Article on Deferred Annuities on HumbleDoller

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Small Law Survivor
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Article on Deferred Annuities on HumbleDoller

Post by Small Law Survivor » Wed Sep 25, 2019 7:20 am

A September 25, 2019 article by an actuary on HumbleDollar discusses how to mitigate the risks of living to very old age. One of these is a "deeply deferred annuity":
Yet another strategy might be to buy a deeply deferred annuity that doesn’t start payments until age 90. A 65-year-old man investing $100,000 today could receive approximately $65,000 of annual income for life starting at age 90.
This idea has always been intuitively appealing to me. I'll be 70 years old in a couple of years. My parents, grandparents and first-degree relatives all lived well into their 90s, and I'd like to reduce the financial risks of being 95 years old and having to rely solely on stocks/bonds.

Has anyone on Bogleheads actually pulled the trigger on this, or is too exotic for everyone here? Inquiring minds want to know.
68 yrs, semi-retired lawyer, 50/40/10 s/b/c, 70/30 dom/int'l. Plan: 4% WR until age 70, 3% after social security kicks in. Boglehead since day 1 (and M* Diehard before that) under various other names

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Re: Article on Deferred Annuities on HumbleDoller

Post by Dottie57 » Wed Sep 25, 2019 8:10 am

Small Law Survivor wrote:
Wed Sep 25, 2019 7:20 am
A September 25, 2019 article by an actuary on HumbleDollar discusses how to mitigate the risks of living to very old age. One of these is a "deeply deferred annuity":
Yet another strategy might be to buy a deeply deferred annuity that doesn’t start payments until age 90. A 65-year-old man investing $100,000 today could receive approximately $65,000 of annual income for life starting at age 90.
This idea has always been intuitively appealing to me. I'll be 70 years old in a couple of years. My parents, grandparents and first-degree relatives all lived well into their 90s, and I'd like to reduce the financial risks of being 95 years old and having to rely solely on stocks/bonds.

Has anyone on Bogleheads actually pulled the trigger on this, or is too exotic for everyone here? Inquiring minds want to know.
Yes I’ve thought of deferred annuities. But I want to start it before 90. Probably age 80 for me. I just can’t pull the trigger.

wolf359
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Re: Article on Deferred Annuities on HumbleDoller

Post by wolf359 » Wed Sep 25, 2019 8:18 am

Small Law Survivor wrote:
Wed Sep 25, 2019 7:20 am
A September 25, 2019 article by an actuary on HumbleDollar discusses how to mitigate the risks of living to very old age. One of these is a "deeply deferred annuity":
Yet another strategy might be to buy a deeply deferred annuity that doesn’t start payments until age 90. A 65-year-old man investing $100,000 today could receive approximately $65,000 of annual income for life starting at age 90.
This idea has always been intuitively appealing to me. I'll be 70 years old in a couple of years. My parents, grandparents and first-degree relatives all lived well into their 90s, and I'd like to reduce the financial risks of being 95 years old and having to rely solely on stocks/bonds.

Has anyone on Bogleheads actually pulled the trigger on this, or is too exotic for everyone here? Inquiring minds want to know.
I am not even close to being old enough to execute on this strategy, but I currently intend to use a QLAC annuity in this fashion. A QLAC is when you convert part of your IRA to a specially designated income annuity, removing it from your RMD requirements. You can defer to 85, and you can get a rider that refunds the purchase price to your estate should you not live to 85. There is a limit to the size of the QLAC, which also falls under the state guaranty association limits for most states (maybe all states -- I haven't checked.)

The cheapest annuity is waiting to claim Social Security until age 70.
Around 2033 or so Social Security might get reduced. A QLAC deferred annuity will help offset that decrease if you are treating SS as longevity insurance.

Deferred annuities are not exotic. Some people don't like annuities in any form. However Single Premium Immediate Annuities (SPIAs) and deferred income annuities (essentially SPIAs that are deferred) are included in the financial tools discussed at length in the main Bogleheads book, the Bogleheads retirement book, and in the wiki. If you have questions, there are experts here who will weigh in. And I believe Taylor is very happy with his annuity experience (but I'm sure he will chime in himself.)

