Are Single Premium Annuities a good deal?

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CWRadio
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Re: Are Single Premium Annuities a good deal?

Post by CWRadio »

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
Is there a mutual fund that implements the rising equity glidepaths strategy?
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Bustoff
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Re: Are Single Premium Annuities a good deal?

Post by Bustoff »

Leeraar wrote: You buy home insurance, auto insurance, ... hoping never to collect. Yet, you won't buy longevity insurance because, on average, you will collect?
But it's far from mere psychology and there are obvious distinctions from delaying SS or buying home/auto insurance.

Unlike SPIA's, SS is not a choice, it's money that is "seized" from you. Moreover, home/auto insurance products are not lump sum up-front bets. Unlike SPIA's, home/auto insurance are periodic payments for coverage that buyers have the option to cancel at any moment. Now if home insurance required a one-time, up-front payment of 20 years worth of non-refundable premiums before coverage began, that would be a more realistic comparison.
Professor Emeritus
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Re: Are Single Premium Annuities a good deal?

Post by Professor Emeritus »

freddie wrote:They also have the highest guaranteed lost of principle of any investment :)
I know you put a smily but this is the same as saying buying any illiquid income asset is a loss of principle

Someone offers you a thousand dollars a month for the rest of your life or 10 K cash do you grab the cash to prevent the "loss of principle"?
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Bustoff
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Re: Are Single Premium Annuities a good deal?

Post by Bustoff »

CWRadio wrote:
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
Is there a mutual fund that implements the rising equity glidepaths strategy?
Not that I am aware of, but see this: http://wpfau.blogspot.com/2013/09/reduc ... ising.html
Professor Emeritus
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Re: Are Single Premium Annuities a good deal?

Post by Professor Emeritus »

Bustoff wrote:
Leeraar wrote: You buy home insurance, auto insurance, ... hoping never to collect. Yet, you won't buy longevity insurance because, on average, you will collect?
But it's far from mere psychology and there are obvious distinctions from delaying SS or buying home/auto insurance.

Unlike SPIA's, SS is not a choice, it's money that is "seized" from you. Moreover, home/auto insurance products are not lump sum up-front bets. Unlike SPIA's, home/auto insurance are periodic payments for coverage that buyers have the option to cancel at any moment. Now if home insurance required a one-time, up-front payment of 20 years worth of non-refundable premiums before coverage began, that would be a more realistic comparison.
Level payment term life insurance is actually pre-funded in exactly that way. it is worht far4 more in teh last years of the policy but you pay for it years before.
Deferrring SS is a choice.

The ONLY question with annuities for living expenses is whether they are "actuarially fair"
this is not an easy question to answer but everything else is political BS or a claim that you are smarter than the longevity market.

If you think you are smarter than the market what are you doing here?
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Bustoff
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SPIA is not a "no brainer"

Post by Bustoff »

Professor Emeritus wrote:
freddie wrote:They also have the highest guaranteed lost of principle of any investment :)
I know you put a smily but this is the same as saying buying any illiquid income asset is a loss of principle

Someone offers you a thousand dollars a month for the rest of your life or 10 K cash do you grab the cash to prevent the "loss of principle"?
But the SPIA is not a "no brainer", at least if you agree with the research that shows SPIA's only win out by a small margin over bonds and stocks with a rising equity glidepath...and that small margin only materializes if you live beyond 105.
Retread
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Re: Are Single Premium Annuities a good deal?

Post by Retread »

Professor Emeritus wrote:
freddie wrote:They also have the highest guaranteed lost of principle of any investment :)
I know you put a smily but this is the same as saying buying any illiquid income asset is a loss of principle

Someone offers you a thousand dollars a month for the rest of your life or 10 K cash do you grab the cash to prevent the "loss of principle"?
How about if we all agree on the spelling? Principal!
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Re: Are Single Premium Annuities a good deal?

Post by Professor Emeritus »

freddie 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.

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.

They have this incredible wonderful new product . it's called "life insurance". You can actually insure against the risk you mention.
stlrick
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Re: SPIA is not a "no brainer"

Post by stlrick »

Bustoff wrote: But the SPIA is not a "no brainer", at least if you agree with the research that shows SPIA's only win out by a small margin over bonds and stocks with a rising equity glidepath...and that small margin only materializes if you live beyond 105.
That may be true - on average, with a 5% or 10% failure rate (and all based on one research study with one set of modeling assumptions). If you want to play the odds that your one roll of the dice will be average, then don't hedge your bets with an SPIA. If you want to insure the risk, an SPIA is a valuable tool.
ot1138
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Re: Are Single Premium Annuities a good deal?

