warrant their purchase. A SPIA ladder is probably more prudent - but with higher inflation risk, of course.

Salaries and pensions don’t necessarily adjust to outrageous inflation either...there is comfort in defined benefit plans (pension) and a “stable jobs”, even though they don’t always adjust to outrageous inflation.
The reference to "income floor" was calling an SPIA an income floor which is dubious considering your floor is sinking below your feet as inflation slowly takes your spending power away.

The point of the statement saying "longevity insurance" is to provide a way to not run out of money. The problem is this statement glosses over the fact that the purchasing power near the end may be 1/2 to 1/4th of the initial based on historical average inflation rates (using CPI historical rates).

That's some pretty poor "insurance." As an example suppose you purchased $1000/month of SPIA by 30 years it could be worth anywhere from $250-500/month based on typical historical inflation rates over 30 years periods. And this is based on historical average inflation rates, it says nothing about what could happen as worst case. If worst case happens the "insurance" you purchased could be worth even less.

99% of the talk about SPIA's on here are not inflation protected which is why I bring up this risk and point out the poor choice of wording that goes to describe these products.

How is this protecting anything????
As I recall the suggestion by Pfau is that the proper pairing is SPIA with equities in comparison to bonds with equities. Bonds also have the issue of inflation unless they are TIPS.

No one (well me anyway) is making light of the serious risk of inflation to retirees.

It is still true that an income stream that is there until death even when we don't know when that will be and participates in pooled risk has advantages.

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Re: Factors Suggesting One Should Buy SPIA

Post by stlutz » Sat May 12, 2018 12:14 am

As I recall the suggestion by Pfau is that the proper pairing is SPIA with equities in comparison to bonds with equities
This is where annuities can get interesting is as a fixed-income alternative.

Just for fun I thought I'd try disregarding Taylor's advice and considered a 50 year old couple who decided to go for super-early retirement and bought an annuity for some income.

According to the Schwab annuity calculator, they can a "life with cash refund" annuity that has a payout rate of 4.69% per year.

If they instead took that lump and invested in bonds and wanted that money to last until age 95, their bond portfolio would need to yield 3.8% (according to the Excel PMT function) in order to get an equivalent payout. The total bond fund right now only yields about 3%. So the annuity isn't that bad of a deal even in the situation where annuities are supposed to be a bad deal.

Regarding inflation, I agree with Taylor that the inflation protection is quite expensive. A better way to handle it would be to buy a SPIA that gives you a higher payout than you really want to start and you invest the difference. As the real value of the annuity payout declines, you supplement with your savings.

There are enough other assets that keep up with inflation. If an annuity is part of a balanced approach to retirement income, the expensive inflation in the annuity contract isn't really necessary.

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Re: Factors Suggesting One Should Buy SPIA

Post by The Wizard » Sat May 12, 2018 5:41 am

Nate79 wrote:
Fri May 11, 2018 4:38 pm

...99% of the talk about SPIA's on here are not inflation protected which is why I bring up this risk and point out the poor choice of wording that goes to describe these products.

How is this protecting anything????
This is the reason that the majority of my immediate annuity income is variable, based on commercial real estate and the stock market. This approach stands a better chance of keeping up with inflation as time goes on...
Attempted new signature...

gilgamesh
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Re: Factors Suggesting One Should Buy SPIA

Post by gilgamesh » Sat May 12, 2018 6:11 am

Nate79 wrote:
Fri May 11, 2018 4:38 pm
gilgamesh wrote:
Fri May 11, 2018 3:04 pm
Nate79 wrote:
Fri May 11, 2018 10:14 am
I disagree with the general statement that SPIA is "longevity insurance". While it certainly assures that you will have some money coming in every month but it doesn't guarantee at all that that money will actually buy anything. Inflation is the enemy. A long enough period of inflation and your so called insurance could be worthless. Same for "income floor". Now if they actually sold inflation adjusted SPIA it would be another story.
Not true...TIPS are inflation protected. You can argue about the nuances in the definition of inflation, but by defintion it’s an inflation protected USA treasury security.

There are inflation protected SPIA’s too, although their cost typically doesn’t warrant their purchase. A SPIA ladder is probably more prudent - but with higher inflation risk, of course.

Salaries and pensions don’t necessarily adjust to outrageous inflation either...there is comfort in defined benefit plans (pension) and a “stable jobs”, even though they don’t always adjust to outrageous inflation.
The reference to "income floor" was calling an SPIA an income floor which is dubious considering your floor is sinking below your feet as inflation slowly takes your spending power away.

The point of the statement saying "longevity insurance" is to provide a way to not run out of money. The problem is this statement glosses over the fact that the purchasing power near the end may be 1/2 to 1/4th of the initial based on historical average inflation rates (using CPI historical rates).

That's some pretty poor "insurance." As an example suppose you purchased $1000/month of SPIA by 30 years it could be worth anywhere from $250-500/month based on typical historical inflation rates over 30 years periods. And this is based on historical average inflation rates, it says nothing about what could happen as worst case. If worst case happens the "insurance" you purchased could be worth even less.

99% of the talk about SPIA's on here are not inflation protected which is why I bring up this risk and point out the poor choice of wording that goes to describe these products.

How is this protecting anything????
Sounds like I misunderstood your initial statement. I thought you were saying any income floor concept won’t work due to inflation. You meant an SPIA couldn’t be a robust income floor in the long term due to inflation - true.

gilgamesh
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Re: Factors Suggesting One Should Buy SPIA

Post by gilgamesh » Sat May 12, 2018 6:22 am

Leesbro63 wrote:
Fri May 11, 2018 3:19 pm
gilgamesh wrote:
Fri May 11, 2018 3:04 pm
Not true...TIPS are inflation protected. You can argue about the nuances in the definition of inflation, but by defintion it’s an inflation protected USA treasury security.
But for taxable accounts, even TIPS are subject to "taxflation" if the very thing TIPS insures against ever comes rip-roaring back.
Yes! I’ve read that explanation in other threads and I agree. TIPS are better kept in retirement accounts to avoid phantom income.

dbr
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Re: Factors Suggesting One Should Buy SPIA

Post by dbr » Sat May 12, 2018 8:34 am

gilgamesh wrote:
Sat May 12, 2018 6:22 am
Leesbro63 wrote:
Fri May 11, 2018 3:19 pm
gilgamesh wrote:
Fri May 11, 2018 3:04 pm
Not true...TIPS are inflation protected. You can argue about the nuances in the definition of inflation, but by defintion it’s an inflation protected USA treasury security.
But for taxable accounts, even TIPS are subject to "taxflation" if the very thing TIPS insures against ever comes rip-roaring back.
Yes! I’ve read that explanation in other threads and I agree. TIPS are better kept in retirement accounts to avoid phantom income.
Taxflation and "phantom income" are two completely different things. Taxflation, if it should be a problem, is not helped by holding TIPS in a tax deferred account because you pay the inflated tax to be able to spend the return no matter where the TIPS are held. "Phantom income" will not create a tax bill when held in tax deferred accounts, but this is not a tax problem but a cash flow issue that might matter in certain situations but not in general. Note that TIPS bond funds do not have a phantom income problem. Also note that TIPS and all Treasuries are more tax efficient than other bonds except tax exempt because they are exempt from state income tax.

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Re: Factors Suggesting One Should Buy SPIA

Post by antiqueman » Sun May 13, 2018 9:22 am

I am the original poster. Thank you all for your replies. If others have comments I hope they will post them.

Mike

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Re: Factors Suggesting One Should Buy SPIA

Post by grabiner » Sun May 13, 2018 7:16 pm

stlutz wrote:
Sat May 12, 2018 12:14 am
As I recall the suggestion by Pfau is that the proper pairing is SPIA with equities in comparison to bonds with equities
This is where annuities can get interesting is as a fixed-income alternative.

Just for fun I thought I'd try disregarding Taylor's advice and considered a 50 year old couple who decided to go for super-early retirement and bought an annuity for some income.

According to the Schwab annuity calculator, they can a "life with cash refund" annuity that has a payout rate of 4.69% per year.

If they instead took that lump and invested in bonds and wanted that money to last until age 95, their bond portfolio would need to yield 3.8% (according to the Excel PMT function) in order to get an equivalent payout. The total bond fund right now only yields about 3%. So the annuity isn't that bad of a deal even in the situation where annuities are supposed to be a bad deal.
This is the wrong bond fund for comparison. A bond portfolio designed to last 45 years has a duration of about 20 years, depending on interest rates. Vanguard Long-Term Bond Index is the closest comparison; it has a 3.88% yield with a 15-year duration.

The problem with either of these investments is the risk of inflation. Getting a guaranteed income of $5000 per month in 2063 if you are still alive then isn't very useful, because you have no idea what $5000 will buy. The long-term bonds in the index have the same problem; a bond whichwill pay $1000 at maturity in 30 years has an unknown real value.
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Re: Factors Suggesting One Should Buy SPIA

Post by capjak » Sun May 13, 2018 9:08 pm

Michael McClung's Living off your money has a lengthy description of when it may be beneficial to underpin systematic withdrawals with guaranteed income. However the majority of his discussion is in regards to "inflation adjusted" SPIAs.
To get the details and several case studies, I would recommend purchasing/reading his book as I could not possibly accurately summarize.

There is a separate thread evaluating some of the analysis in that book.


For me I am not adverse to Guaranteed Income SPIA nor am I concerned with a reduced bequest. Also I do not believe the downside to a SPIA is that adverse if spread out over time and in smaller increments. It appears to be an efficient way to simply generate an income stream with little on going monitoring and will serve as a Fixed Income replacement for a precent of total Fixed Income assets. If purchased over several years the impact of inflation can be reduced (if purchasing non CPI linked SPIA, right now I think Purdential is the only one selling CPI linked several sell 0 to 5% annual increase SPIA but all seem expensive vs a non adjusted SPIA).

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Re: Factors Suggesting One Should Buy SPIA

Post by CWRadio » Wed May 16, 2018 8:31 am

Would it make sense to have ApoE Genetic Test for Alzheimer’s and Cardiac Risk before buying a SPIA?
Paul

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