squaredaway: fewer choosing annuties in TIAA plan

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grok87
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squaredaway: fewer choosing annuties in TIAA plan

Post by grok87 »

...
https://squaredawayblog.bc.edu/squared- ... tiaa-plan/
...
wrote: "he authors suggested two main reasons for annuities’ waning popularity.

First, declining interest rates have reduced the monthly annuity payouts to retirees, meaning that a given amount of savings buys less retirement income – and makes an annuity less appealing. (Prior research suggests people are more influenced by the amount of the annuity’s payout than by how the payout rate compares with the returns to other investments.)...
This trend is not surprising but it seems problematic to me. I wonder if folks are looking at annuity payout rates, seeing that they are very low, and deciding to go with drawing down the money themselves using say a 4% safe withdrawal rate.

the problem is the 4% safe withdrawal rate may be too high in today's low interest rate environment, as other posters have been pointing out...

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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by aristotelian »

I would say with the dominance of the 401k, a larger number of investors have become comfortable investing their own money and trust markets more than insurance companies. Not saying that is right but a lot of people value the freedom to invest their own money and accept the risk. Some are straight up greedy and want the chance to not only invest but try to beat the market.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by dmcmahon »

I would be worried about taking a concentrated risk with an insurer. Just look at AIG during the last crisis. Also you are locking in low rates for the rest of your life, whereas with individual bonds in a ladder you'll get the market rate as you go along. What you give up is the longevity risk pooling; for me personally I'd rather count on Social Security for that component. An annuity might make sense for me later in life, when there's less to lose by locking in the low rates.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by grok87 »

dmcmahon wrote: Sat Apr 18, 2020 11:10 am I would be worried about taking a concentrated risk with an insurer. Just look at AIG during the last crisis. Also you are locking in low rates for the rest of your life, whereas with individual bonds in a ladder you'll get the market rate as you go along. What you give up is the longevity risk pooling; for me personally I'd rather count on Social Security for that component. An annuity might make sense for me later in life, when there's less to lose by locking in the low rates.
agree. and it also helps mitigate the "insurer" risk in a couple of ways.

1. easier to stay under the state guarantee fund limits for a given annual payout since the dollar value of the annuity will be less.
2. you are exposed to the insurer's credit risk for a shorter time
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by Dottie57 »

An annuity (orannuities) will probably be in my future starting at age 70-75.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by ResearchMed »

grok87 wrote: Sat Apr 18, 2020 12:48 pm
dmcmahon wrote: Sat Apr 18, 2020 11:10 am I would be worried about taking a concentrated risk with an insurer. Just look at AIG during the last crisis. Also you are locking in low rates for the rest of your life, whereas with individual bonds in a ladder you'll get the market rate as you go along. What you give up is the longevity risk pooling; for me personally I'd rather count on Social Security for that component. An annuity might make sense for me later in life, when there's less to lose by locking in the low rates.
agree. and it also helps mitigate the "insurer" risk in a couple of ways.

1. easier to stay under the state guarantee fund limits for a given annual payout since the dollar value of the annuity will be less.
2. you are exposed to the insurer's credit risk for a shorter time
Or one could split the annuity amount between 2 (or more) different insurers.
But with TIAA, it might be that a commercial insurer pays too much less than TIAA. I haven't compared in quite a few years.

We'll be over the state "guarantee" limit anyway, but if we decided it's better to keep all with TIAA, that has been quite stable, at least until now. (Let's see how they do if things get really dicey in the near future...)
I doubt we'd do it all with any other insurer.

