Annuities are a bet on future inflation rates and should not be purchased by retirees

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randomguy
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by randomguy » Fri Jun 07, 2019 9:22 am

longinvest wrote:
Fri Jun 07, 2019 8:59 am
The Oblivious Investor article doesn't mention the Federal Reserve's 2% inflation target.

As I wrote earlier, I'm of the opinion that, in absence of a competitively-priced CPI-indexed annuity, a 2%-indexed annuity is a good enough alternative to insure a base of stable lifelong income (in addition to Social Security) when the Federal Reserve communicates its intention to keep inflation on a 2% target to allow the public "to make accurate longer-term economic and financial decisions".
We are going to debate good enough for ever given the lack of unexpected inflation protection the 2% COLA provides. But lets not ignore that there is also the normal case where the COLA does fine. Inflation averages 1-3% for 30 years and at 95, the COLA is getting the same real amount of money while the person who picked the flat payout has to figure out how to deal with the income decline. Making the normal case work out fine is pretty nice even if it doesn't help in the worst case results.

randomguy
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by randomguy » Fri Jun 07, 2019 9:32 am

azanon wrote:
Fri Jun 07, 2019 9:17 am
I apologize upfront if you guys already knew this (and I only had time to scan the thread), but was this article by chance a response to David Blanchett's article at the same site entitled: "Inflation-Linked SPIAs Are a Bad Deal" published 5/20/19(link: https://www.advisorperspectives.com/art ... a-bad-deal )

So David (PhD, CFA, CFP® is the head of retirement research for Morningstar Investment Management LLC.), says SPIAs linked to inflation don't make sense for the vast majority of retirees.
It is all about if you believe inflation will happen. If we only get 2-3% inflation, the real SPIAs make no sense. Get a decade of 5%+, and everyone will talk about how great they are. You are paying for risk protection. If the risk doesn't show up, you should expect to lose money. Now maybe they are charging too much for the protection but I am not sure anyone can tell you if it is a 1% or 10% chance of high inflation showing up over the next 40 years.

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CULater
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by CULater » Fri Jun 07, 2019 9:44 am

randomguy wrote:
Fri Jun 07, 2019 9:22 am
longinvest wrote:
Fri Jun 07, 2019 8:59 am
The Oblivious Investor article doesn't mention the Federal Reserve's 2% inflation target.

As I wrote earlier, I'm of the opinion that, in absence of a competitively-priced CPI-indexed annuity, a 2%-indexed annuity is a good enough alternative to insure a base of stable lifelong income (in addition to Social Security) when the Federal Reserve communicates its intention to keep inflation on a 2% target to allow the public "to make accurate longer-term economic and financial decisions".
We are going to debate good enough for ever given the lack of unexpected inflation protection the 2% COLA provides. But lets not ignore that there is also the normal case where the COLA does fine. Inflation averages 1-3% for 30 years and at 95, the COLA is getting the same real amount of money while the person who picked the flat payout has to figure out how to deal with the income decline. Making the normal case work out fine is pretty nice even if it doesn't help in the worst case results.
Here's the thing. According to Mike Piper's table in Oblivious Investor, an annuity with a fixed 2% COLA doesn't actually begin outperforming a nominal annuity if there is < 3% annual inflation until the person is 88 years old, and then it doesn't outperform by much. The payments are backloaded, so you are foregoing some payout amounts until you are almost 90 years old in exchange for the benefit of higher payout amounts when you are drooling in your teacup in a nursing home somewhere. And the rub is that if inflation is actually higher, you receive even less benefit from the annuity with 2% COLA. Since we don't know what inflation will turn out to be, the fixed COLA annuity is no better than the nominal annuity in terms of inflation.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

longinvest
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by longinvest » Fri Jun 07, 2019 9:51 am

I'll consider buying a joint inflation-indexed SPIA* around age 80 (for my wife and I) with part of our portfolio when the payout starts competing with VPW Table percentages, if necessary to dampen the financial risk of living beyond age 100.

I can't imagine laddering nominal SPIAs starting at age 80. For one thing, I wouldn't want the hassle. For another, insurers stop offering cost-effective SPIAs in older ages; the risk is too high for them.

