2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

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2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by LadyGeek » Sat Oct 28, 2017 11:57 pm

Simultaneous with the book signing on Thursday, October 19th, Mike Piper (Oblivious Investor) and Mel Turner gave a presentation on annuities titled "Annuities: The Good, The Bad, and The Ugly".

The slides are now available in the wiki. See: Bogleheads® 16 - Philadelphia

The presentation was recorded on video and will be made available by Rich Guerra when it's ready.
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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by ThePrune » Sun Oct 29, 2017 5:21 am

I looked through the slides - a very nice summary of the critical information.

Annuity contracts cover such a wide variety of types that it is truly difficult to prepare a compact summary that nevertheless has enough details to be useful. I particularly like how the slides spent much more time covering the important types of annuities for retirees (SPIAs and DIAs), less time on the expensive variable annuities, and just one slide on that "skunk of an annuity type" (FIAs).

I am particularly happy that people within the Bogleheads are becoming more open to learning about annuity products. For me, the book that started to change my thinking about annuities was Mark Warshawsky's academic-level study Retirement Income - Risks and Strategies. Wade Pfau has shown how incorporating fixed annuities into retirement plans can often be much more advantageous that bond funds ( An Efficient Frontier for Retirement Income being just one example from his numerous publications).

It can be difficult to distinguish books on this topic that are mere marketing tools versus those that provide even-handed and intelligent discussion. Since I have read numerous from both categories, I'll be so bold as to post my suggestions.

As an initial plunge into the world of annuities, I recommend John Olsen's Guide to Annuities for the Consumer. I've had both email and telephone conversations with John and found him to be forthright and a real consumer advocate.

For an in-depth reference book on the topic, John Olsen teamed up with Michael Kitces (of Nerd's Eye View fame) to write The Advisors Guide to Annuities 5th Edition. Chapter 14 in this book, "The Great Debate: Are Annuities Good or Bad?" provides an honest and insightful discussion of the pros and cons of annuities.
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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by grok87 » Sun Oct 29, 2017 5:41 am

thanks

i looked through the slides- great detail, very informative.

i was interested by white coat investor's last slide. it seems to suggest that annuities become a worse deal the older one is. for example the (expected?) return is 4% for a 60 year old, 3% for 70 year old and -2% for an 80 year old. I wonder if that was discussed at all at the conference and whether there is consensus around that?

cheers,
grok
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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by magellan » Sun Oct 29, 2017 7:17 am

grok87 wrote:
Sun Oct 29, 2017 5:41 am
it seems to suggest that annuities become a worse deal the older one is.
I wasn't at the conference, but imo there are two things to consider. The first is what you're trying to optimize. If you're trying to protect against living too long, it probably makes more sense to compare using the LE+5 column than the "Return" column.

Second, I don't think the "Return" column is adjusted for inflation risk and my guess is the annuities used to build the table aren't inflation adjusted. If you were to create an "Inflation risk adjusted return" column that deducts a hypothetical inflation risk penalty from each return (based on how long the payment stream goes on), I suspect buying early would always be a worse option compared to buying later.

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by grok87 » Sun Oct 29, 2017 7:36 am

magellan wrote:
Sun Oct 29, 2017 7:17 am
grok87 wrote:
Sun Oct 29, 2017 5:41 am
it seems to suggest that annuities become a worse deal the older one is.
I wasn't at the conference, but imo there are two things to consider. The first is what you're trying to optimize. If you're trying to protect against living too long, it probably makes more sense to compare using the LE+5 column than the "Return" column.

Second, I don't think the "Return" column is adjusted for inflation risk and my guess is the annuities used to build the table aren't inflation adjusted. If you were to create an "Inflation risk adjusted return" column that deducts a hypothetical inflation risk penalty from each return (based on how long the payment stream goes on), I suspect buying early would always be a worse option compared to buying later.
thanks

i think your suggestion about the LE+5 is a good one. i have no doubt that insurance companies price their annuities as if the buyer is going to live forever (see my tagline for example). so i believe the -2% return for the 80 year old. I guess what i am questioning is the rosy +4% return for the 60 year old. feels wrong to me
Keep calm and Boglehead on. KCBO.

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by Ron » Sun Oct 29, 2017 8:32 am

grok87 wrote:
Sun Oct 29, 2017 7:36 am
<snip...>I guess what i am questioning is the rosy +4% return for the 60 year old. feels wrong to me
FWIW, I purchased an SPIA shortly after I retired, at age 59 in 2007. The computed IRR for the guaranteed term (joint at 100%, joint until age 87) came out to 4.79%. This is IRR and does not include the return of premium paid for the policy. I could be wrong, but I've seen current quotes that state a higher return rate but also include return of premium.

