Do I really need an Annuity? I have 40% Bonds

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AK62
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Do I really need an Annuity? I have 40% Bonds

Post by AK62 »

We are retiring in three years at age 60. Medical benefits are covered to age 65 when Medicare kicks in. Spouse and I are debt free, and retirement will have $35k annual pension and investment portfolio is currently $1.8M. We don’t plan to take SS until FRA or even age 70. A few weeks ago I signed up to watch a webinar on investing. Last week a financial advisor from that organization cold called me. He asked me me a few questions and we were discussing my AA. I told him I was 60/40 stocks bonds. He said my portfolio is out of alignment. And due to low interest rates, my bonds are paying zero and a waste in the portfolio.... He said I could do much better if I bought an annuity and change my AA to 💯 stocks because the annuity will guarantee an income much more reliable than the bonds. Please explain the pros and cons. I told him I need to think about it. In my situation do we really need an annuity? Thank you.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by pharmermummles »

What do you expect your expenses to be in retirement? What is your risk tolerance? Do you value leaving a sizable inheritance? Your answers matter quite a lot here.

A lot here might consider a $35K annual pension and impending social security, not to mention another ~$720K of bonds in the portfolio, to be more than enough on the fixed income side. It is perfectly reasonable to take the pension and social security into consideration when deciding whether to increase your stock allocation. But I would stop short of considering bonds to be a dead weight in your portfolio. And this is coming from someone who is 100/0 stocks due to age. People have been saying for years that rates couldn't possibly keep dropping, and yet they have. Bonds have had an incredible run. What they do going forward is anyone's guess.

With a pension, no debt, and a pretty nice portfolio, you're in great shape pretty much no matter what (assuming your spending isn't incredibly high). I'm a fair bit off from retirement, and I have a lot to learn about planning for decumulation, so take my advice with a huge grain of salt, but I personally would avoid the annuity. I would be most concerned with unexpected inflation, and many annuity products don't have COLAs unless they come at a steep price. With a balanced portfolio with a healthy allocation to stocks like you have, I'd feel more comfortable in a variety of unexpected market conditions. But I tend to like to feel more in control.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by FishTaco »

PRO: The financial advisor will earn a phat commission by selling you the annuity.
CON: You will be the one paying for the phat commission.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by nisiprius »

I'm going to keep this as simple as possible. The word "annuity" covers many different kinds of product. My guess is that he is offering you either a so-called "fixed index annuity," which is pure evil incarnate, or a "variable annuity," which is bad. You can recognize a fixed index annuity because the description will mention the S&P 500 index. Variable annuities are complicated products which mix up insurance and investment characteristics, are described by forty-page "prospectuses" printed on onionskin paper in small grey type, and are never exactly like any other variable annuity so it is impossible to compare one to another. If he is talking about one of these, run.

There is a worthwhile kind of annuity called a "single premium immediate annuity," "income annuity," or "SPIA," which can be useful, legitimate, and cheap. It is most useful if you have "just barely enough" or "not quite" a large enough portfolio. An SPIA is a simple product. I own one. The main part of the legal contract that describes the actual terms and conditions is less than a page long (the rest is verbiage about where the company is domiciled and IRS and tax-related stuff). The simplest form is a contract to pay you a certain number of dollars every month for as long as you live. There may be a few extras. The number of dollars might increase by 3% compounded every year. The contract might specify that payments are guaranteed to continue for ten years no matter what. The pros and cons can be discussed for a long time. I will be astonished if he is offering to sell you one of these.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by nisiprius »

There can be, and are, endless discussions about the value of a core bond mutual fund in a portfolio.

But a flip statement that "your bonds are paying zero and a waste in the portfolio" is so glib and inaccurate that I would distrust anyone who presented it that way. This makes exactly as much sense as saying "stocks have cratered and are a waste in the portfolio."

First of all, I hope you know whether or not your bonds are paying you anything. If you don't, check your statement! I feel confident that they not paying zero.

Second, the Fed funds rate, which is the one which just got set to zero--actually 0-0.25%--was also "zero" from March 2010 through November 2015:

Fed funds rate, St. Louis Fed

Image

And yet, an investment of $10,000 in the Vanguard Total Bond Market Index Fund from March 2010 through November 2015 made $2,178 during that period of time,

Source

Image

and the current SEC yield for that fund is 1.81%.

Morningstar quote, VBTLX

Image

Would some other bond fund have paid more? That was the past, what should we expect in the future? Would the best competitive five-year bank CDs be a better choice than a bond fund? All that can be a topic of legitimate discussion.

But if he actually said "your bonds are paying zero and are a waste in the portfolio" and says you should be 100% stocks, that sounds like a jerk who is trying to sell you something that benefits him--not a trustworthy advisor help you to understand your own best interests.

P.S.

4) People that dislike bonds always have a glib reason for trashing them. If you pay attention, when interest rates are low you will hear them saying both "bonds suck because interest rates can only go up" and "bonds suck because interest rates are never going to go up."

