Allan Roth doesn't like single premium annuities

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CULater
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Allan Roth doesn't like single premium annuities

Post by CULater » Fri Oct 05, 2018 3:39 pm

Alan Roth takes a pretty good shot at buying annuities:
It’s illegal to sell something for even a trivial price claiming it will extend your life expectancy if there is no data to support the claim. Yet, it’s completely legal to take people’s life savings and trick them into thinking the return of their own money is income.

Why buy a CD yielding 3% when a SPIA yields 6% income, depending on the client’s age? Fork over $100,000 into a SPIA and that $6,000 income is attractive and guaranteed for life. The problem here is simple to explain – at a 6% payout, the client must live 16 years and 8 months (1/.06) just to get their principal back. It’s like buying a bond with a duration of the rest of the client’s life at a time when interest rates are near an all-time low. So that “guaranteed income for life” not only isn’t income, it guarantees the client will have maximum exposure to inflation risk.
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JoMoney
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Re: Alan Roth doesn't like single premium annuities

Post by JoMoney » Fri Oct 05, 2018 3:47 pm

I can see the argument against, especially in this time of extremely low interest rates.
I can also see why an investment advisor wouldn't like them.
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Re: Alan Roth doesn't like single premium annuities

Post by skjoldur » Fri Oct 05, 2018 4:00 pm

JoMoney wrote:
Fri Oct 05, 2018 3:47 pm
I can also see why an investment advisor wouldn't like them.
FWIW, Alan Roth does not manage money. He sells advice by the hour. So he has no financial incentive one way or the other in the portfolios he recommends. I think it's the best business model for financial advisors.

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Re: Alan Roth doesn't like single premium annuities

Post by hudson » Fri Oct 05, 2018 4:15 pm

I think that Alan's advice is worth listening to. He's given great advice through the years. His technical expertise has helped me.
I'm not an expert, but I've run a number of SPIA calculators.
If I was in my late 70s or 80s and my pile wasn't big enough, I might bite. Of course, I would do lots of research and post my proposal here first.
Taylor Larimore bought one to have enough money to live on. He then gave his children their inheritance early.

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Re: Alan Roth doesn't like single premium annuities

Post by columbia » Fri Oct 05, 2018 5:00 pm

I think there’s a strong case, if one is genuinely vulnerable to running out of money. I’m most certainly going to annuitize my TIAA Traditional hondings and will take it from there.

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Re: Alan Roth doesn't like single premium annuities

Post by Abe » Fri Oct 05, 2018 5:09 pm

hudson wrote:
Fri Oct 05, 2018 4:15 pm
If I was in my late 70s or 80s and my pile wasn't big enough, I might bite. Of course, I would do lots of research and post my proposal here first.
For the most part I agree with Mr. Roth, but there are situations where a SPIA might be the right thing to do.
Slow and steady wins the race.

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Re: Alan Roth doesn't like single premium annuities

Post by jalbert » Fri Oct 05, 2018 5:12 pm

It is not correct to view a SPIA as a bond with duration extending for the rest of your life. That’s because it is not priced by discounting interest payments for the rest of your life back to a present value. It has a duration corresponding to the duration of the payout cash flows up until your age attained at life expectancy. Your estate then gives up residual principal if you are younger than that in exchange for your continued receipt of payout if you live beyond that. The inflation risk is real and may limit the longevity insurance benefit if you don’t have a COLA’d annuity.
Last edited by jalbert on Fri Oct 05, 2018 7:06 pm, edited 1 time in total.
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Re: Alan Roth doesn't like single premium annuities

Post by Beehave » Fri Oct 05, 2018 5:23 pm

"The buyer has maximum exposure to inflation risk." True. Add onto that, the buyer takes on the risk of the insolvency of the seller.

On the other hand, that seller is taking on longevity risk and has exposure to deflation.

As with other purchases, it's a very good idea to know what you are buying and why you are buying it.

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Re: Alan Roth doesn't like single premium annuities

Post by Nate79 » Fri Oct 05, 2018 5:36 pm

About the only good thing about these products is they are low fees and you know exactly what you will get. But I think the inflation risk makes these very dangerous products.

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Re: Alan Roth doesn't like single premium annuities

Post by Dottie57 » Fri Oct 05, 2018 5:38 pm

SPIA is a longevity insurance. It can give a floor to provide for needed expenses. To help with inflation buy annuities a different times of life. 70, 80, 85. Don’t spend all of the money on annuities.

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Re: Alan Roth doesn't like single premium annuities

Post by ThrustVectoring » Fri Oct 05, 2018 5:39 pm

Single premium annuities have one very good feature for retirees: 100% of the funds get spent towards retirement, and nothing gets left behind for heirs. This means that it inherently requires a smaller cash outlay to fund living expenses.