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Taylor Larimore
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Re: Article on Deferred Annuities on HumbleDoller

Post by Taylor Larimore » Wed Sep 25, 2019 10:17 am

And I believe Taylor is very happy with his annuity experience (but I'm sure he will chime in himself.
wolf359 is correct. I'll "chime in."

When my wife and I were about 80, we purchased two Single Premium Immediate Annuities (SPIAs) which guaranteed us a comfortable income for the rest of our lives. With our life income secured, we were able to start giving our children their inheritance (in the form of a monthly allowance) while we are alive and when they needed it most.

These were two of the best things we ever did: Purchasing the annuities which allowed us freedom from worry about running out of money and also to give our children their inheritance early.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I've been able to accumulate wealth despite giving, for about the past 20 years, one-half of my annual income to various philanthropic causes."
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Article on Deferred Annuities on HumbleDoller

Post by Horton » Wed Sep 25, 2019 10:49 am

🏃 since 2005

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Re: Article on Deferred Annuities on HumbleDoller

Post by Horton » Wed Sep 25, 2019 10:52 am

Small Law Survivor wrote:
Wed Sep 25, 2019 7:20 am
A September 25, 2019 article by an actuary on HumbleDollar discusses how to mitigate the risks of living to very old age. One of these is a "deeply deferred annuity":
Yet another strategy might be to buy a deeply deferred annuity that doesn’t start payments until age 90. A 65-year-old man investing $100,000 today could receive approximately $65,000 of annual income for life starting at age 90.
This idea has always been intuitively appealing to me. I'll be 70 years old in a couple of years. My parents, grandparents and first-degree relatives all lived well into their 90s, and I'd like to reduce the financial risks of being 95 years old and having to rely solely on stocks/bonds.

Has anyone on Bogleheads actually pulled the trigger on this, or is too exotic for everyone here? Inquiring minds want to know.
One thing to keep in mind is that you need to factor in inflation. If inflation were 2% between ages 65 and 90, then the $65,000 at age 90 would be worth approximately $40,000 in today’s dollars.
🏃 since 2005

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Re: Article on Deferred Annuities on HumbleDoller

Post by bhsince87 » Wed Sep 25, 2019 11:02 am

I don't understand the benefit of buying a deferred annuity versus just waiting and buying an immediate annuity later.

Is it just peace of mind?
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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Re: Article on Deferred Annuities on HumbleDoller

Post by Alaric » Wed Sep 25, 2019 11:18 am

bhsince87 wrote:
Wed Sep 25, 2019 11:02 am
I don't understand the benefit of buying a deferred annuity versus just waiting and buying an immediate annuity later.

Is it just peace of mind?
You get more longevity credits the further in advance you buy it. You are taking more of a risk that you will never live to collect on an annuity if you buy it 15 (or 25!) years in advance than if you buy it and soon / immediately start receiving the annuity payments, but correspondingly if you do survive, you will eventually receive a higher payout than if you buy an SPIA that starts paying out immediately. So for the risk-averse (with risk here meaning risk of outliving one's savings), it's better longevity insurance to buy it earlier.

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Re: Article on Deferred Annuities on HumbleDoller

Post by ResearchMed » Wed Sep 25, 2019 11:42 am

Alaric wrote:
Wed Sep 25, 2019 11:18 am
bhsince87 wrote:
Wed Sep 25, 2019 11:02 am
I don't understand the benefit of buying a deferred annuity versus just waiting and buying an immediate annuity later.

Is it just peace of mind?
You get more longevity credits the further in advance you buy it. You are taking more of a risk that you will never live to collect on an annuity if you buy it 15 (or 25!) years in advance than if you buy it and soon / immediately start receiving the annuity payments, but correspondingly if you do survive, you will eventually receive a higher payout than if you buy an SPIA that starts paying out immediately. So for the risk-averse (with risk here meaning risk of outliving one's savings), it's better longevity insurance to buy it earlier.
Another reason is that if you purchase a QLAC (a deferred annuity within an IRA), then that amount is deducted when calculating RMD's.

But about the "costs less now", it's complicated. If one purchases an SPIA later, for immediate life income, one would have had all those years for - hopefully - investment returns during those years.
But the "hopefully" is important... and that's part of the trade-off.

Another possibility is to start one SPIA upon retirement, and then over the years, in part to adjust for inflation, add smaller SPIAs every few years.

Many choices (as usual!).