5) Vanguard states that Total Bond and other funds in that category "may be appropriate for investors with medium-term investment horizons (4 to 10 years)." And it is a common rule-of-thumb that, for reasonable safety, one should plan on holding a bond fund for a time frame similar to its "duration," which for Total Bond is 6.3 years. So in your thinking, you should assume a holding period of four to ten years, and what matters is "what is the overnight Fed Funds rate today," but "what are the ups and downs of the 10-year Treasury yield over the next four to ten years?" I don't believe any predictions are reliable, but the point is that--as I said earlier--it no more sensible to say "don't hold bonds because the overnight Fed funds rate is zero today" than to say "don't hold stocks because they have lost 12% year-to-date."
Last edited by nisiprius on Wed Apr 15, 2020 5:59 am, edited 1 time in total.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by vineviz »

AK62 wrote: Wed Apr 15, 2020 2:19 am few weeks ago I signed up to watch a webinar on investing. Last week a financial advisor from that organization cold called me. He asked me me a few questions and we were discussing my AA. I told him I was 60/40 stocks bonds. He said my portfolio is out of alignment. And due to low interest rates, my bonds are paying zero and a waste in the portfolio.... He said I could do much better if I bought an annuity and change my AA to 💯 stocks because the annuity will guarantee an income much more reliable than the bonds.
nisiprius wrote: Wed Apr 15, 2020 5:19 am There is a worthwhile kind of annuity called a "single premium immediate annuity," "income annuity," or "SPIA," which can be useful, legitimate, and cheap ..... I will be astonished if he is offering to sell you one of these.
It's possible the webinar mentioned by the OP was conducted by Blueprint Income (YouTube link), which does not sell variable annuities (AFAIK) but does offer income annuities and fixed annuities.

Generally speaking, the most efficient way to maximize retirement income and a desire to provide legacy wealth to heirs does involve annualizing part (maybe a large part) of the bond allocation at or near retirement, so on the face of it the proposed transaction could very well benefit both the agent (annuities are insurance products, so the cold-caller was more likely an insurance agent than a fiduciary advisor, FWIW) and the OP.

But, as always, the devil is in the details. I would not recommend annuatizing all of the bond allocation at once, for instance, and I'd insist that the SPIA include a cost of living adjustment (COLA). I'd make sure that no SINGLE annuity exceeds the limit of the OP's state guarantee associate.

Further, if Social Security will cover only a small portion of non-discretionary expenses then inflation risk might not be something an annuity can adequately minimize on its own. Some combination of TIPS and annuities might address that balance of risks better?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Do I really need an Annuity? I have 40% Bonds

Post by nisiprius »

vineviz wrote: Wed Apr 15, 2020 5:58 am
AK62 wrote: Wed Apr 15, 2020 2:19 am few weeks ago I signed up to watch a webinar on investing. Last week a financial advisor from that organization cold called me. He asked me me a few questions and we were discussing my AA. I told him I was 60/40 stocks bonds. He said my portfolio is out of alignment. And due to low interest rates, my bonds are paying zero and a waste in the portfolio.... He said I could do much better if I bought an annuity and change my AA to 💯 stocks because the annuity will guarantee an income much more reliable than the bonds.
nisiprius wrote: Wed Apr 15, 2020 5:19 am There is a worthwhile kind of annuity called a "single premium immediate annuity," "income annuity," or "SPIA," which can be useful, legitimate, and cheap ..... I will be astonished if he is offering to sell you one of these.
It's possible the webinar mentioned by the OP was conducted by Blueprint Income (YouTube link), which does not sell variable annuities (AFAIK) but does offer income annuities and fixed annuities.

Generally speaking, the most efficient way to maximize retirement income and a desire to provide legacy wealth to heirs does involve annualizing part (maybe a large part) of the bond allocation at or near retirement, so on the face of it the proposed transaction could very well benefit both the agent (annuities are insurance products, so the cold-caller was more likely an insurance agent than a fiduciary advisor, FWIW) and the OP.

But, as always, the devil is in the details. I would not recommend annuatizing all of the bond allocation at once, for instance, and I'd insist that the SPIA include a cost of living adjustment (COLA). I'd make sure that no SINGLE annuity exceeds the limit of the OP's state guarantee associate.

Further, if Social Security will cover only a small portion of non-discretionary expenses then inflation risk might not be something an annuity can adequately minimize on its own. Some combination of TIPS and annuities might address that balance of risks better?
Well said.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by nisiprius »

If one is going to buy a single-premium immediate annuity, I think it is wise to consider one in which the payout is linked to the CPI, rather than being a fixed-dollar-amount or same-percentage-increase-every-year. These products are becoming rare.

Principal might still be offering inflation-adjusted SPIAs, based on this web page:

Principal Immediate Income Annuity

Image

Unfortunately, I don't know a place where you can actually see availability or dollar figures without giving your personal information to an agent.

The most casual back-of-the-envelope calculation or guesstimate will tell you that a payout that increases with inflation is likely to pay out a lot more than one that doesn't, and therefore the premium is likely to be a lot higher. In the past whenever I've checked, inflation-linked annuities cost roughly the same as one in which the payout increases by 3% every year, and by a lot higher I mean something like 30% higher or more. Apparently the sticker shock puts people off and has made these product unpopular, but some amateur spreadsheet work I once did with a life table convinced me that the higher price was perfectly consistent with the higher payout.

For the record I have no connection with any insurance company other than as policyholder.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by petulant »

nisiprius has provided some excellent, detailed information. But I'll break the situation down to a very simple point, and then provide a caveat about the single premium immediate annuity (SPIA) nisiprius has brought up.