SPIAs aren't the ideal mechanism over the long run, though, since it's essentially 100% fixed-income and has no equities to drive long-term growth. The ideal product - which doesn't exist yet, by the way - is an actuarially fair tontine invested at least partially in the S&P 500. The stakes of members who died would get distributed to survivors as mortality credits based off how old they are, rather than getting distributed to heirs.
Current portfolio: 60% VTI / 40% VXUS

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Re: Alan Roth doesn't like single premium annuities

Post by Nate79 » Fri Oct 05, 2018 6:08 pm

The are NOT longevity insurance. This falsehood continues to be spread. The do not protect you from running out of money for old age because they do not protect against inflation for which the risk gets worse and worse the longer you live.

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Re: Alan Roth doesn't like single premium annuities

Post by Dottie57 » Fri Oct 05, 2018 6:24 pm

Nate79 wrote:
Fri Oct 05, 2018 6:08 pm
The are NOT longevity insurance. This falsehood continues to be spread. The do not protect you from running out of money for old age because they do not protect against inflation for which the risk gets worse and worse the longer you live.
Nothing protects you from not having enough money in old age except death.

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Re: Alan Roth doesn't like single premium annuities

Post by galeno » Fri Oct 05, 2018 6:50 pm

Is it not possible to buy an inflation-indexed SPIA (income annuity)? Of course it would cost more. Possibly lots more?
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: Alan Roth doesn't like single premium annuities

Post by randomguy » Fri Oct 05, 2018 8:28 pm

galeno wrote:
Fri Oct 05, 2018 6:50 pm
Is it not possible to buy an inflation-indexed SPIA (income annuity)? Of course it would cost more. Possibly lots more?
They are available but people don't like them because instead of getting htat 6-7% at the start, you get like ~4.5% and if inflation doesn't show up it takes like 10+ years for the adjusted payouts to match what you get from a nominal SPIA. That makes a tough product to sell compare to the simple 3% versus 6% comparision that is normally made. Most people aren't good enough with numbers to realize that the 3% and 6% are numbers that can't be compared.

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Re: Alan Roth doesn't like single premium annuities

Post by stlutz » Fri Oct 05, 2018 9:27 pm

I think the problem with the inflation-adjusted annuities that only one company sells is that the "breakeven" inflation rate is about 3.5% if you compare to ones with a fixed annual COLA. That's expensive inflation insurance.

For most people (i.e. these not in the "two comma club"), SPIAs do make a lot of sense, as they provide a higher income than a 4% withdrawal rate does. They are an efficient way to turn assets into consistent, predictable income. Yes, they do have a lot of inflation risk, but one can plan for that (i.e. don't necessarily spend all of the income in the early years), and everyone does have another significant income stream that is inflation-adjusted--Social Security.

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Re: Alan Roth doesn't like single premium annuities

Post by Munir » Fri Oct 05, 2018 9:30 pm

Mr. Roth does not mention an inflation rider that can be purchased with an SPIA, and a time period certain rider to protect your heirs in case you die soon after you purchase an annuity. The latter guarantees payout to your heirs for a designated number of years after purchase if you die early. If the buyers of SPIAs don't know about those riders, they should not be buying SPIAs.

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Re: Alan Roth doesn't like single premium annuities

Post by zaboomafoozarg » Fri Oct 05, 2018 10:18 pm

Nate79 wrote:
Fri Oct 05, 2018 6:08 pm
The are NOT longevity insurance. This falsehood continues to be spread. The do not protect you from running out of money for old age because they do not protect against inflation for which the risk gets worse and worse the longer you live.
You can buy SPIAs that increase payouts by the CPI each year.

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Re: Alan Roth doesn't like single premium annuities

Post by Sheepdog » Fri Oct 05, 2018 10:37 pm

For me and my wife, SPIAs are peace of mind contracts, not investments. That is more than profitable for our savings.
I waited until I reached my 80s to buy mine so in actuality I don't have a lot of time to lose
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Re: Alan Roth doesn't like single premium annuities

Post by HomerJ » Fri Oct 05, 2018 10:49 pm

hudson wrote:
Fri Oct 05, 2018 4:15 pm
I think that Alan's advice is worth listening to. He's given great advice through the years. His technical expertise has helped me.
I'm not an expert, but I've run a number of SPIA calculators.
If I was in my late 70s or 80s and my pile wasn't big enough, I might bite. Of course, I would do lots of research and post my proposal here first.
Taylor Larimore bought one to have enough money to live on. He then gave his children their inheritance early.
SPIAs are a great Plan B.

If you hit a bad sequence of returns and half your original money is gone 15-20 years into retirement (and you're a healthy 75-80), buying a 10% SPIA might be a pretty good option.
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Re: Alan Roth doesn't like single premium annuities

Post by HomerJ » Fri Oct 05, 2018 10:51 pm

Dottie57 wrote:
Fri Oct 05, 2018 5:38 pm
SPIA is a longevity insurance. It can give a floor to provide for needed expenses. To help with inflation buy annuities a different times of life. 70, 80, 85. Don’t spend all of the money on annuities.
Yes, that's a good way to use it too..

