Inflation indexed SPIA providers

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gordoni2
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Inflation indexed SPIA providers

Post by gordoni2 » Wed Jun 10, 2015 12:32 am

I know of only three providers of inflation indexed SPIAs in the US. I would be interested to learn of any others. By inflation indexed I mean payments are tied to the CPI:

AIG
https://www-1000.aig.com/TridionData.do?Page_ID=583184
have to go through an agent to purchase, e.g. Vanguard's partner Income Solutions

Principal Financial Group
https://www.principal.com/retirement/ind/anppia.htm
probably have to go through an agent to purchase, e.g. Vanguard's partner Income Solutions

CUNA Mutual Group
http://membersproducts.com/content.aspx ... 5946&s=PBV
have to go through a financial advisor of a member credit union

Older discussions on this topic now mainly lead to dead links or non-inflation indexed products:

viewtopic.php?t=135046
viewtopic.php?t=113522

For my situation AIG is currently 2.3% cheaper than Principal Financial Group. It was 6.8% cheaper when I compared prices two months ago, so prices may move around. I have been unable to get a quote from CUNA Mutual Group.

Bill M
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Re: Inflation indexed SPIA providers

Post by Bill M » Wed Jun 10, 2015 7:11 am

I have quotes for an inflation-indexed SPIA from MetLife back in 2010, but nothing recent. Lincoln Financial Group offered their SmartIncome annuity with CPI-adjustments, but they've gone quiet and updates stopped in 6/2014.

Both PFG and AIG offer quotes through Vanguard (chasing the web links to Hueler Investment Services).

dailybagel
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Re: Inflation indexed SPIA providers

Post by dailybagel » Wed Jun 10, 2015 7:18 am

It would be great to see a comparison of the premium (or the payouts for the same premium) for inflation-adjusted and non-inflation-adjusted annuities.

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Re: Inflation indexed SPIA providers

Post by gordoni2 » Wed Jun 10, 2015 11:36 pm

dailybagel wrote:It would be great to see a comparison of the premium (or the payouts for the same premium) for inflation-adjusted and non-inflation-adjusted annuities.
If I've done the math correctly (for a 48 year old male), an inflation indexed SPIA from AIG initially has 65% of the payout of a non-inflation indexed SPIA. However, over time the payouts of the inflation indexed SPIA will increase. Using the U.S. Treasury real and nominal yield curves to determine the current price of future payments results in the value of the inflation indexed SPIA having 90% of the value of the non-inflation indexed SPIA.

I speculate that the reason the values are not equal is insurance companies can hold higher yielding high quality corporate bonds (in addition to Treasuries) to satisfy their non-inflation indexed SPIA obligations. But the corporate inlation indexed bond market is fairly spotty, and so they might only hold TIPS to satisfy their inflation indexed SPIA obligations.

(Calculations assume the mortality of a typical annuitant, although it shouldn't be too sensitive to this assumption as both the inflation indexed and non-inflation indexed SPIAs use the same mortality assumptions. I also use the 30 year forward rate for the forward rate beyond 30 years.)

555
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Re: Inflation indexed SPIA providers

Post by 555 » Thu Jun 11, 2015 12:51 am

gordoni2 wrote:If I've done the math correctly (for a 48 year old male), an inflation indexed SPIA from AIG initially has 65% of the payout of a non-inflation indexed SPIA.
I would think a better way to compare them would be in terms of the difference in 1st year payout as a percentage of premium. This should be related to the difference between real and nominal interest rates (and in turn, related to expected inflation). In some sense, to be actuarily fair, the difference ought to be about half the difference between real and nominal interest rates, and to the extent that the difference is more than this, it shows that the inflation indexed SPIAs are not as well priced (i.e. a worse deal).

Bill M
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Re: Inflation indexed SPIA providers

Post by Bill M » Thu Jun 11, 2015 6:34 am

555 wrote:
gordoni2 wrote:If I've done the math correctly (for a 48 year old male), an inflation indexed SPIA from AIG initially has 65% of the payout of a non-inflation indexed SPIA.
I would think a better way to compare them ....
Another way to do the comparison (my preference) is to calculate the inflation rate that, when used to increase the SPIA payments, makes the PV of the two annuities equivalent. I then look at this number and decide if I think they are guessing too high or too low.

