Allan Roth doesn't like single premium annuities

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nedsaid
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Re: Allan Roth doesn't like single premium annuities

Post by nedsaid »

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).
Not a scam, you are getting the higher payouts because of mortality credits. In other words, as an annuity owner, you get a higher payout because of those who die early. Hopefully, if you purchase one, you don't want to be one of those chumps who dies early. But this is a trade-off and there are trade-offs to about anything. Pretty much this is what a pension does, folks with pensions are glad to have them and don't call them scams.
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Re: Alan Roth doesn't like single premium annuities

Post by jclear »

Nate79 wrote: 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.
If I saw a deferred inflation-adjusted annuity with a cash refund on early death - getting gouged three extra ways - I'd laugh while comparing it to a TIPS ladder.
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Re: Alan Roth doesn't like single premium annuities

Post by randomguy »

nedsaid wrote: Sun Oct 07, 2018 3:43 pm
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).
Not a scam, you are getting the higher payouts because of mortality credits. In other words, as an annuity owner, you get a higher payout because of those who die early. Hopefully, if you purchase one, you don't want to be one of those chumps who dies early. But this is a trade-off and there are trade-offs to about anything. Pretty much this is what a pension does, folks with pensions are glad to have them and don't call them scams.
How many SPIA documents say you have to live to 90 to break even versus a CD ladder (ie. everyone who dies before 90 loses. I thought the breakeven was actually more like 88 but lets say that is with in the margin of error)? None. They all use the deceptive yield versus payout example. If the product is so good why do they have to hide the truth?:)

Obviously living past 90 isn't much of a stretch (want to say my odds are like 30%) but it isn't by any means the likely outcome. Will having a SPIA protect me against say sequence of return risks? Depends. 10 years of high single digit inflation(i.e. the rate limiting case for the 4% SWR rule) will destroy a nominal SPIA payout. They probably look better during the great depression but given the number of financial institution failures during that time period, I am not sure I would be on it:).
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Re: Alan Roth doesn't like single premium annuities

Post by librarianaire »

When I was shopping for SPIAs recently (for one of my parents), the only company I could find that sells SPIAs with inflation riders was Principal. Is anyone in this forum aware of others?
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Dandy
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Re: Alan Roth doesn't like single premium annuities

Post by Dandy »

If the product serves your need while you are alive it pretty much serves its purpose. You can die a few years after taking out a CD or TIPS ladder too. You won't get the benefit of the CDs or TIPS ladder either. Your spouse/heirs may have some benefit. What if you don't have a spouse? or heirs? or your heirs are doing fine? That is why the key is matching the product to people who need it or understand the trade offs and want it.

There is an aspect of simplicity i.e. a check a month , peace of mind i.e. payments for life, insurance i.e. little risk of not getting the payments/market risk. And some risk - inflation.

Yes the product can be oversold - like almost all commissioned products. A lot of other annuities are scam like with terrible ongoing fees and/or withdrawal penalties but most people feel single pay immediate annuities have legitimate uses in some cases.
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nedsaid
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Re: Alan Roth doesn't like single premium annuities

Post by nedsaid »

randomguy wrote: Sun Oct 07, 2018 7:09 pm
nedsaid wrote: Sun Oct 07, 2018 3:43 pm
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).
Not a scam, you are getting the higher payouts because of mortality credits. In other words, as an annuity owner, you get a higher payout because of those who die early. Hopefully, if you purchase one, you don't want to be one of those chumps who dies early. But this is a trade-off and there are trade-offs to about anything. Pretty much this is what a pension does, folks with pensions are glad to have them and don't call them scams.
How many SPIA documents say you have to live to 90 to break even versus a CD ladder (ie. everyone who dies before 90 loses. I thought the breakeven was actually more like 88 but lets say that is with in the margin of error)? None. They all use the deceptive yield versus payout example. If the product is so good why do they have to hide the truth?:)

Obviously living past 90 isn't much of a stretch (want to say my odds are like 30%) but it isn't by any means the likely outcome. Will having a SPIA protect me against say sequence of return risks? Depends. 10 years of high single digit inflation(i.e. the rate limiting case for the 4% SWR rule) will destroy a nominal SPIA payout. They probably look better during the great depression but given the number of financial institution failures during that time period, I am not sure I would be on it:).
Wow. This is really interesting. Bogleheads used to like Single Premium Immediate Annuities. Alan Roth writes one article and all the sudden SPIA's are a scam. I don't get it. Amazed that people are so easily swayed by one article. Doesn't bode well for the forum. Just wait until somebody writes a compelling article regarding active management, will everyone here sell their index funds?

This is a complex decision. Depends upon longevity in your family. Depends on health of you and your spouse. Depends upon the level of interest rates. Do you want inflation protection or not? SPIA's are not a one size fits all solution but simply a tool in the toolbox. Research has shown that annuitizing a portion of the portfolio decreases the risk of running out of money in retirement, in part because it takes pressure off the rest of the portfolio. Lots of articles about this.

As I said before, folks who have pensions are glad to have them. SPIA's are essentially do-it-yourself pensions. How many people here post that pensions are scams? I just don't get this.

As far as institutional failure, there are a few examples but annuity owners got most if not all their money back. The failure rate on annuities is pretty darned low.
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Re: Alan Roth doesn't like single premium annuities

Post by SevenBridgesRoad »

I agree...the initial reaction surprised me too. But enough folks weighed in (myself, HomerJ, the Doobies, others) to say annuities are just alright with me. OK, maybe not the Doobies... 8-)
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AGE 75 CD vs SPIA...$300,000

Post by hudson »

I would bet that all of you have pulled out your envelopes and have done this comparison.

CD: 300K will spin off $9600 a year with a 3.2% 5 year CD...but you get to keep your money.
If you withdrew 20K per year, it would last 15 years. That would take one to age 90.

300K will spin off $28044 a year with a SPIA...that's 9.3% a year ....but your nest egg is gone.

I would go with the CD option, but the SPIA option is tempting.
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Re: Alan Roth doesn't like single premium annuities

Post by SGM »

I have read that the correlation between bonds and stocks have been 59% or 0.59 over the long term. If the correlation increases then retiree portfolios will not have as much safety built in by having a higher amount of bonds. In such a scenario more portfolios will fail. Good luck in a downturn if you don't have income streams outside of your portfolio like pensions and SPIAs.
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Re: Alan Roth doesn't like single premium annuities

Post by Stormbringer »

librarianaire wrote: Sun Oct 07, 2018 8:49 pm When I was shopping for SPIAs recently (for one of my parents), the only company I could find that sells SPIAs with inflation riders was Principal. Is anyone in this forum aware of others?
I think it's easier to find ones with a fixed percentage annual increase (like 2%). Fidelity offers them.
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Re: Alan Roth doesn't like single premium annuities

Post by vineviz »

nedsaid wrote: Sun Oct 07, 2018 11:08 pm Wow. This is really interesting. Bogleheads used to like Single Premium Immediate Annuities.
Thankfully, most reasonable Bogleheads still do.
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Dandy
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Re: Alan Roth doesn't like single premium annuities

Post by Dandy »

CD: 300K will spin off $9600 a year with a 3.2% 5 year CD...but you get to keep your money.
If you withdrew 20K per year, it would last 15 years. That would take one to age 90.