* Single Premium Immediate Annuity.
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randomguy
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by randomguy » Fri Jun 07, 2019 10:03 am

CULater wrote:
Fri Jun 07, 2019 9:44 am
randomguy wrote:
Fri Jun 07, 2019 9:22 am
longinvest wrote:
Fri Jun 07, 2019 8:59 am
The Oblivious Investor article doesn't mention the Federal Reserve's 2% inflation target.

As I wrote earlier, I'm of the opinion that, in absence of a competitively-priced CPI-indexed annuity, a 2%-indexed annuity is a good enough alternative to insure a base of stable lifelong income (in addition to Social Security) when the Federal Reserve communicates its intention to keep inflation on a 2% target to allow the public "to make accurate longer-term economic and financial decisions".
We are going to debate good enough for ever given the lack of unexpected inflation protection the 2% COLA provides. But lets not ignore that there is also the normal case where the COLA does fine. Inflation averages 1-3% for 30 years and at 95, the COLA is getting the same real amount of money while the person who picked the flat payout has to figure out how to deal with the income decline. Making the normal case work out fine is pretty nice even if it doesn't help in the worst case results.
Here's the thing. According to Mike Piper's table in Oblivious Investor, an annuity with a fixed 2% COLA doesn't actually begin outperforming a nominal annuity if there is < 3% annual inflation until the person is 88 years old, and then it doesn't outperform by much. The payments are backloaded, so you are foregoing some payout amounts until you are almost 90 years old in exchange for the benefit of higher payout amounts when you are drooling in your teacup in a nursing home somewhere. And the rub is that if inflation is actually higher, you receive even less benefit from the annuity with 2% COLA. Since we don't know what inflation will turn out to be, the fixed COLA annuity is no better than the nominal annuity in terms of inflation.
See I read that and that is exactly what I expect and want. If the 2% beat nominal at 85, it would be too good of deal. I am buying an annuity for my 90-100 years and it is good that it will be generating the income I want when I want it. Could I get similar results by buying the nominal and buying more annuities over time with the added money? Maybe. But I am taking on risk of not being able to buy what I need (say rates plummet) AND I am also complicating my life by having to deal with buying a bunch of products.

I wouldn't expect much different between a 2% COLA and a nominal product. They both have the same amount of money to split up among the buyers and they just do it in slightly different ways. You pick the distribution that meets your needs. For a lot of people the decline of a nominal SPIA isn't a big because as you say when you 88 and drooling in a tea cup, you don't need money to travel to europe:)

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by Leesbro63 » Fri Jun 07, 2019 10:49 am

randomguy wrote:
Fri Jun 07, 2019 10:03 am
CULater wrote:
Fri Jun 07, 2019 9:44 am
randomguy wrote:
Fri Jun 07, 2019 9:22 am
longinvest wrote:
Fri Jun 07, 2019 8:59 am
The Oblivious Investor article doesn't mention the Federal Reserve's 2% inflation target.

As I wrote earlier, I'm of the opinion that, in absence of a competitively-priced CPI-indexed annuity, a 2%-indexed annuity is a good enough alternative to insure a base of stable lifelong income (in addition to Social Security) when the Federal Reserve communicates its intention to keep inflation on a 2% target to allow the public "to make accurate longer-term economic and financial decisions".
We are going to debate good enough for ever given the lack of unexpected inflation protection the 2% COLA provides. But lets not ignore that there is also the normal case where the COLA does fine. Inflation averages 1-3% for 30 years and at 95, the COLA is getting the same real amount of money while the person who picked the flat payout has to figure out how to deal with the income decline. Making the normal case work out fine is pretty nice even if it doesn't help in the worst case results.
Here's the thing. According to Mike Piper's table in Oblivious Investor, an annuity with a fixed 2% COLA doesn't actually begin outperforming a nominal annuity if there is < 3% annual inflation until the person is 88 years old, and then it doesn't outperform by much. The payments are backloaded, so you are foregoing some payout amounts until you are almost 90 years old in exchange for the benefit of higher payout amounts when you are drooling in your teacup in a nursing home somewhere. And the rub is that if inflation is actually higher, you receive even less benefit from the annuity with 2% COLA. Since we don't know what inflation will turn out to be, the fixed COLA annuity is no better than the nominal annuity in terms of inflation.
See I read that and that is exactly what I expect and want. If the 2% beat nominal at 85, it would be too good of deal. I am buying an annuity for my 90-100 years and it is good that it will be generating the income I want when I want it. Could I get similar results by buying the nominal and buying more annuities over time with the added money? Maybe. But I am taking on risk of not being able to buy what I need (say rates plummet) AND I am also complicating my life by having to deal with buying a bunch of products.