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Re: Inflation indexed SPIA providers

Post by Independent » Thu Jun 11, 2015 9:45 am

555 wrote:
gordoni2 wrote:If I've done the math correctly (for a 48 year old male), an inflation indexed SPIA from AIG initially has 65% of the payout of a non-inflation indexed SPIA.
I would think a better way to compare them would be in terms of the difference in 1st year payout as a percentage of premium. This should be related to the difference between real and nominal interest rates (and in turn, related to expected inflation). In some sense, to be actuarily fair, the difference ought to be about half the difference between real and nominal interest rates, and to the extent that the difference is more than this, it shows that the inflation indexed SPIAs are not as well priced (i.e. a worse deal).
I'm not sure what "actuarily fair" means. An actuary would do a calculation similar to gordoni2's, except the actuary would use a mortality table to do fractional payments at each age.

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Taylor Larimore
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Re: Inflation indexed SPIA providers

Post by Taylor Larimore » Thu Jun 11, 2015 10:11 am

Gordon:

I believe it is usually a mistake for a 48 year old to purchase a lifetime annuity.

One of the best studies on the subject is one by Milevsky & Young which concluded:
We estimate that the real option to defer annuitization is quite valuable until the mid-70s or mid-80s. Of course, the precise values depend on one’s gender, risk aversion, and subjective health assessment.
http://ifid.ca/pdf_workingpapers/WP2002B.pdf

Most annuity salespeople urge us to buy SPIA annuities NOW. These are reasons for WAITING:

* The premium is less or the lifetime income is larger.

* You might need the cash for an emergency.

* Inflation is less of a factor which allows an expensive "inflation rider" to be avoided.

* Current low interest rates are likely to become higher, thereby making the SPIA payments larger by waiting.

* Less time for insurance companies to get in trouble.

* If your health deteriorates an annuity is usually a bad choice.

* If you wait, and your portfolio becomes larger than needed, you may never need to purchase an annuity.

* In a study by Mitchell, Frank and Pfau, the authors state:
For ages younger than the 80’s, the assets are best kept within the family and future heirs since both inflation and possible future market returns have time to do better than SPIA lifetime sums do.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Inflation indexed SPIA providers

Post by randomguy » Thu Jun 11, 2015 10:46 am

Bill M wrote:
555 wrote:
gordoni2 wrote:If I've done the math correctly (for a 48 year old male), an inflation indexed SPIA from AIG initially has 65% of the payout of a non-inflation indexed SPIA.
I would think a better way to compare them ....
Another way to do the comparison (my preference) is to calculate the inflation rate that, when used to increase the SPIA payments, makes the PV of the two annuities equivalent. I then look at this number and decide if I think they are guessing too high or too low.
I think you will find the guess to to high and that is to be expected. There is value in being protected against high inflation and you should expect to pay for that

miles monroe
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Re: Inflation indexed SPIA providers

Post by miles monroe » Thu Jun 11, 2015 11:03 am

i didn't do it for an estimated inflation rate; but i built an excel spreadsheet and calculated the annual payments for a regular, 2%, and 3% increasing spias to get an idea of the return of capital points and at what point the inflation adjusted annuites returned more than the regular.

at this point a spia is not for me but is something i intend to review periodically. also considering a longevity annuity.

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Re: Inflation indexed SPIA providers

Post by gordoni2 » Thu Jun 11, 2015 5:46 pm

Taylor Larimore wrote:I believe it is usually a mistake for a 48 year old to purchase a lifetime annuity.
Thanks Taylor, I appreciate your feedback. In my case I lack a significant bequest motive, and I am currently only planning on annuitizing what otherwise would form less than half the bond portion of my portfolio.
One of the best studies on the subject is one by Milevsky & Young which concluded:
We estimate that the real option to defer annuitization is quite valuable until the mid-70s or mid-80s. Of course, the precise values depend on one’s gender, risk aversion, and subjective health assessment.
http://ifid.ca/pdf_workingpapers/WP2002B.pdf
Milevsky's work is always worth paying attention to. His finding that annuitization should be deferred until the mid-70s or mid-80s is quite compatible with my own finding that the mid-point for bond annuitization (with half of bond holdings converted to SPIAs) should be around 45. It all depends of the coefficient of relative risk aversion, gamma, used.

Milevsky and Young use values for gamma of 1, 1.5, and 2. These are very low values. Indeed, according to Merton's formula (stocks expected to pay 6% above risk free with 20% standard deviation), a gamma of 1 implies a 150% stock holding and a -50% holding of the risk free asset. Using a gamma of 1, I likewise find there are no bond holdings ever, and the mid-point of stock annuitization is around age 80.