300K will spin off $28044 a year with a SPIA...that's 9.3% a year ....but your nest egg is gone.
Not the usual decision issue. The question is better phrased "How much income do you need?" If it is about $9k then take 100k and buy a single premium immediate annuity and keep the other 200k (maybe in CDs). Or try the CD ladder. If you need 28k in income then maybe you have to spend it all on an immediate annuity. I don't think the CD ladder will work with a 300k nest egg and a need for 28k yearly income. You can't get 9,600 a year and withdraw 20k a year for 15 years with the CD ladder mentioned (I don't believe). But even if you could get close it might be a bit unsettling at age 88 when you have your health and not much else.

Also, nothing says that future CD rates will have to be higher. I remember my mother-in-law's panic when CD rates started dropping which was reducing her income substantially. When a 3% CDs can only be renewed for 2% you feel the haircut.

I do agree that it would be very scary and unlikely to use all or even most of your nest egg to buy an immediate annuity. But, I haven't faced that difficult trade off. The main point is there are some people and some circumstances that make the immediate annuity a viable option.
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Re: Alan Roth doesn't like single premium annuities

Post by TN_Boy »

nedsaid wrote: Sun Oct 07, 2018 11:08 pm
randomguy wrote: Sun Oct 07, 2018 7:09 pm
nedsaid wrote: Sun Oct 07, 2018 3:43 pm
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).
Not a scam, you are getting the higher payouts because of mortality credits. In other words, as an annuity owner, you get a higher payout because of those who die early. Hopefully, if you purchase one, you don't want to be one of those chumps who dies early. But this is a trade-off and there are trade-offs to about anything. Pretty much this is what a pension does, folks with pensions are glad to have them and don't call them scams.
How many SPIA documents say you have to live to 90 to break even versus a CD ladder (ie. everyone who dies before 90 loses. I thought the breakeven was actually more like 88 but lets say that is with in the margin of error)? None. They all use the deceptive yield versus payout example. If the product is so good why do they have to hide the truth?:)

Obviously living past 90 isn't much of a stretch (want to say my odds are like 30%) but it isn't by any means the likely outcome. Will having a SPIA protect me against say sequence of return risks? Depends. 10 years of high single digit inflation(i.e. the rate limiting case for the 4% SWR rule) will destroy a nominal SPIA payout. They probably look better during the great depression but given the number of financial institution failures during that time period, I am not sure I would be on it:).
Wow. This is really interesting. Bogleheads used to like Single Premium Immediate Annuities. Alan Roth writes one article and all the sudden SPIA's are a scam. I don't get it. Amazed that people are so easily swayed by one article. Doesn't bode well for the forum. Just wait until somebody writes a compelling article regarding active management, will everyone here sell their index funds?

This is a complex decision. Depends upon longevity in your family. Depends on health of you and your spouse. Depends upon the level of interest rates. Do you want inflation protection or not? SPIA's are not a one size fits all solution but simply a tool in the toolbox. Research has shown that annuitizing a portion of the portfolio decreases the risk of running out of money in retirement, in part because it takes pressure off the rest of the portfolio. Lots of articles about this.

As I said before, folks who have pensions are glad to have them. SPIA's are essentially do-it-yourself pensions. How many people here post that pensions are scams? I just don't get this.

As far as institutional failure, there are a few examples but annuity owners got most if not all their money back. The failure rate on annuities is pretty darned low.
And I've never understood why people think SPIAs are just like pensions -- it's not that simple. I posted this in another thread:
And I'm always surprised when people are puzzled that folks are hesitant about SPIA while they like SS and pensions!

SPIAs often make sense. But why wouldn't people react differently to SS/pensions and SPIAs? Pension and SS benefits show up "magically" after many years of payroll deductions. You certainly notice the deductions, but they are a relatively small (for most people) reduction in your take-home pay. And certainly the SS deduction, at least, is not optional. The deductions are a defacto part of your budget.

But to get a decent sized payment from an SPIA, I am going to have to write somebody a six figure check. That's a big check. And that money is gone forever (for the simplest SPIAs), whether I die the next month (at which point I wouldn't care) or whether I have a financial crisis of some sort and would like that money back to be spent as a lump sum. Plus, most SPIAs pay out in nominal dollars (inflation adjusted ones pay out quite a bit less early, right?) and so will be worth less as time goes on (unlike SS).

And since you need a large check to get a decent sized payment, I don't see an SPIA as useful to anybody that doesn't have a fairly big investment portfolio. If you've only saved 50k or 100k, you probably don't want to take money out of those savings to get an SPIA.

And finally you have other factors, like if the insurer you buy from goes bankrupt, how will that play out, etc.

We will take a hard look at SPIAs down the road, but rightly or wrongly it seems "clear" to me why they are not more loved, in spite of the potential advantages of an income stream unaffected by market returns.
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Re: Alan Roth doesn't like single premium annuities

Post by Dandy »

When people are set to retire they are sometimes given a choice between a lump sum and a pension (usually non COLA). The lump sum is usually several hundred thousand dollars. The advice on this forum is somewhat split some say take the lump and invest it and others say the pension. But it is a similar choice i.e. take a non COLA payment for life or a keep a large lump sum. It is not exactly the same since the viability of the company offering the pension is usually more of a risk than a top rated insurance company offering annuities.

There is no wrong decision if people know what they are doing. i.e. understand the risk/reward involved. Investing the lump sum can payoff with many more dollars over a 25 to 30 year retirement -- but there is no guarantee. There are risks and investment management involved but that can often be a wise decision. For others they see the prospect of lifetime income, despite the inflation risk, as the risk they can live with. Their needs and risk preferences are different. Peace of mind by having income with longevity insurance is often overlooked. Some people don't want to be responsible or have the risk of managing a larger portfolio-- they don't have the skills, time or trust in others. Outsourcing that portion of the assets to an insurance company helps address that issue. Also, let's keep in mind that the inflation risk while real becomes a bit less of a risk with age. e.g. taking an immediate annuity at age 60 has a much greater inflation risk than if it were done at 75 or 80.

It is not a product for everyone but it is an option that can be very useful to some.
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Re: Alan Roth doesn't like single premium annuities

Post by Ron »

Dandy wrote: Mon Oct 08, 2018 9:22 am When people are set to retire they are sometimes given a choice between a lump sum and a pension (usually non COLA). The lump sum is usually several hundred thousand dollars. The advice on this forum is somewhat split some say take the lump and invest it and others say the pension. But it is a similar choice i.e. take a non COLA payment for life or a keep a large lump sum. It is not exactly the same since the viability of the company offering the pension is usually more of a risk than a top rated insurance company offering annuities.
Exactly. As stated before, here's my story...

In my case, I retired (at age 59, 11 years ago) without a pension. However, I did have the proceeds (lump sum) from my former's company's cash balance plan ( https://www.investopedia.com/terms/c/ca ... onplan.asp ).

At the time of my retirement, in the spring of 2007, I had no idea of what the market would be doing for the immediate future. If I did have a crystal ball, I might had held off on retirement until I got past the 2008-09 downturn. As it was, I played the hand I was dealt.

I did not want to just depend on my retirement portfolio (which included the lump sum held in a MM account) for my current/future income. Additionally, I was not "tainted" by the discussions of annuities at the time, nor the "rules of engagement" (you never purchase any annuity, and if you do, not unless you're an old geezer). Those discussions only came about on different forums a few years later after I had retired and already had my/our SPIA.

