willthrill81 wrote: ↑Sun Apr 19, 2020 7:43 pm
I'm confused as to why the mortality credits would shrink due to the latter issue though. Even though your life expectancy grows as you age, the relative impact of mortality credits would still seem to be much greater for an 80 year old than a 40 year old.
I'm not entirely sure that "mortality credits" is the correct term to describe the effect I'm seeing.
Maybe I'll describe it and see if someone else can explain what I'm seeing, essentially:
If you price a SPIA for someone age 40 to 60, it's essentially interchangeable with a portfolio of bonds laddered out over their life expectancy, being spent down, but earning some equivalent interest rate amortized out over their remaining life expectancy. At any point from from age 40 to 60 the person withdrawing on that laddered portfolio could decide to take their remaining bond-ladder balance and exchange it for a SPIA that would have an equivalent payout as if they were just continuing on their fixed withdrawal schedule.
Sometime in the mid 60's that stops being the case, and the remaining portfolio will only purchase a much smaller payout and it drops steeper as time goes on.
https://www.immediateannuities.com/annu ... rs/?sce=hc
A 45yo (M ,AZ) can buy a $5,000 monthly payout for $1,430,984
That corresponds to a 2.7% interest rate amortized out over their remaining life expectancy
of 38.8 years
If instead of buying the annuity, they had some bond ladder portfolio earning that 2.7% rate, by age
60 the remaining balance after taking their withdrawals over the years would be (roughly) $1,103,000 (life expectancy down 25.2 years)
A 60yo (M, AZ) can buy a $5,000 monthly payout for $1,149,320 ... pretty close to interchangeable with the portfolio...
By age 70, the person spending down the portfolio, balance would have $743,230
But an annuity with the $5,000 payout would cost $885,128
By age 80, the portfolio spender would be down to $273,805
But an annuity with a $5,000 payout would cost $563,387
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham