Evaluating an Annuity (SPIA)

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Kookaburra
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Evaluating an Annuity (SPIA)

Post by Kookaburra »

Could I get guidance on how to assess an annuity?

Using a hypothetical example, if I receive a proposal to annuitize $100K into $Xk per month of income, how do I know if it’s a good deal in terms of its return?

I’m guessing it has something to do with estimating the year of one’s death and calculating an internal rate of return (IRR) by discounting future cash flows out to the projected year of death? If so, what should one compare the IRR to to make sure it is competitive?

Also, let’s assume it’s a SPIA. I have no idea if SPIA’s are inflation-indexed. If it is, how does that affect the analysis above?
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squirrel1963
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Re: Evaluating an Annuity (SPIA)

Post by squirrel1963 »

You can compare rates on blueprintincome.com to see if it's a good offer.
Keep in mind that an insurance company with a high credit rating will offer you a lower rate than one with a lower credit rating.
Personally I'd split the capital and buy it 2 or 3 SPIA from different companies with a good credit rating.

Most SPIA offers are not adjusted for inflation. I think only one company offers inflation adjustment, but I don't know how much it costs and I also don't know if the company is a good one.

You can do something in the middle and pick a SPIA which has a 3% or 4% annual fixed adjustments. Long term inflation in the US averaged around 3% or so.
LMP | Liability Matching Portfolio | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks
ElGalloRico
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Re: Evaluating an Annuity (SPIA)

Post by ElGalloRico »

This is a great question and I am curious to see what others answer!

Personally, I am thinking that my "in retirement" portfolio (after a massive re-balance) will be a single fund: VASGX and then use a SPIA to complement it.
Postings are my opinion, not financial advice. | Taxable/CC Rewards: VTI-60 | VXUS-30 | VTEB-10 | IRA: AVGE-100 | Tax Deferred: FXAIX-50 | VSIIX-20 | VTIAX-20 | FXNAX-10
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Stinky
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Re: Evaluating an Annuity (SPIA)

Post by Stinky »

Kookaburra wrote: Tue Nov 22, 2022 9:36 pm Could I get guidance on how to assess an annuity?

Using a hypothetical example, if I receive a proposal to annuitize $100K into $Xk per month of income, how do I know if it’s a good deal in terms of its return?

I’m guessing it has something to do with estimating the year of one’s death and calculating an internal rate of return (IRR) by discounting future cash flows out to the projected year of death? If so, what should one compare the IRR to to make sure it is competitive?

Also, let’s assume it’s a SPIA. I have no idea if SPIA’s are inflation-indexed. If it is, how does that affect the analysis above?
You can do an IRR if you’d like. And you could do multiple IRRs, testing the sensitivity of IRR to your date of death.

But the best way to see if the SPIA is competitive is to compare the rates from the company you’re considering to other companies. A form that sells SPIAs from multiple companies like immediateannuities.com or Blueprint Income can give you quotes from many companies.

Few if any SPIAs sold these days are indexed for inflation. Many insurers will allow you to select an annual increase of 2% or 3%. If you elect that option, your initial payment will be lower.
Last edited by Stinky on Tue Nov 22, 2022 10:15 pm, edited 1 time in total.
Retired life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
ElGalloRico
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Re: Evaluating an Annuity (SPIA)

Post by ElGalloRico »

squirrel1963 wrote: Tue Nov 22, 2022 9:45 pm You can compare rates on blueprintincome.com to see if it's a good offer.
Keep in mind that an insurance company with a high credit rating will offer you a lower rate than one with a lower credit rating.
Personally I'd split the capital and buy it 2 or 3 SPIA from different companies with a good credit rating.

Most SPIA offers are not adjusted for inflation. I think only one company offers inflation adjustment, but I don't know how much it costs and I also don't know if the company is a good one.

You can do something in the middle and pick a SPIA which has a 3% or 4% annual fixed adjustments. Long term inflation in the US averaged around 3% or so.
Thanks for the site recommendation! I was surprised to see some SPIA's with 3% inflation increases from accredited places like MassMutual... but boy do the prices go up!
Postings are my opinion, not financial advice. | Taxable/CC Rewards: VTI-60 | VXUS-30 | VTEB-10 | IRA: AVGE-100 | Tax Deferred: FXAIX-50 | VSIIX-20 | VTIAX-20 | FXNAX-10
capjak
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Re: Evaluating an Annuity (SPIA)

Post by capjak »

I check SPIAs on Blueprint/Stan Annuity Man/Immediate Annuity/ several times a week. Rates right now are the highest I have seen in several years.

They are typically the same across platforms.

If you create an account in Blueprint Income and get quotes and than review "details" it will calculate an IRR based on different ages.

Sometimes A+ rated is better than A++ and a few times I have seen A++ very close to A+ or higher.

Right now Penn (A+) seems to be the highest with Northwest and New York Life close for non COLA increases.

If you add a COLA the break even point will be a higher age, a 60 year old male and female Joint policy can get a 3% COLA that has a payout rate sightly above 4.0%. At 4.0% COLA the payout is around 3.8%. Versus a NON COLA of 6.5% Payout rate.

Payout rate includes original premium so do not confuse payout rate with an interest rate return.
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