Are Single Premium Annuities a good deal?

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Are Single Premium Annuities a good deal?

Post by Browser »

Informative article by Joe Tomlinson which argues in favor of single premium annuities. He argues they're a good deal even in this low interest environment, and examines some of the common arguments against buying them:
Single-premium immediate annuities (SPIAs) have been out of favor in the current low-interest-rate environment. But my new research indicates that SPIAs still offer especially attractive opportunities for retirees. One of the key reasons is that typical advisor clients will, on average, live longer than the overall population.

It's better to wait until rates rise before purchasing a SPIA. It is likely that interest rates will be higher in a few years, and SPIA rates will be more attractive then. The problem with this argument is that the long end of the yield curve, which is incorporated in current SPIA pricing, already reflects the market expectation for future rate increases.

Purchasing a SPIA risks a loss to heirs in the event of an early death. This argument may not hold up if one also considers the expense side of the retirement equation.

Purchasing a SPIA results in a loss of flexibility. Again, if the SPIA is purchased to provide income for basic living expenses, one does not actually have the flexibility to forgo basic food and shelter expenses. So the flexibility one holds onto by living off savings may be an illusion.
http://advisorperspectives.com/newslett ... _Rates.php
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Re: Are Single Premium Annuities a good deal?

Post by Alex Frakt »

They are a useful tool. Whether they are a good deal depends on the potential purchaser's specific situation.
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Re: Are Single Premium Annuities a good deal?

Post by gerrym51 »

I am for taking SS at 62.

However if i was considering annuities-which i don't believe in-I would take SS at 70 instead. :mrgreen:
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Re: Are Single Premium Annuities a good deal?

Post by dhodson »

They use different life tables for life insurance and annuities bc of the fact that people who are likely to live longer purchase them. That sort of negates the potential benefit. They have decades upon decades of experience with this so it isn't like you can fool the insurance companies.

The interest rate environment really doesn't change the need or lack of need for these things. In my view, the best thing to do is purchase when old like 80 for basic needs. This helps to negate most of the issues but does not completely eliminate them.
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Re: Are Single Premium Annuities a good deal?

Post by thx1138 »

dhodson wrote:They use different life tables for life insurance and annuities bc of the fact that people who are likely to live longer purchase them. That sort of negates the potential benefit. They have decades upon decades of experience with this so it isn't like you can fool the insurance companies.
I don't see how proper actuarial work reduces the benefits of risk pools. In fact, it should improve the solvency of the risk pools. If you want to see the consequences of bad actuarial work just look at what happened to LTC insurance.

EDIT: I guess if your point was you'd get a higher monthly payout if they used different life expectancy tables then I agree you'd get slightly more, but that misses the larger point of risk pooling I think.
Last edited by thx1138 on Tue May 13, 2014 10:32 am, edited 1 time in total.
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Re: Are Single Premium Annuities a good deal?

Post by Bustoff »

I've always had trouble determining when SPIA's are a good deal.
They display the "Annual Payout Rate", but that includes return of principal -- that makes it's difficult to determine the true rate of return.
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Re: Are Single Premium Annuities a good deal?

Post by dhodson »

thx1138 wrote:
dhodson wrote:They use different life tables for life insurance and annuities bc of the fact that people who are likely to live longer purchase them. That sort of negates the potential benefit. They have decades upon decades of experience with this so it isn't like you can fool the insurance companies.
I don't see how proper actuarial work reduces the benefits of risk pools. In fact, it should improve the solvency of the risk pools. If you want to see the consequences of bad actuarial work just look at what happened to LTC insurance.

EDIT: I guess if your point was you'd get a higher monthly payout if they used different life expectancy tables then I agree you'd get slightly more, but that misses the larger point of risk pooling I think.
I understand the pooling risk but you seem to understand my point. In essence though you can't say that people who purchase them live longer is an advantage like you are getting one over on them since they might be using avg life expectancies. The return is baked into that already bc they know.

I do agree that bad actuarial work like ltci is a problem.....
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Re: Are Single Premium Annuities a good deal?

Post by inbox788 »

dhodson wrote:They use different life tables for life insurance and annuities bc of the fact that people who are likely to live longer purchase them. That sort of negates the potential benefit. They have decades upon decades of experience with this so it isn't like you can fool the insurance companies.

The interest rate environment really doesn't change the need or lack of need for these things. In my view, the best thing to do is purchase when old like 80 for basic needs. This helps to negate most of the issues but does not completely eliminate them.
If that's the case, I should buy one so I can increase my chances of living longer!

Seriously, it's a form of insurance from outliving your money, and like all products, has as cost. So on one end, you buy life insurance from dying too young and annuities from dying too old. Some people really could use them for reduce risk, but a lot of people probably don't.

If you have little money, you'll only reduce your benefits. If you have a lot of money, you have nothing to worry about. Not to be morbid, but if you're the typical average poor health american (overweight with diabetes and hypertension), you're probably not going to make out on an annuity.
Last edited by inbox788 on Tue May 13, 2014 10:48 am, edited 1 time in total.
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Re: Are Single Premium Annuities a good deal?

Post by dhodson »

inbox788 wrote:
dhodson wrote:They use different life tables for life insurance and annuities bc of the fact that people who are likely to live longer purchase them. That sort of negates the potential benefit. They have decades upon decades of experience with this so it isn't like you can fool the insurance companies.

The interest rate environment really doesn't change the need or lack of need for these things. In my view, the best thing to do is purchase when old like 80 for basic needs. This helps to negate most of the issues but does not completely eliminate them.
If that's the case, I should buy one so I can increase my chances of living longer!

Seriously, it's a form of insurance from outliving your money, and like all products, has as cost. So on one end, you buy life insurance from dying too young and annuities from dying too old. Some people really need the, a lot of people probably don't.

If you have little money, you'll only reduce your benefits. If you have a lot of money, you have nothing to worry about. Not to be morbid, but if you're the typical average poor health american (overweight with diabetes and hypertension), you're probably not going to make out on an annuity.

I'll assume you jest with the first comment. Of course that isn't cause and effect. Its more like the person you were talking about in the last comment isn't going to buy one.
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Re: Are Single Premium Annuities a good deal?

Post by dodecahedron »

If insurance companies offering annuities are to stay solvent, annuities can't be a good deal for all customers, if we define "a good deal" as positive expected value. But that is true of any kind of insurance.