Things change greatly however when you plug in what I consider to be a more realistic value of gamma, 4. Then, in my work at least, the mid-point of stock annuitization is around age 70, and the mid-point of bond annuitization is around 45. The ability to partially annuitize assets offers a best of both worlds, and is not something Milevsky and Young's paper appears to consider doing.

For more details see figures 7 and 8 of my paper Floor and Upside Investing in Retirement with Nominal SPIAs for graphs of my estimates of how much to annuitize as a function of age for gamma values 4 and 1. This is for nominal SPIAs. I haven't constructed similar graphs for inflation indexed SPIAs, but suspect the graphs would be similar.

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Taylor Larimore
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Resume of Gordon Irlam

Post by Taylor Larimore » Thu Jun 11, 2015 7:19 pm

Wow!

Resume of Gordon Irlam

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

ralph124cf
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Re: Inflation indexed SPIA providers

Post by ralph124cf » Fri Jun 12, 2015 9:00 am

One other advantage of partial fairly early annuitization is that it removes that portion of wealth from the risk of the bad decisions that people tend to make as they age.

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Re: Inflation indexed SPIA providers

Post by itstoomuch » Fri Jun 12, 2015 9:39 am

Quickie comment:
In any market place, the vendor should be making money besides offering a product that buyers want/need. The lack of vendors for I-SPIA, only indicates to me that the Vendors 1) See too much risk in this product. I'd bet that they already have looked at I-SPIA), 2) Their current product mix is sufficient to cover most of their target market. 3) Too many complicated financial instruments confuse the seller and the potential client. 4) The financial incentive to the Financial Advisor is insufficient or noncompetitive to existing products.

Thus we see the fall of LTCi and limited markets/marketing for hybrid deferred annuities. Both good products for personal longevity planning but potentially terrible for the insurance company. :oops:
Last edited by itstoomuch on Fri Jun 12, 2015 9:47 am, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Inflation indexed SPIA providers

Post by randomguy » Fri Jun 12, 2015 9:46 am

itstoomuch wrote:Quickie comment:
In any market place, the vendor should be making money besides offering a product that the market buyers want. The lack of vendors for I-SPIA, only indicates to me that the Vendors 1) See too much risk in this product. I'd bet that they already have looked at I-SPIA), 2) Their current product mix is sufficient to cover most of their target market. 3) Too many complicated financial instruments confuse the seller and the potential client.

Thus we see the fall of LTCi and limited markets/marketing for hybrid deferred annuities. Both good products for personal longevity planning but potentially terrible for the insurance company. :oops:
Selling nominal annuities is hard. Most people don't like giving up control of thier money for the safety. Selling inflation adjusted annuities that payout less in most cases but protect you against something we haven't seen in 30 years is an even tougher sell. Unlike LTCi insurance, there are instruments so that insurance companies can manage the risk of inflation adjusted annuities. The problem is that most people don't like the returns that those instruments give you.

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Re: Inflation indexed SPIA providers

Post by Independent » Fri Jun 12, 2015 2:22 pm

randomguy wrote:
itstoomuch wrote:Quickie comment:
In any market place, the vendor should be making money besides offering a product that the market buyers want. The lack of vendors for I-SPIA, only indicates to me that the Vendors 1) See too much risk in this product. I'd bet that they already have looked at I-SPIA), 2) Their current product mix is sufficient to cover most of their target market. 3) Too many complicated financial instruments confuse the seller and the potential client.

Thus we see the fall of LTCi and limited markets/marketing for hybrid deferred annuities. Both good products for personal longevity planning but potentially terrible for the insurance company. :oops:
Selling nominal annuities is hard. Most people don't like giving up control of thier money for the safety. Selling inflation adjusted annuities that payout less in most cases but protect you against something we haven't seen in 30 years is an even tougher sell. Unlike LTCi insurance, there are instruments so that insurance companies can manage the risk of inflation adjusted annuities. The problem is that most people don't like the returns that those instruments give you.
+1

I expect that if TIPS had maintained the 3% coupons we saw on the early issues, and if the CPI had fluctuated around a mean of 4%, we'd see that any "serious" SPIA provider would have a CPI-indexed option. And, it would get a good share of their sales.

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