My decision was to take a portion of the cash balance proceeds and purchase an SPIA, after investigating the available rates/payout/companies offering the product at the time. This included VG, FIDO, my former company (they offered a 3rd party SPIA for those that had no idea what to do with the payout, but were hesitant to invest on their own) and the facilities of https://www.annuities.com/ . The premium represented 10% of our joint retirement portfolio assets at the time. At the time of application, we had to attest that the future SPIA, along with all other current annuity (if any) products did not exceed 50% of our total retirement portfolio assets.

After much research, I (along with my wife) decided on the offering provided by FIDO. While every contract is different, and not necessarily offered at the current time, we opted for an SPIA that would be for life (both), along with a guaranteed payout period. In our case, it was 28 years, based upon our policy joint issue age of 59. If either passed before the age of 87, payments would continue (at 100%) to the survivor. And if both passed before the age of 87, the remaining payments (at 100%) would be paid to our estate. BTW, the loss of income for the survivorship option reduced our payout very little. This "insurance on insurance" seemed well worth the cost to us. Others may disagree, and that is their option.

I/we originally looked at the SPIA as "SS gap insurance" - that is to provide a base income in retirement until reaching our target SS age. At the time, I/we planned on taking SS at our respective FRA age of 66. As it turned out, we learned of the SS file/suspend/restricted application process a few years after we retired. Since most at this time can no longer use this claiming technique, the SPIA - along with my wife's spousal claim against my SS for the last four years, provided a good deal of our required income for many years. In fact, it turned out so well that it resulted in both of us claiming SS earlier this year, both at age 70. That SPIA is just an additional topping for our retirement income "sundae".

As for not being COLA'ed, it was not a concern. If I would have received a (private) pension benefit, it would not have been COLA'ed either. How do I know? Because the pension available to me when I started there in 1979 (later terminated and replaced by the cash balance and 401(k) plans in the mid-80's) was also not COLA'ed. While the computed IRR of the SPIA is 4.79% (does not include return of premium paid) was a concern to me at the time (I lived through the inflation of the 80's), it was a bit of luck that inflation has been tame for the last decade - or at least during the period I've been retired. I would think that the purchase of an SPIA would be questionable at this time due to the expected inflation in the foreseeable future.

- Ron
JackoC
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Re: Alan Roth doesn't like single premium annuities

Post by JackoC »

librarianaire wrote: Sun Oct 07, 2018 8:49 pm When I was shopping for SPIAs recently (for one of my parents), the only company I could find that sells SPIAs with inflation riders was Principal. Is anyone in this forum aware of others?
I don't come across any just searching now. I hadn't looked at annuities in a few years and was disappointed to see now no CPI adjusted quotes on the Hueler Investments site affiliated with Vanguard. A few years ago there were. This 2017 thread discusses a bit further the apparent twilight of the CPI adjusted annuity, The Principal was also the only provider identified.
viewtopic.php?t=209937

I posted earlier based on my out of date knowledge that CPI adjusted annuities were fewer but there were still multiple providers, but I guess not necessarily. Marketing-wise this is understandable. As you see on threads even on this relatively sophisticated forum, people see a substantially lower rate for CPI adjustment and say 'oh that's a rip off!', but that conclusion is basically money illusion*. And as the Fed has been saying for years and it's true 'inflation expectations are anchored': more and more people never experienced serious inflation as adults, it's strictly theoretical to them. I read somewhere, maybe the referenced thread, that some marketing study said 1% of annuities were CPI adjusted even some years ago. I guess they won't return until there's sustained significantly higher inflation to create demand. Somewhat like the way many people dismiss TIPS. Although when annuities are discussed there's usually the saw 'you can do that yourself with TIPS'. No, you can't. The thing a CPI adjusted annuity can do is cover if you live to 95 or 100 or more (and while even the first milestone is quite unlikely in the general US populace it's much less unlikely for upper middle class people with good health history and habits). The inflation protection of an individual portfolio of TIPS does nothing to guard against needing many more years of payouts from that portfolio than you expect. But now, it is realistically for the most part *non* inflation adjusted protection against extreme longevity (fixed SPIA) or inflation protection without protection against extreme longevity (any kind of DIY portfolio of inflation resistant assets but with no pooling of longevity risk).

Some of both suggests itself as a possibly reasonable response, though not a very satisfying one.

*secondarily it could always be shown CPI adjusted annuities were generally less tightly priced to a given actuarial table than fixed, but not by a huge amount.
Last edited by JackoC on Mon Oct 08, 2018 9:57 am, edited 1 time in total.
TN_Boy
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Re: Alan Roth doesn't like single premium annuities

Post by TN_Boy »

Dandy wrote: Mon Oct 08, 2018 9:22 am When people are set to retire they are sometimes given a choice between a lump sum and a pension (usually non COLA). The lump sum is usually several hundred thousand dollars. The advice on this forum is somewhat split some say take the lump and invest it and others say the pension. But it is a similar choice i.e. take a non COLA payment for life or a keep a large lump sum. It is not exactly the same since the viability of the company offering the pension is usually more of a risk than a top rated insurance company offering annuities.

There is no wrong decision if people know what they are doing. i.e. understand the risk/reward involved. Investing the lump sum can payoff with many more dollars over a 25 to 30 year retirement -- but there is no guarantee. There are risks and investment management involved but that can often be a wise decision. For others they see the prospect of lifetime income, despite the inflation risk, as the risk they can live with. Their needs and risk preferences are different. Peace of mind by having income with longevity insurance is often overlooked. Some people don't want to be responsible or have the risk of managing a larger portfolio-- they don't have the skills, time or trust in others. Outsourcing that portion of the assets to an insurance company helps address that issue. Also, let's keep in mind that the inflation risk while real becomes a bit less of a risk with age. e.g. taking an immediate annuity at age 60 has a much greater inflation risk than if it were done at 75 or 80.

It is not a product for everyone but it is an option that can be very useful to some.
I agree with everything you said, my post is merely noting that I believe there are good reasons why SPIAs are a little harder to swallow. And the exact situation matters.

I just tried a quick quote at immediate annuities.com. I told it I was 65 and my spouse 61 (which is false, but a reasonable situation). For $200k now, in my state they say an "average" quote will pay$ 900 a month with survivor benefits. So if I had $400,000 saved, I'm writing them a check for 1/2 my liquid assets to get under $11,000 a year. Okay, that IS more than 4% a year. And no worries about market fluctuation. But still. That's a big percentage of assets to hand over. The math does get better if you get an annuity when older ... then again, you could pull more than 4% also. Add in the way legacies might be affected (not a factor for me either) and well, SPIAs are a bit of a hard sell.

