[Poll] My philosophy on SPIAs

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

If you are retired, what best expresses your philosophy toward SPIAs?

I am participating in this poll. EVERYONE please check this box so we'll have a total of respondents.
185
19%
I have or plan to buy an SPIA
57
6%
I don't need one because my portfolio is adequate to meet my spending goals with a good safety margin and some left over.
65
7%
I don't mind having money left over at the end because I want to leave something to my heirs
68
7%
I don't mind having money left over at the end, period.
43
4%
I have an adequate floor from Social Security; I don't have a defined-benefit pension.
20
2%
I have an adequate floor from Social Security and a defined pension
46
5%
I have an adequate floor from a defined-benefit pension; I don't have Social Security.
4
0%
I have an adequate floor coming in part from other guaranteed income sources
9
1%
I expect to be able to adapt to the possible range of performance of my investments, even in the face of hard times.
78
8%
I feel that insurance is generally a bad deal and SPIAs are no exception
22
2%
I am concerned about the irrevocability and loss of control in an SPIA
56
6%
I am concerned about the possibility of insurance company failure
84
9%
I am concerned about buyer's remorse if interest rates rise and better SPIA deals become available
42
4%
I see benefits in SPIAs but for me they are outweighed by disadvantages
35
4%
I don't rule out an SPIA as a desperation move to be used only as a last resort, but I don't _plan_ to buy one.
43
4%
I accept the risks of my investments not performing adequately.
56
6%
I am not convinced the risks of an SPIA are really any lower than the risk of my investments.
18
2%
It's meaningless to fuss about small risks of portfolio exhaustion in the face of the big risks of ordinary life.
19
2%
Other
22
2%
 
Total votes: 972

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nisiprius
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[Poll] My philosophy on SPIAs

Post by nisiprius » Wed Apr 25, 2012 8:45 am

This is a followup to the [Poll]: How many of you actually have an SPIA? and is an attempt to get at the reasons why people do not have or do not plan to get a single-premium immediate annuity (SPIA). I've tried to be inclusive in listing reasons. The poll allows more than one answer and most people will have more than one answer.

[Added] A single-premium immediate annuity (SPIA), also called "fixed immediate annuity" or "income annuity," is an insurance product. They are a simple contract in which the buyer irrevocably pays in the insurance company a big lump sum, with no possibility of withdrawal or surrender, and in exchange the insurer contracts to pay the buyer fixed monthly payments for life. "Fixed" here can mean "contractual"--the contract might call for annual compounded 3% increases or inflation adjustments. It is a pure life annuity and thus very different from variable annuities. Variable annuities are hybrid products that are commonly used investment vehicles, in which a package of investments grows with some limited tax protection, and there are various options, often never exercised, for annuitizing the package at some later date. In their book on alternative investments, Larry Swedroe and Jared Kizer put SPIAs under the "good" heading, variable annuities under the "bad" heading, and equity indexed annuities under the "ugly" heading.
Last edited by nisiprius on Thu Apr 26, 2012 8:07 am, edited 1 time in total.
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Re: [Poll] My philosophy on SPIAs

Post by GregLee » Wed Apr 25, 2012 9:54 am

An SPIA would be a great way to spend everything without risking running out near the end, but SPIAs cost too much. It's a pity. There is also the possibility to worry about of having some unpredicted large medical expenses late in life.
Greg, retired 8/10.

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Re: [Poll] My philosophy on SPIAs

Post by Leesbro63 » Wed Apr 25, 2012 10:00 am

I'm only 52 so it's not on my radar yet. But we bot two inflation adjusted annuities in early 2008 for my (now age 76) mother, who was healthy had had a grandmother live to age 96. One was from AIG and caused a little sweat for a while. Anyway, mom had a heart attack last year but seems fine and is under good care. That being said, I don't think we'd do any more annuities (as was the original thinking) as she ages because:

1. The cost of inflation adjusted annuities seems steep.
2. People can live many years with heart conditions, but the heart attack does suggest the odds are much lower than we previously thought.

To me, the inflation rider seems to be the most important thing. Otherwise you risk the very "falling short-ness" that buying an annuity is to prevent. (Although even with the rider, higher inflation-higher payouts means higher taxes so you don't really get full inflation protection).

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Re: [Poll] My philosophy on SPIAs

Post by ObliviousInvestor » Wed Apr 25, 2012 10:05 am

I am not retired, so I did not answer the poll. But if inflation-adjusted lifetime annuities are still offered by the time I get there, I plan to use them, despite having at least two of the concerns listed above.
Mike Piper, author/blogger

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Re: [Poll] My philosophy on SPIAs

Post by Munir » Wed Apr 25, 2012 1:31 pm

I question the need for inflation-indexing if one is in his mid-seventies or above. Not worth the expense unless you feel sure of living into your nineties.

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Re: [Poll] My philosophy on SPIAs

Post by jidina80 » Wed Apr 25, 2012 1:59 pm

Other: I haven't decided yet whether to buy an inflation-adjusted single premium immediate anuity, but am keeping my options open. I'm retired in my 50's and will decide ten years from now. I'm not biased for or against them.

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Re: [Poll] My philosophy on SPIAs

Post by rr2 » Wed Apr 25, 2012 2:41 pm

Nisi -- many thanks for making this poll.

I too am not retired and have more than 20+ years to full retirement age. More than likely SS will not provide us with an adequate floor. We may get an inflation adjusted SPIA to at least reach this floor. We also don't have any kids so no need to pass any money to them. Whatever is left will go to charitable organizations. One possibility would be to get a Charitable Gift Annuity.