The bottom line is that the webinar you watched, OP, was a marketing tool to lure prospects in to get sold annuities. The information in the webinar is therefore suspect. Further, when the first word out of an investment advisor's mouth is that you need an annuity--not that one option is an annuity--it is time to run. It is a salesperson, not an objective advisor.

Now, the caveat about the SPIA. I really think that most retirees are better off setting up 80-90% of their retirement income needs as an annuity. The thing is, that's already built in for an American through social security. Depending on your income, expenses, and geographic location, many many people in America can get retirement income annuities for 90% of retirement needs just by taking social security at 70. That's really what I recommend for OP. Take the pension and spend down the portfolio as needed until age 70, then let pension and social security cover expenses from there on out with dips into the portfolio as needed. An SPIA can be suitable in OP's circumstances but I would not recommend it.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by vineviz »

nisiprius wrote: Wed Apr 15, 2020 6:18 am If one is going to buy a single-premium immediate annuity, I think it is wise to consider one in which the payout is linked to the CPI, rather than being a fixed-dollar-amount or same-percentage-increase-every-year. These products are becoming rare.

Principal might still be offering inflation-adjusted SPIAs, based on this web page:
As far as I can tell, Principal has actually stopped offering their CPI-linked annuities. I can't remember who said this (maybe it was the Blueprint folks in the webinar, which I only partially watched, or a recent podcast interview I listened to), but I definitely heard someone say they had withdrawn the product due to low demand.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Do I really need an Annuity? I have 40% Bonds

Post by nick evets »

I like the idea of SPIA's and our megacorp presents them as an option in our retirement savings portal. But:
1) inflation-indexed SPIA's aren't offered (through sources I'd purchase from).

2) I've come to the conclusion that the principal benefit is convenience: not having to manage CD-ladders and the like. The downside is the complete surrender and it's considerable.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by anon_investor »

FishTaco wrote: Wed Apr 15, 2020 4:27 am PRO: The financial advisor will earn a phat commission by selling you the annuity.
CON: You will be the one paying for the phat commission.
+1, the guy cold called you...
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Re: Do I really need an Annuity? I have 40% Bonds

Post by vineviz »

petulant wrote: Wed Apr 15, 2020 6:27 am Now, the caveat about the SPIA. I really think that most retirees are better off setting up 80-90% of their retirement income needs as an annuity. The thing is, that's already built in for an American through social security. Depending on your income, expenses, and geographic location, many many people in America can get retirement income annuities for 90% of retirement needs just by taking social security at 70. That's really what I recommend for OP.
This is a good point, and I totally agree with the premise.

There is a caveat that the 90% figure is likely not quite accurate for what I perceive is the typical Boglehead. The median household income for people with a college degree is approximately $95k, and such a household can expect a Social Security benefit of perhaps $2,000 to $3,000/month. This is probably more like 60% or 70% of their expenses, which is a much bigger hole to fill with income from a market portfolio.

I'm especially worried for folks who, at the end of 2019, thought they were just two or three years away from "hitting their number". With the spike in unemployment, many of these people may find that working for another couple of years is now impractical. And with bond yields as low as they are, the difference between covering 5 years until claiming Social Security at age 70 and covering (say) 8 years to age 70 is potentially an insurmountable difference for some subset of these folks.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by petulant »

vineviz wrote: Wed Apr 15, 2020 6:58 am
petulant wrote: Wed Apr 15, 2020 6:27 am Now, the caveat about the SPIA. I really think that most retirees are better off setting up 80-90% of their retirement income needs as an annuity. The thing is, that's already built in for an American through social security. Depending on your income, expenses, and geographic location, many many people in America can get retirement income annuities for 90% of retirement needs just by taking social security at 70. That's really what I recommend for OP.
This is a good point, and I totally agree with the premise.

There is a caveat that the 90% figure is likely not quite accurate for what I perceive is the typical Boglehead. The median household income for people with a college degree is approximately $95k, and such a household can expect a Social Security benefit of perhaps $2,000 to $3,000/month. This is probably more like 60% or 70% of their expenses, which is a much bigger hole to fill with income from a market portfolio.

I'm especially worried for folks who, at the end of 2019, thought they were just two or three years away from "hitting their number". With the spike in unemployment, many of these people may find that working for another couple of years is now impractical. And with bond yields as low as they are, the difference between covering 5 years until claiming Social Security at age 70 and covering (say) 8 years to age 70 is potentially an insurmountable difference for some subset of these folks.
This is all fair. One thing I would point out on the social security expectation is that spousal benefits, either from both working or from one claiming a 50% benefit of the other, can bump up the social security benefit.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by Watty »

AK62 wrote: Wed Apr 15, 2020 2:19 am ... will have $35k annual pension and investment portfolio is currently $1.8M.


.....We don’t plan to take SS until FRA or even age 70.
See this web site to get a suggested SS claiming stragety.

https://opensocialsecurity.com/

It can vary but often for a couple it makes sense of one person to start SS earely then have the other wait until they are around 70.

Your pension and Social Security are both basically annuities. Just for diversification you would likely not need another Single Premium Immediate annuity

Your portfolios will also generate a reliable 1 to 2 percent in dividends and interest.

You dodged a bullet, 99% of financial advisors are just sales people in disguise that will try to sell you complex high cost junk that are called annuities.

The only type of annuity that is worth considering is a single premium immediate annuity(SPIA) that is like buying a pension. There is almost zero chance that the salesperson you were talking to was trying to sell you one of those.
AK62 wrote: Wed Apr 15, 2020 2:19 am We are retiring in three years at age 60
When a SPIA annuity makes sense the next big question is when to buy it.