But if we define "a good deal" as hedging a risk that some of us (with fortunate health and genetic heritage) are concerned about at a competitive price, SPIA policies look better than almost anything out there.

One alternative to SPIA I am considering that might be an even better deal is a Charitable Gift Annuity. There are charities I would like to support anyway, I can fund them with appreciated securities and avoid and/or defer capital gains taxes, and the IRS longevity tables on which the charitable deductions are based are old and out of date and certainly do not represent an accurate calculation of my particular longevity, which tilts the expected value calculation in my favor.

Forbes had an article a few years ago stating that Pomona College's charitable gift annuities were available on such excellent terms that a bunch of folks with no particular attachment to the college were contributing. I think about half their CGA purchasers were non-alums. I don't know if that is still true, and in any case, I would prefer to support a charity with which I have a greater affinity, but it does suggest there are some alternatives worth exploring. (And yes, there is risk if the charity's finances are fragile, so due diligence and diversification, spreading gifts around, seems like a good idea.)
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Re: Are Single Premium Annuities a good deal?

Post by Browser »

Seems to me Tomlinson makes some good points. I believe in the "safety first" approach to retirement finance: first make sure that your fundamental income needs are covered by liability-matching income sources. Social security is one of the most important income sources, since it amounts to a lifetime inflation-adjusted annuity. If that's not sufficient to meet floor income needs, SPIAs would be way up the list for me to fill in the difference. Much better than something like bonds or a bond ladder because they provide lifetime income and the effective interest (which includes mortality credits) is higher than bonds. Once you've locked in your basic income needs with SS and annuities, you're able to invest the residual in risky investments such as stocks if you so desire. As long as your annuities are for purposes of covering your basic income needs over your lifespan, it's hard for me to see anything wrong with them.
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Re: Are Single Premium Annuities a good deal?

Post by steve_14 »

It's better to wait until rates rise before purchasing a SPIA. [/b]It is likely that interest rates will be higher in a few years, and SPIA rates will be more attractive then. The problem with this argument is that the long end of the yield curve, which is incorporated in current SPIA pricing, already reflects the market expectation for future rate increases.
Missing the point here - it's the risk that's not priced in you're worried about.
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Re: Are Single Premium Annuities a good deal?

Post by jwa »

Bustoff, not only is there the return of premium to contend with but survivorship credits as well. In other words, when others die, you win.
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An easy decision.

Post by Taylor Larimore »

Browser:

Thank you for the link to Mr. Tomlinson's article about Single Premium Immediate Annuities (SPIAs)

When Pat and I were about 80, we realized we had a choice:

1. Continue with our (conservative) portfolio returning about 6% with a chance of running out of money.

2. Purchase a SPIA returning about 11% with no chance of running out of money.

It was an easy decision. We bought one. We liked it so well we bought another a year later.

Best wishes.
Taylor
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Re: An easy decision.

Post by Retread »

Taylor Larimore wrote:Browser:

Thank you for the link to Mr. Tomlinson's article about Single Premium Immediate Annuities (SPIAs)

When Pat and I were about 80, we realized we had a choice:

1. Continue with our (conservative) portfolio returning about 6% with a chance of running out of money.

2. Purchase a SPIA returning about 11% with no chance of running out of money.

It was an easy decision. We bought one. We liked it so well we bought another a year later.

Best wishes.
Taylor
I'm in complete agreement with you on this, Taylor. I'm in my mid 70's and, since turning 70, have invested a high six figure amount in SPIA's. I still have a seven figure portfolio, and may yet buy additional SPIA's as the years go by.
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Re: Are Single Premium Annuities a good deal?

Post by HomerJ »

Bustoff wrote:I've always had trouble determining when SPIA's are a good deal.
They display the "Annual Payout Rate", but that includes return of principal -- that makes it's difficult to determine the true rate of return.
It's not about getting a good deal... It's like insurance... it's piece of mind...

By the time I'm 80 (if I live that long), I will have all my needs covered by SS and SPIA, plus some.

This will ensure I don't run out of money, and even if I get dementia and get tricked into giving all my money in the bank to some swindler, I still have money coming in each month that will cover my bills.
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Re: Are Single Premium Annuities a good deal?

Post by dhodson »

HomerJ wrote:
Bustoff wrote:I've always had trouble determining when SPIA's are a good deal.
They display the "Annual Payout Rate", but that includes return of principal -- that makes it's difficult to determine the true rate of return.
It's not about getting a good deal... It's like insurance... it's piece of mind...

By the time I'm 80 (if I live that long), I will have all my needs covered by SS and SPIA, plus some.

This will ensure I don't run out of money, and even if I get dementia and get tricked into giving all my money in the bank to some swindler, I still have money coming in each month that will cover my bills.
If you need the insurance feature then just compare payments from different providers. Don't focus on the % return if you need the insurance feature.
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Re: Are Single Premium Annuities a good deal?

Post by Taylor Larimore »

I've always had trouble determining when SPIA's are a good deal.
They display the "Annual Payout Rate", but that includes return of principal -- that makes it's difficult to determine the true rate of return.
Bustoff:

A SPIA (Single Premium Immediate Annuity) is more like insurance than an investment. It insures that we won't run out of money before running out of life.

A SPIA also provides the highest guaranteed income of any investment.

Best wishes.
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Re: Are Single Premium Annuities a good deal?

Post by Ron »

Bustoff wrote:They display the "Annual Payout Rate", but that includes return of principal -- that makes it's difficult to determine the true rate of return.
If you're given the monthly payout and you have a guaranteed term rider, it's easy to compute your actual rate using the Excel IRR (not XIRR) function.

For instance, I purchased an SPIA at age 59 with a joint/survivor at 100% and guaranteed life (computed at 28 years, joint) riders. I know what the monthly payment is and I have a minimum term of 28 years. Under those circumstances, the SPIA pays a rate of 4.79% which did not include a return of principal. Under the contract, if either/both live beyond that 28 year term, payments continue at 100% (no reduction). Also, if both pass before that 28 year term is met, remaining payments go to our estate. BTW, if one/both beats that 28 year "bet", the return actually increases evey month. However, I would not bet against the insurance company.