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Re: [Poll] My philosophy on SPIAs

Post by ruralavalon » Wed Apr 25, 2012 2:43 pm

Concern over low interest rate environment, and adequacy of portfolio to generate needed retirement income.

An important additional factor, we both have significant health issues and very few insureres offering SPIAs offer medical underwriting.
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Re: [Poll] My philosophy on SPIAs

Post by tetractys » Wed Apr 25, 2012 2:47 pm

I've noted the possibility of a SPIA in my future. But recently I've landed a pretty good defined benefit plan that renders any need for a SPIA less likely. I'm still trying to understand everything about my defined benefit plan, and it differs a little from anything mentioned in the Bogleheads WIKI, so I may OP in the near future. -- Tet

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Re: [Poll] My philosophy on SPIAs

Post by Khanmots » Wed Apr 25, 2012 2:56 pm

Munir wrote:I question the need for inflation-indexing if one is in his mid-seventies or above. Not worth the expense unless you feel sure of living into your nineties.
The purpose of a SPIA is to insure against longevity risk. Why buy one if you're not concerned about living longer?

Personally I don't see the purpose of buying a non-inflation adjusted SPIA. By purchasing a SPIA I'm trying to make sure that I will be able to maintain a minimum standard of living if I "overlive." This would seem to require a payment that is in real not nominal dollars.

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Re: [Poll] My philosophy on SPIAs

Post by greg24 » Wed Apr 25, 2012 3:12 pm

While I'm a long way from retirement at 39, my somewhat limited understanding of my TIAA Traditional investment makes me think I'll annuitize that portion of my 403b. So I answered that I'll purchase a SPIA.

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Re: [Poll] My philosophy on SPIAs

Post by Leesbro63 » Wed Apr 25, 2012 6:50 pm

Khanmots wrote:Personally I don't see the purpose of buying a non-inflation adjusted SPIA. By purchasing a SPIA I'm trying to make sure that I will be able to maintain a minimum standard of living if I "overlive." This would seem to require a payment that is in real not nominal dollars.
Although this doesn't completely solve the problem. Especially for high income folks, and especially if inflation heats up. Because the tax penalty increases,in real terms, as the annuity merely maintains parity,in real terms.

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Re: [Poll] My philosophy on SPIAs

Post by orlandoman » Wed Apr 25, 2012 6:59 pm

Looking at your poll objectively ...

Look at the questions ... how many express a negative position toward SPIA's.
Look at the questions ... how many express a positive position toward SPIA's.

I believe the results of your poll will be skewed against SPIA's by the questions you listed. You may or may not have wanted an objective poll.
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Re: [Poll] My philosophy on SPIAs

Post by Munir » Wed Apr 25, 2012 7:04 pm

Khanmots wrote:
Munir wrote:I question the need for inflation-indexing if one is in his mid-seventies or above. Not worth the expense unless you feel sure of living into your nineties.
The purpose of a SPIA is to insure against longevity risk. Why buy one if you're not concerned about living longer?

Personally I don't see the purpose of buying a non-inflation adjusted SPIA. By purchasing a SPIA I'm trying to make sure that I will be able to maintain a minimum standard of living if I "overlive." This would seem to require a payment that is in real not nominal dollars.
That may be your purpose for buying an SPIA, and possibly for most people under 70. For me, it's for providing a continuous and safe source of incme that is not dependent on the vagaries of the market or interest rates.

An indexed-policy provides a much lower payout than a non-inexed one, and it's said that it takes 10-12 years for the monthly payout to catch up. I can have a higher payout during that period for a joint-survivor and period certain policy. Most of my assets will still be in fixed income and less so in equities. Each person has to individualize what type of an SPIA one wants since there is no one size-fits-all SPIA.

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Re: [Poll] My philosophy on SPIAs

Post by rr2 » Wed Apr 25, 2012 7:11 pm

orlandoman wrote:Looking at your poll objectively ...

Look at the questions ... how many express a negative position toward SPIA's.
Look at the questions ... how many express a positive position toward SPIA's.

I believe the results of your poll will be skewed against SPIA's by the questions you listed. You may or may not have wanted an objective poll.
From what I can see there does not appear to be any significant skew when compared to the earlier poll.
http://www.bogleheads.org/forum/viewtop ... 10&t=95289
There is roughly a 2:1 opinion against/for SPIAs which is consistent across the two polls.

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Re: [Poll] My philosophy on SPIAs

Post by nisiprius » Wed Apr 25, 2012 7:30 pm

orlandoman wrote:Looking at your poll objectively ...

Look at the questions ... how many express a negative position toward SPIA's.
Look at the questions ... how many express a positive position toward SPIA's.

I believe the results of your poll will be skewed against SPIA's by the questions you listed. You may or may not have wanted an objective poll.
My motive was curiosity as to how many people held which opinions. I am a advocate of SPIAs and have purchased one. I may have bent over backwards. I was interested in exploring reasons for not having SPIAs, particularly in separating out the people who don't have them because they don't need them from the people who don't have them because they don't like them.

Originally the poll was going to be "your reasons for not having an SPIA" because I was trying to disambiguate the single answer on another poll. I decided that people like answering polls and resent not being able to participate, so I'd better include the choice "I have or plan to buy SPIA!"