The situation where an SPIA would look good to me would be if somebody had 2 or 3M in invest-able assets, and interest rates were high ... handing somebody $500k might feel okay -- you still have a lot of assets for emergencies, legacies, etc. Though in our situation, we have reasonable assets, then inflation adjusted SS kicks in to cover a decent fraction of our living expenses.
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Re: Alan Roth doesn't like single premium annuities

Post by Dandy »

I just tried a quick quote at immediate annuities.com. I told it I was 65 and my spouse 61 (which is false, but a reasonable situation). For $200k now, in my state they say an "average" quote will pay$ 900 a month with survivor benefits. So if I had $400,000 saved, I'm writing them a check for 1/2 my liquid assets to get under $11,000 a year. Okay, that IS more than 4% a year. And no worries about market fluctuation. But still. That's a big percentage of assets to hand over. The math does get better if you get an annuity when older ... then again, you could pull more than 4% also. Add in the way legacies might be affected (not a factor for me either) and well, SPIAs are a bit of a hard sell.
What you point out is that the immediate annuity deal is less attractive the younger you are due to mortality credits and of course greater exposure to inflation risk. Finally, some benefits of getting older! :happy I agree it would be a harder sell.
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HomerJ
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Re: Alan Roth doesn't like single premium annuities

Post by HomerJ »

nedsaid wrote: Sun Oct 07, 2018 11:08 pmWow. This is really interesting. Bogleheads used to like Single Premium Immediate Annuities. Alan Roth writes one article and all the sudden SPIA's are a scam. I don't get it. Amazed that people are so easily swayed by one article. Doesn't bode well for the forum. Just wait until somebody writes a compelling article regarding active management, will everyone here sell their index funds?
A couple of Bogleheads don't like SPIAs. Not sure why you're scared for the forum. :)
This is a complex decision. Depends upon longevity in your family. Depends on health of you and your spouse. Depends upon the level of interest rates. Do you want inflation protection or not? SPIA's are not a one size fits all solution but simply a tool in the toolbox. Research has shown that annuitizing a portion of the portfolio decreases the risk of running out of money in retirement, in part because it takes pressure off the rest of the portfolio. Lots of articles about this.

As I said before, folks who have pensions are glad to have them. SPIA's are essentially do-it-yourself pensions. How many people here post that pensions are scams? I just don't get this.
I agree.
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nedsaid
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Re: Alan Roth doesn't like single premium annuities

Post by nedsaid »

HomerJ wrote: Mon Oct 08, 2018 10:20 am
nedsaid wrote: Sun Oct 07, 2018 11:08 pmWow. This is really interesting. Bogleheads used to like Single Premium Immediate Annuities. Alan Roth writes one article and all the sudden SPIA's are a scam. I don't get it. Amazed that people are so easily swayed by one article. Doesn't bode well for the forum. Just wait until somebody writes a compelling article regarding active management, will everyone here sell their index funds?
A couple of Bogleheads don't like SPIAs. Not sure why you're scared for the forum. :)
This is a complex decision. Depends upon longevity in your family. Depends on health of you and your spouse. Depends upon the level of interest rates. Do you want inflation protection or not? SPIA's are not a one size fits all solution but simply a tool in the toolbox. Research has shown that annuitizing a portion of the portfolio decreases the risk of running out of money in retirement, in part because it takes pressure off the rest of the portfolio. Lots of articles about this.

As I said before, folks who have pensions are glad to have them. SPIA's are essentially do-it-yourself pensions. How many people here post that pensions are scams? I just don't get this.
I agree.
Well, Bogleheads are human. I have seen the consensus on the forum change. For example, keeping 50% of your bonds in TIPS used to be standard wisdom here. The forum has mostly given up on TIPS, even Taylor Larimore. Many Bogleheads who used to like REITs have given up on them. So "stay the course" has become "sort of stay the course". Now I am seeing that Single Premium Annuities and even Vanguard itself are scams, a small minority here, but it does alarm me when I see people here say this kind of stuff. I don't think the vast majority of folks here will give up on Vanguard but I am seeing less fervor around here for Vanguard. So I see opinions change, most around the edges but even on a couple of core recommendations. Were I a long time Vanguard customer, I wouldn't abandon Vanguard because Fidelity and Blackrock can beat them by a few basis points in funds representing certain indexes.
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Re: Alan Roth doesn't like single premium annuities

Post by randomguy »

TN_Boy wrote: Mon Oct 08, 2018 9:55 am

I agree with everything you said, my post is merely noting that I believe there are good reasons why SPIAs are a little harder to swallow. And the exact situation matters.

I just tried a quick quote at immediate annuities.com. I told it I was 65 and my spouse 61 (which is false, but a reasonable situation). For $200k now, in my state they say an "average" quote will pay$ 900 a month with survivor benefits. So if I had $400,000 saved, I'm writing them a check for 1/2 my liquid assets to get under $11,000 a year. Okay, that IS more than 4% a year. And no worries about market fluctuation. But still. That's a big percentage of assets to hand over. The math does get better if you get an annuity when older ... then again, you could pull more than 4% also. Add in the way legacies might be affected (not a factor for me either) and well, SPIAs are a bit of a hard sell.

The situation where an SPIA would look good to me would be if somebody had 2 or 3M in invest-able assets, and interest rates were high ... handing somebody $500k might feel okay -- you still have a lot of assets for emergencies, legacies, etc. Though in our situation, we have reasonable assets, then inflation adjusted SS kicks in to cover a decent fraction of our living expenses.
50/50 stocks/bonds have a like 98% success rate with a 6% nominal SWR over 30 years. Your spia is paying you less money for a 2% case. The SPIA might look better when looking at 40 year terms but even there you run into the case where normally the 50/50 portfolio will have a more money so that you could make an inflation adjustment (ie. money being worth ~1/2-1/4rd as much after 30 years is the expected result). It isn't clear which one really gives you better longevity protection.

SPIA and pensions are similar but lets not forget most pensions have better payouts than SPIA. Getting 20% more money makes the product a lot more appealing:) Not to mention not having to worry about investing for 30+ years while working.
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Re: Alan Roth doesn't like single premium annuities

Post by JackoC »

randomguy wrote: Mon Oct 08, 2018 10:54 am
TN_Boy wrote: Mon Oct 08, 2018 9:55 am

I agree with everything you said, my post is merely noting that I believe there are good reasons why SPIAs are a little harder to swallow. And the exact situation matters.
50/50 stocks/bonds have a like 98% success rate with a 6% nominal SWR over 30 years. Your spia is paying you less money for a 2% case. The SPIA might look better when looking at 40 year terms but even there you run into the case where normally the 50/50 portfolio will have a more money so that you could make an inflation adjustment (ie. money being worth ~1/2-1/4rd as much after 30 years is the expected result). It isn't clear which one really gives you better longevity protection.

SPIA and pensions are similar but lets not forget most pensions have better payouts than SPIA. Getting 20% more money makes the product a lot more appealing:) Not to mention not having to worry about investing for 30+ years while working.
SPIA's are particular 'hard to swallow' now because rates are low. I don't reject your entire follow explanation, but the common loose phraseology '50/50 stock/bonds have 98% success' when you mean '50/50 stocks/bonds have *had* 98% success' makes a real difference in this case. The bond part of the 50/50's return is comparing past realized bond returns to current yields on which the SPIA price is based. Even with the recent run up in yields expected returns on long term bonds are order of 2% lower than historical realized returns.

This is part of another endless debate, whether it's reasonable to estimate the success of a strategy going forward in today's expected return environment by using historical returns. But whatever position one takes on that debate for stocks (mine is that's too optimistic to use historical equity returns as the expected equity return now, by a significant amount), it's definitely skewed to compare the historical return of one type of fixed income instrument (bond) with the current yield of another fixed income instrument (fixed SPIA).

I say I don't reject the whole argument because you're right that on an expected basis there's an advantage in return from taking risk, a portfolio 50% in stocks v 100% in bonds (which an SPIA is basically besides the longevity insurance aspect). However OTOH question why we'd necessarily compare 50/50 stock/bond to 100% annuity rather than say 50% stock/50% annuity, or some other combination.