Is that a good enough rate of long term return for the "investment" (premium)? Only if it is, in your opinion. In our case, we were looking for a product that would act as a private company defined benefit plan (e.g. pension) since the company I retired from eliminated theirs in the early 80's. Like a common private company pension, it gives you a standard payment with no COLA. Unlike most private company pension plans, it gives survivor benefits at 100%, continue payments even if you and your spouse pass earlier than normal (per the actuary tables). In our case, the SPIA (regardless of value lost to inflation) will just be icing on the cake after our respective SS's start. The funny thing is that when I/we purchased the SPIA, inflation was a concern of ours but it was a risk we were willing to take. We were counting on our future SS and investments to cover the impact of inflation over the long term. As it turned out, seven years after we purchased the SPIA, inflation has not been much of an impact.

We purchased an SPIA as an option not normally considered - that is to provide income early in our retirement, rather than late. It has provided (and continue to do so) a base of income not tied only to our joint retirement portfolios and allowed us to spread our risk among multiple financial products. It's also supported our long term goal of delaying SS until age 70. We're well on our way of meeting that goal, since I filed/suspended my SS in January and my wife receives her first spousal SS payment tomorrow ( :mrgreen: ).

Are SPIA's for everybody? Of course not. However, they remain a retirement income tool in your "toolbox". Only you can determine if it fits the task at hand (and no, not all tools are hammers :annoyed ).

FWIW,

- Ron
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Re: Are Single Premium Annuities a good deal?

Post by jimkinny »

I suppose retrospectively one could say the annuity you purchased was a good deal if you live longer than the insurance company thinks someone like you will live. Other than that, they could be consider a good deal if they give you peace of mind or by some other subjective measure.

I think they are better than a 30 year Treasury, but that is for me and my situation. Many will disagree, for their situation or maybe simply because they know more than me or have a belief. A 30 year TIPS, maybe not for many but for me, I would prefer to buy the annuity if I had to choose.

As far as age, most feel the later the better but I think it was bobcat2 who pointed, what is obvious but easily overlooked, that regardless of age, the mortality credits start no matter what age you buy the annuity. Later is probably better for most but maybe not for me or you.

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Re: Are Single Premium Annuities a good deal?

Post by dodecahedron »

Ron wrote:The funny thing is that when I/we purchased the SPIA, inflation was a concern of ours but it was a risk we were willing to take. We were counting on our future SS and investments to cover the impact of inflation over the long term. As it turned out, seven years after we purchased the SPIA, inflation has not been much of an impact.
Yes, it is clear (in retrospect) that purchasing annuities five or ten or 20 years ago has turned out to be an exceptionally good deal, since inflation has been relatively modest (lower than most folks expected) and the interest rates baked into those annuities was relatively high.

But I am sure Ron was not alone in being concerned about inflation at the outset, a concern that those of us considering annuities also need to deal with. Working as a volunteer with senior citizens on DB pensions and annuities of a variety of vintages, some going back to the 60s and 70s (in the case of widows married to older men who retired back then) makes the clear the ravages of unexpected inflation.

My hope is that the market for inflation-adjusted annuities will grow "thicker" and more competitive a few years down the road. Alternatively, I could just do a variable TIPS fund annuity at TIAA-CREF. Despite the rather excessive fees (42 basis points for a TIPS fund??? seems like an awfully high ER given that minimal due diligence research is needed on the creditworthiness of the issuer, unlike other types of bond funds), a variable annuity based on it might still be a reasonably good actuarial deal for a female (since TIAA-CREF has unisex rates) with a family longevity history like mine.
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Re: Are Single Premium Annuities a good deal?

Post by Frugal Al »

Taylor Larimore wrote:A SPIA (Single Premium Immediate Annuity) is more like insurance than an investment. It insures that we won't run out of money before running out of life.

A SPIA also provides the highest guaranteed income of any investment.
For the most part, at today's rates for a 65 year old, annuities only really guarantee returning one's own capital, and provide insurance from outliving that capital. Today, the nominal return over average lifetimes is just about what the historical rate of inflation has been, and sometimes lower. Even when purchased at older ages it can be difficult to see the benefit of the mortality credits reflected in the pricing--I suspect consumed by the preloading of administrative expenses, commissions, and adverse selection surcharges.
Saying an SPIA provides the highest guaranteed income of any investment is true, but largely because of the nature of investment return, risk, and guarantees--not because it's necessarily a good investment. As pointed out many times, it's really insurance.
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Re: Are Single Premium Annuities a good deal?

Post by freddie »

They also have the highest guaranteed lost of principle of any investment :) They are an insurance product. You are giving up money (on average) for safety. Depending on your situation that might be a good tradeoff.

Taylor Larimore wrote:
I've always had trouble determining when SPIA's are a good deal.
They display the "Annual Payout Rate", but that includes return of principal -- that makes it's difficult to determine the true rate of return.
Bustoff:

A SPIA (Single Premium Immediate Annuity) is more like insurance than an investment. It insures that we won't run out of money before running out of life.

A SPIA also provides the highest guaranteed income of any investment.

Best wishes.
Taylor
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Re: Are Single Premium Annuities a good deal?

Post by Browser »

I think Tomlinson's advice is pretty good; to determine your necessary living expenses and purchase sufficient SPIAs to make up any difference between that and what's being provided from social security, pensions, any other lifetime income sources. As he indicates, two of the often mentioned drawbacks to annuities are negated in this scenario:
Purchasing a SPIA risks a loss to heirs in the event of an early death. This argument may not hold up if one also considers the expense side of the retirement equation.

Purchasing a SPIA results in a loss of flexibility. Again, if the SPIA is purchased to provide income for basic living expenses, one does not actually have the flexibility to forgo basic food and shelter expenses.
Now you have your basic liability costs covered and you and decide what to do from there.
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Re: Are Single Premium Annuities a good deal?

Post by Bustoff »

I'm not smart enough to know the what qualifies as the safest investment with the highest return over the duration of ones retirement.

It would seem for most folks that "safety" should be the highest priority, followed by the highest reliable returns--not the other way around. If safety ranks as ones highest priority in retirement, then preservation of wealth (legacy desires) and/or highest possible SWR might become different strategies.

Locking in a risk free "floor income" by dedicating a portion of wealth to either TIPS ladders or SPIA's, or both is frequently recommended and makes sense for both strategies. But opinions vary on what is considered truly risk free concerning SPIA COLA vs. SPIA, or individual TIPS ladders vs.TIPS funds. Not to mention the cost issues associated with SPIA-COLA or the feasibility of individual TIPS ladders. Then again there are those that suggest "age in bonds" accomplish the same goal.