By my count, one choice is truly neutral ("I am answering this poll,") one is "I have an SPIA," eight amount to "I don't have one because I don't need one," which to my mind does not express a negative view of SPIAs, eight are negative, and two are unclassifiable.

I think it's interesting so many checked "concerned about insurance company failure," far more than were concerned about irrevocability, and far, far, more than just feel insurance is generally a bad deal. I think this represents a serious problem that the insurance industry and the guaranty associations are not addressing properly.
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Re: [Poll] My philosophy on SPIAs

Post by SirHorace » Wed Apr 25, 2012 10:29 pm

What is a SPIA ???

SirHorace

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Re: [Poll] My philosophy on SPIAs

Post by CABob » Wed Apr 25, 2012 10:40 pm

SirHorace wrote:What is a SPIA ???

SirHorace
Single premium immediate annuity.
http://www.brkdirect.com/spia/why.htm
Bob

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Re: [Poll] My philosophy on SPIAs

Post by Harold » Wed Apr 25, 2012 10:56 pm

I am not convinced the risks of an SPIA are really any lower than the risk of my investments.
This entry should have far more than 8 (as of this post) responses. And perhaps it could be more accurately stated as "I don't fully comprehend the risks I am taking by managing my own investments, and I overstate the risks associated with annuitization". (Of course someone who isn't aware of the risk he is taking wouldn't be aware that he falls into that category.)

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Re: [Poll] My philosophy on SPIAs

Post by steve roy » Wed Apr 25, 2012 11:06 pm

One reason not to own a SPIA is, you have a defined benefit pension plus Social Security.

So there's no pressing need.

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Re: [Poll] My philosophy on SPIAs

Post by 555 » Wed Apr 25, 2012 11:24 pm

nisiprius wrote:`My motive was curiosity as to how many people held which opinions. I am a advocate of SPIAs and have purchased one. I may have bent over backwards. I was interested in exploring reasons for not having SPIAs, particularly in separating out the people who don't have them because they don't need them from the people who don't have them because they don't like them.'
A significant proportion of people here won't get an SPIA because they have plenty of assets compared to spending (e.g. Spending=2%ofAssets) so they just won't ever need one. They may have nothing against them, and they certainly understand their purpose. That's the impression I got from earlier polls and threads.

In the general population, more people would need them and less people would understand them.

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Re: [Poll] My philosophy on SPIAs

Post by 555 » Thu Apr 26, 2012 2:15 am

I have no SS or pension. I would get an SPIA, if/when needed, meaning if I wanted to reduce the withdrawal rate of the unannuitized proportion below a certain level. I'd try to always be aware how much I might need for an SPIA, and keep that in fixed income, recalculating each year. (You're more indifferent to interest rate changes that way.) After buying an SPIA I'd still count it as fixed income part of AA, figuring it's value each year.

I'm not sure about inflation protection, but I expect I'd be getting one at age 75 or 80, so it's less of an issue. You can get a regular SPIA and hold a chunk of TIPS outside. I'd always have a healthy dose of stocks too, at least 30%, counting SPIA as fixed income. So if I were stocks:bonds 30:70, and then spent half my portfolio on an SPIA, then the rest of my portfolio would be 60:40.

You don't need an SPIA as a floor. You just need it as a potential future landing pad if/when needed.

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Re: [Poll] My philosophy on SPIAs

Post by neurosphere » Thu Apr 26, 2012 7:46 am

There have been a lot of posts recently on SPIAs. I'm 40, and just now entering my main earning years. With no children, and no desire to leave anything behind, products like SPIAs are something I would seriously need to consider.

There has been a lot of talk of WHEN is the best time to purchase one. And of course the answers have ranged from "80 years old" to "buy every year starting at 40".

Is it TOTALLY a stupid question to ask whether periodically buying an SPIA PRIOR to retirement is appropriate? I.e., say I have maxed out my tax-deferred space (401k x 2, ROTH x2, I-bonds) and still have some extra money to invest. Why not put this in an SPIA every year? Then the 3 legs of retirement would be SS, IRA-like accounts, and the SPIAs. I'll have to research a couple of things, such as 1) how are the returns on SPIAs taxed, and 2) what is the minimum amount one needs to purchase an SPIA.

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Re: [Poll] My philosophy on SPIAs

Post by nisiprius » Thu Apr 26, 2012 8:16 am

neurosphere wrote:I'm 40... Is it TOTALLY a stupid question to ask whether periodically buying an SPIA PRIOR to retirement is appropriate?
Moshe Milevsky wrote "I am hesitant to advocate a single optimal age at which a life-cycle investor should convert his or her savings account into an irreversible income annuity. Given the many tradeoffs involved in this decision and numerous sources of uncertainty, I am quite comfortable arguing that annuitizing prior to age 60 is too early, while waiting until the age of 90 it is obviously too late."

At a young age, very few people in the pool of annuitants are exiting via mortality and leaving unused principal behind that can be used to fund the payouts for the survivor. If you buy an SPIA at age 40 or age 50, essentially all that is happening for several decades is that you've irrevocably given a big chunk of money to an insurance company so that they can invest it conservatively and dole it back to you along with some of your own principle. In return for that, they take something in the likely order of 2 to 10% for themselves.

That is, for a young policyholder, an SPIA truly is what insurance-haters believe it to be.

It's not clear what the purpose of doing this at a young age would be unless it is to time the market and lock in a temporarily high interest rate.