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Re: squaredaway: fewer choosing annuties in TIAA plan

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I despise annuities unless you're the issuer. Wouldn't the fact interest rates that are tied to the annuities are at the lowest point in history be like, umm, a major factor here.
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Re: squaredaway: fewer choosing annuties in TIAA plan

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muddlehead wrote: Sat Apr 18, 2020 7:11 pm I despise annuities unless you're the issuer. Wouldn't the fact interest rates that are tied to the annuities are at the lowest point in history be like, umm, a major factor here.
If you're putting the annuity money into bonds you're impacted by the same low interest rates.
We can hope stocks may return more, but there are no guarantees of any return, it's not really comparable.
If you put the money in shorter-term bonds and hope interest rates rise later on, you're running a different kind of risk.
If you bought a ladder of bonds expected to pay out over your life expectancy the return at current interest rates would likely be less than a SPIA, and if you live longer than expected the bond portfolio method is out of money.
Last edited by JoMoney on Sat Apr 18, 2020 7:34 pm, edited 1 time in total.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by windaar »

I have been with T/C for 20 years. I use TIAA TRAD for my fixed allocation and I have been very happy with the interest rates and never losing money in that fund. Not sure if I will annuitize in retirement or not. In my 401(a) I have to take those funds over 10 years, that stabilizes the fund for everyone invested. In my 403(b) I can move in and out of other funds as I wish.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by nisiprius »

dmcmahon wrote: Sat Apr 18, 2020 11:10 am...Just look at AIG during the last crisis...
My wife was not too happy with me for having purchased an annuity from the AIG Life Insurance Company when the screaming headlines about AIG hit in 2008. The AIG Life Insurance Company's financial strength rating dropped to the lowest it could be in and still be in the A range. Nevertheless, it was the holding company that was in danger, while the insurance was a sound asset held by the holding company. Anyway, as things turned out, the annuity kept paying out its monthly payments on time, the AIG Life Insurance Company did not fold or need rescue by the state guaranty association, and it discreetly changed its name to "American General" and gradually pulled its financial strength rating back to the middle of the A's.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by grok87 »

nisiprius wrote: Sat Apr 18, 2020 7:52 pm
dmcmahon wrote: Sat Apr 18, 2020 11:10 am...Just look at AIG during the last crisis...
My wife was not too happy with me for having purchased an annuity from the AIG Life Insurance Company when the screaming headlines about AIG hit in 2008. The AIG Life Insurance Company's financial strength rating dropped to the lowest it could be in and still be in the A range. Nevertheless, it was the holding company that was in danger, while the insurance was a sound asset held by the holding company. Anyway, as things turned out, the annuity kept paying out its monthly payments on time, the AIG Life Insurance Company did not fold or need rescue by the state guaranty association, and it discreetly changed its name to "American General" and gradually pulled its financial strength rating back to the middle of the A's.
thanks for that. i guess that reinforces the need to stay withing state guarantee fund limits. before the Global financial crisis AIG was viewed as a rock solid company...
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by Grt2bOutdoors »

nisiprius wrote: Sat Apr 18, 2020 7:52 pm
dmcmahon wrote: Sat Apr 18, 2020 11:10 am...Just look at AIG during the last crisis...
My wife was not too happy with me for having purchased an annuity from the AIG Life Insurance Company when the screaming headlines about AIG hit in 2008. The AIG Life Insurance Company's financial strength rating dropped to the lowest it could be in and still be in the A range. Nevertheless, it was the holding company that was in danger, while the insurance was a sound asset held by the holding company. Anyway, as things turned out, the annuity kept paying out its monthly payments on time, the AIG Life Insurance Company did not fold or need rescue by the state guaranty association, and it discreetly changed its name to "American General" and gradually pulled its financial strength rating back to the middle of the A's.
American General was acquired by AIG in 2001, the acquisition was announced in May 2001. You’d have to look back through the press releases but chances are names were not just “changed” but that the two life insurance subsidiaries were merged with the surviving entity with the American General name surviving.
The name change was likely just coincidence.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by dmcmahon »