There is no set answer but 60 is realy young to buy one and often it makes sense to buy it when you are maybe in your late 70 since there will be less time for inflation to be a problem. It may also then make sense to buy additional annuities every five to ten years to make up for purchasing power that has been lost to inflation.
Last edited by Watty on Wed Apr 15, 2020 8:43 am, edited 1 time in total.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by Dottie57 »

Watty wrote: Wed Apr 15, 2020 8:28 am
AK62 wrote: Wed Apr 15, 2020 2:19 am ... will have $35k annual pension and investment portfolio is currently $1.8M.


.....We don’t plan to take SS until FRA or even age 70.
See this web site to get a suggested SS claiming stragety.

https://opensocialsecurity.com/

It can vary but often for a couple it makes sense of one person to start SS earely then have the other wait until they are around 70.

Your pension and Social Security are both basically annuities. Just for diversification you would likely not need another Single Premium Immediate annuity

Your portfolios will also generate a reliable 1 to 2 percent in dividends and interest.

You dodged a bullet, 99% of financial advisors are just sales people in disguise that will try to sell you complex high cost junk that are called annuities.

The only type of annuity that is worth considering is a single premium immediate annuity(SPIA) that is like buying a pension. There is almost zero chance that the salesperson you were talking to was trying to sell you one of those.
AK62 wrote: Wed Apr 15, 2020 2:19 am We are retiring in three years at age 60
When a SPIA annuity makes sense the next big question is when to buy it.

There is not set answer but 60 is realy young to buy one and often it makes sense to buy it when you are maybe in your late 70 since there will be less time for inflation to be a problem. It may also then make sense to buy additional annuities every five to ten years to make up for purchasing power that has been lost to inflation.
+1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by restingonmylaurels »

Dottie57 wrote: Wed Apr 15, 2020 8:38 am +1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
I never have considered an annuity in any form, as I cannot understand how giving a bunch of money to someone else, having them deduct their expenses/profit, and then giving it back to you slowly can possibly be financially more advantageous than investing that money yourself.

In what scenario would your overall net worth be improved by purchasing a SPIA?
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Re: Do I really need an Annuity? I have 40% Bonds

Post by iamblessed »

AK62 wrote: Wed Apr 15, 2020 2:19 am We are retiring in three years at age 60. Medical benefits are covered to age 65 when Medicare kicks in. Spouse and I are debt free, and retirement will have $35k annual pension and investment portfolio is currently $1.8M. We don’t plan to take SS until FRA or even age 70. A few weeks ago I signed up to watch a webinar on investing. Last week a financial advisor from that organization cold called me. He asked me me a few questions and we were discussing my AA. I told him I was 60/40 stocks bonds. He said my portfolio is out of alignment. And due to low interest rates, my bonds are paying zero and a waste in the portfolio.... He said I could do much better if I bought an annuity and change my AA to 💯 stocks because the annuity will guarantee an income much more reliable than the bonds. Please explain the pros and cons. I told him I need to think about it. In my situation do we really need an annuity? Thank you.
Read my post viewtopic.php?f=10&t=311710
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Re: Do I really need an Annuity? I have 40% Bonds

Post by Dottie57 »

restingonmylaurels wrote: Wed Apr 15, 2020 10:04 am
Dottie57 wrote: Wed Apr 15, 2020 8:38 am +1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
I never have considered an annuity in any form, as I cannot understand how giving a bunch of money to someone else, having them deduct their expenses/profit, and then giving it back to you slowly can possibly be financially more advantageous than investing that money yourself.

In what scenario would your overall net worth be improved by purchasing a SPIA?
It is a paycheck for life. No need to sell any asset which is now down for the year. I would be happy to buy an SPIA that gives me about 12k per year. The price would not take all of my FI and I would be comfortable upping my stock %.

I AM NOT TRYING TO MAXIMIZE NET WORTH. I am trying to have a comfortable retirement. No kids, no spouse.

It seems our goals are very different.

P.S. an SPIA gives me my money back plus some earnings. The amount comes back at a rate > 4%. A 75 yo female in MN would get a 7.6% payout. A male would have more mortality credits and therefore a higher payout.
Last edited by Dottie57 on Wed Apr 15, 2020 11:08 am, edited 2 times in total.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by azanon »

vineviz wrote: Wed Apr 15, 2020 6:37 am
nisiprius wrote: Wed Apr 15, 2020 6:18 am If one is going to buy a single-premium immediate annuity, I think it is wise to consider one in which the payout is linked to the CPI, rather than being a fixed-dollar-amount or same-percentage-increase-every-year. These products are becoming rare.

Principal might still be offering inflation-adjusted SPIAs, based on this web page:
As far as I can tell, Principal has actually stopped offering their CPI-linked annuities. I can't remember who said this (maybe it was the Blueprint folks in the webinar, which I only partially watched, or a recent podcast interview I listened to), but I definitely heard someone say they had withdrawn the product due to low demand.
While I know both of these guys know their stuff, I'd still suggestion caution on the inflation-linked SPIAs because there are also some heavy hitters (experts) who say the inflation-protection for SPIAs is often too expensive. I believe David Blanchett and Wade Pfau fall in this camp. (Found David's article on this here: https://www.advisorperspectives.com/art ... a-bad-deal )

And then there's the other argument (I'll make it myself), that the gradual drop in real income from a non-inflation-linked SPIA possibly approximates the gradually dropping need of that income for aging individuals, who are less mobile.