Post by ot1138 »

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.

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.
You got enough of my attention with this that I went and got a 10-year deferred annuity quote. In my case, the results aren't quite as rosy. With my wife receiving 75% of the benefit if I die, I'm getting only 7.5%. If I want that indexed to 2% growth, I'm down to 5.5%. If I want that indexed to CPI, I'm down to 4.4%.

Still better than the 4% rule but not by much. If there was a way to get 7% distribution indexed to some reasonable inflation estimate (2% seems reasonable given that I'll have a pile of cash in addition the annuity), this would be a lot more attractive.
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HomerJ
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Re: Are Single Premium Annuities a good deal?

Post by HomerJ »

ot1138 wrote:You got enough of my attention with this that I went and got a 10-year deferred annuity quote.
Where's a good place to get a quote?
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Taylor Larimore
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Re: Are Single Premium Annuities a good deal?

Post by Taylor Larimore »

HomerJ wrote:
ot1138 wrote:You got enough of my attention with this that I went and got a 10-year deferred annuity quote.
Where's a good place to get a quote?
Homer:

Try http://www.immediateannuities.com

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

Post by freddie »

Yep. And guess what? It costs money. :) I have to imagine it prices out very similar to the guarantees that the annuity companies use on average.
Professor Emeritus wrote:
freddie 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.

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.

They have this incredible wonderful new product . it's called "life insurance". You can actually insure against the risk you mention.
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HomerJ
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Re: Are Single Premium Annuities a good deal?

Post by HomerJ »

Taylor Larimore wrote:
HomerJ wrote:
ot1138 wrote:You got enough of my attention with this that I went and got a 10-year deferred annuity quote.
Where's a good place to get a quote?
Homer:

Try http://www.immediateannuities.com

Best wishes.
Taylor
Thanks Taylor...

Took a little searching to get a deferred annuity calculator that would work on that site (the front page one gives the same results if you say start the income in 1 month or 10 years), but I did find it

So if my wife (she's 53) gets a 10-year deferred annuity today (starts getting income at 63), a single life, 20-year guaranteed to the beneficiaries pays about $760 a month (or $9120 a year) for each $100,000 invested...

So it's actually pretty good... If rates don't change (of course they will, but let's assume), it would take $160,000 to purchase a SPIA that would generate $9120 a year.

If we kept the $100,000 and invested it ourselves over the next 10 years, we would need about a 4.9% return to get $160,000

So this deferred annuity is pretty decent... generates a 4.9% return over the next 10 years, then hands out a 9.1% lifetime annuity at the young age of 63... That seems awfully good compared to investing it myself, and pulling 4% a year instead...

Yes, I know the annuity money is GONE, while the 4% money is most likely providing 4% AND growing larger... But I'm intrigued... I'll still probably just invest the $100k myself, and buy a SPIA in 10 years (rates will probably be higher)... but the deferred annuity is not as a bad a deal as I thought...

(I'd still like to know where Quickfoot got his numbers... those seem too good to be true).
Last edited by HomerJ on Thu May 15, 2014 1:10 pm, edited 2 times in total.
freddie
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Re: Are Single Premium Annuities a good deal?

Post by freddie »

The 4.4% CPI rate may or may not be higher than a normal 3.5% or 4% SWR. Lets say we put 100k and check back in 10 years (and inflation just happens to be zero).

Annuity - 4400k/yr
0% real return = 3500
2% real/4% SWR - 4800
2% real/3.5% swr = 4230.
4%/4% SWR = 5900
4%/3.5% swr = 5180


I consider 2% real a pretty reasonable estimate for something like a 50/50 portfolio. 4% can definitely happen and so can 0 (or probably something like -2%. A lot will depend on your exact asset selection). When you look at it like that those annuity rates look pretty sane. You give up some return in exchange for offloading risk. And it should be mentioned this is with 100% payout to the survivor so it still isn't really 100% apples to apples.



ot1138 wrote:
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.

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.
You got enough of my attention with this that I went and got a 10-year deferred annuity quote. In my case, the results aren't quite as rosy. With my wife receiving 75% of the benefit if I die, I'm getting only 7.5%. If I want that indexed to 2% growth, I'm down to 5.5%. If I want that indexed to CPI, I'm down to 4.4%.

Still better than the 4% rule but not by much. If there was a way to get 7% distribution indexed to some reasonable inflation estimate (2% seems reasonable given that I'll have a pile of cash in addition the annuity), this would be a lot more attractive.
Professor Emeritus
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Re: Are Single Premium Annuities a good deal?

Post by Professor Emeritus »

freddie wrote:Yep. And guess what? It costs money. :) I have to imagine it prices out very similar to the guarantees that the annuity companies use on average.
Professor Emeritus wrote:
freddie 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.

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.

They have this incredible wonderful new product . it's called "life insurance". You can actually insure against the risk you mention.

TANSTAAFL

Life is a matrix of risk and cost. Inflation risk, longevity risk, rate of return risk , variability risk and default risk all exist. They can all be hedged at a variety of costs. Somehow you think that stuffing yoru pockets or mattress with cash avoids risk. It doesn't. You just exchange one for another. Historically for example your heirs have an incentive to kill you. Annuities avoid that risk. With an annuity they have an incentive to keep you alive etc you pays your money you takes your choice
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Re: Are Single Premium Annuities a good deal?

Post by Leeraar »

I am not sure there is a good reason to buy a deferred annuity. Wait until you want to assure the cash flow, and buy an SPIA at that time.

If you really want a term certain provision, I suggest you look at a regular SPIA and purchase term life insurance separately to get what you want. Personally, I have a hard time imagining the scenario where you need both. If you "lose" the SPIA wager, you'll be dead. What will you then care?

Since an SPIA is insurance against living beyond your life expectancy, and term life is insurance against dying before your life expectancy, aren't you buying two things that cancel each other out?

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
freddie
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Re: Are Single Premium Annuities a good deal?

Post by freddie »

You realize that is pretty much what I said in the first place?:) . The point I was making is that he really doesn't answer those objections that people have to annuities. He doesn't show why after buying an annuity and dying 3 years later (i.e. early death) that the heirs end up with more money. Of how they didn't lose the flexibility that a lump sums gives them. They are legit downsides to annuities. He just hand waves around them. The upside might be worth it but there is definitely some downsides.
Professor Emeritus wrote:
freddie wrote:Yep. And guess what? It costs money. :) I have to imagine it prices out very similar to the guarantees that the annuity companies use on average.
Professor Emeritus wrote:
freddie 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.

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.

They have this incredible wonderful new product . it's called "life insurance". You can actually insure against the risk you mention.

TANSTAAFL

Life is a matrix of risk and cost. Inflation risk, longevity risk, rate of return risk , variability risk and default risk all exist. They can all be hedged at a variety of costs. Somehow you think that stuffing yoru pockets or mattress with cash avoids risk. It doesn't. You just exchange one for another. Historically for example your heirs have an incentive to kill you. Annuities avoid that risk. With an annuity they have an incentive to keep you alive etc you pays your money you takes your choice
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Taylor Larimore
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Why wait to purchase a SPIA?

Post by Taylor Larimore »

Homer:

In my opinion, it is usually better to wait until our late 70s to purchase lifetime annuities for these reasons:

* The premium is less or the lifetime income is larger.

* You might need the cash.

* Inflation is less of a factor which allows an expensive "inflation rider" to be avoided.

* Current low interest rates may become higher, thereby making the SPIA payments larger.

* If your health deteriorates annuities are usually a bad choice.

* Less time for insurance companies to get in trouble.

* If you wait, and your portfolio becomes larger than needed, you may never need to purchase an annuity.

This is a study on the subject:

Optimal Asset Allocation and The Real Option to Delay Annuitization: It’s Not Now-or-Never

Best wishes.
Taylor
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Leeraar
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Re: Why wait to purchase a SPIA?

Post by Leeraar »

Taylor Larimore wrote:Homer:

In my opinion, it is usually better to wait until our late 70s to purchase lifetime annuities for these reasons:

* The premium is less or the lifetime income is larger.

* You might need the cash.

* Inflation is less of a factor which allows an expensive "inflation rider" to be avoided.

* Current low interest rates may become higher, thereby making the SPIA payments larger.

* If your health deteriorates annuities are usually a bad choice.

* Less time for insurance companies to get in trouble.

* If you wait, and your portfolio becomes larger than needed, you may never need to purchase an annuity.