nisiprius wrote: Sat Apr 18, 2020 7:52 pm
dmcmahon wrote: Sat Apr 18, 2020 11:10 am...Just look at AIG during the last crisis...
My wife was not too happy with me for having purchased an annuity from the AIG Life Insurance Company when the screaming headlines about AIG hit in 2008. The AIG Life Insurance Company's financial strength rating dropped to the lowest it could be in and still be in the A range. Nevertheless, it was the holding company that was in danger, while the insurance was a sound asset held by the holding company. Anyway, as things turned out, the annuity kept paying out its monthly payments on time, the AIG Life Insurance Company did not fold or need rescue by the state guaranty association, and it discreetly changed its name to "American General" and gradually pulled its financial strength rating back to the middle of the A's.
I did not know that, thanks for clarifying.
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Re: squaredaway: fewer choosing annuties in TIAA plan

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dmcmahon wrote: Sat Apr 18, 2020 11:10 amAn annuity might make sense for me later in life, when there's less to lose by locking in the low rates.
I think that this may be one of the best ways to use an annuity. Wait until you're at least 80 and at least seem to have a good chance of longevity 'showing up' and when payout rates are much more favorable (vs. in your 60s).
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by adamthesmythe »

muddlehead wrote: Sat Apr 18, 2020 7:11 pm Wouldn't the fact interest rates that are tied to the annuities are at the lowest point in history be like, umm, a major factor here.
Yes, but not as much as you might think.

Have a look at the chart at https://www.marketwatch.com/story/plung ... 2020-04-08

For annuity purchase at 65, a decrease of 2% in bond interest rates drops the annuity payout by ~1.2%. This is because the payout depends on both interest income and "mortality credits." I would expect even less of an effect if the annuity is purchased when older than 65.

Also, when the prevailing interest rate is low inflation expectations are also low. And one reason to not buy an annuity is fear of inflation.

Personally I am not deciding yet but buying an (immediate) annuity with part of my assets is not out of the question.
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Re: squaredaway: fewer choosing annuties in TIAA plan

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adamthesmythe wrote: Sun Apr 19, 2020 1:28 pm
muddlehead wrote: Sat Apr 18, 2020 7:11 pm Wouldn't the fact interest rates that are tied to the annuities are at the lowest point in history be like, umm, a major factor here.
And one reason to not buy an annuity is fear of inflation.
agree, it is a shame that inflation adjusted annuities are not available for purchase.
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Re: squaredaway: fewer choosing annuties in TIAA plan

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JoMoney wrote: Sat Apr 18, 2020 7:28 pm
muddlehead wrote: Sat Apr 18, 2020 7:11 pm I despise annuities unless you're the issuer. Wouldn't the fact interest rates that are tied to the annuities are at the lowest point in history be like, umm, a major factor here.
If you're putting the annuity money into bonds you're impacted by the same low interest rates.
We can hope stocks may return more, but there are no guarantees of any return, it's not really comparable.
If you put the money in shorter-term bonds and hope interest rates rise later on, you're running a different kind of risk.
If you bought a ladder of bonds expected to pay out over your life expectancy the return at current interest rates would likely be less than a SPIA, and if you live longer than expected the bond portfolio method is out of money.
Correct. All fixed income currently has low yields, and this includes fixed annuities.

However, from what I've researched on this topic, interest rates don't have nearly as much impact on SPIA payout ratios as does the age of the annuitant.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by JoMoney »

willthrill81 wrote: Sun Apr 19, 2020 3:02 pm
JoMoney wrote: Sat Apr 18, 2020 7:28 pm
muddlehead wrote: Sat Apr 18, 2020 7:11 pm I despise annuities unless you're the issuer. Wouldn't the fact interest rates that are tied to the annuities are at the lowest point in history be like, umm, a major factor here.
If you're putting the annuity money into bonds you're impacted by the same low interest rates.
We can hope stocks may return more, but there are no guarantees of any return, it's not really comparable.
If you put the money in shorter-term bonds and hope interest rates rise later on, you're running a different kind of risk.
If you bought a ladder of bonds expected to pay out over your life expectancy the return at current interest rates would likely be less than a SPIA, and if you live longer than expected the bond portfolio method is out of money.
Correct. All fixed income currently has low yields, and this includes fixed annuities.