Even avoiding the apples v oranges of stocks and fixed SPIA's, the SPIA could still be criticized relative to bonds for at least a few reasons:
a) your DIY bonds could provide inflation protection, TIPS, whereas CPI adj annuity unfortunately has as few as one major provider left
b) even diversifying among several annuity providers there's more credit risk than govt bonds, again at least historically
c) the expected duration and thus inflation vulnerability of nominal SPIA is long when purchased or you would not, whereas you can choose any duration you like for DIY nominal bonds

But, [even fixed] SPIA's are not IMO clearly unattractive in a fair comparison ie.
fully recognizes the risk that one lives much longer than expected (not treat '30 yr retirement' as a quasi-fixed number)
does not compare stocks to fixed income unless the pitch for SPIA is specifically to cut equity exposure
does not compare historical return of bonds to current annuity rates
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Re: Allan Roth doesn't like single premium annuities

Post by gotester2000 »

Since I dont have an inflation adjusted pension, I am considering an annuity ladder - if I live a long life.
Is there any other product that will give you peaceful sleep?
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JoMoney
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Re: Allan Roth doesn't like single premium annuities

Post by JoMoney »

gotester2000 wrote: Mon Oct 08, 2018 1:16 pm...Is there any other product that will give you peaceful sleep?
I think that's a key thing that gets missed when people try to compare and evaluate annuities to investments.
An annuity is an insurance product, not an investment. Peace of mind has a value. I don't think I've seen any threads on here with people evaluating the cost of car insurance or health insurance relative to the probability of a catastrophic event. Outliving your savings could very easily be a catastrophe worth insuring against, if it's a non-zero possibility the consequences might be far more severe than potential upside... And if someone is investing in bonds and fixed income anyway, annuities are very fairly priced actuarially.
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Re: Allan Roth doesn't like single premium annuities

Post by longinvest »

According to immediateannuities.com, a retired couple with both spouses of age 80 can buy a fixed SPIA paying $714/month for $100,000. This conservatively translates into a $554/month 3%-indexed SPIA, or a 6.6% payout rate on the $100,000.

This is similar to the percentage, at age 80, for a 40/60 stocks/bonds portfolio in the VPW table, except that the SPIA it eliminates volatility and longevity risk at the cost, of course, of liquidity.

Had one spouse died before 80, the survivor would pay even less. A single male would get a 9.3% payout rate ($959/month fixed translated to $771/month 3%-indexed) and a single female a 8.1% payout rate ($849/month fixed translated to $673/month 3%-indexed).

While few providers sell CPI-indexed SPIAs, many sell SPIAs indexed to a specific percentage like 2% and 3%. So, it should be fairly easy to diversify annuity providers, when annuitizing bigger amounts, with a fixed percentage increase. At age 80, many would argue that a 3% annual increase is probably too big, but I like to be conservative in my planning.

I definitely plan to buy a cost-of-living (3%) adjusted SPIA at age 80 with part of my residual portfolio* to dampen the financial risk of surviving beyond age 100.

* Not all of it! I want to always keep some liquidity as long as I'm alive.
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Re: Allan Roth doesn't like single premium annuities

Post by CuriousTacos »

I see both sides of the argument about whether an SPIA is worth it for the longevity insurance. And some of us may have large enough portfolios that this isn't really a concern (a 3% withdrawal rate is pretty safe forever).

But I don't see cognitive decline mentioned in this thread, and that's what tips the scales for me. While I may be confident that I can manage my investments in a way that is superior to an SPIA, I may eventually reach a point where I can't even manage the simplest of portfolios (or worse, I make some very poor decisions or get taken advantage of).

So when I approach an age where mental decline is more likely (or if I see any signs of early decline), I think an SPIA (for some of my $) would attractive.
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Re: Allan Roth doesn't like single premium annuities

Post by HomerJ »

CuriousTacos wrote: Mon Oct 08, 2018 3:17 pm I see both sides of the argument about whether an SPIA is worth it for the longevity insurance. And some of us may have large enough portfolios that this isn't really a concern (a 3% withdrawal rate is pretty safe forever).

But I don't see cognitive decline mentioned in this thread, and that's what tips the scales for me. While I may be confident that I can manage my investments in a way that is superior to an SPIA, I may eventually reach a point where I can't even manage the simplest of portfolios (or worse, I make some very poor decisions or get taken advantage of).

So when I approach an age where mental decline is more likely (or if I see any signs of early decline), I think an SPIA (for some of my $) would attractive.
This is a very good point.
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Re: Alan Roth doesn't like single premium annuities

Post by TN_Boy »

Dandy wrote: Mon Oct 08, 2018 10:13 am
I just tried a quick quote at immediate annuities.com. I told it I was 65 and my spouse 61 (which is false, but a reasonable situation). For $200k now, in my state they say an "average" quote will pay$ 900 a month with survivor benefits. So if I had $400,000 saved, I'm writing them a check for 1/2 my liquid assets to get under $11,000 a year. Okay, that IS more than 4% a year. And no worries about market fluctuation. But still. That's a big percentage of assets to hand over. The math does get better if you get an annuity when older ... then again, you could pull more than 4% also. Add in the way legacies might be affected (not a factor for me either) and well, SPIAs are a bit of a hard sell.
What you point out is that the immediate annuity deal is less attractive the younger you are due to mortality credits and of course greater exposure to inflation risk. Finally, some benefits of getting older! :happy I agree it would be a harder sell.
The problem I'd have with taking the SPIA later is that if SS is paying a decent percent of my basic living expenses, and it will be for us after we start it, well, I already HAVE a guaranteed income stream. Do I really need two? The later you take the SPIA, the less time the portfolio has to last, and the more likely you have SS helping you some.

But yeah, we'll look at them. Obviously if the payout was better, they'd look more interesting.
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Re: Alan Roth doesn't like single premium annuities

Post by epoxyresin »

Stormbringer wrote: Mon Oct 08, 2018 7:02 am
librarianaire wrote: Sun Oct 07, 2018 8:49 pm When I was shopping for SPIAs recently (for one of my parents), the only company I could find that sells SPIAs with inflation riders was Principal. Is anyone in this forum aware of others?
I think it's easier to find ones with a fixed percentage annual increase (like 2%). Fidelity offers them.
I can see how that might be helpful from a psychological point of view (i.e. most people are likely to spend what they get, so you give them less in the early years and more in the later years so that hopefully it's about the same in real dollars), but I don't really think you're getting any inflation protection. It's exactly the same bet as a constant payout annuity: you do well if inflation remains low (and you live a long high), if it runs high for a few years the value gets eaten pretty quickly.

If you expect inflation, it's easy enough to plan for (and 2% is about what I expect inflation to be). It's unexpected inflation that's hard to insure against.