I wouldn't expect much different between a 2% COLA and a nominal product. They both have the same amount of money to split up among the buyers and they just do it in slightly different ways. You pick the distribution that meets your needs. For a lot of people the decline of a nominal SPIA isn't a big because as you say when you 88 and drooling in a tea cup, you don't need money to travel to europe:)
But you need $25/hr for an aide to be there to clean up your drool.

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CULater
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by CULater » Fri Jun 07, 2019 10:55 am

Mike Piper says:
My point here isn’t that the COLA annuities are a bad idea. As you’ll notice, they do a better job of protecting against longevity than annuities without COLAs. (That is, the longer the lifetime, the better they perform.)
Since payment amounts from fixed- COLA annuities are backloaded, the longer you live the better they are, but still won't protect you from high inflation significantly. I'm not sure most people who select this option have a clear understanding of that. There are other options.

Eyeballing Mike Piper's table indicates that a nominal annuity would pay roughly 10% more on average than a 2% COLA annuity between age 73 and 88 (15 years). For example at 2% inflation at age 73, the nominal annuity pays 17% more than the 2% COLA annuity, at age 78 it pays 11% more, at age 83 it pays 5% more, and finally matches the the fixed-COLA annuity at age 88. So let's say that you have a nominal annuity. You don't have to spend all the payments received. You could instead invest the average 10% larger amount than the fixed-COLA annuity payment into TIPS. If your nominal annuity payment were $2000/ month ($24K per year), you could put an average of about $2400 / yr into TIPS while having the same amount to spend as the 2% COLA annuity would have provided. This would be roughly $36,000 into TIPS over the 15 year period. Now I'm age 88 and I hold $36,000 in TIPS in addition to my nominal annuity going forward. Unlike the annuity, the TIPS would provide more inflation protection than the fixed COLA in the years beyond age 88 and would have provided some inflation protection along the way had the inflation rate been higher than 2%.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by longinvest » Fri Jun 07, 2019 11:04 am

CULater wrote:
Fri Jun 07, 2019 10:55 am
Mike Piper says:
My point here isn’t that the COLA annuities are a bad idea. As you’ll notice, they do a better job of protecting against longevity than annuities without COLAs. (That is, the longer the lifetime, the better they perform.)
Since payment amounts from fixed- COLA annuities are backloaded, the longer you live the better they are, but still won't protect you from high inflation significantly. I'm not sure most people who select this option have a clear understanding of that. There are other options.

Eyeballing Mike Piper's table indicates that a nominal annuity would pay roughly 10% more on average than a 2% COLA annuity between age 73 and 88 (15 years). For example at 2% inflation at age 73, the nominal annuity pays 17% more than the 2% COLA annuity, at age 78 it pays 11% more, at age 83 it pays 5% more, and finally matches the the fixed-COLA annuity at age 88. So let's say that you have a nominal annuity. You don't have to spend all the payments received. You could instead invest the average 10% larger amount than the fixed-COLA annuity payment into TIPS. If your nominal annuity payment were $2000/ month ($24K per year), you could put an average of about $2400 / yr into TIPS while having the same amount to spend as the 2% COLA annuity would have provided. This would be roughly $36,000 into TIPS over the 15 year period. Now I'm age 88 and I hold $36,000 in TIPS in addition to my nominal annuity going forward. Unlike the annuity, the TIPS would provide more inflation protection than the fixed COLA in the years beyond age 88 and would have provided some inflation protection along the way had the inflation rate been higher than 2%.
Then the wife goes on to live to 110, and she's in trouble, especially if she doesn't understand TIPS!