The question of an "optimum age" is bruited about, but it's difficult to establish one. What happens is that the economic justification for the annuity, the mortality credits, have a curve like the first few seconds of the liftoff of a Saturn rocket--stays at zero not moving, then creeps, then gathers speed, always up but negligible at first. Meanwhile the factors that are balanced against it are all soft and difficult to evaluate--opportunity cost, etc. So it's a balance between something tiny and something hard to measure. The point at which it becomes clear that the tiny thing has grown enough to overcome the hard-to-measure thing is very uncertain.
Last edited by nisiprius on Thu Apr 26, 2012 8:19 am, edited 3 times in total.
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Re: [Poll] My philosophy on SPIAs

Post by ObliviousInvestor » Thu Apr 26, 2012 8:17 am

neurosphere wrote:I'll have to research a couple of things, such as 1) how are the returns on SPIAs taxed
In the most basic case, when a lifetime annuity is purchased in a taxable account, the idea is that the cost of the annuity is returned, tax-free, over the life expectancy of the annuitant. For example, if a fixed lifetime annuity is purchased for $100,000 when the annuitant has a remaining life expectancy of 20 years, $5,000 of the payment will be tax-free each year. If the annuitant makes it past 20 years (such that the entire cost of the annuity has been recovered tax-free), further payments will be entirely taxable.

More information here: http://www.irs.gov/publications/p939/ar02.html#d0e366
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Post by Curlyq » Thu Apr 26, 2012 10:34 am

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Re: [Poll] My philosophy on SPIAs

Post by GregLee » Thu Apr 26, 2012 12:01 pm

When you give an insurance company a bunch of money to give back to you as annuity payments, you should expect to get back some interest on your money, shouldn't you? Money has interest value. Why is it that in discussing whether to buy an SPIA, no one seems at all concerned with cost? Does it make sense to decide you need an SPIA on issues like providing yourself an income floor, then just leave the cost of the SPIA completely up to the insurance company? "Charge me whatever you want -- I'm sure it will be fair." What trusting souls you SPIA folks are!
Greg, retired 8/10.

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Re: [Poll] My philosophy on SPIAs

Post by yobria » Thu Apr 26, 2012 12:16 pm

nisiprius wrote:At a young age, very few people in the pool of annuitants are exiting via mortality and leaving unused principal behind that can be used to fund the payouts for the survivor. If you buy an SPIA at age 40 or age 50, essentially all that is happening for several decades is that you've irrevocably given a big chunk of money to an insurance company so that they can invest it conservatively and dole it back to you along with some of your own principle. In return for that, they take something in the likely order of 2 to 10% for themselves.
2 to 10%? When I've looked at general insurance company income statements in the past, their expenses and profits have been more than claims paid in a given year. I'd imagine SPIAs have a higher payout, but do you know any sources of hard data?

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Re: [Poll] My philosophy on SPIAs

Post by 555 » Thu Apr 26, 2012 12:28 pm

Curlyq wrote:One of the options in the survey not listed was the idea of purchasing an SPIA to avoid making money mistakes as one's cognitive functions start to decline. It's nice to think that one will always be able to manage one's portfolio, even into the 70s and 80s in age, but I don't think that's a realistic viewpoint. While there is insurance company failure risk with an SPIA, you are limiting the risk of some slick salesman selling you some inappropriate product or being preyed upon by unscrupulous others for your money.
This is a good one. I'd vote for that, at least in terms of keeping things simple. I'd still have the remaining portfolio to manage, but it'd be simple (e.g. 3 funds) but an SPIA takes the withdrawal rate pressure of the remaining portfolio, and that might also reduce the risk of bad decisions.

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Re: [Poll] My philosophy on SPIAs

Post by 555 » Thu Apr 26, 2012 12:41 pm

You can look here to learn the basics.
http://www.immediateannuities.com/
GregLee wrote:When you give an insurance company a bunch of money to give back to you as annuity payments, you should expect to get back some interest on your money, shouldn't you? Money has interest value. Why is it that in discussing whether to buy an SPIA, no one seems at all concerned with cost? Does it make sense to decide you need an SPIA on issues like providing yourself an income floor, then just leave the cost of the SPIA completely up to the insurance company? "Charge me whatever you want -- I'm sure it will be fair." What trusting souls you SPIA folks are!

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Re: [Poll] My philosophy on SPIAs

Post by Khanmots » Thu Apr 26, 2012 12:46 pm

GregLee wrote:When you give an insurance company a bunch of money to give back to you as annuity payments, you should expect to get back some interest on your money, shouldn't you?
Not really. You're not buying the annuity for the potential return. The expectation is that on average you'll do worse having the SPIA than you would investing the monies yourself. The reason they make sense is that you're insuring against living longer than average.
GregLee wrote:Money has interest value. Why is it that in discussing whether to buy an SPIA, no one seems at all concerned with cost? Does it make sense to decide you need an SPIA on issues like providing yourself an income floor, then just leave the cost of the SPIA completely up to the insurance company? "Charge me whatever you want -- I'm sure it will be fair." What trusting souls you SPIA folks are!
Competition between companies keeps costs in line. That said, there are studies done on this subject that can be used as a guideline for what is an acceptable cost and when it starts to make sense.

A SPIA is insurance; it's not an investment; it should be treated as such. When people start trying to blur the line then the confusion arises. You don't have insurance for the average or nominal case. You have insurance for the outliers. With a SPIA you're insuring against living longer than average and running out of money before you run out of years.

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Re: [Poll] My philosophy on SPIAs

Post by SGM » Thu Apr 26, 2012 2:09 pm

I am considering an SPIA at 65, 70, and 75. I have a deferred fixed annuity that Is quite flexible. Now that interest rates are down I stopped additional contributions. A consideration is longevity. Also If SPIAs are paying out 6,6.5, and 7 % per year then I will take less out of other funds to average 4%, so I take out 2, 2.5, and 3% out of some other funds that are hopefully growing. I don't know how much or if I would increase withdrawals to make up for inflation. Delayed SS, two small defined benefit plans will cover some expenses. I have also looked at investments paying out 6% that may lose some capital but won't go down to zero at death as SPIAs will. This is all evolving as I study more, watch how my investments grow or decrease in value, look at the evolving tax picture. Also I am semi-retiring for a number of reasons which has changed my planning.

I will probably gift assets earlier rather than hold larger sums for an inheritance.

Of course viability of the insurance company, state limits on insurance and higher interest rates are always a concern, but would probably have some money in an SPIA regardless.
"Let us endeavor, so to live, that when we die, even the undertaker will be sorry." Mark Twain

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Re: [Poll] My philosophy on SPIAs

Post by yobria » Thu Apr 26, 2012 2:26 pm

555 wrote:
Curlyq wrote:One of the options in the survey not listed was the idea of purchasing an SPIA to avoid making money mistakes as one's cognitive functions start to decline. It's nice to think that one will always be able to manage one's portfolio, even into the 70s and 80s in age, but I don't think that's a realistic viewpoint. While there is insurance company failure risk with an SPIA, you are limiting the risk of some slick salesman selling you some inappropriate product or being preyed upon by unscrupulous others for your money.
This is a good one. I'd vote for that, at least in terms of keeping things simple. I'd still have the remaining portfolio to manage, but it'd be simple (e.g. 3 funds) but an SPIA takes the withdrawal rate pressure of the remaining portfolio, and that might also reduce the risk of bad decisions.
In that case I'd probably do a charitable remainder annuity trust. I can think of a lot of organizations I'd rather gift my nest egg to than an insurance company.

http://en.wikipedia.org/wiki/Charitable ... uity_Trust

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Re: [Poll] My philosophy on SPIAs

Post by natureexplorer » Thu Apr 26, 2012 2:28 pm

I voted "I plan to buy an SPIA". However, the main problem I see with SPIAs is limited state and federal guarantees. The question therefore becomes one of how much to invest in SPIAs and to what degree to spread out among different insurance companies. I believe, up to the state guarantee is a no-brainer. Beyond that is more difficult to justify.

EDIT: I would only considered inflation-adjusted SPIAs.
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SPIA premiums are transparent and competitive.

Post by Taylor Larimore » Thu Apr 26, 2012 2:34 pm

GregLee wrote:When you give an insurance company a bunch of money to give back to you as annuity payments, you should expect to get back some interest on your money, shouldn't you? Money has interest value. Why is it that in discussing whether to buy an SPIA, no one seems at all concerned with cost? Does it make sense to decide you need an SPIA on issues like providing yourself an income floor, then just leave the cost of the SPIA completely up to the insurance company? "Charge me whatever you want -- I'm sure it will be fair." What trusting souls you SPIA folks are!
Hi Greg:

Unlike most annuity products, SPIAs (Single Premium Immediate Annuities) are easily understood and nearly all alike (a lifetime income). The result is that it is easy to compare price and benefit between different insurance companies. This forces the insurance companies to keep prices low and competitive.

No Boglehead would say, "Charge me whatever you want." Instead they compare prices at Vanguard or websites like this:

http://www.immediateannuities.com/

Best wishes.
Taylor
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Re: [Poll] My philosophy on SPIAs

Post by nisiprius » Thu Apr 26, 2012 4:14 pm

1) For Greglee's question, it might worth noting that the BRK Direct SPIA EZ-Quote site states precisely the bond interest rate on which the quotation is based.

2) The "2-10%" figure is a rough impression based on three sources:

a) Babbel and Merrill, Rational Decumulation. In my personal opinion they are an insurer-friendly source. What they say, for what it is worth, is
When evaluated according to the mortality tables that reflect those who actually purchase annuities, as opposed to the general population mortality tables that reflect approximately 10% higher mortality rates, the current loadings (March of 2006) ranged from 3% to 5% on nominal annuity prices above actuarially fair values, and 2% loadings on real annuities.
They immediately follow this with a sentence suggests editorializing on behalf of the insurance industry: "This one-time charge compares favorably to the front-end or deferred loads of many mutual funds, together with their annually recurring gross expense ratios, which according to Morningstar averaged 1.67% on assets across all mutual funds in February of 2006." And I'm not sure they've made a completely fair or neutral choice of mortality table. But, anyway, the lowest number they mention is 2% and the highest is 5%.

b) Vanguard is upfront about saying that when you buy an SPIA through them and their annuity partner, Hueler Income Solutions, there is a 2% fee which I'm pretty needs to be added on to the baked-in 3-5% "load" mentioned by Babbel and Merrill. I trust Vanguard enough to believe this 2% is competitive and that other sales channels for SPIAs charge about that much or more.

c) Vanguard's paper by John Ameriks, [https://personal.vanguard.com/pdf/icruia.pdf]Understanding Income Annuities[/url], which states on page 10 that The data indicate, for example, that a 65-year-old male buying an immediate annuity in 1995 received 92.7 cents in present value for every dollar paid. By 1998, the ratio was substantially higher: A 65-year-old male received 97.0 cents in present value for every dollar paid." Again, I assume, but might be wrong, that those numbers do not include the extra 2% added on by Vanguard/Hueler. And while I trust Vanguard, they do sell annuities, and I don't know how to do the "verify" part of "trust but verify."