Basically create yourself a pension.
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Re: Alan Roth doesn't like single premium annuities

Post by randomguy » Fri Oct 05, 2018 11:32 pm

Munir wrote:
Fri Oct 05, 2018 9:30 pm
Mr. Roth does not mention an inflation rider that can be purchased with an SPIA, and a time period certain rider to protect your heirs in case you die soon after you purchase an annuity. The latter guarantees payout to your heirs for a designated number of years after purchase if you die early. If the buyers of SPIAs don't know about those riders, they should not be buying SPIAs.
The problem is those riders aren't free. Get an inflation adjusted spia and your getting 4% not 7%. Get a return on principle and you reduce the value of mortality credits (i.e. you only split the gains and not the principle of the people that die early). That reduces both the losses (i.e. you die early) and wins (you don't die). Figuring out if they are worth to you requires careful thought.

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Re: Alan Roth doesn't like single premium annuities

Post by SevenBridgesRoad » Sat Oct 06, 2018 1:28 am

Apparently everyone hates annuities. Some guy named Ken Fisher hates them. And now Alan Roth hates them too.

SPIAs can be part of Plan A. Nobody should chuck all their savings into a SPIA, but they can make sense as part of a plan.

Annuities have at least three advantages:
1) Lifetime Income: It is possible to outlive the income from every other investment.
2) Guaranteed Income: The stock market can turn bearish or bullish, interest rates can climb or plummet, but the income from your annuity is known in advance.
3) Income is partly tax-free: This is not a big one for me, but I’ll list it because its on the list of advantages. A portion of each payment is considered repayment of the money you put in and therefore not taxed.


Disadvantages:
1) Irrevocable: Once you hand over your money, you can’t get it back. And you could die soon after handing over your money.
2) Inflation: Years of inflation will eat away at the value of the payments. (There are mitigations for this.)
3) Insolvency: The insurer or charity issuing your annuity could become financially insolvent. No government backstop. (There are mitigations for this.)


I’ll credit Stephen Pollan’s “Die Broke” book (late 1990's?) with the above pros and cons (I shortened it a bit).

As one piece of an overall retirement strategy, his approach made sense to me back when I read this many years ago. Still does. Have to be comfortable with spending your kid’s inheritance while you are still alive, while you can be in on their enjoyment. How cool is that? Combine a SPIA or two with SS and a nice three fund portfolio to cover the rest, you’ve got a pretty bullet proof package for sleeping well at night and never running out of money. Different strokes.
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Re: Alan Roth doesn't like single premium annuities

Post by SevenBridgesRoad » Sat Oct 06, 2018 1:31 am

HomerJ wrote:
Fri Oct 05, 2018 10:51 pm
Dottie57 wrote:
Fri Oct 05, 2018 5:38 pm
SPIA is a longevity insurance. It can give a floor to provide for needed expenses. To help with inflation buy annuities a different times of life. 70, 80, 85. Don’t spend all of the money on annuities.
Yes, that's a good way to use it too..

Basically create yourself a pension.
+1
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Re: Alan Roth doesn't like single premium annuities

Post by Nate79 » Sat Oct 06, 2018 5:06 am

zaboomafoozarg wrote:
Fri Oct 05, 2018 10:18 pm
Nate79 wrote:
Fri Oct 05, 2018 6:08 pm
The are NOT longevity insurance. This falsehood continues to be spread. The do not protect you from running out of money for old age because they do not protect against inflation for which the risk gets worse and worse the longer you live.
You can buy SPIAs that increase payouts by the CPI each year.
Perhaps but any type of SPIA with any sort of inflation adjustment is basically a unicorn and is not what 99% of the discussion on BH about these products.

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Re: Alan Roth doesn't like single premium annuities

Post by Dandy » Sat Oct 06, 2018 8:25 am

A single pay annuity is a good product/tool for some people in some instances. Since they are usually sold by those getting a commission they are often sold to people who might be better off with a different product or by putting a lesser amount into the product.

Many retirees who are not investment savvy and/or do not have sufficient assets can benefit by using some of those assets to get guaranteed income for life. Inflation is a major risk to this decision granted. So, is running out of money. The key is getting good advice that fits the individual's need and that the advice is not affected by commissions. Not an easy solution.

So, I guess the concept is a good one for some, the real risk is the matching of the product to the individual fairly.

I consider myself fairly good with investments and money management. I have 2 non COLA pensions. I would not trade them in for a lump sum equivalent now or at the time I took them. They plus Social Security cover most of our current expenses. They provide a base income for life, peace of mind, less reliance on my portfolio and less investment management for me and especially for my non investment savvy wife. A properly sold single pay annuity can provide much of the same benefit.