One of my main concerns was purchasing a product at such a "low" pay out rate. Living through the '80's (still have my WIN button) I know how inflation can easily sap buying power of any non-inflation protected vehicle (such as a private pension).

The reason for the purchase was two fold; first to provide myself a pension (since I didn't retire with one) without having to rely exclusively on my portfolio for income, and secondly, to be able to delay my claim of SS until my FRA of 66 rather than having to claim earlier due to a downturn in the market (which happened the next two years after my retirement :annoyed ).

As it turned out, the annuity payments along with a substantial cash bucket allowed me to go through the 2007-08 downturn without even breathing hard. Additionally, during that time I found out about the SS file/suspend/restricted application (not well known then) which turned out quite well and allows both me/wife to delay our own SS until age 70 (next year) while my wife receives 50% of my FRA and adding $60K+ to our retirement income. BTW, if either/both my wife/me live beyond age 87, the actual computed IRR will increase year by year.

And inflation? My main fear never came to pass. Just proves the point that sometimes dumb luck is better than discrete planning :mrgreen: ...

- Ron

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by magellan » Sun Oct 29, 2017 8:45 am

grok87 wrote:
Sun Oct 29, 2017 7:36 am
I guess what i am questioning is the rosy +4% return for the 60 year old. feels wrong to me
I see what you're getting at.

First, here's the whitecoatinvestor post where the table came from. It has a bit more detail, but not much:
https://www.whitecoatinvestor.com/spia- ... ?print=pdf

I tried to replicate the return numbers in excel. It was close, but not exact, so I'm not sure if I made a mistake (EDIT: I found it, need to use type=1 in the formula to match whitecoatinvestor result - see next post).

For the return column, I used the formula
=RETURN(LE-current_age, payment percent*100000, -100000)

So for age 50, payment percent was 5.23% and LE was 82, so the formula would be:
=Return(82-50,.0523*100000, -100000) -> 3.5%

The LE+5 and LE-5 columns add or subtract 5 to the first parameter, for example:
=Return(5+82-50,.0523*100000, -100000) ->4.0%

Here's the full table:

Code: Select all

Age   Payment	LE	Payment	Return	LE+5	LE-5
50	5.23%	82	167360	3.5%	4.0%	2.6%
55	5.68%	82	153360	3.3%	4.1%	2.0%
60	6.21%	83	142830	3.2%	4.3%	1.2%
65	6.95%	84	132050	2.9%	4.6%	-0.4%
70	7.96%	85	119400	2.3%	4.9%	-3.9%
75	9.43%	86	103730	0.6%	5.3%	-14.2%
80	11.66%	88	93280	-1.5%	6.5%	-38.5%
85	14.87%	91	89220	-3.2%	9.3%	-85.1%
90	19.70%	94	78800	-8.9%	13.3%	N/A

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by magellan » Sun Oct 29, 2017 9:08 am

Here's the table again, but this time with type=1 in the formula so it exactly matches whitecoatinvestor's result. setting type=1 indicates that the payment is made at the end of the period rather than at the beginning. I'm actually surprised this makes so much of a difference.

For the return column, I used the formula
=RETURN(LE-current_age, payment percent*100000, -100000,1)

So for age 50, payment percent was 5.23% and LE was 82, so the formula would be:
=Return(82-50,.0523*100000, -100000,1) -> 3.8%

The LE+5 and LE-5 columns add or subtract 5 to the first parameter, for example:
=Return(5+82-50,.0523*100000, -100000,1) ->4.3%

Here's the update table (now matches whitecoatinvestor):

Code: Select all

Age   Payment	LE	Payment	Return	LE+5	LE-5
50	5.23%	82	167360	3.8%	4.3%	2.9%
55	5.68%	82	153360	3.7%	4.5%	2.2%
60	6.21%	83	142830	3.5%	4.7%	1.3%
65	6.95%	84	132050	3.3%	5.1%	-0.4%
70	7.96%	85	119400	2.7%	5.5%	-4.7%
75	9.43%	86	103730	0.7%	6.2%	-18.4%
80	11.66%	88	93280	-1.9%	7.9%	-56.5%
85	14.87%	91	89220	-4.3%	11.7%	N/A
90	19.70%	94	78800	-13.9%	18.0%	N/A
Finally, here's a redo of the table using monthly payments instead of annual payments using
=RATE((LE-Age)*12,(100000*payment_percent)/12,-100000, 0,1)*12

This may be the most appropriate way to model it, although I'm probably splitting hairs.