So, 2% is the lowest number mentioned by Babbel and Merrill, while the highest number mentioned by Vanguard is 100% - 92.7% = 7.3%, I add 2% to that and got 9.3%, rounded up to 10%, and stated the lowest and highest numbers as the range 2-10%.

Also, my Medigap policy states explicitly that the payout ratio is 87%, making it credible that there are insurance products that pay out in least the general vicinity of 90%

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Re: [Poll] My philosophy on SPIAs

Post by Midpack » Thu Apr 26, 2012 4:36 pm

Buying a SPIA is part of our plan B, I would not rule it out. We don't care about leaving a residual estate and 'dying broke' would be fine as we have no heirs, but leaving money to our favorite charities would be fine too. Our portfolio should hold us indefinitely (about a 2.5% WR), so hopefully we won't have to consider a SPIA until age 75 or so, if ever. My parents are both 90 and going strong, so longevity is an issue for us. We use the annuitization hurdle methodology to monitor when/if we need to consider a SPIA. I'd hate to need to buy one now with costs so so high for a given income. But this is a decision unique to each individual in terms of portfolio and risk tolerance (some people need a guaranteed floor to sleep at night, nothing wrong with that).
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Re: [Poll] My philosophy on SPIAs

Post by Leesbro63 » Thu Apr 26, 2012 4:54 pm

ObliviousInvestor wrote:
neurosphere wrote:I'll have to research a couple of things, such as 1) how are the returns on SPIAs taxed
In the most basic case, when a lifetime annuity is purchased in a taxable account, the idea is that the cost of the annuity is returned, tax-free, over the life expectancy of the annuitant. For example, if a fixed lifetime annuity is purchased for $100,000 when the annuitant has a remaining life expectancy of 20 years, $5,000 of the payment will be tax-free each year. If the annuitant makes it past 20 years (such that the entire cost of the annuity has been recovered tax-free), further payments will be entirely taxable.
I don't think this is right. My mother's annuities (2) are taxed in a way that a percentage is considered return of principal (no tax) and a percentage is considered interest (taxed via 1099-B). In the early years the taxable portion is small but if she lives long and/or if inflation heats up (they are inflation adjusted) the taxable amounts will rise.

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Re: [Poll] My philosophy on SPIAs

Post by yobria » Thu Apr 26, 2012 5:00 pm

nisiprius wrote:2) The "2-10%" figure is a rough impression based on three sources...
Thanks, I checked out the Vanguard source. It seems a little theoretical (and I'm not sure why they chose 1995 and 1998 numbers in a 2008 paper). I was thinking income statements might give a better clue (or at least a different one).

For example, take the life insurance segment (which includes LTCI and fixed annuities) of the 2011 Genworth income statment:

Premiums: 2,979
Investment Income: 2,538
Product Fees: 686

Total Revenues: 6,130
Benefits Paid: 3,774
Expenses and profits: 2,356

So we see in 2011 Genworth had about a 60/40 benefits/expense ratio.

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Re: [Poll] My philosophy on SPIAs

Post by ObliviousInvestor » Thu Apr 26, 2012 5:05 pm

Leesbro63 wrote:
ObliviousInvestor wrote:
neurosphere wrote:I'll have to research a couple of things, such as 1) how are the returns on SPIAs taxed
In the most basic case, when a lifetime annuity is purchased in a taxable account, the idea is that the cost of the annuity is returned, tax-free, over the life expectancy of the annuitant. For example, if a fixed lifetime annuity is purchased for $100,000 when the annuitant has a remaining life expectancy of 20 years, $5,000 of the payment will be tax-free each year. If the annuitant makes it past 20 years (such that the entire cost of the annuity has been recovered tax-free), further payments will be entirely taxable.
I don't think this is right. My mother's annuities (2) are taxed in a way that a percentage is considered return of principal (no tax) and a percentage is considered interest (taxed via 1099-B). In the early years the taxable portion is small but if she lives long and/or if inflation heats up (they are inflation adjusted) the taxable amounts will rise.
It's certainly possible I'm missing something, but I think this is in keeping with what I said.
Mike Piper, author/blogger

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Re: [Poll] My philosophy on SPIAs

Post by nisiprius » Thu Apr 26, 2012 6:05 pm

yobria wrote:For example, take the life insurance segment (which includes LTCI and fixed annuities) of the 2011 Genworth income statment... we see in 2011 Genworth had about a 60/40 benefits/expense ratio.
It's not that hard to do amateur-actuary stuff and get a ballpark estimate. On SPIAs, I figure it has got to be more like a 90% benefits/premium ratio, probably a little higher because of adverse selection. It just can't be 60%.

BRK Direct EZ-Quote says, for a man born 4/1/1947 (age 65) "Your investment of $187,537 will yield 2.30% based upon our mortality assumptions and the U.S. Treasury yield curve as of April 23, 2012. This investment will provide you with $1,000 every month for as long as you live, beginning on June 1, 2012."

I get the CDC 2003 Life Table for Males. Notice that this is the general population, not the supposedly-healther adversely-selected part of the population that buys annuities.