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Re: Alan Roth doesn't like single premium annuities

Post by SGM » Sat Oct 06, 2018 9:08 am

I think a ladder of SPIAs will be a helpful addition to our retirement. I completely understand the inflation downside and that early on it is a return of principal. Having a large portfolio is helpful, but having multiple income streams will allow us to take out less from our portfolio. Also income streams are somewhat safer from fraud than a portfolio, but that is a different topic. I have separate spreadsheets tracking income and expenses and another tracking portfolio value. I am looking at the large picture in retirement as no one else cares as much about it.

We do have one variable annuity with TIAA-CREF from an old 403b. In 3 years time the annuity has paid out 6 x what was initially put into the account including matching by the former employer. Also the variable CREF portion has increased the payout over 30% in the 3 years. The costs to the insurance company is quite low compared to other insurance products because there is no guarantee. As retirees die off surviving annuitants share in what is left. It is tontine like in that respect. I tried to explain this to Alan Roth, but in my opinion he seemed close minded on the subject. I would not by a variable annuity on the open market, but we are very satisfied with this one.

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Re: Alan Roth doesn't like single premium annuities

Post by smackboy1 » Sat Oct 06, 2018 9:36 am

SPIA are just another tool in the tool box. Sometimes it's the right tool, but not always. I think the problem is when people consider them investments and start looking at ROI. I don't consider them investments. They are more akin to insurance like life insurance, flood insurance, umbrella insurance. I account for a negative expected return i.e. I expect to lose $ and the issuer to make a profit. Utility of SPIA is that it is a way to shift the burden of loss of longevity risk from the purchaser onto the issuer. Like other insurance it provides a safety net against a specific type of risk.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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Re: Alan Roth doesn't like single premium annuities

Post by Stormbringer » Sat Oct 06, 2018 9:44 am

Alan Roth wrote:Income is the wrong goal
Ugh, this is terrible advice! Most people's lives are organized around income, not the current market value of our brokerage accounts. Our first and foremost retirement goal should be to secure a reliable stream of income that provides us with an acceptable standard of living and doesn't evaporate when the markets do this or that, or get wiped out by inflation, or suddenly vanishes because we live too long.

People are too focused on being the richest guy in the cemetery. If you can pull that off after securing your retirement needs, fine. But first things first.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Alan Roth doesn't like single premium annuities

Post by HomerJ » Sat Oct 06, 2018 9:51 am

SevenBridgesRoad wrote:
Sat Oct 06, 2018 1:28 am
Apparently everyone hates annuities. Some guy named Ken Fisher hates them. And now Alan Roth hates them too.

SPIAs can be part of Plan A. Nobody should chuck all their savings into a SPIA, but they can make sense as part of a plan.

Annuities have at least three advantages:
1) Lifetime Income: It is possible to outlive the income from every other investment.
2) Guaranteed Income: The stock market can turn bearish or bullish, interest rates can climb or plummet, but the income from your annuity is known in advance.
3) Income is partly tax-free: This is not a big one for me, but I’ll list it because its on the list of advantages. A portion of each payment is considered repayment of the money you put in and therefore not taxed.


Disadvantages:
1) Irrevocable: Once you hand over your money, you can’t get it back. And you could die soon after handing over your money.
2) Inflation: Years of inflation will eat away at the value of the payments. (There are mitigations for this.)
3) Insolvency: The insurer or charity issuing your annuity could become financially insolvent. No government backstop. (There are mitigations for this.)


I’ll credit Stephen Pollan’s “Die Broke” book (late 1990's?) with the above pros and cons (I shortened it a bit).

As one piece of an overall retirement strategy, his approach made sense to me back when I read this many years ago. Still does. Have to be comfortable with spending your kid’s inheritance while you are still alive, while you can be in on their enjoyment. How cool is that? Combine a SPIA or two with SS and a nice three fund portfolio to cover the rest, you’ve got a pretty bullet proof package for sleeping well at night and never running out of money. Different strokes.
This is a great post, and I agree with everything you wrote.

For other readers, remember we are talking ONLY about SPIA (single-premium immediate annuities). You give the insurance company $100,000, and they give you $6000 a year (or whatever) for life. Very simple, very straightforward. Of course, the $100,000 is gone, and if you die 2 years later, it was a pretty bad deal. For the first 15+ years, they are just giving you your own money back, but the guarantee of $X dollars a year for life is definitely worth some peace of mind.

Stay away from the other type of annuities, where it's treated like an investment over time deal, and there are a ton of hidden fees and riders. The SPIA is just a simple income contract.
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Re: Alan Roth doesn't like single premium annuities

Post by HomerJ » Sat Oct 06, 2018 10:07 am

Stormbringer wrote:
Sat Oct 06, 2018 9:44 am
Alan Roth wrote:Income is the wrong goal
Ugh, this is terrible advice! Most people's lives are organized around income, not the current market value of our brokerage accounts. Our first and foremost retirement goal should be to secure a reliable stream of income that provides us with an acceptable standard of living and doesn't evaporate when the markets do this or that, or get wiped out by inflation, or suddenly vanishes because we live too long.