Some of us plan to consider buying an inflation-indexed SPIA later in life, at age 80, to dampen the financial risk of long life, not to maximize returns.
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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CULater
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by CULater » Fri Jun 07, 2019 11:51 am

Or, you could just purchase a nominal annuity that will pay out about the same total $$ as the 2% COLA annuity to age 88 and invest the difference in premium cost into TIPS right from the get-go. Some inflation protection and the same total payout $$ to age 88.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

longinvest
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by longinvest » Fri Jun 07, 2019 12:07 pm

longinvest wrote:
Fri Jun 07, 2019 11:04 am
CULater wrote:
Fri Jun 07, 2019 10:55 am
Mike Piper says:
My point here isn’t that the COLA annuities are a bad idea. As you’ll notice, they do a better job of protecting against longevity than annuities without COLAs. (That is, the longer the lifetime, the better they perform.)
Since payment amounts from fixed- COLA annuities are backloaded, the longer you live the better they are, but still won't protect you from high inflation significantly. I'm not sure most people who select this option have a clear understanding of that. There are other options.

Eyeballing Mike Piper's table indicates that a nominal annuity would pay roughly 10% more on average than a 2% COLA annuity between age 73 and 88 (15 years). For example at 2% inflation at age 73, the nominal annuity pays 17% more than the 2% COLA annuity, at age 78 it pays 11% more, at age 83 it pays 5% more, and finally matches the the fixed-COLA annuity at age 88. So let's say that you have a nominal annuity. You don't have to spend all the payments received. You could instead invest the average 10% larger amount than the fixed-COLA annuity payment into TIPS. If your nominal annuity payment were $2000/ month ($24K per year), you could put an average of about $2400 / yr into TIPS while having the same amount to spend as the 2% COLA annuity would have provided. This would be roughly $36,000 into TIPS over the 15 year period. Now I'm age 88 and I hold $36,000 in TIPS in addition to my nominal annuity going forward. Unlike the annuity, the TIPS would provide more inflation protection than the fixed COLA in the years beyond age 88 and would have provided some inflation protection along the way had the inflation rate been higher than 2%.
Then the wife goes on to live to 110, and she's in trouble, especially if she doesn't understand TIPS!

Some of us plan to consider buying an inflation-indexed SPIA later in life, at age 80, to dampen the financial risk of long life, not to maximize returns.
CULater wrote:
Fri Jun 07, 2019 11:51 am
Or, you could just purchase a nominal annuity that will pay out about the same total $$ as the 2% COLA annuity to age 88 and invest the difference in premium cost into TIPS right from the get-go. Some inflation protection and the same total payout $$ to age 88.
I don't understand. How do TIPS protect my wife against the financial risk of long life?
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by TropikThunder » Fri Jun 07, 2019 12:14 pm

Tayler said on post #9 that your title is misleading, the authors’ conclusion was “buy nominal or not at all”. They did not say “don’t buy at all”. Maybe 160 posts later you could fix that?

CULater wrote:
Fri Jun 07, 2019 11:51 am
Or, you could just purchase a nominal annuity that will pay out about the same total $$ as the 2% COLA annuity to age 88 and invest the difference in premium cost into TIPS right from the get-go. Some inflation protection and the same total payout $$ to age 88.
Stlutz said the same thing on post #10 yet here we still are 160 posts later .....
Last edited by TropikThunder on Fri Jun 07, 2019 5:59 pm, edited 1 time in total.

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by CWRadio » Fri Jun 07, 2019 12:19 pm

longinvest wrote:
Fri Jun 07, 2019 12:07 pm
longinvest wrote:
Fri Jun 07, 2019 11:04 am
CULater wrote:
Fri Jun 07, 2019 10:55 am
Mike Piper says:
My point here isn’t that the COLA annuities are a bad idea. As you’ll notice, they do a better job of protecting against longevity than annuities without COLAs. (That is, the longer the lifetime, the better they perform.)
Since payment amounts from fixed- COLA annuities are backloaded, the longer you live the better they are, but still won't protect you from high inflation significantly. I'm not sure most people who select this option have a clear understanding of that. There are other options.