It shows me that of an initial population of 100,000, 78,694 survive to age 65, 77,235 to age 66, etc. Let's say someone wants to pay all 78,694 of them $1,000 a month for the rest of their lives. I take those numbers and multiply each of them by 12,000. Then in the next column, I calculate the discount, based on BRK's 2.30%, for each year, as (1.0230)^(-n) where n = age-65. There are endless questions about "start-of-year-or-end-of-year" etc. but I'm just trying to get a ballpark estimate.

It will cost $13,067,294,408 to make $1,000/month payments for life to 78,694 people, or $166,052/person.

So, with no profit and no expenses, assuming a 2.3% interest rate, it would cost $166,052 to fund those payouts, i.e. $166,052 is the actuarially fair premium. BRK, which is not a particularly low-cost insurer, wants $187,537. So, that implies their payouts cost them 88.5% of the premium.

And I used the real CDC life table for the general male population. Somewhere I once found a COSM table that has what I'll call "phonied-up" life tables that supposedly represent the mortality curve of the annuity-buying population--it goes up to age 120! If I used that table I'd get a higher payout number.

The point is, I have no idea whether the benefits/premium ratio is 88.5% or 95%, but it can't as low as 60% or even 75% or 80%. It's got to be in the general ballpark of 90% unless I screwed up the calculation. I'd give more details of the calculations but I'd rather have someone do a completely independent check.

I got the life table here, table 2, page 10.

I'd hypothesize that actuarial math is so cut-and-dried that the risk is small--they can calculate very precisely how many of their annuitants will still need to be paid in 2032, and they can buy in advance the exact bonds they need to make those payments. And the information on mortality rates is not secret--they might even be required to all use the same tables--and neither is the Treasury yield curve. So it's a low-risk business and they probably don't need much profit to justify the risk, and probably can't get much because all their competitors know what they know.
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Re: [Poll] My philosophy on SPIAs

Post by yobria » Thu Apr 26, 2012 7:53 pm

nisiprius wrote:
yobria wrote:For example, take the life insurance segment (which includes LTCI and fixed annuities) of the 2011 Genworth income statment... we see in 2011 Genworth had about a 60/40 benefits/expense ratio.
It's not that hard to do amateur-actuary stuff and get a ballpark estimate. On SPIAs, I figure it has got to be more like a 90% benefits/premium ratio, probably a little higher because of adverse selection. It just can't be 60%.

BRK Direct EZ-Quote says, for a man born 4/1/1947 (age 65) "Your investment of $187,537 will yield 2.30% based upon our mortality assumptions and the U.S. Treasury yield curve as of April 23, 2012. This investment will provide you with $1,000 every month for as long as you live, beginning on June 1, 2012."

I get the CDC 2003 Life Table for Males. Notice that this is the general population, not the supposedly-healther adversely-selected part of the population that buys annuities.

It shows me that of an initial population of 100,000, 78,694 survive to age 65, 77,235 to age 66, etc. Let's say someone wants to pay all 78,694 of them $1,000 a month for the rest of their lives. I take those numbers and multiply each of them by 12,000. Then in the next column, I calculate the discount, based on BRK's 2.30%, for each year, as (1.0230)^(-n) where n = age-65. There are endless questions about "start-of-year-or-end-of-year" etc. but I'm just trying to get a ballpark estimate.

It will cost $13,067,294,408 to make $1,000/month payments for life to 78,694 people, or $166,052/person.

So, with no profit and no expenses, assuming a 2.3% interest rate, it would cost $166,052 to fund those payouts, i.e. $166,052 is the actuarially fair premium. BRK, which is not a particularly low-cost insurer, wants $187,537. So, that implies their payouts cost them 88.5% of the premium.

And I used the real CDC life table for the general male population. Somewhere I once found a COSM table that has what I'll call "phonied-up" life tables that supposedly represent the mortality curve of the annuity-buying population--it goes up to age 120! If I used that table I'd get a higher payout number.

The point is, I have no idea whether the benefits/premium ratio is 88.5% or 95%, but it can't as low as 60% or even 75% or 80%. It's got to be in the general ballpark of 90% unless I screwed up the calculation. I'd give more details of the calculations but I'd rather have someone do a completely independent check.

I got the life table here, table 2, page 10.

I'd hypothesize that actuarial math is so cut-and-dried that the risk is small--they can calculate very precisely how many of their annuitants will still need to be paid in 2032, and they can buy in advance the exact bonds they need to make those payments. And the information on mortality rates is not secret--they might even be required to all use the same tables--and neither is the Treasury yield curve. So it's a low-risk business and they probably don't need much profit to justify the risk, and probably can't get much because all their competitors know what they know.
Yes, I think you're right. The way I calculated it is - thought of the SPIA as an amortizing bond. Plugging in 2.3% for the interest rate (reasonable given the current yield curve), and using the SSA life expectancy calculator and the Excel PMT function, I get payment of $1,024/month, similar to your result. The only risk, of course, is how low an interest rate that is, historically speaking.

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Re: [Poll] My philosophy on SPIAs

Post by nisiprius » Thu Apr 26, 2012 8:01 pm

yobria wrote:Plugging in 2.3% for the interest rate (reasonable given the current yield curve), and using the SSA life expectancy calculator and the Excel PMT function, I get payment of $1,024/month, similar to your result.
Thanks for the reality check! And, note that 2.3% is the rate that BRK Direct says they used. I assume that 2.30% is some appropriately-weighted average, i.e. the weighted average of the interest rate for an X year bond times the number of people that must be paid by bonds maturing in that year.