People are too focused on being the richest guy in the cemetery. If you can pull that off after securing your retirement needs, fine. But first things first.
Yes, I agree that's a very weird thing for Alan Roth to say. Maybe he's so rich, he has no worries, and is just trying to maximize inheritance for his kids.

The whole point of an SPIA is to increase your income, while letting you sleep at night.

If I have $1 million dollars at 65, 4% rule says I should only take $40,000 a year. Now, that million will probably grow only taking 4%, but it might not, and I have to be careful, so I stick with 4% to be safe. The odds are high my kids are going to inherit a TON of money because I'm too scared (rightly so) to spend it.

Maybe when I'm 80, I'll loosen the purse strings, but even then, if I'm healthy I'll still have to worry about living another 20 years (and possible long-term care!), and if I'm not healthy, the extra money isn't really going to good use. Sure wish I could I have spent more of it back in my 60s!

If I get a SPIA using $300,000 at 65, I could get 6.7% on that, and then taking 4% on $700,000, now I get to pull $48,000 a year.

That's a 20% gain in spending. Yes, it's not inflation adjusted, but in 10 years at age 75, I could buy another SPIA (at 9.3%) to increase my income a bit more.

And for the super conservative people here who think 4% is crazy reckless, and only want to pull 3%, they absolutely should be looking at SPIAs.

Unless, of course, you have so much money that you don't have to bother with SPIAs. They are NOT a good investment. But they are a good way to increase your income. Like others have said, it's insurance, just in case you live too long, and outlive your money.
Last edited by HomerJ on Sat Oct 06, 2018 10:11 am, edited 2 times in total.
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Re: Alan Roth doesn't like single premium annuities

Post by columbia » Sat Oct 06, 2018 10:08 am

SGM wrote:
Sat Oct 06, 2018 9:08 am
I think a ladder of SPIAs will be a helpful addition to our retirement. I completely understand the inflation downside and that early on it is a return of principal. Having a large portfolio is helpful, but having multiple income streams will allow us to take out less from our portfolio. Also income streams are somewhat safer from fraud than a portfolio, but that is a different topic. I have separate spreadsheets tracking income and expenses and another tracking portfolio value. I am looking at the large picture in retirement as no one else cares as much about it.

We do have one variable annuity with TIAA-CREF from an old 403b. In 3 years time the annuity has paid out 6 x what was initially put into the account including matching by the former employer. Also the variable CREF portion has increased the payout over 30% in the 3 years. The costs to the insurance company is quite low compared to other insurance products because there is no guarantee. As retirees die off surviving annuitants share in what is left. It is tontine like in that respect. I tried to explain this to Alan Roth, but in my opinion he seemed close minded on the subject. I would not by a variable annuity on the open market, but we are very satisfied with this one.

Interesting.

It sounds like you are pretty happy with your choice over the standard TIAA annuity option.

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Re: Alan Roth doesn't like single premium annuities

Post by Stormbringer » Sat Oct 06, 2018 10:09 am

HomerJ wrote:
Sat Oct 06, 2018 9:51 am
You give the insurance company $100,000, and they give you $6000 a year (or whatever) for life. Very simple, very straightforward. Of course, the $100,000 is gone, and if you die 2 years later, it was a pretty bad deal.
Maybe, but the alternative may have been that, using the 4% rule, you only got to spend $4000 a year for the last two years of your life. That's an even worse deal (unless you are concerned about leaving money to someone when you die).
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Alan Roth doesn't like single premium annuities

Post by Dandy » Sat Oct 06, 2018 10:16 am

Interesting that people don't complain that Social Security is just giving your own money back for awhile - of course it is inflation protected and not a choice.

As far as being comfortable about giving away some of your inheritance that isn't necessarily so. Yes especially if it is a large amount and/or you die quickly. But, by reducing the withdrawals on your portfolio it may not be such a big loss to heirs. Also, less likely the heirs will have to help you out financially. Of course a lot depends on the size of the annuity purchase and the size of the remaining investment portfolio and its returns.

Don't have an insurance annuity but my non COLA pensions and Social Security have enabled me to gift early inheritance to my children since almost all my current expenses are covered by this income. So, instead of my heirs having to wait for my/our demise, they are getting some help now when they can use it and we can enjoy them having less financial stress in their life. Meanwhile, my investment portfolio is barely touched to cover normal expenses.

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Re: Alan Roth doesn't like single premium annuities

Post by Bob » Sat Oct 06, 2018 11:00 am

It does not take much to show that annuities are a financial scam on consumers -- totally legal just like payday lenders in most states.
  • Scam #1: They are advertised featuring "payout rates" which most consumers compare to CD rates because most people do not know better even after they read the fine print.
    Scam #2: They are advertised as "guaranteed" which sounds great. And how many people understand the fine print about the company is assumed to be able to pay
Financially, annuities are a usually not a clear winner versus investing in a rolling ladder of safer, FDIC-insured CDs unless people really think they will live well past their life expectancy. For instance at age 70, a $100,000 purchase of a joint life, SPIA would "payout" $6,276 per year. Starting with $100,000, invested it in CDs and annually withdrawing the same amount as the annuity's payout ($6,276) would last until age 90 if the CD rate one got was just 3.0% (which is about 10% less than 5 year CDs pay today).