Eyeballing Mike Piper's table indicates that a nominal annuity would pay roughly 10% more on average than a 2% COLA annuity between age 73 and 88 (15 years). For example at 2% inflation at age 73, the nominal annuity pays 17% more than the 2% COLA annuity, at age 78 it pays 11% more, at age 83 it pays 5% more, and finally matches the the fixed-COLA annuity at age 88. So let's say that you have a nominal annuity. You don't have to spend all the payments received. You could instead invest the average 10% larger amount than the fixed-COLA annuity payment into TIPS. If your nominal annuity payment were $2000/ month ($24K per year), you could put an average of about $2400 / yr into TIPS while having the same amount to spend as the 2% COLA annuity would have provided. This would be roughly $36,000 into TIPS over the 15 year period. Now I'm age 88 and I hold $36,000 in TIPS in addition to my nominal annuity going forward. Unlike the annuity, the TIPS would provide more inflation protection than the fixed COLA in the years beyond age 88 and would have provided some inflation protection along the way had the inflation rate been higher than 2%.
Will a TIPS fund or ETF work the same for the above example? Thanks

longinvest
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by longinvest » Fri Jun 07, 2019 5:29 pm

longinvest wrote:
Fri Jun 07, 2019 12:07 pm
longinvest wrote:
Fri Jun 07, 2019 11:04 am
CULater wrote:
Fri Jun 07, 2019 10:55 am
Mike Piper says:
My point here isn’t that the COLA annuities are a bad idea. As you’ll notice, they do a better job of protecting against longevity than annuities without COLAs. (That is, the longer the lifetime, the better they perform.)
Since payment amounts from fixed- COLA annuities are backloaded, the longer you live the better they are, but still won't protect you from high inflation significantly. I'm not sure most people who select this option have a clear understanding of that. There are other options.

Eyeballing Mike Piper's table indicates that a nominal annuity would pay roughly 10% more on average than a 2% COLA annuity between age 73 and 88 (15 years). For example at 2% inflation at age 73, the nominal annuity pays 17% more than the 2% COLA annuity, at age 78 it pays 11% more, at age 83 it pays 5% more, and finally matches the the fixed-COLA annuity at age 88. So let's say that you have a nominal annuity. You don't have to spend all the payments received. You could instead invest the average 10% larger amount than the fixed-COLA annuity payment into TIPS. If your nominal annuity payment were $2000/ month ($24K per year), you could put an average of about $2400 / yr into TIPS while having the same amount to spend as the 2% COLA annuity would have provided. This would be roughly $36,000 into TIPS over the 15 year period. Now I'm age 88 and I hold $36,000 in TIPS in addition to my nominal annuity going forward. Unlike the annuity, the TIPS would provide more inflation protection than the fixed COLA in the years beyond age 88 and would have provided some inflation protection along the way had the inflation rate been higher than 2%.
Then the wife goes on to live to 110, and she's in trouble, especially if she doesn't understand TIPS!

Some of us plan to consider buying an inflation-indexed SPIA later in life, at age 80, to dampen the financial risk of long life, not to maximize returns.
CULater wrote:
Fri Jun 07, 2019 11:51 am
Or, you could just purchase a nominal annuity that will pay out about the same total $$ as the 2% COLA annuity to age 88 and invest the difference in premium cost into TIPS right from the get-go. Some inflation protection and the same total payout $$ to age 88.
I don't understand. How do TIPS protect my wife against the financial risk of long life?
CULater, I'm still waiting for clarifications. Can you explain?
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by Ben Mathew » Sat Jun 08, 2019 9:03 am

randomguy wrote:
Fri Jun 07, 2019 9:32 am
Now maybe they are charging too much for the protection but I am not sure anyone can tell you if it is a 1% or 10% chance of high inflation showing up over the next 40 years.
We can use TIPS vs nominal treasuries as the benchmark to see if real annuities cost too much. Since TIPS don't cost much more than nominals + expected inflation (and some argue it costs less), there is essentially no premium for inflation protection in bonds. So the real annuities currently available do cost too much since they are more expensive than 3% COLAs nominal annuities (i.e. well above expected inflation).