Of course, I don't know the ins and outs of what they're allowed to invest in. Maybe they're allowed to price and state the annuity as if they were investing in Treasuries, go out an invest it in something riskier and higher-yielding, and pocket the extra.
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Re: [Poll] My philosophy on SPIAs

Post by FrugalInvestor » Thu Apr 26, 2012 8:05 pm

I voted "other." I am (early) retired so still relatively young and my wife even younger. At this point I'm not particularly worried about running out of money but things can always change so we will continue to monitor the success of our portfolio and make a decision at a later date. We have not ruled it in or out and do not have any particular bias for or against. I just view a SPIA as another tool that may make sense to add to our financial toolkit at some point.

Edit: Even if we don't need it to extend our income stream a SPIA may be the right tool for providing ongoing income to my wife and relieving her of the burden of portfolio management when I am not around to do so. It may also take the burden off of me when I am not as able.
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Re: [Poll] My philosophy on SPIAs

Post by yobria » Fri Apr 27, 2012 8:59 am

FrugalInvestor wrote:I voted "other." I am (early) retired so still relatively young and my wife even younger. At this point I'm not particularly worried about running out of money but things can always change so we will continue to monitor the success of our portfolio and make a decision at a later date. We have not ruled it in or out and do not have any particular bias for or against. I just view a SPIA as another tool that may make sense to add to our financial toolkit at some point.
Yes, that's exactly my plan for my mother, now 62. Let's face it - having a big lump sum that you have complete control over and can draw down and invest flexibly is always better than being broke and hoping the insurance company sends you a check every month, and that no large expenditures pop up. We'll swap the former for the latter if there's a real need (eg she's 80, in great health, and has higher than expected expenses), but we'll prefer not to.
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Re: [Poll] My philosophy on SPIAs

Post by GregLee » Fri Apr 27, 2012 9:37 am

yobria wrote:Let's face it - have a big lump sum that you have complete control over and can draw down and invest flexibly is always better than being broke and hoping the insurance company sends you a check every month, and that no large expenditures pop up.
It seems to me that that would depend on the size of the check and, of course, how long you live. I am still resisting these arguments that propose to tell us whether buying an annuity is advantageous, in a way that is independent of the cost of the annuity. I understand your reasoning here that having a large sum at your disposal is worth something, and if you spend some or all of that in buying an annuity, you've given up something of value. But how much do you give up in comparison to the value you receive from the annuity? Maybe it's worth it.

I think that the annuity decision is inherently quantitative and cannot reasonably be treated by comparing advantages with disadvantages. How much does it cost, and how much can you expect to get back?
Greg, retired 8/10.

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Re: [Poll] My philosophy on SPIAs

Post by Lbill » Fri Apr 27, 2012 9:55 am

One concern not listed in the poll, and frankly the primary one that is causing me to delay annuitizing, is the naming of a joint annuitant. I'm presently single but may not remain so, and I'd want something to go to my spouse if I die. My understanding is that you're locked into the annuity option and joint annuitant that are chosen at the outset. If I marry later, there's no way to add this person as a joint annuitant. If I could figure out how to handle this, I'd probably go ahead and annuitize a portion of my portfolio.
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Re: [Poll] My philosophy on SPIAs

Post by yobria » Fri Apr 27, 2012 10:10 am

GregLee wrote:
yobria wrote:Let's face it - have a big lump sum that you have complete control over and can draw down and invest flexibly is always better than being broke and hoping the insurance company sends you a check every month, and that no large expenditures pop up.
It seems to me that that would depend on the size of the check and, of course, how long you live. I am still resisting these arguments that propose to tell us whether buying an annuity is advantageous, in a way that is independent of the cost of the annuity. I understand your reasoning here that having a large sum at your disposal is worth something, and if you spend some or all of that in buying an annuity, you've given up something of value. But how much do you give up in comparison to the value you receive from the annuity? Maybe it's worth it.

I think that the annuity decision is inherently quantitative and cannot reasonably be treated by comparing advantages with disadvantages. How much does it cost, and how much can you expect to get back?
Right, doing the math always trumps rules of thumb. It's a question of weighing the pros and cons. And IMO that comes down to your marginal utility of income. If you're living happily off $30K/year, and your non-annuity retirement income is $60K, you probably won't give up the lump, and vice versa. Expected lifespan (current health and family history) are also important of course.

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Useless information.

Post by Taylor Larimore » Fri Apr 27, 2012 10:25 am

Bogleheads:

Internal company commissions, earned interest rate, mortality credits, etc., are not relevant when considering the purchase of a single premium immediate annuity (SPIA).

What counts is the amount of the premium, the amount of income guaranteed, and the strength of the company-- all easily understandable and available. It is one reason why SPIAs are "good" annuities.

Best wishes.
Taylor
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Re: [Poll] My philosophy on SPIAs

Post by Leesbro63 » Fri Apr 27, 2012 10:56 am

Not to diverge, but what Taylor just said reminds me of what I have concluded about leasing cars (not that doing so is Bogleheadish). The fact that brand X has a reputation of lasting 300,000 miles and brand Y has a reputation of requiring extensive repairs after just 50,000 miles is irrevelant. All that matters is what is the no-money-down lease payment for the period of the lease (assuming the lease period is less than the standard 3 or 4 year bumper to bumper warranty) for similar cars.

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