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Re: Alan Roth doesn't like single premium annuities

Post by columbia » Sat Oct 06, 2018 11:09 am

Bob wrote:
Sat Oct 06, 2018 11:00 am
It does not take much to show that annuities are a financial scam on consumers -- totally legal just like payday lenders in most states.
  • Scam #1: They are advertised featuring "payout rates" which most consumers compare to CD rates because most people do not know better even after they read the fine print.
    Scam #2: They are advertised as "guaranteed" which sounds great. And how many people understand the fine print about the company is assumed to be able to pay
Financially, annuities are a usually not a clear winner versus investing in a rolling ladder of safer, FDIC-insured CDs unless people really think they will live well past their life expectancy. For instance at age 70, a $100,000 purchase of a joint life, SPIA would "payout" $6,276 per year. Starting with $100,000, invested it in CDs and annually withdrawing the same amount as the annuity's payout ($6,276) would last until age 90 if the CD rate one got was just 3.0% (which is about 10% less than 5 year CDs pay today).
True. But then you’re broke at age 90.
What’s the next move for the above scenario?

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Re: Alan Roth doesn't like single premium annuities

Post by stlutz » Sat Oct 06, 2018 11:21 am

Financially, annuities are a usually not a clear winner versus investing in a rolling ladder of safer, FDIC-insured CDs unless people really think they will live well past their life expectancy. For instance at age 70, a $100,000 purchase of a joint life, SPIA would "payout" $6,276 per year. Starting with $100,000, invested it in CDs and annually withdrawing the same amount as the annuity's payout ($6,276) would last until age 90 if the CD rate one got was just 3.0% (which is about 10% less than 5 year CDs pay today)
Yes, an annuity is not a good idea if you are seeking income for an exact number of years.

The problem here is I'm not living an average life, I'm living my own. What do I with with the CD ladder approach if I'm still alive at 90 and I'm now out of money? I could say that I'll withdraw at a lower rate to take me to 100. With that approach, I need 30% more more money to create that $6276 of income. So, I can have a $130,000 CD ladder or a $100,000 annuity + $30,000 that I can do something else with, like invest in stocks.

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Re: Alan Roth doesn't like single premium annuities

Post by Bob » Sat Oct 06, 2018 11:36 am

Yes, an approach using CDs could "fail". For people age 70, 20% of men and 33% women are expected to be alive at age 90. However, only 10% of the time do both partners in a couple achieve age 90 together. But if one is in that "lucky" group that lives past 90, it could be a BIG problem if adjustments were not made. Agreed.

On other hand, a CD-based strategy incorporates much lower cost, inflation protection. When we encounter inflation CD rates rise -- and there is not an added charge or lower initial payout for that protection. With annuities you need to guess what inflation will occur and buy that protection so that your initial "payout" is much less than the figure I quoted in the annuity that was not inflation-adjusted.

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Re: Alan Roth doesn't like single premium annuities

Post by stlutz » Sat Oct 06, 2018 11:43 am

Bob wrote:
Sat Oct 06, 2018 11:36 am
Yes, an approach using CDs could "fail". For people age 70, 20% of men and 33% women are expected to be alive at age 90. However, only 10% of the time do both partners in a couple achieve age 90 together. But if one is in that "lucky" group that lives past 90, it could be a BIG problem if adjustments were not made. Agreed.
Thanks for the life expectancy stats--those odds are actually higher than I would have guessed. So, for a couple there appears to be a 46% chance of one of them living past 90. Sounds like if you're 70 you need to have some plan for income beyond then.
On other hand, a CD-based strategy incorporates much lower cost, inflation protection. When we encounter inflation CD rates rise -- and there is not an added charge or lower initial payout for that protection. With annuities you need to guess what inflation will occur and buy that protection so that your initial "payout" is much less than the figure I quoted in the annuity that was not inflation-adjusted.
Good point.

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Re: Alan Roth doesn't like single premium annuities

Post by Bob » Sat Oct 06, 2018 12:03 pm

I have not run the numbers on this scenario but I wonder if a strategy that starts with a CD-based approach and then has a trigger for when to buy an annuity (if ever) might be the best of all options? When I have time, I'll look into that. I am not sure if the right trigger would be one spouse dying, the nest egg reaching a certain level (like 50% of original value) or something else.

Some things to think and work through include:
  • Delaying buying an annuity and using CDs has the advantage of some "free" inflation protection and maybe some upside in rates (or downside, too, i guess.)

    The longer one waits to buy an annuity of higher the "payout" and if it is on one life and not two, the "payout" also increases.

    The odds suggest one (an perhaps both) partners will die before age 90 so this would be tailored to a likely scenario.