This is a study on the subject:

Optimal Asset Allocation and The Real Option to Delay Annuitization: It’s Not Now-or-Never

Best wishes.
Taylor
Taylor,

Thank you! Aside from your usual good advice, this is a wonderful paper:
From a practical point of view, we find that most individuals in their 60s and 70s
should hold a substantial portion of their wealth in non-annuitized assets since the option
value to wait is quite large. More importantly, the presence of asymmetric mortality
beliefs – whether they are healthier or less healthy compared to the annuity population –
and insurance loads that are absent from the non-annuitized assets create a real option to
wait. We note that even when there is only a risk-free asset in the economy, a retiree with
asymmetric mortality beliefs might be willing to give up the mortality credits embedded
in the immediate annuity in exchange for the ability to self-annuitize and create an
optimal consumption pattern.
One thing to consider is that people are not very good at predicting their personal longevity. What the last sentence of the above quote means is if you believe you will die younger, don't buy an annuity, but then the rational plan is to consume more to spend the money before you die.

The irrational plan, IMO, is to not buy the annuity but then to constrain your spending in case you live longer.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Re: Are Single Premium Annuities a good deal?

Post by Frugal Al »

HomerJ wrote:So if my wife (she's 53) gets a 10-year deferred annuity today (starts getting income at 63), a single life, 20-year guaranteed to the beneficiaries pays about $760 a month (or $9120 a year) for each $100,000 invested...

So it's actually pretty good... If rates don't change (of course they will, but let's assume), it would take $160,000 to purchase a SPIA that would generate $9120 a year.

If we kept the $100,000 and invested it ourselves over the next 10 years, we would need about a 4.9% return to get $160,000

So this deferred annuity is pretty decent... generates a 4.9% return over the next 10 years, then hands out a 9.1% lifetime annuity at the young age of 63... That seems awfully good compared to investing it myself, and pulling 4% a year instead...
Homer, look away from this illusion. The IRR thru age 87 is 4%, nominal. Thru age 92 it's 4.5%, nominal, and perhaps 39 years inflation exposure. As Taylor points out, if you need an SPIA later, get one then.
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Re: Are Single Premium Annuities a good deal?

Post by Curlyq »

What i don't see as part of this discussion is that peoples' cognitive abilities to manage their money generally starts to decline in their 70s. They may not even realize it. I think this factor needs to be considered. Annuitization may help protect income in this case. The costs of annuitization need to be considered in addition to other protective measures, such as trusts.
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Re: Are Single Premium Annuities a good deal?

Post by Taylor Larimore »

What i don't see as part of this discussion is that peoples' cognitive abilities to manage their money generally starts to decline in their 70s. They may not even realize it.
Curleyq:

:oops:

Best wishes.
Taylor (age 90)
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Re: Are Single Premium Annuities a good deal?

Post by dodecahedron »

I would like to join others above in thanking Taylor for posting the link to the optimal annuity timing paper. It is indeed good to remind oneself that the purchase of a SPIA is not a "now or never" decision and there are good arguments for delaying the decision to annuitize based on the optionality value as well as market imperfections and information asymmetry in the annuities markets.

Of course, the cognitive decline issue is certainly worth bearing in mind as well and annuitization is something I will discuss with trusted family members whom I plan to educate and hope will gradually help take over my finances when I am no longer able to manage them myself. I hope to have a couple decades before that becomes an issue, so I have time to educate myself and those I may need to rely on to help me.
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Re: Are Single Premium Annuities a good deal?

Post by HomerJ »

Frugal Al wrote:
HomerJ wrote:So if my wife (she's 53) gets a 10-year deferred annuity today (starts getting income at 63), a single life, 20-year guaranteed to the beneficiaries pays about $760 a month (or $9120 a year) for each $100,000 invested...

So it's actually pretty good... If rates don't change (of course they will, but let's assume), it would take $160,000 to purchase a SPIA that would generate $9120 a year.

If we kept the $100,000 and invested it ourselves over the next 10 years, we would need about a 4.9% return to get $160,000

So this deferred annuity is pretty decent... generates a 4.9% return over the next 10 years, then hands out a 9.1% lifetime annuity at the young age of 63... That seems awfully good compared to investing it myself, and pulling 4% a year instead...
Homer, look away from this illusion. The IRR thru age 87 is 4%, nominal. Thru age 92 it's 4.5%, nominal, and perhaps 39 years inflation exposure. As Taylor points out, if you need an SPIA later, get one then.
Can you explain the math for the IRR?
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Re: Are Single Premium Annuities a good deal?