Even more generally speaking, it's my understanding, the more features you add to your base level annuity product, the more you're going to pay and it's always at a premium. Kinda like a base model car vs. the fully loaded one. The value car is the base one, almost always.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by Mel Lindauer »

Dottie57 wrote: Wed Apr 15, 2020 10:48 am
restingonmylaurels wrote: Wed Apr 15, 2020 10:04 am
Dottie57 wrote: Wed Apr 15, 2020 8:38 am +1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
I never have considered an annuity in any form, as I cannot understand how giving a bunch of money to someone else, having them deduct their expenses/profit, and then giving it back to you slowly can possibly be financially more advantageous than investing that money yourself.

In what scenario would your overall net worth be improved by purchasing a SPIA?
It is a paycheck for life. No need to sell any asset which is now down for the year. I would be happy to buy an SPIA that gives me about 12k per year. The price would not take all of my FI and I would be comfortable upping my stock %.

I AM NOT TRYING TO MAXIMIZE NET WORTH. I am trying to have a comfortable retirement. No kids, no spouse.

It seems our goals are very different.

P.S. an SPIA gives me my money back plus some earnings. The amount comes back at a rate > 4%. A 75 yo female in MN would get a 7.6% payout. A male would have more mortality credits and therefore a higher payout.
Don't confuse the higher payout (7.6%) as a return ON your money. Actually, it's a return OF your money, since they're actually giving you your money back until it runs out. And then if you live long enough, you're actually getting paid by someone who died earlier than predicted.
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Mel Lindauer
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Re: Do I really need an Annuity? I have 40% Bonds

Post by Mel Lindauer »

I suspect that he's going to pitch this lousy annuity to you. Just say "No".

Here's a Forbes column I did on them.

https://www.forbes.com/2010/08/10/truth ... b441ef1257
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azanon
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Re: Do I really need an Annuity? I have 40% Bonds

Post by azanon »

Mel Lindauer wrote: Wed Apr 15, 2020 11:36 am
Dottie57 wrote: Wed Apr 15, 2020 10:48 am
restingonmylaurels wrote: Wed Apr 15, 2020 10:04 am
Dottie57 wrote: Wed Apr 15, 2020 8:38 am +1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
I never have considered an annuity in any form, as I cannot understand how giving a bunch of money to someone else, having them deduct their expenses/profit, and then giving it back to you slowly can possibly be financially more advantageous than investing that money yourself.

In what scenario would your overall net worth be improved by purchasing a SPIA?
It is a paycheck for life. No need to sell any asset which is now down for the year. I would be happy to buy an SPIA that gives me about 12k per year. The price would not take all of my FI and I would be comfortable upping my stock %.

I AM NOT TRYING TO MAXIMIZE NET WORTH. I am trying to have a comfortable retirement. No kids, no spouse.

It seems our goals are very different.

P.S. an SPIA gives me my money back plus some earnings. The amount comes back at a rate > 4%. A 75 yo female in MN would get a 7.6% payout. A male would have more mortality credits and therefore a higher payout.
Don't confuse the higher payout (7.6%) as a return ON your money. Actually, it's a return OF your money, since they're actually giving you your money back until it runs out. And then if you live long enough, you're actually getting paid by someone who died earlier than predicted.
I know it's completely legal, but this reminds me of one of my favorite shows on CNBC - American Greed. That sounds a very lucrative business. :mrgreen:
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Re: Do I really need an Annuity? I have 40% Bonds

Post by vineviz »

azanon wrote: Wed Apr 15, 2020 11:05 am
vineviz wrote: Wed Apr 15, 2020 6:37 am
nisiprius wrote: Wed Apr 15, 2020 6:18 am If one is going to buy a single-premium immediate annuity, I think it is wise to consider one in which the payout is linked to the CPI, rather than being a fixed-dollar-amount or same-percentage-increase-every-year. These products are becoming rare.

Principal might still be offering inflation-adjusted SPIAs, based on this web page:
As far as I can tell, Principal has actually stopped offering their CPI-linked annuities. I can't remember who said this (maybe it was the Blueprint folks in the webinar, which I only partially watched, or a recent podcast interview I listened to), but I definitely heard someone say they had withdrawn the product due to low demand.
While I know both of these guys know their stuff, I'd still suggestion caution on the inflation-linked SPIAs because there are also some heavy hitters (experts) who say the inflation-protection for SPIAs is often too expensive. I believe David Blanchett and Wade Pfau fall in this camp. (Found David's article on this here: https://www.advisorperspectives.com/art ... a-bad-deal )
Actually, I agree: if I recall correctly the last time I was able to pull a quote for Principal's CPI-linked annuity I calculated that the implied (or breakeven) inflation rate was over 3%.