I also understand why there are very few companies offering inflation-indexed annuities. How long people live is an independent event for each person, but with high inflation they'd be paying out extra for all of their contracts. The reason that pretty much only the government will give you an inflation-indexed annuity (social security) is the same reason why only the government is willing to insure you against flood damage and crop failures.
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Re: Alan Roth doesn't like single premium annuities

Post by JoMoney »

TN_Boy wrote: Mon Oct 08, 2018 4:02 pm...Obviously if the payout was better, they'd look more interesting.
That's the kicker for any younger person trying to evaluate them. I would have no desire to buy long-term bonds at current rates, if yields got high enough they could be more interesting, and annuities would as well, possibly as an alternative replacement for a chunk of bond allocation.
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Re: Alan Roth doesn't like single premium annuities

Post by Munir »

vineviz wrote: Mon Oct 08, 2018 7:07 am
nedsaid wrote: Sun Oct 07, 2018 11:08 pm Wow. This is really interesting. Bogleheads used to like Single Premium Immediate Annuities.
Thankfully, most reasonable Bogleheads still do.
I like them and have used them (I have four) over the last 10 years. I have been very satisfied with them. One needs to do some research and study to know what one is buying and will do well then. The inflation factor and guaranteed time periods have been discussed very often but some posters keep ignoring them with words of gloom and doom about annuities generally, rip-offs, scams etc... We can do better on this forum if we stick to reasonable discussions that can include disagreements without using the fear tactic.
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Re: Alan Roth doesn't like single premium annuities

Post by JoMoney »

Munir wrote: Mon Oct 08, 2018 4:25 pm... words of gloom and doom about annuities generally, rip-offs, scams etc... We can do better on this forum if we stick to reasonable discussions that can include disagreements without using the fear tactic.
There is a distinction that needs to be made between different types of annuities though, which kind of muddies the water. Some of them ARE rip-offs with high fees, high commissions, with very little discernible benefit to the purchaser.
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Re: Alan Roth doesn't like single premium annuities

Post by Munir »

JoMoney wrote: Mon Oct 08, 2018 4:31 pm
Munir wrote: Mon Oct 08, 2018 4:25 pm... words of gloom and doom about annuities generally, rip-offs, scams etc... We can do better on this forum if we stick to reasonable discussions that can include disagreements without using the fear tactic.
There is a distinction that needs to be made between different types of annuities though, which kind of muddies the water. Some of them ARE rip-offs with high fees, high commissions, with very little discernible benefit to the purchaser.
Totally agree. I am strictly referring to SPIAs for individuals preferably over 70 who in my view are the best candidates for SPIAs.
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Re: Alan Roth doesn't like single premium annuities

Post by JackoC »

epoxyresin wrote: Mon Oct 08, 2018 4:07 pm
Stormbringer wrote: Mon Oct 08, 2018 7:02 am
librarianaire wrote: Sun Oct 07, 2018 8:49 pm When I was shopping for SPIAs recently (for one of my parents), the only company I could find that sells SPIAs with inflation riders was Principal. Is anyone in this forum aware of others?
I think it's easier to find ones with a fixed percentage annual increase (like 2%). Fidelity offers them.
I can see how that might be helpful from a psychological point of view (i.e. most people are likely to spend what they get, so you give them less in the early years and more in the later years so that hopefully it's about the same in real dollars), but I don't really think you're getting any inflation protection. It's exactly the same bet as a constant payout annuity: you do well if inflation remains low (and you live a long high), if it runs high for a few years the value gets eaten pretty quickly.

If you expect inflation, it's easy enough to plan for (and 2% is about what I expect inflation to be). It's unexpected inflation that's hard to insure against.

I also understand why there are very few companies offering inflation-indexed annuities. How long people live is an independent event for each person, but with high inflation they'd be paying out extra for all of their contracts. The reason that pretty much only the government will give you an inflation-indexed annuity (social security) is the same reason why only the government is willing to insure you against flood damage and crop failures.
On the first part about fixed escalation fixed SPIA's I agree. There is no inflation protection. It's just more convenient to receive fewer nominal $'s at the beginning and more going forward along a particular path of *expected* inflation than to received extra $'s at the beginning you just have cycle back around and reinvest to make up the later shortfall due to expected inflation. If inflation is lower or higher than expected you still have a mismatch, if it's higher you get hurt financially, like any other nominal fixed income investor. A level payment OTOH is more transparent, I'd probably choose it if I ever bought a fixed SPIA.

As to why CPI adjusted annuities have been disappearing, I don't think it's ins co worry about risk from all the CPI adjusted annuities they were writing as opposed to writing so few it wasn't worth continuing writing any. Because few people want them, because money illusion is pervasive. A lot of anti-TIPS feeling is driven by it too (not to say there are no valid arguments against TIPS, but anti-TIPS is often at least partly money illusion IME/IMO). If ins co's hedge them with TIPS, and investors are interested at those prices, there really isn't a lot more risk to the ins co than the graduated fixed ones, if greater longevity doesn't correlate much with inflation. Although still there's a bigger tail risk with high inflation and big shift to the right in longevity, where the graduated ones have largely disappeared. But again that would be a reason to limit CPI adj's to some % of ins co liabilities, not do away with them if people wanted them. Mainly I think it's too many investors who say 'inflation, sminflation, give me 6% not 4%' to make it a viable product, and more so as low real rates have persisted. That's illustrated with the point about comparing *past* performance of bond heavy portfolio's to today's fixed SPIA rates. Even nominal SPIA rates now 'look' low.
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Re: Alan Roth doesn't like single premium annuities

Post by JoMoney »

JackoC wrote: Mon Oct 08, 2018 4:47 pm...Even nominal SPIA rates now 'look' low.

They are, but so are the rates on nominal bonds. I think there is some consideration that could be looked at regarding the relative sort-of 'duration' on the investment. A 40 year old buying a SPIA would be comparing to rates on long-term bonds, and the result is ... meh :? ... an 80 year olds expected lifespan might have them comparing a SPIA to cash and short-term bonds with fewer concerns about long-term inflation risks.
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Re: Allan Roth doesn't like single premium annuities

Post by TN_Boy »

longinvest wrote: Mon Oct 08, 2018 2:43 pm According to immediateannuities.com, a retired couple with both spouses of age 80 can buy a fixed SPIA paying $714/month for $100,000. This conservatively translates into a $554/month 3%-indexed SPIA, or a 6.6% payout rate on the $100,000.

This is similar to the percentage, at age 80, for a 40/60 stocks/bonds portfolio in the VPW table, except that the SPIA it eliminates volatility and longevity risk at the cost, of course, of liquidity.

Had one spouse died before 80, the survivor would pay even less. A single male would get a 9.3% payout rate ($959/month fixed translated to $771/month 3%-indexed) and a single female a 8.1% payout rate ($849/month fixed translated to $673/month 3%-indexed).

While few providers sell CPI-indexed SPIAs, many sell SPIAs indexed to a specific percentage like 2% and 3%. So, it should be fairly easy to diversify annuity providers, when annuitizing bigger amounts, with a fixed percentage increase. At age 80, many would argue that a 3% annual increase is probably too big, but I like to be conservative in my planning.

I definitely plan to buy a cost-of-living (3%) adjusted SPIA at age 80 with part of my residual portfolio* to dampen the financial risk of surviving beyond age 100.

* Not all of it! I want to always keep some liquidity as long as I'm alive.
One of the points above struck me a bit. I said this in another post:
The problem I'd have with taking the SPIA later is that if SS is paying a decent percent of my basic living expenses, and it will be for us after we start it, well, I already HAVE a guaranteed income stream. Do I really need two? The later you take the SPIA, the less time the portfolio has to last, and the more likely you have SS helping you some.
And I still think that, but consider a couple where, as I postulate, we have SS from both spouses paying most of their expenses (maybe 1/2 to 3/4). Now, sadly, one of them passes on to the great beyond. At this point (financially) some things happen:

1) SS benefits are reduced, maybe a lot if the couple had anywhere near equal benefits.
2) An SPIA becomes a better deal, since there are no survivor benefits.
3) There is only one person to think about finances ie. no-one to say "TN_Boy, we are NOT investing in a llama farm."