Post by Browser »

If you had not dilly-dallied about buying an annuity and done it just a few years ago, the interest rate would be making you salivate and you would be sitting pretty. I have a couple TIAA transfer payout annuities (which is how you must take distribions over a 9 year period from TIAA Traditional). They're running out next year I'm sad to say because of the high fixed rate on them. If you can predict the future of interest rates, and know they will go up then maybe dilly-dallying for a few years will work out. If your interest rate crystal ball is a little cloudy, then you don't know if today's rates will make you cry or make you salivate down the road. Bad idea to try to time your investments based on predicting the future -- it's a bad idea for purchasing annuities too.
We don't know where we are, or where we're going -- but we're making good time.
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Re: Are Single Premium Annuities a good deal?

Post by Leeraar »

Browser wrote:If you had not dilly-dallied about buying an annuity and done it just a few years ago, the interest rate would be making you salivate and you would be sitting pretty. I have a couple TIAA transfer payout annuities (which is how you must take distribions over a 9 year period from TIAA Traditional). They're running out next year I'm sad to say because of the high fixed rate on them. If you can predict the future of interest rates, and know they will go up then maybe dilly-dallying for a few years will work out. If your interest rate crystal ball is a little cloudy, then you don't know if today's rates will make you cry or make you salivate down the road. Bad idea to try to time your investments based on predicting the future -- it's a bad idea for purchasing annuities too.
The best predictor of tomorrow's interest rates is today's interest rates.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Browser
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Re: Are Single Premium Annuities a good deal?

Post by Browser »

Leeraar wrote:
Browser wrote:If you had not dilly-dallied about buying an annuity and done it just a few years ago, the interest rate would be making you salivate and you would be sitting pretty. I have a couple TIAA transfer payout annuities (which is how you must take distribions over a 9 year period from TIAA Traditional). They're running out next year I'm sad to say because of the high fixed rate on them. If you can predict the future of interest rates, and know they will go up then maybe dilly-dallying for a few years will work out. If your interest rate crystal ball is a little cloudy, then you don't know if today's rates will make you cry or make you salivate down the road. Bad idea to try to time your investments based on predicting the future -- it's a bad idea for purchasing annuities too.
The best predictor of tomorrow's interest rates is today's interest rates.

L.
What does that mean exactly - that interest rates aren't going to change?
We don't know where we are, or where we're going -- but we're making good time.
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Re: Are Single Premium Annuities a good deal?

Post by Leeraar »

Browser wrote:What does that mean exactly - that interest rates aren't going to change?
No, no one knows.

But, the best predictor of future interest rates, and of future inflation, is today's rates.

It is not Zimbabwe or the picture of the guy with a wheelbarrow of paper money.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Browser
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Re: Are Single Premium Annuities a good deal?

Post by Browser »

Leeraar wrote:
Browser wrote:What does that mean exactly - that interest rates aren't going to change?
No, no one knows.

But, the best predictor of future interest rates, and of future inflation, is today's rates.

It is not Zimbabwe or the picture of the guy with a wheelbarrow of paper money.

L.
In other words, we don't know.
We don't know where we are, or where we're going -- but we're making good time.
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Re: Are Single Premium Annuities a good deal?

Post by HomerJ »

Leeraar wrote:The best predictor of tomorrow's interest rates is today's interest rates.
No one cares about tomorrow's interest rates... What will the interest rates be 5 or 10 years from now?

Today's interest rates tell us very little about that.
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Re: Are Single Premium Annuities a good deal?

Post by Leeraar »

HomerJ wrote:
Leeraar wrote:The best predictor of tomorrow's interest rates is today's interest rates.
No one cares about tomorrow's interest rates... What will the interest rates be 5 or 10 years from now?

Today's interest rates tell us very little about that.
Why is this so hard to understand?

The best predictor is today's rates.

It is not that the federal budget is out of control and there will be runaway inflation. It is not that the banking system will collapse and there will be catastrophic deflation.

The best predictor is today's rates.
What will the interest rates be 5 or 10 years from now?
What exactly would you do with that knowledge?

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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Frugal Al
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Re: Are Single Premium Annuities a good deal?

Post by Frugal Al »

Leeraar wrote:Why is this so hard to understand?
The best predictor is today's rates.
It's hard to understand because it's naive, irrational, and incomplete. Indeed, the best predictor for tomorrow's rates is today's rates, but we should not conflate that to mean rates 10 years hence will be unchanged--the rationale falls apart. The same thing is often said about the temperature yet we obviously have wide swings over time. Just because we don't have a crystal ball does not mean we just put our blinders on and follow some old "rule of thumb" to the Nth degree.