However, from what I've researched on this topic, interest rates don't have nearly as much impact on SPIA payout ratios as does the age of the annuitant.
Last year about this time, I did a quote for a 40yo male to get a SPIA paying $50,000 a year at https://www.immediateannuities.com/
The cost for such an annuity was just about $1mil
Today, with the dramatic drop in interest rates, the cost for the same at that age would be $250,000 more.... whereas the cost difference for being a few years older was negligible.
If one had that same money in a bond portfolio laddered out with maturities averaging 20+ years, the market value of that portfolio would have commensurately risen to be able to afford that same annuity... so in that regard, I would expect the interest rates wouldn't be a factor in the decision, but if the money was otherwise sitting in cash or something else interest rates could be a major factor.

Another oddity, that perhaps runs contrary the advice that says to wait as long as possible to buy an annuity, is the older you get the further out your actuarial life expectancy is, but it doesn't move at the same rate - for example, when your age 40 to 60 you're expectancy is projected to be out to about 84 years old. But by the time you hit age 70 its moved out to about 87yo, and for every year older you age after that, almost another year is added to your life expectancy, so the 'mortality credit' starts shrinking considerably.
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Re: squaredaway: fewer choosing annuties in TIAA plan

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JoMoney wrote: Sun Apr 19, 2020 3:40 pm
willthrill81 wrote: Sun Apr 19, 2020 3:02 pm
JoMoney wrote: Sat Apr 18, 2020 7:28 pm
muddlehead wrote: Sat Apr 18, 2020 7:11 pm I despise annuities unless you're the issuer. Wouldn't the fact interest rates that are tied to the annuities are at the lowest point in history be like, umm, a major factor here.
If you're putting the annuity money into bonds you're impacted by the same low interest rates.
We can hope stocks may return more, but there are no guarantees of any return, it's not really comparable.
If you put the money in shorter-term bonds and hope interest rates rise later on, you're running a different kind of risk.
If you bought a ladder of bonds expected to pay out over your life expectancy the return at current interest rates would likely be less than a SPIA, and if you live longer than expected the bond portfolio method is out of money.
Correct. All fixed income currently has low yields, and this includes fixed annuities.

However, from what I've researched on this topic, interest rates don't have nearly as much impact on SPIA payout ratios as does the age of the annuitant.
Last year about this time, I did a quote for a 40yo male to get a SPIA paying $50,000 a year at https://www.immediateannuities.com/
The cost for such an annuity was just about $1mil
Today, with the dramatic drop in interest rates, the cost for the same at that age would be $250,000 more.... whereas the cost difference for being a few years older was negligible.
If one had that same money in a bond portfolio laddered out with maturities averaging 20+ years, the market value of that portfolio would have commensurately risen to be able to afford that same annuity... so in that regard, I would expect the interest rates wouldn't be a factor in the decision, but if the money was otherwise sitting in cash or something else interest rates could be a major factor.

Another oddity, that perhaps runs contrary the advice that says to wait as long as possible to buy an annuity, is the older you get the further out your actuarial life expectancy is, but it doesn't move at the same rate - for example, when your age 40 to 60 you're expectancy is projected to be out to about 84 years old. But by the time you hit age 70 its moved out to about 87yo, and for every year older you age after that, almost another year is added to your life expectancy, so the 'mortality credit' starts shrinking considerably.
The first instance makes a lot of sense to me because the annuitant's still has an expected longevity of 40 years. There isn't nearly as much 'return of capital' as there is for an 80 year old annuitant.

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.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by JoMoney »

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

:confused :annoyed
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by willthrill81 »

JoMoney wrote: Sun Apr 19, 2020 9:14 pm
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

:confused :annoyed
I believe that there is a mistake in how you're calculating the size of the needed bond ladder.