The one thing I'm sure of is that I will never be able to determine the optimum retirement drawdown strategy on my own. Academic studies have their place, but I would rather learn what portfolio, asset allocation and drawdown has worked for retirees who have already experienced a substantial period of retirement. There are Bogleheads like Taylor who have seen and been through most everything during the course of their retirement. To that end, it would be extremely helpful to learn how other retired Bogleheads navigated 20 or 30 years of retirement.
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Re: Are Single Premium Annuities a good deal?

Post by Old Guy »

What about the TSP annuities? Do any of you have them?
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Re: Are Single Premium Annuities a good deal?

Post by HomerJ »

Bustoff wrote:To that end, it would be extremely helpful to learn how other retired Bogleheads navigated 20 or 30 years of retirement.
I agree in general, but one should note that all the Bogleheads who have navigated 20-30 years of retirement as of today, retired between 1984-1994, which was a pretty good time to retire, so their experiences may not be as relevant as we'd hope.
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Re: Are Single Premium Annuities a good deal?

Post by Quickfoot »

If the climate stays the same we plan to purchase a deferred annuity at 50, another at 55 and an immediate at 60, all with payments starting at 60. Even in today's low rate environment that would yield about an 8-9% spend rate on the SPIA money or more than twice the safe withdraw rate from a traditional portfolio. We expect to annuitize 30% or so of our portfolio and will carry a 20 year payment guarantee so our heirs will at least get the principal back should we die early.

We plan to retire around 55 (60 at latest) and wish to enjoy our early retirement years without worrying about running out of money. We will employ a higher spending rate of remaining assets to 70 at which point we'll claim SS and more than likely not have to draw down the portfolio at all. We also will have considerable tax deferred assets, spending down the tax deferred assets will minimize RMDs at 70. The five years proceeding retirement and the first five years of retirement are the most risky, we'll cover 1.5X our base spending needs with SPIAS and invest the rest 50/50 to 60/40.
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Re: Are Single Premium Annuities a good deal?

Post by HomerJ »

Quickfoot wrote:If the climate stays the same we plan to purchase a deferred annuity at 50, another at 55 and an immediate at 60, all with payments starting at 60. Even in today's low rate environment that would yield about an 8-9% spend rate on the SPIA money or more than twice the safe withdraw rate from a traditional portfolio. We expect to annuitize 30% or so of our portfolio and will carry a 20 year payment guarantee so our heirs will at least get the principal back should we die early.

We plan to retire around 55 (60 at latest) and wish to enjoy our early retirement years without worrying about running out of money. We will employ a higher spending rate of remaining assets to 70 at which point we'll claim SS and more than likely not have to draw down the portfolio at all. We also will have considerable tax deferred assets, spending down the tax deferred assets will minimize RMDs at 70. The five years proceeding retirement and the first five years of retirement are the most risky, we'll cover 1.5X our base spending needs with SPIAS and invest the rest 50/50 to 60/40.
I don't think you're going to get a 8%-9% spend rate for a couple at age 60 with a 20 year guarantee.
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Re: Are Single Premium Annuities a good deal?

Post by nisiprius »

Like all insurance, SPIAs should not be about getting a good deal. Insurance is never a good deal. It should be about whether it can match what you have to what you need, and allow you fulfill a greater portion of your needs than you could without one.

I have a little inverter I keep in my car to convert the 12V at the power socket to 110VAC, or close enough to power small AC-powered devices. It has a little (and surprisingly noisy) fan on it and gets warm when in use. It is wasting power, less energy comes out than goes in. From an economist's point of view, it is irrational to use it. But I use it anyway, because my electric shaver works off of it and doesn't work off 12V.

Better to have (making the numbers up) 8 watts of 120V AC that I can use, then 10 watts of 12VDC that I can't use.

Various research suggests that the "efficiency" of an SPIA is in the ballpark 90-95%; that is, collectively holders get something like 90-95% of what they put into it. NEVERTHELESS, if one has no need to have money left over--if one wants to use up as much of one's money as possible during life and have as little left over as possible--the "efficiency" of the usable safe spending amount from an SPIA, for equivalent risk, is much higher than the "efficiency" of withdrawal from portfolios.
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Re: Are Single Premium Annuities a good deal?

Post by Quickfoot »

I don't think you're going to get a 8%-9% spend rate for a couple at age 60 with a 20 year guarantee.
That's about what we would achieve today with today's rates if we implemented that plan. The way that is achieved is through using deferred annuities which result in a higher payout. A 10 year deferred annuity is paying 10.9%, 5 year deferred is paying 8.4% and an immediate with a 20 year guarantee is paying 5.23%. It is reasonable to expect rates will be higher by the time we actually need to purchase but if they aren't that's OK too. If rates are exceptionally low we can always turn the SPIA at 60 into a 5 year deferred with payments starting at 65. Achieving 8-9% is just a matter of purchasing the correct size deferred SPIA at the appropriate time.

Purchasing deferred annuities guarantees growth of income in the last 10 years prior to retirement, even if 2008 hits the year before our retirement 1.5 times our base living expenses will be paid for. Provided we have sufficient savings we can still retire at 55 and allow the tax deferred assets to recover. From 60-69 we will probably withdraw 4-5% of the balance each year (not inflation adjusted and not a fixed number, value drops the withdraw drops). Social security will be taxed so we'll want to spend down tax deferred between 60 and 70 anyway. We have Roth 401k available to us but it doesn't make sense due to our income.

We might miss out on some amazing growth if another 2013 happens, but at that point in our life we will be more concerned with income than growth and 60% to 70% of our portfolio will still be invested in the market.
Last edited by Quickfoot on Wed May 14, 2014 11:57 am, edited 3 times in total.
freddie
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Re: Are Single Premium Annuities a good deal?

Post by freddie »

How are those objections negated?
a) I buy the annuity at 70 and die at 75, how do my heirs end up with more money?
b) I buy the annuity at 70, get a cancer diagnosis of 6 months to live how have I not lost the flexibility to spend my money over 1 year instead of 20.

There are no free lunches in avoiding risk. Buy the annuity and take on the risk of not getting your money back. Don't buy the annuity and take on market risk and the chance to go broke.