The best SPIA strategy in my opinion given current options is along the lines of your suggestion: set a fixed COLA (2% or 3% seems prudent) for the portion of the annuity stream that matches the gap between Social Security and NON-DISCRETIONARY expected expenses, and then set a lower (e.g. 0% or 1%) COLA for the discretionary expected expenses.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Do I really need an Annuity? I have 40% Bonds

Post by vineviz »

Mel Lindauer wrote: Wed Apr 15, 2020 11:36 am Don't confuse the higher payout (7.6%) as a return ON your money.
Just like a bond.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Do I really need an Annuity? I have 40% Bonds

Post by Dottie57 »

Mel Lindauer wrote: Wed Apr 15, 2020 11:36 am
Dottie57 wrote: Wed Apr 15, 2020 10:48 am
restingonmylaurels wrote: Wed Apr 15, 2020 10:04 am
Dottie57 wrote: Wed Apr 15, 2020 8:38 am +1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
I never have considered an annuity in any form, as I cannot understand how giving a bunch of money to someone else, having them deduct their expenses/profit, and then giving it back to you slowly can possibly be financially more advantageous than investing that money yourself.

In what scenario would your overall net worth be improved by purchasing a SPIA?
It is a paycheck for life. No need to sell any asset which is now down for the year. I would be happy to buy an SPIA that gives me about 12k per year. The price would not take all of my FI and I would be comfortable upping my stock %.

I AM NOT TRYING TO MAXIMIZE NET WORTH. I am trying to have a comfortable retirement. No kids, no spouse.

It seems our goals are very different.

P.S. an SPIA gives me my money back plus some earnings. The amount comes back at a rate > 4%. A 75 yo female in MN would get a 7.6% payout. A male would have more mortality credits and therefore a higher payout.
Don't confuse the higher payout (7.6%) as a return ON your money. Actually, it's a return OF your money, since they're actually giving you your money back until it runs out. And then if you live long enough, you're actually getting paid by someone who died earlier than predicted.
I understand those points. Truly. SPIA is an insurance product on long life. Same idea as house insurance - people whose house is destroyed are paid by premiums from people who still have their houses safe and sound.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by Mountain Doc »

vineviz wrote: Wed Apr 15, 2020 5:58 am Generally speaking, the most efficient way to maximize retirement income and a desire to provide legacy wealth to heirs does involve annualizing part (maybe a large part) of the bond allocation at or near retirement, so on the face of it the proposed transaction could very well benefit both the agent (annuities are insurance products, so the cold-caller was more likely an insurance agent than a fiduciary advisor, FWIW) and the OP.

...

Further, if Social Security will cover only a small portion of non-discretionary expenses then inflation risk might not be something an annuity can adequately minimize on its own. Some combination of TIPS and annuities might address that balance of risks better?
For the Boglehead who is retiring at 50-55 and whose social security at 70 should cover all non-discretionary expenses, what do you think of a TIPS ladder stretching from retirement to age 70 for the non-discretionary expenses during those years and everything else in a risk portfolio?
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Re: Do I really need an Annuity? I have 40% Bonds

Post by AK62 »

As I had expected, and as usual, you all are exceptional and extraordinary people. I thank you all for your very candid and informative replies. In my humble opinion, I have participated in some other finance type groups (on Facebook) and by far, you all are levels exceeding any place else I can ask for financial advice in a group setting. BTW, I've dropped out of these FB groups because I observed a lot of trolls, snarky, sniping, trashy, sophomoric, ignorant, uninformed, childish behavior. You all here on the BH forums are my go to place for advice. Thanks again for always going the extra mile to help people like me. We are lucky to be here.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by ScoobyDoo »

AK62 wrote: Wed Apr 15, 2020 12:14 pm BTW, I've dropped out of these FB groups because I observed a lot of trolls, snarky, sniping, trashy, sophomoric, ignorant, uninformed, childish behavior.
Give credit to the moderators!!!!!! I've observed this behavior here too! Although very rare, because when it does happen the moderators fly in fairly quickly to nip that in the bud.... :sharebeer :D
ScoobyDoo!
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Re: Do I really need an Annuity? I have 40% Bonds

Post by Dottie57 »

Mountain Doc wrote: Wed Apr 15, 2020 12:07 pm
vineviz wrote: Wed Apr 15, 2020 5:58 am Generally speaking, the most efficient way to maximize retirement income and a desire to provide legacy wealth to heirs does involve annualizing part (maybe a large part) of the bond allocation at or near retirement, so on the face of it the proposed transaction could very well benefit both the agent (annuities are insurance products, so the cold-caller was more likely an insurance agent than a fiduciary advisor, FWIW) and the OP.

...

Further, if Social Security will cover only a small portion of non-discretionary expenses then inflation risk might not be something an annuity can adequately minimize on its own. Some combination of TIPS and annuities might address that balance of risks better?
For the Boglehead who is retiring at 50-55 and whose social security at 70 should cover all non-discretionary expenses, what do you think of a TIPS ladder stretching from retirement to age 70 for the non-discretionary expenses during those years and everything else in a risk portfolio?
I have used CDs instead. TIPS would be fine too.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by petulant »

Mountain Doc wrote: Wed Apr 15, 2020 12:07 pm
vineviz wrote: Wed Apr 15, 2020 5:58 am Generally speaking, the most efficient way to maximize retirement income and a desire to provide legacy wealth to heirs does involve annualizing part (maybe a large part) of the bond allocation at or near retirement, so on the face of it the proposed transaction could very well benefit both the agent (annuities are insurance products, so the cold-caller was more likely an insurance agent than a fiduciary advisor, FWIW) and the OP.

...