For example, according to immediate annuities.com, $200,000k would buy a single male age 75 $1,550 a month, a single female age 75 $1,430 a month. A joint annuity if both are age 75 pays about $1,200 a month.

From what I've seen in the various threads we've had on SPIAs, the example above is one of the situations where SPIAs (with current payouts) become more interesting -- one spouse is gone, SS benefits reduced.
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Re: Alan Roth doesn't like single premium annuities

Post by The Wizard »

columbia wrote: 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.
TIAA Traditional is better than other insurance company SPIAs for two reasons:
1) initial payout rate can be significantly high if you have old vintage $$ in there.
2) the "additional amounts" in your monthly payout increase a small amount some years whereas SPIAs apparently do not...
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Re: Alan Roth doesn't like single premium annuities

Post by The Wizard »

SGM wrote: Sat Oct 06, 2018 9:08 am
...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.
Right.
I also have variable monthly income based on the CREF Stock account and also on the TIAA Real Estate Account.
I don't generally try to explain or defend these products to others who think that all Variable Annuities are terrible things...
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Re: Allan Roth doesn't like single premium annuities

Post by randomguy »

JoMoney wrote: Mon Oct 08, 2018 1:25 pm
gotester2000 wrote: Mon Oct 08, 2018 1:16 pm...Is there any other product that will give you peaceful sleep?
I think that's a key thing that gets missed when people try to compare and evaluate annuities to investments.
An annuity is an insurance product, not an investment. Peace of mind has a value. I don't think I've seen any threads on here with people evaluating the cost of car insurance or health insurance relative to the probability of a catastrophic event. Outliving your savings could very easily be a catastrophe worth insuring against, if it's a non-zero possibility the consequences might be far more severe than potential upside... And if someone is investing in bonds and fixed income anyway, annuities are very fairly priced actuarially.
How well will you sleep at night knowing that you are getting less and less spending power every year and with an uptick in inflation you will not be able to pay your bills? Anyone remember the fatevof people on a fixed income in the 70s and early 80s?
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Re: Allan Roth doesn't like single premium annuities

Post by JoMoney »

randomguy wrote: Tue Oct 09, 2018 9:49 am...
How well will you sleep at night knowing that you are getting less and less spending power every year and with an uptick in inflation you will not be able to pay your bills? Anyone remember the fatevof people on a fixed income in the 70s and early 80s?
As well as I would with bonds and other fixed income investments.
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Re: Allan Roth doesn't like single premium annuities

Post by garlandwhizzer »

Fear and insecurity are common among the elderly, and they are the main tools exploited by those who sell and market annuities. On paper the numbers don't work for buyers but they work big time for the companies that issue them and those who reap commissions selling them. A rolling ladder of bonds or CDs or a solid bond fund which offers lower monthly payouts but whose shares can be sold as needed to provide money is in my view a preferable way to go. What annuities offer is the illusion of safety. Inflation is toxic to their nominal returns over a long time span. If you must annuitize a portion of your portfolio, I suggest you wait as long as possible to buy it which reduces the ravages of cumulative inflation over lifetime payments. In a rising rate environment like ours waiting to buy also increases your monthly payouts. Finally I suggest you buy only SPIAs which tend to have lower sales commissions than the more complex annuities. Good luck.

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Re: Allan Roth doesn't like single premium annuities

Post by Allan Roth »

nedsaid wrote: Sun Oct 07, 2018 3:43 pm
Not a scam, you are getting the higher payouts because of mortality credits. In other words, as an annuity owner, you get a higher payout because of those who die early. Hopefully, if you purchase one, you don't want to be one of those chumps who dies early. But this is a trade-off and there are trade-offs to about anything. Pretty much this is what a pension does, folks with pensions are glad to have them and don't call them scams.
I'm not saying SPIAs are a scam but I am saying:

1) Return of principal is NOT income.
2) It's essentially buying a fixed income product with a duration of the rest of your life at a time when long-term rates are near an all-time low.
3) Actuaries aren't stupid - they are making money from the mortality credits and use a different life-expectancy table since SPIAs attract the more healthy.
4) You expose yourself to future inflation that could eat away the vast majority of purchasing power. Like I said - actuaries aren't stupid and don't want to take on inflation risk.
5) The mortality credits aren't worth the two unnecessary intermediaries - the agent and the insurance company.

With that said - SPIAs are the least bad of all annuities sold by insurance agents. Pensions don't involve expensive intermediaries and are not based on the same life expectancy tables as insurance companies. I recommend three annuities that arent' sold by agents:
https://www.aarp.org/money/investing/in ... es-ar.html
Last edited by Allan Roth on Tue Oct 09, 2018 2:26 pm, edited 1 time in total.
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Re: Allan Roth doesn't like single premium annuities

Post by vineviz »

garlandwhizzer wrote: Tue Oct 09, 2018 2:12 pm Fear and insecurity are common among the elderly . . . .
Not only among the elderly, it seems. There are many people with an irrational fear of single premium annuities, it appears to me.
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Re: Allan Roth doesn't like single premium annuities

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Allan Roth wrote: Tue Oct 09, 2018 2:21 pm1) Return of principal is NOT income.
At what point do annuity payments become income, which they surely must at some point? When their nominal (or real) value surpasses the price paid for the annuity?

Honestly, this sounds like a semantics argument.
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm2) It's essentially buying a fixed income product with a duration of the rest of your life at a time when long-term rates are near an all-time low.
True, but we don't know how high long-term rates will get, nor how long it will take to get there, nor how long they will stay there.
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm3) Actuaries aren't stupid - they are making money from the mortality credits and use a different life-expectancy table since SPIAs attract the more healthy.
I don't doubt that, but the quoted benefits are what they are. The steps that insurers take to arrive at those benefits does not directly impact the value that the SPIA may provide.
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm4) You expose yourself to future inflation that could eat away the vast majority of purchasing power. Like I said - actuaries aren't stupid and don't want to take on inflation risk.
I can't blame them for that. I don't want to take on inflation risk either. But in all fairness, I thought that the primary reason that most insurers got away from COLAs was lack of interest on the part of buyers.
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm5) The mortality credits aren't worth the two unnecessary intermediaries - the agent and the insurance company.
I believe that's a subjective assessment. There are some people out there (not me) who crave guarantees. And there aren't many out there.

While I don't anticipate ever buying a SPIA myself, I can see value in the approach suggested by Wade Pfau: buy a SPIA that will, in conjunction with other guaranteed income streams like Social Security, cover your non-discretionary spending, and use the remainder of your portfolio to fund your discretionary spending. I'm sure that many would sleep well at night with such an arrangement.
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Re: Allan Roth doesn't like single premium annuities

Post by vineviz »

Allan Roth wrote: Tue Oct 09, 2018 2:21 pm 1) Return of principal is NOT income.
A distinction without a difference, and not wholly true either.
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm2) It's essentially buying a fixed income product with a duration of the rest of your life at a time when long-term rates are near an all-time low.
SPIAs are an insurance product, making a comparison between them and bonds mostly irrelevant.
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm3) Actuaries aren't stupid - they are making money from the mortality credits and use a different life-expectancy table since SPIAs attract the more healthy.
Every mutual fund management firm makes money too. You're not arguing that we shouldn't buy mutual funds just because the people who run them are making money, surely?