Code: Select all

Age   Payment	LE	Payment	Return	LE+5	LE-5
50	5.23%	82	167360	3.6%	4.1%	2.7%
55	5.68%	82	153360	3.4%	4.2%	2.1%
60	6.21%	83	142830	3.3%	4.4%	1.3%
65	6.95%	84	132050	3.1%	4.7%	-0.4%
70	7.96%	85	119400	2.5%	5.1%	-4.4%
75	9.43%	86	103730	0.7%	5.6%	-17.6%
80	11.66%	88	93280	-1.7%	7.0%	-60.7%
85	14.87%	91	89220	-3.8%	10.0%	N/A
90	19.70%	94	78800	-11.6%	14.5%	N/A

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Post tefra cost basis

Post by sambb » Sun Oct 29, 2017 9:27 am

If a variable annuity was transferred to Vanguard, is the following correct for taxation:
Lets say I withdraw early, before ager 59.5

Vanguard lists the POST TEFRA COST BASIS as $1000
The annuity value is $2000
Hence the earnings are $1000
I would owe my AGI rate on the $1000 PLUS and additional 10%.

But then, i can use the funds free and clear, correct?

What sort of tax form does vanguard send for this at the end of the year?

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by grok87 » Sun Oct 29, 2017 3:36 pm

Ron wrote:
Sun Oct 29, 2017 8:32 am
As it turned out, the annuity payments along with a substantial cash bucket allowed me to go through the 2007-08 downturn without even breathing hard.
Thanks for sharing your experience.

Your story, and others like it, have convinced me that i don't want the bulk of my retirement income to be dependent on using a 4% safe withdrawal rate on my total portfolio. With my luck a downturn would occur right as i start retirement. Then i would hear folks on this forum start saying things like "well if the market is bad, then you should modify the 4% rule and spend less". All of that would equate to "breathing hard" and sleepless nights for me i fear.

My plan is to adopt a "3 legged stool" approach with:
1) Social Security,
2) Private Pension/Annuity/TIPS Ladder
3) Risk Portfolio (using 4% safe withdrawal rate)

cheers,
grok
Keep calm and Boglehead on. KCBO.

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by grok87 » Sun Oct 29, 2017 3:37 pm

magellan wrote:
Sun Oct 29, 2017 9:08 am
Here's the table again, but this time with type=1 in the formula so it exactly matches whitecoatinvestor's result. setting type=1 indicates that the payment is made at the end of the period rather than at the beginning. I'm actually surprised this makes so much of a difference.

For the return column, I used the formula
=RETURN(LE-current_age, payment percent*100000, -100000,1)

So for age 50, payment percent was 5.23% and LE was 82, so the formula would be:
=Return(82-50,.0523*100000, -100000,1) -> 3.8%

The LE+5 and LE-5 columns add or subtract 5 to the first parameter, for example:
=Return(5+82-50,.0523*100000, -100000,1) ->4.3%

Here's the update table (now matches whitecoatinvestor):

Code: Select all

Age   Payment	LE	Payment	Return	LE+5	LE-5
50	5.23%	82	167360	3.8%	4.3%	2.9%
55	5.68%	82	153360	3.7%	4.5%	2.2%
60	6.21%	83	142830	3.5%	4.7%	1.3%
65	6.95%	84	132050	3.3%	5.1%	-0.4%
70	7.96%	85	119400	2.7%	5.5%	-4.7%
75	9.43%	86	103730	0.7%	6.2%	-18.4%
80	11.66%	88	93280	-1.9%	7.9%	-56.5%
85	14.87%	91	89220	-4.3%	11.7%	N/A
90	19.70%	94	78800	-13.9%	18.0%	N/A
Finally, here's a redo of the table using monthly payments instead of annual payments using
=RATE((LE-Age)*12,(100000*payment_percent)/12,-100000, 0,1)*12

This may be the most appropriate way to model it, although I'm probably splitting hairs.

Code: Select all

Age   Payment	LE	Payment	Return	LE+5	LE-5
50	5.23%	82	167360	3.6%	4.1%	2.7%
55	5.68%	82	153360	3.4%	4.2%	2.1%
60	6.21%	83	142830	3.3%	4.4%	1.3%
65	6.95%	84	132050	3.1%	4.7%	-0.4%
70	7.96%	85	119400	2.5%	5.1%	-4.4%
75	9.43%	86	103730	0.7%	5.6%	-17.6%
80	11.66%	88	93280	-1.7%	7.0%	-60.7%
85	14.87%	91	89220	-3.8%	10.0%	N/A
90	19.70%	94	78800	-11.6%	14.5%	N/A
Thanks for all these calcs. I also spot-checked a few of the numbers. The IRR function is helpful as well.