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by Ben Mathew » Sat Jun 08, 2019 9:26 am

CULater wrote:
Fri Jun 07, 2019 8:45 am
This from Oblivious Investor, argues that annuities with a fixed COLA actually are actually worse than nominal annuities for most people when there is high inflation:
The key point here is that, the higher inflation is over this person’s lifetime, the worse the annuity with the COLA does as compared to the annuity without the COLA.

Why is this? It’s because the annuity with the COLA has a greater portion of its payout occurring later in the annuitant’s life (due to the fact that its payout starts lower, but climbs over time). And in a scenario in which dollars are declining in value over time due to inflation, the annuity that front-loads the payout (i.e., the annuity without the COLA) does better.

But annuities with fixed cost of living adjustments do not protect against inflation. Not only do they not keep up with high rates of inflation, they actually perform worse in the face of inflation than annuities without COLAs.
https://obliviousinvestor.com/annuities ... inflation/
But the goal with an annuity is to try to match its payout with our consumption profile. So looking at the total payout over a lifetime is not the right metric. We should try to evaluate how well the payout matched desired consumption. An annuity that paid out well in the early years and left you with little in the later years is not doing it's job, even if it paid out more over the lifetime.

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by dknightd » Sat Jun 08, 2019 9:48 am

I agree annuities are a bet on future inflation rates. The bet is inflation will stay reasonable.
I'm not convinced any retirement investment is safe in the eyes of extremely high inflation.
I'm not convinced SS will keep up. I'm not convinced TIPS will keep up. The inflation adjustments to both could be changed at any time. I'm not sure stocks will keep up if something weird happens.

I still plan to buy an annuity (TIAA graded). I don't care what your "expert" suggests. I'm choosing what (hopefully) works for me. Some of our retirement "income" will be from annuity (what used to be called a pension) some will come from other savings, and some from SS.

I know that buying an annuity is potentially risky. I will doing it anyway. Dual life, so potentially cuts down our returns even more. In my mind I'm essentially buying a pension. I like the three leg stool approach (pension, SS, savings). I don't have a pension, so I will be buying one! What you do is up to you ;) :)

Personally I think everybody should have more than one income stream in retirement. I guess this is called diversification. By buying a "pension" or "annuity" that fills in one of the legs in my stool.

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by CULater » Sat Jun 08, 2019 12:21 pm

dknightd wrote:
Sat Jun 08, 2019 9:48 am
I agree annuities are a bet on future inflation rates. The bet is inflation will stay reasonable.
I'm not convinced any retirement investment is safe in the eyes of extremely high inflation.
I'm not convinced SS will keep up. I'm not convinced TIPS will keep up. The inflation adjustments to both could be changed at any time. I'm not sure stocks will keep up if something weird happens.

I still plan to buy an annuity (TIAA graded). I don't care what your "expert" suggests. I'm choosing what (hopefully) works for me. Some of our retirement "income" will be from annuity (what used to be called a pension) some will come from other savings, and some from SS.

I know that buying an annuity is potentially risky. I will doing it anyway. Dual life, so potentially cuts down our returns even more. In my mind I'm essentially buying a pension. I like the three leg stool approach (pension, SS, savings). I don't have a pension, so I will be buying one! What you do is up to you ;) :)

Personally I think everybody should have more than one income stream in retirement. I guess this is called diversification. By buying a "pension" or "annuity" that fills in one of the legs in my stool.
I think it's a matter of how much one's portfolio and income streams are exposed to inflation risk, and how great that risk is. The income streams and assets that are least exposed are SS and TIPS/IBonds. The assets that are most exposed to high, unexpected inflation are nominal bonds and stocks. A nominal annuity would have comparable inflation risk to nominal bonds. In selecting one's asset allocation in retirement this should be taken into consideration. For example, I think it makes sense for retirees to own a lot of TIPS/IBonds rather than nominal bonds. So, unless you are putting your entire nestegg into an annuity, you will probably be owning some TIPS at least for awhile. A TIPS fund is easiest to manage, but doesn't provide the degree of inflation protection that owning individual TIPS until maturity does.
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by HomerJ » Wed Jun 12, 2019 5:10 pm

CULater wrote:
Sat Jun 08, 2019 12:21 pm
A nominal annuity would have comparable inflation risk to nominal bonds.
This isn't exactly correct.