Using the SS Administration's data, an 80 year old male has a life expectancy of 8.34 years (the source you cited doesn't differentiate by sex, though your annuity quote does). With an annual rate of return of 2.7%, the net present value of $5k/month for 100 months (payment made at the beginning) is $448,300. That's a lot more than the $273,805 you came up with.

But still, the cost of the annuity is still significantly more than $448k. The only way I can see that making sense is if the insurance company believes that you'll live longer than the SSA does. But given that there is certainly substantial selection bias in who chooses a lifetime annuity, that might be the answer.

In this example, by funding the bond ladder with the same amount needed to buy the annuity, you could fund an additional 30 months past the 80 year old's life expectancy. That's still going to leave a significant likelihood of outliving the ladder though, at least 30% by my estimation without looking at the longevity calculators.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by JoMoney »

willthrill81 wrote: Sun Apr 19, 2020 9:58 pm
JoMoney wrote: Sun Apr 19, 2020 9:14 pm
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

:confused :annoyed
I believe that there is a mistake in how you're calculating the size of the needed bond ladder.

Using the SS Administration's data, an 80 year old male has a life expectancy of 8.34 years (the source you cited doesn't differentiate by sex, though your annuity quote does). With an annual rate of return of 2.7%, the net present value of $5k/month for 100 months (payment made at the beginning) is $448,300. That's a lot more than the $273,805 you came up with.

But still, the cost of the annuity is still significantly more than $448k. The only way I can see that making sense is if the insurance company believes that you'll live longer than the SSA does. But given that there is certainly substantial selection bias in who chooses a lifetime annuity, that might be the answer.

In this example, by funding the bond ladder with the same amount needed to buy the annuity, you could fund an additional 30 months past the 80 year old's life expectancy. That's still going to leave a significant likelihood of outliving the ladder though, at least 30% by my estimation without looking at the longevity calculators.
I think you misunderstood what I was showing. The 80yo with the $273,805 balance was the result from a 45 year old starting with a $1,430,984 balance, earning 2.7% a year, while withdrawing $60,000 a year for 35 years (420 months).
I was demonstrating that they could not buy a SPIA with equivalent payout if they had waited as long as possible to exchange their portfolio for a SPIA, whereas they could get very close to the same payout if they had made the change with their remaining portfolio at age 60.
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Re: squaredaway: fewer choosing annuties in TIAA plan

Post by willthrill81 »

JoMoney wrote: Sun Apr 19, 2020 10:17 pm
willthrill81 wrote: Sun Apr 19, 2020 9:58 pm
JoMoney wrote: Sun Apr 19, 2020 9:14 pm
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

:confused :annoyed
I believe that there is a mistake in how you're calculating the size of the needed bond ladder.

Using the SS Administration's data, an 80 year old male has a life expectancy of 8.34 years (the source you cited doesn't differentiate by sex, though your annuity quote does). With an annual rate of return of 2.7%, the net present value of $5k/month for 100 months (payment made at the beginning) is $448,300. That's a lot more than the $273,805 you came up with.

But still, the cost of the annuity is still significantly more than $448k. The only way I can see that making sense is if the insurance company believes that you'll live longer than the SSA does. But given that there is certainly substantial selection bias in who chooses a lifetime annuity, that might be the answer.

In this example, by funding the bond ladder with the same amount needed to buy the annuity, you could fund an additional 30 months past the 80 year old's life expectancy. That's still going to leave a significant likelihood of outliving the ladder though, at least 30% by my estimation without looking at the longevity calculators.
I think you misunderstood what I was showing. The 80yo with the $273,805 balance was the result from a 45 year old starting with a $1,430,984 balance, earning 2.7% a year, while withdrawing $60,000 a year for 35 years (420 months).
I was demonstrating that they could not buy a SPIA with equivalent payout if they had waited as long as possible to exchange their portfolio for a SPIA, whereas they could get very close to the same payout if they had made the change with their remaining portfolio at age 60.
Ah, I see.

That does seem odd.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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