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Re: Alan Roth doesn't like single premium annuities

Post by jalbert » Sat Oct 06, 2018 1:06 pm

If you otherwise would hold a portfolio that includes nominal bonds, there is no reason that the nominal bond allocation cannot be annuitized with a nominal SPIA without much change to the inflation risk of the portfolio.
Risk is not a guarantor of return.

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Re: Alan Roth doesn't like single premium annuities

Post by stlutz » Sat Oct 06, 2018 1:33 pm

Bob wrote:
Sat Oct 06, 2018 12:03 pm
I have not run the numbers on this scenario but I wonder if a strategy that starts with a CD-based approach and then has a trigger for when to buy an annuity (if ever) might be the best of all options? When I have time, I'll look into that. I am not sure if the right trigger would be one spouse dying, the nest egg reaching a certain level (like 50% of original value) or something else.

Some things to think and work through include:
  • Delaying buying an annuity and using CDs has the advantage of some "free" inflation protection and maybe some upside in rates (or downside, too, i guess.)

    The longer one waits to buy an annuity of higher the "payout" and if it is on one life and not two, the "payout" also increases.

    The odds suggest one (an perhaps both) partners will die before age 90 so this would be tailored to a likely scenario.
There are any number of good ways to go about it. My main argument here is against the idea that SPIAs are as bad of an idea as Roth suggests.

One approach is to kind of do the opposite of what you proposed:

1) At age 65 buy a deferred annuity that starts paying at age 85. Suppose I want $4000 of annual income. I'll assume 3% inflation for the next 20 years, so I actually need to buy $7225 in income. That costs me $28,000 for a joint annuity.

2) I use a TIPS ladder (or CDs as you propose) to fund the rest. Assuming I want to generate the same $4000 of inflation-adjusted income for the next 20 years, I need $72,000.

Total cost for the $4000/yr. in guaranteed income comes to $100,000.

Don't think I would do that with my entire portfolio given the very high likelihood that the same 4% WR works from a standard balanced portfolio, but I could see doing that with a portion of it when I get to that age.

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telemark
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Re: Alan Roth doesn't like single premium annuities

Post by telemark » Sat Oct 06, 2018 1:43 pm

This is like calculating how many accidents you need to have before your car insurance becomes a good investment.

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Re: Alan Roth doesn't like single premium annuities

Post by 2pedals » Sat Oct 06, 2018 3:27 pm

I don't have a problem with the article. The product they are selling is misleading via marketing buzzwords by saying it is “guaranteed income for life”. The income isn't income but mainly a return on principle that you may not get back and will be exposed to inflation risk. Kind of like saying you are buying 100% Juice (income) when you really are buying a cocktail instead (income your return on invested + return of your principle). You need to understand what you are purchasing.

Having said that I think single premium annuities are right for many people.
Last edited by 2pedals on Sat Oct 06, 2018 3:51 pm, edited 2 times in total.

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Re: Alan Roth doesn't like single premium annuities

Post by Dandy » Sat Oct 06, 2018 3:41 pm

A single pay immediate annuity isn't a scam - though many other annuities have scam-like qualities and should be avoided. They are useful to some people, especially those blessed with good longevity genes and who don't have a decent source of "guaranteed" lifetime income. They are better the older you are since the payouts should be greater assuming interest rates don't drop.

Yes the guarantees aren't the same as FDIC but it has been extremely rare that annuitants have lost money due to a insurance company failure. It is wise to select a highly rated insurer rather than just shop for the highest rate. People are somewhat confused by payout rate vs a CD rate. I think they realize they can't get their money back and most do compare to what they could get from say a 5 year CD. For many the higher payout now for life or joint life seems more important. They do often ignore the risk of inflation or the benefit of rising rates on CDs (and immediate annuities that are purchased later).

The fact the buyers don't always realize all the benefits and drawbacks of a product doesn't make the product a scam - it makes the fit to the individual circumstance key. You can't always rely on the salesman for insurance, annuities or when you buy a car. But, in fairness, an immediate annuity is not all that complex. You give them the money and you get a monthly check for life. They don't say it will grow with inflation or if interest rates rise or that you can change your mind in a year or two. An immediate annuity is often a hard sell since people usually have to part with a substantial amount of their savings to get a decent payment. People don't easily do that.

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Re: Alan Roth doesn't like single premium annuities

Post by FBN2014 » Sat Oct 06, 2018 4:45 pm

I would like to see Roth debate Tom Hegna on the use of annuities. That would be fun to watch.
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Re: Alan Roth doesn't like single premium annuities

Post by Earl Lemongrab » Sun Oct 07, 2018 12:43 pm

In effect I bought one when I elected the pension over a lump-sum at retirement. It was a better deal than I could have gotten on the open market for an SPIA, but of course there's no way to accurately predict the opportunity cost of not investing the lump.