I suspect that White Coat investor has used the standard life table. Whereas life insurance companies actually use a different table (with more longevity built in) to price their annuity products.
Keep calm and Boglehead on. KCBO.

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by ObliviousInvestor » Sun Oct 29, 2017 5:46 pm

Thanks for posting the slides, LadyGeek.

To provide some context for anybody who wasn't there, Mel provided a broad overview of the industry, including conflicts of interest that may influence people recommending an annuity to you, state guaranty associations, and other similar topics. The first 16 slides are Mel's.

My part of the presentation (beginning with slide 17, headed "fixed lifetime single premium immediate annuity") was basically just an explanation of a few types of annuities that people are likely to encounter -- how they work and their pros and cons.
Mike Piper, author/blogger

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Re: Post tefra cost basis

Post by HueyLD » Sun Oct 29, 2017 5:54 pm

sambb wrote:
Sun Oct 29, 2017 9:27 am
If a variable annuity was transferred to Vanguard, is the following correct for taxation:
Lets say I withdraw early, before ager 59.5

Vanguard lists the POST TEFRA COST BASIS as $1000
The annuity value is $2000
Hence the earnings are $1000
I would owe my AGI rate on the $1000 PLUS and additional 10%.

But then, i can use the funds free and clear, correct?

What sort of tax form does vanguard send for this at the end of the year?
(1). Yes on taxes.

(2). Yes, the money, net of taxes and penalty, is yours and you can spend or invest it as you see fit.

(3). 1099-R.

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by Levett » Sun Oct 29, 2017 6:56 pm

I don't see any citations re the title (perhaps they exist somewhere), but the title has been used before and deserves some form of acknowledgment:

e.g., https://www.forbes.com/sites/feeonlypla ... 17e4067990

Further, I regret the co-authors pass by TIAA (a rare "participating annuity"), as in many cases (mine included) TIAA can be a great deal for participants who have built up "vintages."

YMMV.

Lev

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by LadyGeek » Sun Oct 29, 2017 7:17 pm

I'm not a lawyer, but after The Good, the Bad and the Ugly movie was released in 1966, you can find the title in common use. Check this Google Search.
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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by CWRadio » Wed Nov 01, 2017 11:31 am

Slide 17 had the following quot:
Notes:
Taylor on Wed 10/11/17: “My wife and I purchased a joint lifetime annuity (SPIA) about my age
80. We liked it so well we bought another a year later. With no more worry about running out
of money, we were able to start giving our heirs their inheritance while we are still alive.”


What other reasons would you buy a SPIA if your withdrawal rate in retirement is 2% or less? Thanks Paul

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by Lynette » Wed Nov 01, 2017 12:11 pm

If you are single and don't have family close-by or heirs who need the money, could be a reason. As one ages, cognitive ability may decline. I will likely buy an SPIA annuity in my eighties even if I don't need the money. It will be a type of protection against fraud.

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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by The Wizard » Wed Nov 01, 2017 4:57 pm

Levett wrote:
Sun Oct 29, 2017 6:56 pm

...Further, I regret the co-authors pass by TIAA (a rare "participating annuity"), as in many cases (mine included) TIAA can be a great deal for participants who have built up "vintages."

YMMV.

Lev
Right.
But there's at least two issues at play here, the main one being that TIAA tax deferred products aren't available to the general public. They are only available via certain employers.

And we can't really project how TIAA's Vintage System will work out twenty years from now for younger participants putting current contributions into Trad.

There are a number of TIAA-particular topics which are probably better dealt with on the other forum, not here...
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Re: 2017 Bogleheads Conference - Annuities: The Good, The Bad, and The Ugly

Post by The Wizard » Wed Nov 01, 2017 5:14 pm

CWRadio wrote:
Wed Nov 01, 2017 11:31 am

...What other reasons would you buy a SPIA if your withdrawal rate in retirement is 2% or less? Thanks Paul
When you get down to a withdrawal rate of 2% or less, you are dealing with reasonably Large Wealth, where annuities are a less useful tool.
Nonetheless, if I had $10M in financial assets at start of retirement, I could annuitize $2M at a 6.5% Payout Rate, thus generating $130,000/year in lifetime income and thus insulating my remaining $8M portfolio from any withdrawals at all, aside perhaps from RMDs.

Sadly, numbers of this magnitude aren't a problem that I personally will need to be concerned with...
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