Bonds usually have shorter terms than "the rest of your life", and can be rolled over.

I agree that TIPs and i-bonds are a good way to protect yourself against inflation, but short-term bonds aren't too terrible either.

Once they mature, you can buy new bonds paying out more due to interest rates going up to combat inflation.

Inflation is indeed a risk for bonds, but it is a much higher risk for a nominal annuity.

But a nominal annuity can still certainly be PART of one's investment plan.

I wish you would change the title and remove the statement "should not be purchased". There's no need for wild statements on this website. You don't get paid per-click.
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elainet7
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by elainet7 » Wed Jun 12, 2019 7:02 pm

well respected ric Edelman's firm will not sell annuities of any type

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willthrill81
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by willthrill81 » Wed Jun 12, 2019 7:06 pm

elainet7 wrote:
Wed Jun 12, 2019 7:02 pm
well respected ric Edelman's firm will not sell annuities of any type
And that has what to do with the price of tea in China?
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by dknightd » Wed Jun 12, 2019 7:22 pm

I'm going to buy an annuity in a few months. When I stop getting paid.

If an annuity should not be purchased by a retiree, who should buy one? Perhaps nobody?

I have a plan. My plan includes a dual life annuity. Please do not make me question my plan unless you have a better alternative.

Thanks

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by willthrill81 » Wed Jun 12, 2019 7:40 pm

dknightd wrote:
Wed Jun 12, 2019 7:22 pm
I'm going to buy an annuity in a few months. When I stop getting paid.

If an annuity should not be purchased by a retiree, who should buy one? Perhaps nobody?

I have a plan. My plan includes a dual life annuity. Please do not make me question my plan unless you have a better alternative.

Thanks
What are you trying to achieve with an annuity?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by dknightd » Thu Jun 13, 2019 6:29 am

willthrill81 wrote:
Wed Jun 12, 2019 7:40 pm

What are you trying to achieve with an annuity?
Income, that combined with SS, should provide for comfortable enough living no matter how long we live.

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by willthrill81 » Thu Jun 13, 2019 8:47 am

dknightd wrote:
Thu Jun 13, 2019 6:29 am
willthrill81 wrote:
Wed Jun 12, 2019 7:40 pm

What are you trying to achieve with an annuity?
Income, that combined with SS, should provide for comfortable enough living no matter how long we live.
I'm assuming that you mean guaranteed income.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by dbr » Thu Jun 13, 2019 9:21 am

It would not be uncommon for someone to have a corporate fixed pension started at the beginning of retirement, Social Security, and a portfolio for withdrawals. In that case one has to run a retirement model to see how much withdrawals will have to increase in excess of inflation to make up for erosion in the value of the pension. The result is statistical because the result involves probabilities for inflation. One can also see what the effect of when SS is elected might be. This is pretty a much an "It is was it is." sort of situation but should not be problematic unless inflation goes way off the scale and even then may be fine given the diversity of income sources.

Whether or not one should decide that actually choosing to buy a fixed annuity is a bad idea might be a wash mostly, but it still makes sense to provide some insurance against longevity even if at inflation risk as long as income sources are diversified.

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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by dknightd » Thu Jun 13, 2019 12:57 pm

willthrill81 wrote:
Thu Jun 13, 2019 8:47 am

I'm assuming that you mean guaranteed income.
yes

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willthrill81
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Re: Annuities are a bet on future inflation rates and should not be purchased by retirees

Post by willthrill81 » Thu Jun 13, 2019 3:29 pm

dknightd wrote:
Thu Jun 13, 2019 12:57 pm
willthrill81 wrote:
Thu Jun 13, 2019 8:47 am

I'm assuming that you mean guaranteed income.
yes
If that's what you want, then an annuity may be your only option. I would urge you to consider an inflation-indexed annuity or at least one with a fixed annual increase.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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