Further, if Social Security will cover only a small portion of non-discretionary expenses then inflation risk might not be something an annuity can adequately minimize on its own. Some combination of TIPS and annuities might address that balance of risks better?
For the Boglehead who is retiring at 50-55 and whose social security at 70 should cover all non-discretionary expenses, what do you think of a TIPS ladder stretching from retirement to age 70 for the non-discretionary expenses during those years and everything else in a risk portfolio?
This is what I plan to do in many years to cover the bridge between retirement and age 70.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by Sandtrap »

Did the salesman say what his commission is for stemming you and annuity??

Based on limited data you look great and doing well on your own. Suggest posting for a comprehensive portfolio review per forum guidelines and format.

You don’t need an FA

j🌺
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Re: Do I really need an Annuity? I have 40% Bonds

Post by capjak »

nisiprius wrote: Wed Apr 15, 2020 6:18 am

Unfortunately, I don't know a place where you can actually see availability or dollar figures without giving your personal information to an agent.

you can get a quote based on age and gender at this web site

https://www.immediateannuities.com

If you want the companies you do have to put in your email and something in for the name, I just use random letters.

I have never been contacted by immediate annuities after doing this.....They will send an email with a phone number if you want to contact them.

Prudential used to be the only carrier with CPI adjusted SPIA but that went away a few months ago.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by vineviz »

Mountain Doc wrote: Wed Apr 15, 2020 12:07 pm For the Boglehead who is retiring at 50-55 and whose social security at 70 should cover all non-discretionary expenses, what do you think of a TIPS ladder stretching from retirement to age 70 for the non-discretionary expenses during those years and everything else in a risk portfolio?
I think a TIPS ladder for these "bridge years" between retirement and Social Security is a really good strategy. Covers all the main risks (interest rate risk, inflation risk, sequence risk, etc.). Plus it is relatively simple to implement and easy to understand.

If there required withdrawal rate from the risky portfolio is low enough (i.e. <2.5%) I'd say that investor is probably done planning.

If the required withdrawal rate is >2.5% I might consider adding a deferred income annuity down the line (e.g. in ten years or so) as pure longevity insurance. You could pre-fund this with a pair of TIPS "bullets" maturing at ages 65 and 70. That way you could plan your withdrawal strategy without worrying about the "problem" of living much longer than average.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Do I really need an Annuity? I have 40% Bonds

Post by capjak »

Sandtrap wrote: Wed Apr 15, 2020 12:33 pm Did the salesman say what his commission is for stemming you and annuity??

Based on limited data you look great and doing well on your own. Suggest posting for a comprehensive portfolio review per forum guidelines and format.

You don’t need an FA

j🌺
Commissions on SPIA are around 2% of the premium (paid by insurance company). For a Equity index or Fixed Index annuity it is around 4- 6%+ the longer the surrender period the higher the commission and dependent on the insurance carrier motivation to push a product. Thus many annuity salespeople are motivated to recommend a FIA over a SPIA.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by 2pedals »

Wade Pfau has an excellent book. He talks about using stocks and immediate annuities (among other insurance products rather than bonds) for longevity insurance. See the book called "Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement (The Retirement Researcher Guide Series)"

https://www.amazon.com/Safety-First-Ret ... B07X2TW623
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Re: Do I really need an Annuity? I have 40% Bonds

Post by chipperd »

As others have mentioned, we are a short on info so...
Going to assume that when the OP said "...we retire..." that means both OP and spouse have social security coming at age 70. Another assumption I'm going to make is that, b/c OP and spouse are not going to take social security until age 70, they may be living on 4% withdraw rate of the 1.8 million plus the $35k/year pension which totals $107,000/year income until age 70. Again, another assumption, if that portfolio can keep up with inflation, at age 70, the time the OP and spouse start social security, that portfolio is now worth 1.08 million. Not sure how much the social securities both at up to, but presumably that 4% withdraw rate could at least be cut in half to 2%.
Given the assumptions above, which include, basically, 3 pensions (2 of which are inflation adjusted), I don't see a need for an instrument that acts like a 4th pension, but each has their own comfort level.
We (spouse and I) drastically cut back on work last year with a 50k/year pension and 10 years from social security with half the OP's portfolio balance. We explored the SPIA route as a means to build a bridge to social security, but instead decided to roll the dice a bit, managing it ourselves and put 6 years living expenses in 3% yielding cash equivalent to ride out any potential swan events. If you decide not to go the SPIA route and want to play it somewhere in the middle risk wise, I would suggest a large cash equivalent account to carry expenses for several years.
Either way, I conclude, no, you don't "need" an annuity.
Sounds like your in good shape OP!
Be well.
"A portfolio is like a bar of soap, the more it's handled, the less there is." Dr. William Bernstein
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Re: Do I really need an Annuity? I have 40% Bonds

Post by garlandwhizzer »

Do I at age 60 really need an annuity with 40% (of a hopefully large portfolio) in bonds? IMO, NO. It is het another example of something that happens too frequently, the financial industry taking advantage of the natural fears and insecurities of elders. At age 60, you're too young to buy one. If you wait until you're 75 or 80 and purchase a SPIA, it's not such a bad deal. If you've still got your marbles, which I assume you do if you're posting on the Forum, it's a bad deal for a 60 year old but a great deal for the guy who sells it to you and the company that offers it.

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Re: Do I really need an Annuity? I have 40% Bonds

Post by GaryA505 »

restingonmylaurels wrote: Wed Apr 15, 2020 10:04 am
Dottie57 wrote: Wed Apr 15, 2020 8:38 am +1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
I never have considered an annuity in any form, as I cannot understand how giving a bunch of money to someone else, having them deduct their expenses/profit, and then giving it back to you slowly can possibly be financially more advantageous than investing that money yourself.