Browser wrote:I think Tomlinson's advice is pretty good; to determine your necessary living expenses and purchase sufficient SPIAs to make up any difference between that and what's being provided from social security, pensions, any other lifetime income sources. As he indicates, two of the often mentioned drawbacks to annuities are negated in this scenario:
Purchasing a SPIA risks a loss to heirs in the event of an early death. This argument may not hold up if one also considers the expense side of the retirement equation.

Purchasing a SPIA results in a loss of flexibility. Again, if the SPIA is purchased to provide income for basic living expenses, one does not actually have the flexibility to forgo basic food and shelter expenses.
Now you have your basic liability costs covered and you and decide what to do from there.
Quickfoot
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Re: Are Single Premium Annuities a good deal?

Post by Quickfoot »

How are those objections negated?
a) I buy the annuity at 70 and die at 75, how do my heirs end up with more money?
b) I buy the annuity at 70, get a cancer diagnosis of 6 months to live how have I not lost the flexibility to spend my money over 1 year instead of 20.
You purchase a guaranteed payout term sufficient to insure most if not all of your principal is paid to your heirs should you die early. If you have no heirs you just purchase the SPIA and enjoy the higher payout. If you die early you'll also be giving up SS payouts you've paid for your entire life but you'll be dead so you wont care and also wont need the money :). If you have no heirs, purchase a normal SPIA and die early you are basically helping finance other people's SPIAs which could be seen as pretty altruistic.

For example today if you were 70 and purchased a SPIA for 200K you would receive a 7.96% annual payout with no guaranteed term. Adding a 10 year guarantee would drop your payout to 7.39% (still twice what most people think you can safely pull from your portfolio) and would receive a minimum of $147,720 in payouts even if you died early. A 15 year guarantee would insure at least $205,560 was paid out but would drop your payout to 6.85% (still not bad in today's market).

Principal is generally not at risk with a SPIA, unless you want it to be. All you are really giving up is liquidity which is why you shouldn't annuitize 100% of your portfolio unless you need to maximize monthly income and have insufficient savings. Multiple studies have shown annuitizing 30% to 40% of a portfolio increases payouts and decreases risk, it also helps people sleep better because they don't have to worry what the market is doing. Annuities cover living expenses, anything the market gives them on the rest of the portfolio is gravy.
Last edited by Quickfoot on Wed May 14, 2014 12:01 pm, edited 1 time in total.
freddie
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Re: Are Single Premium Annuities a good deal?

Post by freddie »

What is the safe withdrawal rate if you wait 10years to start taking the money and don't inflation adjust it? About 12%. And it has the plus that lot of those gains will have favorable tax treatment. There is nothing wrong with your plan as giving up returns to avoid market risk is a solid strategy. But their is a reason why you can get a 2x rate and it isn't because the insurance companies are great investors.
Quickfoot wrote:If the climate stays the same we plan to purchase a deferred annuity at 50, another at 55 and an immediate at 60, all with payments starting at 60. Even in today's low rate environment that would yield about an 8-9% spend rate on the SPIA money or more than twice the safe withdraw rate from a traditional portfolio. We expect to annuitize 30% or so of our portfolio and will carry a 20 year payment guarantee so our heirs will at least get the principal back should we die early.

We plan to retire around 55 (60 at latest) and wish to enjoy our early retirement years without worrying about running out of money. We will employ a higher spending rate of remaining assets to 70 at which point we'll claim SS and more than likely not have to draw down the portfolio at all. We also will have considerable tax deferred assets, spending down the tax deferred assets will minimize RMDs at 70. The five years proceeding retirement and the first five years of retirement are the most risky, we'll cover 1.5X our base spending needs with SPIAS and invest the rest 50/50 to 60/40.
Quickfoot
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Re: Are Single Premium Annuities a good deal?

Post by Quickfoot »

SPIAs pay more because of mortality credits, I'm not interested in inflation adjusting my SPIAs. If you look at total payout inflation adjusted SPIAs almost never make sense (unless you plan to live a very long time). Inflation adjusted SPIAs *only* make sense when you are depending on the SPIA as your primary source of income with no other assets and plan to spend 100% of the payout for living expenses every year.

We know retirees generally experience deflationary income requirements (as we age we spend less) at nearly or exceeding the rate of inflation. Meaning that although 80K wont buy the same amount of goods 20 years into retirement as it did at the start it doesn't matter because you don't need it to.

Deferring social security to age 70 maximizes guaranteed inflation adjusted income and 60 to 70% of the remaining portfolio being invested at 50/50 or 60/40 also provides inflation protection. Most retirees depending on their portfolio to pay their bills will be invested closer to 20/80 or 30/70 and will get far less inflation protection from their portfolio.

Longevity of the portfolio is also maximized because I don't have to inflation adjust withdraws, I'll be happy taking 5% of whatever the balance is even if that 5% is 25% less than the year prior (in the case 2008 happens and portfolio drops 25% with a 50/50 asset allocation).

We may also purchase a deferred annuity with payments starting at 80 to provide for longevity, just depends on the climate at age 60-65.
What is the safe withdrawal rate if you wait 10years to start taking the money and don't inflation adjust it? About 12%
Only if the market is nice to you, if the market is mean to you then you may not be able to retire at all or will be living on far less income. The point of annuitizing 30-40% is to insulate against unexpected market drops and also to eliminate the risk of running out of money (#1 and #2 fears among most retirees). Yes our heirs may give up some potential growth on the principal, but 60-70% will still grow *if* the market is nice.

Also purchasing the SPIAS and maximizing income allows us to help our children while we are still alive, while they are in their late 20's and early 30's and need the help the most. We can do that without worrying about giving away more money than we should and living in poverty our last few years. It also allows us to avoid the situation where we could have helped our children more but didn't because we were afraid of running out of money and wind up dying with too much money in our portfolio.

Also gives us more security to enjoy the vacations, travel, cars, and other things we'd like to do in our retirement without feeling like we are spending money we might *need* later.
Last edited by Quickfoot on Wed May 14, 2014 12:13 pm, edited 1 time in total.
steve_14
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Re: Are Single Premium Annuities a good deal?

Post by steve_14 »

Quickfoot wrote:For example today if you were 70 and purchased a SPIA for 200K you would receive a 7.96% annual payout with no guaranteed term. Adding a 10 year guarantee would drop your payout to 7.39% (still twice what most people think you can safely pull from your portfolio) and would receive a minimum of $147,720 in payouts even if you died early.
A 3.7% withdrawal rate for a single male with a 15 year life expectancy is extremely conservative. Maybe for a 65 year old couple. Also, you're not accounting for inflation, which safe withdrawal rates do. After about 16 years at 2.5% inflation, a 6% withdrawal rate becomes a 9% rate on the original balance, for example. I'm not saying SPIAs aren't useful tools, I just wouldn't oversell them.
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Re: Are Single Premium Annuities a good deal?

Post by Quickfoot »

Many people are saying a 3.5% withdraw right might be pretty aggressive for a 30 year retirement so I would not call a 3.7% conservative at all. I'm sure there are a number of people on this forum a 3.7% withdraw rate would freak out, especially if they retired at 55. If you don't purchase annuities you can't plan for a 15 year lifespan because you may live considerably longer, thus you are forced to plan for a 30 or 35 year retirement (maybe 40 or 45 years if you retire at 55) and your withdraw rate drops to 3 to 3.5%. It may turn out the market does the unexpected and a 4% or 5% can be maintained but those aren't games you want to play in retirement.

Vanguard says a 3.8% withdraw rate for 35 years only has a 91% chance of survival at a 50/50 asset allocation. Go to 40 years and it's only 88%, drop to a 30/70 (what most people will wind up at) at 3.8 for 40 years and you are down to 85%. If you retire at 55 needing 40 years of income is entirely possible, especially if you are a couple. Retiring at 55 or 60 dramatically increases our longevity risk which is nicely addressed by SPIAS.
I'm not saying SPIAs aren't useful tools, I just wouldn't oversell them.
If you wanted to maximize what you leave behind AND you don't care about early retirement buying SPIAS early may be the wrong choice. It just happens we want to retire early, are willing to make some tradeoffs and don't want to worry about running out of money. In our specific situation deferred annuities and SPIAS help us achieve what we want to and dramatically reduce risk.

I'm not worried about inflation, we aren't going to 100% annuitize. We will qualify for maximum social security benefits which will be even larger by waiting until 70 (or more likely 72 once reform is made). Social security and annuities alone will provide for a very comfortable retirement for us, that means all we need our investment portfolio to do is provide for inflation.

If we annuitize 30% of our portfolio and inflation is 3% the remaining 70% of our portfolio needs to return around 4.5% per year to inflation adjust our income and that's without considering social security inflation adjustments or spending decreasing as we age.
Last edited by Quickfoot on Wed May 14, 2014 12:31 pm, edited 2 times in total.
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Bustoff
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Re: Are Single Premium Annuities a good deal?

Post by Bustoff »

nisiprius wrote: Various research suggests that the "efficiency" of an SPIA is in the ballpark 90-95%; that is, collectively holders get something like 90-95% of what they put into it. NEVERTHELESS, if one has no need to have money left over--if one wants to use up as much of one's money as possible during life and have as little left over as possible--the "efficiency" of the usable safe spending amount from an SPIA, for equivalent risk, is much higher than the "efficiency" of withdrawal from portfolios.
Nisi
- regarding the "efficiency" aspect, does purchasing a SPIA become a better investment the older one becomes?

- Also, do you agree with Michael Kitces here:
...the majority of the benefits commonly attributed to partial annuitization are actually just the indirect result of a bucket strategy that produces a rising equity glidepath. While SPIAs do still provide superior results for very long-lived retirees, it truly takes extreme longevity - i.e., married couples living beyond age 100 - before the contribution from mortality credits actually outweighs the benefits of just using a strategy that liquidates more fixed income in the early years and allows equity exposure to rise. Accordingly, the bottom line is that for retirees who truly want to hedge extreme longevity, the benefits of SPIAs remain unmatched, but for most retirees who will not live that long the reality is that SPIAs not only fail to provide benefits, but they can actually produce results inferior to just replicating the rising equity glidepath without annuitizing at all!
see SPIA
Last edited by Bustoff on Wed May 14, 2014 4:14 pm, edited 1 time in total.
Quickfoot
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Re: Are Single Premium Annuities a good deal?

Post by Quickfoot »

regarding the "efficiency" aspect, does purchasing a SPIA become a better investment the older one becomes?
Not really, SPIAs work like social security, the monthly payout of a SPIA taken at a higher age will be more because they expect you to live a shorter period of time. If you live longer than they think you will you come out ahead, if you die early you lose and if you die on time you break even. That can be addressed with guaranteed payout terms which decrease the monthly payout but insure a minimum amount is paid back.

If you exercise, stay healthy, reduce stress, and have good genes you are likely to win with a SPIA, especially given medical breakthroughs extending the average life. Realize that breakthroughs that extend an average life have an even greater affect on people with longer than average lifespans or above average health.

Now if you have NOT saved enough and need to maximize monthly income at a late stage in life efficiency really doesn't matter, however odds are high you wont have many remaining assets to purchase a SPIA with so the higher payout may not help you. Waiting to buy a SPIA is only a good strategy if you know you will have assets available to purchase it with.
Last edited by Quickfoot on Wed May 14, 2014 12:36 pm, edited 1 time in total.
steve_14
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Re: Are Single Premium Annuities a good deal?

Post by steve_14 »

Quickfoot wrote:Many people are saying a 3.5% withdraw right might be pretty aggressive for a 30 year retirement so I would not call a 3.7% conservative at all. I'm sure there are a number of people on this forum a 3.7% withdraw rate would freak out, especially if they retired at 55.
Again, a 30 year 100% SWR is far too conservative for a typical 70 year old single male. If you want to compare a 55 year old male, post SPIA rates for that age. And again SWRs always factor in inflation adjustments, where your SPIA quote did not. So apples to oranges.
Quickfoot
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Re: Are Single Premium Annuities a good deal?

Post by Quickfoot »

The SPIA quote doesn't have to factor inflation because what ultimately matters is overall income, the overall income IS inflation adjusted. What we wind up with is a much higher level of guaranteed income with inflation adjustment achieved through the investment portfolio.

Just as we don't consider what an individual fund is doing performance wise, retirement income needs to be looked at holistically. We don't dump bonds because they under perform for 5 or even 15 years because we know if bonds are under performing it is likely another asset class is out performing and the portfolio as a whole is doing well.

Inflation adjustment is already built into most portfolios even without increasing income because most retirees experience decreased spending over the life of their retirement, until they reach end of life and medical costs soar. We definitely need to keep an eye on inflation but for most people it isn't the retirement killer some people think it is.
freddie
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Re: Are Single Premium Annuities a good deal?