I went with it because I have another couple mill already in a lump. The (non-COLA) pension takes care of my spending needs in early retirement. Of course, if I die early then it's a bad deal - for my heirs. All the same to me.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Alan Roth doesn't like single premium annuities

Post by randomguy » Sun Oct 07, 2018 1:39 pm

Dandy wrote:
Sat Oct 06, 2018 3:41 pm
A single pay immediate annuity isn't a scam - though many other annuities have scam-like qualities and should be avoided. They are useful to some people, especially those blessed with good longevity genes and who don't have a decent source of "guaranteed" lifetime income. They are better the older you are since the payouts should be greater assuming interest rates don't drop.

The product isn't a scam. The marketing is pretty scammy when they compare bond yields to SPIA payouts cause they are both percentages. And of course all the people on this board who talk about SPIAs paying 7% instead of the 4% of a portfolio are doing the same thing.

They aren't really better as you get older. You get paid more but your odds of dying have also skyrocketed. It more or less balances out. The distribution of winners and losers might be a bit different (the person that dies 5 years too early or lives 5 years too long) as the mortality credit benefit gets shifted around.

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Re: Alan Roth doesn't like single premium annuities

Post by JackoC » Sun Oct 07, 2018 2:38 pm

Dandy wrote:
Sat Oct 06, 2018 3:41 pm
1. A single pay immediate annuity isn't a scam - though many other annuities have scam-like qualities and should be avoided. They are useful to some people, especially those blessed with good longevity genes and who don't have a decent source of "guaranteed" lifetime income.

2. Yes the guarantees aren't the same as FDIC but it has been extremely rare that annuitants have lost money due to a insurance company failure.

3. The fact the buyers don't always realize all the benefits and drawbacks of a product doesn't make the product a scam - it makes the fit to the individual circumstance key.
1. I agree, and would also add that 'genes' is probably not the major reason a given individual differs from the SSA table. More likely it's lifestyle stuff which generally correlates with social groupings like race and class, or specific objective lifestyle (exercise) or health condition differences (smoke, diabetes, far overweight, etc). But the point is the same, fixed SPIA's are priced fairly attractively v. the SSA table. A thread long ago here went through numbers, I recall looking it up as a lurker. Not a ripoff even for SSA-average people, and an actually good deal if you know you stack up well on various of those life expectancy variables v the SSA table, especially on factors insurance co.'s aren't allowed to or can't practically price against you. Fixed SPIA's can be a quite good *actuarial* deal, particularly for some people.

2. But you do have to consider credit risk relative to the US govt (SS, CD's, treasuries). I'm not a true believer in the 'risklessness' of the US govt forever looking forward, but it's still going to tend to be *less* of a risk than ins co's. An annuity with any one provider should be limited to a % of overall assets you can afford to lose a portion of, IMO. That doesn't mean you can't have just one annuity with a solid ins co if it's only say 10% (or name your moderate %) of your overall PV. But if annuities are a big part of your plan you should divide among at least a few ins co's, I believe.

And the other valid caveat is inflation risk for fixed annuities. In the kind of oversimplification common by personal finance writers, the author is ignoring that the duration of a retiree's fixed bonds could be just as long as their fixed annuity duration, although in general it probably wouldn't be. And, there *are* CPI adjusted annuities. Their problems are a) not *as* sharply priced actuarially because less competition and b) for the same reason harder to get several good prices to diversify credit risk.

3. Absolutely. Again I think this comes down to the business of mass personal finance advice. Writing to people who basically don't know what they are doing in finance, the essence of personal finance writing, you don't get far *telling* them they don't know what they are doing. It goes down easier to blame supposed perfidy on the part of financial product providers for the silly mistakes people might make themselves. Although there is sometimes deceptive marketing also. But in general ins co's have sold the classic product of fixed SPIA's by deceptive marketing? I don't think that's a fair accusation in general (I don't and have never worked in the ins industry).

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Re: Alan Roth doesn't like single premium annuities

Post by Dandy » Sun Oct 07, 2018 2:49 pm

There are people who really need income to meet their needs in retirement. If they have modest assets and are somewhat risk averse they often look to CDs. But if the CDs don't pay enough interest income then they start supplementing that with consuming assets to try to make ends meet. Fewer assets mean fewer dollars available for CDs and they feel like they are in a downward spiral. If they can get 6k from a 100k immediate annuity vs putting that 100k in a CD paying 3% they often don't care "if much of the money is a return of their own money". They are looking for income and will get substantially more from the immediate annuity -- for life then from their current CD plan.

And if they wait and take out another immediate annuity a few years later they will most likely get even higher income (than the previous annuity). Some retirees needs are heavily oriented toward income vs assets. Their rent or taxes are going up, their health insurance premium is going up etc. They often feel this product is a good match for them. I think they usually understand they can't get their premium back and that the lifetime payments won't change so inflation is a risk. They may prefer that risk to consuming assets to meet their income needs. The key is the right match of this product to the person's needs. Like anything else they can be over sold.

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