Homer, the roughly 5% over the ten year deferral isn't bad, but there's no getting around the 2.75% IRR of the annuitized $160k thru age 87 (24 years). Input the numbers in Excel or LibreOffice. What is the penalty for not annuitizing after the deferral?
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Re: Are Single Premium Annuities a good deal?

Post by HomerJ »

Leeraar wrote:
HomerJ wrote:
Leeraar wrote:The best predictor of tomorrow's interest rates is today's interest rates.
No one cares about tomorrow's interest rates... What will the interest rates be 5 or 10 years from now?

Today's interest rates tell us very little about that.
Why is this so hard to understand?

The best predictor is today's rates.

It is not that the federal budget is out of control and there will be runaway inflation. It is not that the banking system will collapse and there will be catastrophic deflation.

The best predictor is today's rates.
Weird, I could have sworn rates were different 5-10 years ago. How come those rates didn't predict today's rates?
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Re: Are Single Premium Annuities a good deal?

Post by steve_14 »

HomerJ wrote:
Leeraar wrote:
HomerJ wrote:
Leeraar wrote:The best predictor of tomorrow's interest rates is today's interest rates.
No one cares about tomorrow's interest rates... What will the interest rates be 5 or 10 years from now?

Today's interest rates tell us very little about that.
Why is this so hard to understand?

The best predictor is today's rates.

It is not that the federal budget is out of control and there will be runaway inflation. It is not that the banking system will collapse and there will be catastrophic deflation.

The best predictor is today's rates.
Weird, I could have sworn rates were different 5-10 years ago. How come those rates didn't predict today's rates?
It's only weird if you don't understand the idea of predictions. I do, so I know that while five year treasuries won't pay exactly 1.55% X years from today, that's probably the most reasonable prediction, unless I know something the market doesn't.
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Re: Are Single Premium Annuities a good deal?

Post by Professor Emeritus »

HomerJ wrote:
Weird, I could have sworn rates were different 5-10 years ago. How come those rates didn't predict today's rates?
Not weird, if you have any background in the concept of prediction.
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Frugal Al
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Re: Are Single Premium Annuities a good deal?

Post by Frugal Al »

The most important concept to understand is that most financial predictions, including those by some very intelligent people, are...WRONG!
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Re: Are Single Premium Annuities a good deal?

Post by Bustoff »

Can someone please explain how a SPIA is different than a 1/N withdrawal method. 'N' being equal to the number of years you need to draw on the portfolio. (The N number is readjusted each year, meaning that for a portfolio that you wish to draw from for 30 years would allow a 1/30th of the total portfolio value to be withdrawn the first year, 1/29th the second, and so on.)

Seems that "1/N" doesn't have the risks of fixed SPIA's, i.e. insurance company insolvency, inflation, dying too soon.
What am I missing?
Last edited by Bustoff on Fri May 16, 2014 10:14 am, edited 1 time in total.
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Re: Are Single Premium Annuities a good deal?

Post by Professor Emeritus »

Frugal Al wrote:The most important concept to understand is that most financial predictions, including those by some very intelligent people, are...WRONG!
You will have to define wrong and when and how you know its wrong.

Predictions are the "best available estimate". to show it's "wrong" you have to show that at the same time you had a more accurate estimate.
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Re: Are Single Premium Annuities a good deal?

Post by steve_14 »

Bustoff wrote:Can someone please explain how a SPIA is different than a 1/N withdrawal method. 'N' being equal to the number of years you need to draw on the portfolio. (The N number is readjusted each year, meaning that for a portfolio that you wish to draw from for 30 years would allow a 1/30th of the total portfolio value to be withdrawn the first year, 1/29th the second, and so on.)
What happens if you live past N years?
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Re: Are Single Premium Annuities a good deal?

Post by Professor Emeritus »

Bustoff wrote:Can someone please explain how a SPIA is different than a 1/N withdrawal method. 'N' being equal to the number of years you need to draw on the portfolio. (The N number is readjusted each year, meaning that for a portfolio that you wish to draw from for 30 years would allow a 1/30th of the total portfolio value to be withdrawn the first year, 1/29th the second, and so on.)

Seems that "1/N" doesn't have the trade-off of higher risk inherent with fixed SPIA's, i.e. insurance company insolvency, inflation, dying too soon.
What am I missing?
Where did you get thirty years from ? Do you kill yourself at the end of 30 years?
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Re: Are Single Premium Annuities a good deal?

Post by Alex Frakt »

from the forum policies:
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