Post by freddie »

Yes you can buy those riders but in exchange your giving up income. But lets use your last case (after all it is the only one that gets my money back). What is the math if I die right on time at 80. SPIA will pay out 200k. Bonds at 2% would be worth 92k with payouts of 13.7k*10 = 229k. That almost a 15% loss. Now if I live past 87, I will be real happy about that annuity:)

Yes you don't annuitize everything. But you are still losing access to that money. That is a loss of flexibility. I am not saying annuities are bad products. The early death loss and lack of flexibility are just facts of the product. You need to accept them and realize what you are gaining by the purchase.

As far as SS, that is the number one reason I have heard people use for taking it at 62. They are afraid of dying before they reach the break even dates for waiting.

Quickfoot wrote:
How are those objections negated?
a) I buy the annuity at 70 and die at 75, how do my heirs end up with more money?
b) I buy the annuity at 70, get a cancer diagnosis of 6 months to live how have I not lost the flexibility to spend my money over 1 year instead of 20.
You purchase a guaranteed payout term sufficient to insure most if not all of your principal is paid to your heirs should you die early. If you have no heirs you just purchase the SPIA and enjoy the higher payout. If you die early you'll also be giving up SS payouts you've paid for your entire life but you'll be dead so you wont care and also wont need the money :). If you have no heirs, purchase a normal SPIA and die early you are basically helping finance other people's SPIAs which could be seen as pretty altruistic.

For example today if you were 70 and purchased a SPIA for 200K you would receive a 7.96% annual payout with no guaranteed term. Adding a 10 year guarantee would drop your payout to 7.39% (still twice what most people think you can safely pull from your portfolio) and would receive a minimum of $147,720 in payouts even if you died early. A 15 year guarantee would insure at least $205,560 was paid out but would drop your payout to 6.85% (still not bad in today's market).

Principal is generally not at risk with a SPIA, unless you want it to be. All you are really giving up is liquidity which is why you shouldn't annuitize 100% of your portfolio unless you need to maximize monthly income and have insufficient savings. Multiple studies have shown annuitizing 30% to 40% of a portfolio increases payouts and decreases risk, it also helps people sleep better because they don't have to worry what the market is doing. Annuities cover living expenses, anything the market gives them on the rest of the portfolio is gravy.
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Re: Are Single Premium Annuities a good deal?

Post by HomerJ »

Quickfoot wrote:
I don't think you're going to get a 8%-9% spend rate for a couple at age 60 with a 20 year guarantee.
That's about what we would achieve today with today's rates if we implemented that plan. The way that is achieved is through using deferred annuities which result in a higher payout. A 10 year deferred annuity is paying 10.9%, 5 year deferred is paying 8.4% and an immediate with a 20 year guarantee is paying 5.23%. It is reasonable to expect rates will be higher by the time we actually need to purchase but if they aren't that's OK too. If rates are exceptionally low we can always turn the SPIA at 60 into a 5 year deferred with payments starting at 65. Achieving 8-9% is just a matter of purchasing the correct size deferred SPIA at the appropriate time.
Edit: see my post below before answering this one

Deferred annuities is one of the "bad" annuities... You are not getting a higher payout from a deferred annuity. It's smoke and mirrors. Explain how the 10-year deferred works, and how you figure it's paying 10.9%.

I'm betting you would get more money investing that money for 10 years in intermediate-term bonds or bond funds, and then buying a immediate annuity after 10 years have gone by.

Letting an insurance company collect 10 years of fees is not a way to achieve a higher payout.
Last edited by HomerJ on Wed May 14, 2014 2:12 pm, edited 4 times in total.
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HomerJ
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Re: Are Single Premium Annuities a good deal?

Post by HomerJ »

Explain how the 10-year deferred works, and how you figure it's paying 10.9%.
Actually, doing the math, I'm very interested in where this number comes from...

In this case you are saying that they will take $100,000 (for example) and in 10 years start paying you 10,900 a year?

A SPIA lifetime annuity for a couple of 60s year olds with 20-year guaranteed pays about 5.25% right now.

If the rates are the same in 10 years... that means you'd have to grow your $100,000 into $207,600 in 10 years in order to buy a SPIA that paid $10,900 a year (5.25%)

That's like 7.25% return over those 10 years...

Wow, this really is a good deal... They must assume interest rates are definitely going to go up in the next 10 years. If they don't, I'd be worried about how the insurance company is going to pay itself and guarantee you 7.25% return on your money over 10 years.

Am I doing this right? They promise to pay you $10,900 a year at 60 if you give them $100,000 at 50? Is that guaranteed? Or "projected"?
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Re: Are Single Premium Annuities a good deal?

Post by VictoriaF »

jimkinny wrote:As far as age, most feel the later the better but I think it was bobcat2 who pointed, what is obvious but easily overlooked, that regardless of age, the mortality credits start no matter what age you buy the annuity. Later is probably better for most but maybe not for me or you.
From the actuarial point of view, it does not matter at what age you purchase an SPIA. However, the later you do it, the less likely the insurance company is to go out of business. I don't think that a potential insurance company demise is priced into the annuity.

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Browser
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Re: Are Single Premium Annuities a good deal?

Post by Browser »

It's an interesting quirk of the human mind that purchasing annuities is so unpopular, primarily because people have the illusion that having the money in their own hands is superior -- as if they can self-manage a portfolio of risky assets over the span of their retirement (some 30 years or so) and precisely gauge the withdrawals so that they can optimize their lifestyle without running out of money before they run out of life. Paradoxically, however, when employees have been given a choice to switch from their defined benefit pension plans (which are basically deferred life annuities) to defined contribution plans (where they have the money and can manage it themselves), they overwhelmingly prefer a defined benefit plan. Go figure.
When given the option of switching to a defined contribution plan, workers overwhelmingly elect to stay in their defined benefit plan. In Florida and Michigan, more than 90% of those eligible to switch to a defined contribution plan stayed with the defined benefit plan.
http://www.ilretirementsecurity.org/faq?id=0010

I guess you have to look at it from the angle of already owning an annuity that you paid $X to purchase that pays a guaranteed income for life, and ask yourself if you'd be willing to sell it just so you can have $X in your own hands and have to figure out how you're going to invest it, manage it, and take withdrawals from it over the rest of your lifetime. Or maybe you can think of your Social Security benefits. Let's say that you had the choice of cashing those it at retirement and getting your contributions back as a lump sum to handle yourself for the rest of your lifetime. That could be nice for your heirs, especially if you have the decency to die right away. Would you do it? I sure wouldn't
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Re: Are Single Premium Annuities a good deal?