In what scenario would your overall net worth be improved by purchasing a SPIA?
Mortality credits, if an individual is in better than average health and comes from a family where long life is typical.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by David Jay »

GaryA505 wrote: Wed Apr 15, 2020 2:25 pm
restingonmylaurels wrote: Wed Apr 15, 2020 10:04 am
Dottie57 wrote: Wed Apr 15, 2020 8:38 am +1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
I never have considered an annuity in any form, as I cannot understand how giving a bunch of money to someone else, having them deduct their expenses/profit, and then giving it back to you slowly can possibly be financially more advantageous than investing that money yourself.

In what scenario would your overall net worth be improved by purchasing a SPIA?
Mortality credits, if an individual is in better than average health and comes from a family where long life is typical.
Risk pooling is the one thing that insurance can do that other financial tools cannot do.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Do I really need an Annuity? I have 40% Bonds

Post by vineviz »

GaryA505 wrote: Wed Apr 15, 2020 2:25 pm
restingonmylaurels wrote: Wed Apr 15, 2020 10:04 am
Dottie57 wrote: Wed Apr 15, 2020 8:38 am +1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
I never have considered an annuity in any form, as I cannot understand how giving a bunch of money to someone else, having them deduct their expenses/profit, and then giving it back to you slowly can possibly be financially more advantageous than investing that money yourself.

In what scenario would your overall net worth be improved by purchasing a SPIA?
Mortality credits, if an individual is in better than average health and comes from a family where long life is typical.
I think it’s important to acknowledging that purchasing ANY form of insurance will never improve your “net worth”.

Which is fine, IMO, since that’s not why people do it. Insurance transfers and manages risk, and retirees face many risks for which insurance is a legitimate solution.

Purchasing a SPIA will (counterintuitively to many people) generally provide a higher income AND more terminal wealth than a portfolio which includes only stocks and bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Do I really need an Annuity? I have 40% Bonds

Post by petulant »

2pedals wrote: Wed Apr 15, 2020 12:42 pm Wade Pfau has an excellent book. He talks about using stocks and immediate annuities (among other insurance products rather than bonds) for longevity insurance. See the book called "Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement (The Retirement Researcher Guide Series)"

https://www.amazon.com/Safety-First-Ret ... B07X2TW623
A note. I have not read this book, but I have read many Pfau articles, both academic and on various websites. Pfau often argues for annuities + stocks, but it's not clear until you read the fine print that he assumes social security is included as an annuity that is good enough for many investors. Thus, the first step to implement what Pfau is talking about is to optimize social security.
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Mel Lindauer
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Re: Do I really need an Annuity? I have 40% Bonds

Post by Mel Lindauer »

GaryA505 wrote: Wed Apr 15, 2020 2:25 pm
restingonmylaurels wrote: Wed Apr 15, 2020 10:04 am
Dottie57 wrote: Wed Apr 15, 2020 8:38 am +1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
I never have considered an annuity in any form, as I cannot understand how giving a bunch of money to someone else, having them deduct their expenses/profit, and then giving it back to you slowly can possibly be financially more advantageous than investing that money yourself.

In what scenario would your overall net worth be improved by purchasing a SPIA?
Mortality credits, if an individual is in better than average health and comes from a family where long life is typical.
My hunch is that the insurance companies know that folks who expect to live longer than their published life expectancy are likely to be the largest number of SPIA purchasers. Therefore, I'd think that they adjust the mortality credits to compensate for that. After all, they're in business to make money, not give it away.

However, once you're in the pool, if they've done their calculations properly, those who die younger than expected will pay for those who live longer than expected and the insurance company will get their anticipated piece of the pie.
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Re: Do I really need an Annuity? I have 40% Bonds

Post by MathIsMyWayr »

Mel Lindauer wrote: Wed Apr 15, 2020 4:34 pm
GaryA505 wrote: Wed Apr 15, 2020 2:25 pm
restingonmylaurels wrote: Wed Apr 15, 2020 10:04 am
Dottie57 wrote: Wed Apr 15, 2020 8:38 am +1.
Agree that an SPIA is only good annuity. It can give life time “paycheck” like a pension. I don’t have a pension so will probably purchase one in my mid-70’s. I won’t put all of FI in an annuity and may spread out money among several insurers.
I never have considered an annuity in any form, as I cannot understand how giving a bunch of money to someone else, having them deduct their expenses/profit, and then giving it back to you slowly can possibly be financially more advantageous than investing that money yourself.

In what scenario would your overall net worth be improved by purchasing a SPIA?
Mortality credits, if an individual is in better than average health and comes from a family where long life is typical.
My hunch is that the insurance companies know that folks who expect to live longer than their published life expectancy are likely to be the largest number of SPIA purchasers. Therefore, I'd think that they adjust the mortality credits to compensate for that. After all, they're in business to make money, not give it away.

However, once you're in the pool, if they've done their calculations properly, those who die younger than expected will pay for those who live longer than expected and the insurance company will get their anticipated piece of the pie.
Collectively you will rarely better off financially by purchasing an insurance against major events such as home, heath, life, or travel insurance. SPIA may be valuable as an insurance for longevity (guaranteed income for life).
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