Allan Roth wrote: Tue Oct 09, 2018 2:21 pm4) You expose yourself to future inflation that could eat away the vast majority of purchasing power. Like I said - actuaries aren't stupid and don't want to take on inflation risk.
Virtually every possible asset an investor owns is exposed to inflation risk. Moreover, most retirees have expenditures that decline in real terms anyway which means the difference between nominal returns and real returns is less important than many advisors would have you believe.
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm5) The mortality credits aren't worth the two unnecessary intermediaries - the agent and the insurance company.
I argue that this an opinion, one you are entitled to, but is one that many retirees don't share. I don't think you'd have to know many retirees to conclude that they hold a wide range of risk aversion profiles and utility functions.
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Re: Allan Roth doesn't like single premium annuities

Post by Allan Roth »

vineviz wrote: Tue Oct 09, 2018 2:43 pm
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm 1) Return of principal is NOT income.
A distinction without a difference, and not wholly true either.
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm2) It's essentially buying a fixed income product with a duration of the rest of your life at a time when long-term rates are near an all-time low.
SPIAs are an insurance product, making a comparison between them and bonds mostly irrelevant.
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm3) Actuaries aren't stupid - they are making money from the mortality credits and use a different life-expectancy table since SPIAs attract the more healthy.
Every mutual fund management firm makes money too. You're not arguing that we shouldn't buy mutual funds just because the people who run them are making money, surely?

Allan Roth wrote: Tue Oct 09, 2018 2:21 pm4) You expose yourself to future inflation that could eat away the vast majority of purchasing power. Like I said - actuaries aren't stupid and don't want to take on inflation risk.
Virtually every possible asset an investor owns is exposed to inflation risk. Moreover, most retirees have expenditures that decline in real terms anyway which means the difference between nominal returns and real returns is less important than many advisors would have you believe.
Allan Roth wrote: Tue Oct 09, 2018 2:21 pm5) The mortality credits aren't worth the two unnecessary intermediaries - the agent and the insurance company.
I argue that this an opinion, one you are entitled to, but is one that many retirees don't share. I don't think you'd have to know many retirees to conclude that they hold a wide range of risk aversion profiles and utility functions.
Wow - okay then give me $100K and I'll give you $25K for three years and keep your principal - no difference so that's 25% income - right? Look at an insurance company balance sheet - 80-90% in investment grade bonds so you are buying a bond portfolio with extra fees - I assure you insurance companies don't produce the income with magic. I don't know what to say about your comment on mutual fund fees - I think most Bogleheads understand the importance of minimizing fees. Some financial products have more exposure to inflation - for example a fixed payment for decades has far more inflation risk than TIPS. Yes my opinions are based on IRRs and having been officers of two insurance companies. As an hourly advisor, I'd recommend these if the numbers and logic worked.
Last edited by Allan Roth on Tue Oct 09, 2018 3:30 pm, edited 1 time in total.
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Re: Allan Roth doesn't like single premium annuities

Post by Prokofiev »

Allan Roth wrote: Tue Oct 09, 2018 2:21 pm
nedsaid wrote: Sun Oct 07, 2018 3:43 pm
Not a scam, you are getting the higher payouts because of mortality credits. In other words, as an annuity owner, you get a higher payout because of those who die early. Hopefully, if you purchase one, you don't want to be one of those chumps who dies early. But this is a trade-off and there are trade-offs to about anything. Pretty much this is what a pension does, folks with pensions are glad to have them and don't call them scams.
I'm not saying SPIAs are a scam but I am saying:

1) Return of principal is NOT income.

Of course it's not. This is a strawman. Which BogleHead would claim such a thing?

2) It's essentially buying a fixed income product with a duration of the rest of your life

The same as buying a 20-30 year Treasury/corporate bond or a LT bond fund.

at a time when long-term rates are near an all-time low.

That is not true. The 5yr TIPs has risen 1.5% real since Oct 2012. The 30 yr bottomed Jan 2015. 10 yr Treasuries have been going up for 2.5 years. Rates may still be relatively low, but are still higher than 2-5 years ago. And for the future . . . do you claim to know where rates will be?


3) Actuaries aren't stupid - they are making money from the mortality credits and use a different life-expectancy table since SPIAs attract the more healthy.

Another strawman. Who said they were stupid? Only I know my state of health and the longevity of my immediate family, not the insurance company. This boils down to "If you are in bad health, don't buy an annuity".


4) You expose yourself to future inflation that could eat away the vast majority of purchasing power. Like I said - actuaries aren't stupid and don't want to take on inflation risk.


Again, no one said they were stupid. All nominal fixed-income investments will expose you to inflation risk.
Nothing special about SPIAs.

5) The mortality credits aren't worth the two unnecessary intermediaries - the agent and the insurance company.

This may or may not be true. I can receive a quote on the product, calculate the break-even point and estimate IRR as a function of age at death. I don't need to know the mortality credits or life-expectancy table used by the insurance company. I can calculate the personal value of a given SPIA based upon its pay-out and my own personal health and longevity estimates and decide whether it is a reasonable proposition. To those in the 70-80 camp with no heirs and in good health, I see real value in SPIAs. They are an insurance product and as such, I fully expect them to make a profit. As longevity insurance, I expect that on average, I will lose out. Should i die early, so be it. But they also form insurance against cognitive decline and doing something stupid or expecting my surviving spouse to suddenly manage our nest egg should I disappear unexpectantly. I think you are being too hard on this idea.

With that said - SPIAs are the least bad of all annuities sold by insurance agents. Pensions don't involve expensive intermediaries and are not based on the same life expectancy tables as insurance companies. I recommend three annuities that arent' sold by agents:
https://www.aarp.org/money/investing/in ... es-ar.html
Last edited by Prokofiev on Wed Oct 10, 2018 1:50 pm, edited 4 times in total.
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Re: Allan Roth doesn't like single premium annuities

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Allan Roth wrote: Tue Oct 09, 2018 3:24 pm Wow - okay then give me $100K and I'll give you $25K for three years and keep your principal - no difference so that's 25% income - right?
If you think that's the way that SPIAs work it's no wonder you don't like them.
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Re: Allan Roth doesn't like single premium annuities

Post by Allan Roth »

vineviz wrote: Tue Oct 09, 2018 3:30 pm
Allan Roth wrote: Tue Oct 09, 2018 3:24 pm Wow - okay then give me $100K and I'll give you $25K for three years and keep your principal - no difference so that's 25% income - right?
If you think that's the way that SPIAs work it's no wonder you don't like them.
I'm extrapolating your logic to show the flaw. If one buys a 6% SPIA, they need to live 16 years an 8 months to get their principal back in nominal terms and far longer in real inflation adjusted returns. This is arithmetic (1/.06). It's not income!
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Re: Allan Roth doesn't like single premium annuities

Post by Allan Roth »

vineviz wrote: Tue Oct 09, 2018 3:30 pm
If you think that's the way that SPIAs work it's no wonder you don't like them.
I'm extrapolating your logic to show the flaw. If one buys a 6% SPIA, they need to live 16 years an 8 months to get their principal back in nominal terms and far longer in real inflation adjusted terms. This is arithmetic (1/.06). It's not income and IMO, it shouldn't be legal to sell it as income in the same way as a CD paying 3% income. https://www.advisorperspectives.com/art ... ur-clients
Last edited by Allan Roth on Tue Oct 09, 2018 3:39 pm, edited 2 times in total.
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