Post by bsteiner »

nisiprius wrote:Like all insurance, SPIAs should not be about getting a good deal. Insurance is never a good deal. It should be about whether it can match what you have to what you need, and allow you fulfill a greater portion of your needs than you could without one.
...
Various research suggests that the "efficiency" of an SPIA is in the ballpark 90-95%; that is, collectively holders get something like 90-95% of what they put into it. NEVERTHELESS, if one has no need to have money left over--if one wants to use up as much of one's money as possible during life and have as little left over as possible--the "efficiency" of the usable safe spending amount from an SPIA, for equivalent risk, is much higher than the "efficiency" of withdrawal from portfolios.
The "efficiency" depends on the discount rate you use to determine the present value of the annuity payments. You could use a low rate since the annuity payments are safe, or a high rate since you can't easily sell the annuity.
Browser wrote:It's an interesting quirk of the human mind that purchasing annuities is so unpopular, primarily because people have the illusion that having the money in their own hands is superior -- as if they can self-manage a portfolio of risky assets over the span of their retirement (some 30 years or so) and precisely gauge the withdrawals so that they can optimize their lifestyle without running out of money before they run out of life. Paradoxically, however, when employees have been given a choice to switch from their defined benefit pension plans (which are basically deferred life annuities) to defined contribution plans (where they have the money and can manage it themselves), they overwhelmingly prefer a defined benefit plan. Go figure....
I would buy or sell depending on the pricing. There's some price at which I would buy an annuity (though I doubt that anyone, with the possible exception of Social Security, would sell me one at that price). If I had one, there's some price at which I would sell it.

As to the retirement plans, it may be that people tend to prefer that which they have to that which they can swap it for. It also may depend on the pricing.
Bustoff wrote:...do you agree with Michael Kitces here:
...the majority of the benefits commonly attributed to partial annuitization are actually just the indirect result of a bucket strategy that produces a rising equity glidepath. While SPIAs do still provide superior results for very long-lived retirees, it truly takes extreme longevity - i.e., married couples living beyond age 100 - before the contribution from mortality credits actually outweighs the benefits of just using a strategy that liquidates more fixed income in the early years and allows equity exposure to rise. Accordingly, the bottom line is that for retirees who truly want to hedge extreme longevity, the benefits of SPIAs remain unmatched, but for most retirees who will not live that long the reality is that SPIAs not only fail to provide benefits, but they can actually produce results inferior to just replicating the rising equity glidepath without annuitizing at all!
see SPIA
I haven't looked at this closely enough to comment on it, other than to say that I know Michael Kitces and I have a great deal of respect for his opinions.
freddie
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Re: Are Single Premium Annuities a good deal?

Post by freddie »

I think a lot of it is inertia but I also don't think it is a fair comparison. I have never heard of a deferred annuity that will pay me 80% of my last 3 years of working (i.e guaranteed return ) and then when I quit gives me the option of taking a lump sum. To me that feels lot different than choosing between 1 million in cash or 50k/yr for the rest of my life. Market risk when you need to be in stocks (i.e. I believe most plans are in the 6% range) versus retirement (you just need 2-3% to last 30 years) is a lot different risk wise.

As far as social security, if it was allowed would you buy more insurance at the same rate? I might buy a little more (i.e. up my benefit from lets say 38k to 50k) but I wouldn't go much beyond that. The return is just too bad versus investing. And that is for an inflation asset with low bankruptcy risk.

Browser wrote:It's an interesting quirk of the human mind that purchasing annuities is so unpopular, primarily because people have the illusion that having the money in their own hands is superior -- as if they can self-manage a portfolio of risky assets over the span of their retirement (some 30 years or so) and precisely gauge the withdrawals so that they can optimize their lifestyle without running out of money before they run out of life. Paradoxically, however, when employees have been given a choice to switch from their defined benefit pension plans (which are basically deferred life annuities) to defined contribution plans (where they have the money and can manage it themselves), they overwhelmingly prefer a defined benefit plan. Go figure.
When given the option of switching to a defined contribution plan, workers overwhelmingly elect to stay in their defined benefit plan. In Florida and Michigan, more than 90% of those eligible to switch to a defined contribution plan stayed with the defined benefit plan.
http://www.ilretirementsecurity.org/faq?id=0010

I guess you have to look at it from the angle of already owning an annuity that you paid $X to purchase that pays a guaranteed income for life, and ask yourself if you'd be willing to sell it just so you can have $X in your own hands and have to figure out how you're going to invest it, manage it, and take withdrawals from it over the rest of your lifetime. Or maybe you can think of your Social Security benefits. Let's say that you had the choice of cashing those it at retirement and getting your contributions back as a lump sum to handle yourself for the rest of your lifetime. That could be nice for your heirs, especially if you have the decency to die right away. Would you do it? I sure wouldn't
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Re: Are Single Premium Annuities a good deal?

Post by Leeraar »

Wow.

Is working 30 years for a company and getting a defined benefit pension a good deal?

Is Social Security a good deal?

Is delaying Social Security a good deal?

The psychology of the lump sum is very interesting. I did not take the lump sum in lieu of my pension because the lump sum came nowhere near being able to buy my pension. I know others who retired early to get a lump sum and went back to work the next day as contractors with no benefits.

Read what Mike Piper has to say:

http://www.obliviousinvestor.com/why-mo ... -security/

You buy home insurance, auto insurance, ... hoping never to collect. Yet, you won't buy longevity insurance because, on average, you will collect?

L.
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Frugal Al
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Re: Are Single Premium Annuities a good deal?

Post by Frugal Al »

nisiprius wrote:Like all insurance, SPIAs should not be about getting a good deal. Insurance is never a good deal. It should be about whether it can match what you have to what you need, and allow you fulfill a greater portion of your needs than you could without one.
If someone really needs insurance they are foolhardy not to have it just to get a marginally better deal. On the other hand, as we all know, expenses matter. There is a point where self insurance makes sense if the insurance expense is too high. Some of us have more need for insurance than others. Annuity payouts are already up 9% from where they were about a year ago. That's not exactly insignificant.
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