RM
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Re: Article on Deferred Annuities on HumbleDoller

Post by vineviz » Wed Sep 25, 2019 11:47 am

Alaric wrote:
Wed Sep 25, 2019 11:18 am
bhsince87 wrote:
Wed Sep 25, 2019 11:02 am
I don't understand the benefit of buying a deferred annuity versus just waiting and buying an immediate annuity later.

Is it just peace of mind?
You get more longevity credits the further in advance you buy it. You are taking more of a risk that you will never live to collect on an annuity if you buy it 15 (or 25!) years in advance than if you buy it and soon / immediately start receiving the annuity payments, but correspondingly if you do survive, you will eventually receive a higher payout than if you buy an SPIA that starts paying out immediately. So for the risk-averse (with risk here meaning risk of outliving one's savings), it's better longevity insurance to buy it earlier.
I agree.

Another benefit of the deferred annuity is the ability to set up the entire retirement plan at the beginning of retirement.

For instance, a newly retired 65 year old might choose to construct a hybrid retirement plan consisting of a 24 year TIPS ladder plus a deferred annuity which starts at age 89, placing any excess capital in a "risky" portfolio like Vanguard LifeStrategy Moderate Growth Fund (VSMGX) or Vanguard Target Retirement 2035 Fund (VTTHX). Such a plan could be constructed to minimize, or least balance, a whole hosts of risks: interest rate risk, inflation risk, longevity risk, sequence of returns risk, cognitive decline risk, and so forth.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Article on Deferred Annuities on HumbleDoller

Post by Alaric » Wed Sep 25, 2019 12:12 pm

Yet another strategy might be to buy a deeply deferred annuity that doesn’t start payments until age 90. A 65-year-old man investing $100,000 today could receive approximately $65,000 of annual income for life starting at age 90.
That sounded surprisingly underwhelming to me. The 2016 SS period life table (why don't they update this more frequently?), indicates that for every 79,893 men who reach age 65, only 18,303 (22.9% of them) achieve age 90. Then at age 90, a male survivor has a further life expectancy of 4.08 years.

So tying up $100,000 of today's dollars for a 22.9% chance of receiving an expected $65,000 in 2044's dollars + $65,000 in each of 2045's, 2046's, and 2047's dollars, plus 0.08 * $65,000 in 2048's dollars (with a 77.1% chance of dying before age 90 and therefore receiving zero) doesn't seem remotely close to being actuarially fair, even making allowances for profit and administration. At a 2% annual discount rate, the PV of the expected payout on the $100,000 annuity is $35,923. At 1.5% it is $40,925, and at 1% it is $46,654. Even at 0%, not a remotely realistic discount rate an annuity provider would use internally, it is only $60,756.

Looking at higher discount rates - and over 25 to 30 year spans, rates have averaged over 2% - at 2.5% such an annuity would have a PV of only $31,554, and at 3%, only $27,735.

I am all in favor of longevity insurance - I plan to take SS at 70 - but the example provided in the HumbleDollar column, if it is realistic, makes this seem like a sucker bet. $100,000 today could be much better invested against tail-end risk.

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Re: Article on Deferred Annuities on HumbleDoller

Post by Stinky » Wed Sep 25, 2019 12:42 pm

Alaric wrote:
Wed Sep 25, 2019 12:12 pm
Yet another strategy might be to buy a deeply deferred annuity that doesn’t start payments until age 90. A 65-year-old man investing $100,000 today could receive approximately $65,000 of annual income for life starting at age 90.
That sounded surprisingly underwhelming to me. The 2016 SS period life table (why don't they update this more frequently?), indicates that for every 79,893 men who reach age 65, only 18,303 (22.9% of them) achieve age 90. Then at age 90, a male survivor has a further life expectancy of 4.08 years.

So tying up $100,000 of today's dollars for a 22.9% chance of receiving an expected $65,000 in 2044's dollars + $65,000 in each of 2045's, 2046's, and 2047's dollars, plus 0.08 * $65,000 in 2048's dollars (with a 77.1% chance of dying before age 90 and therefore receiving zero) doesn't seem remotely close to being actuarially fair, even making allowances for profit and administration. At a 2% annual discount rate, the PV of the expected payout on the $100,000 annuity is $35,923. At 1.5% it is $40,925, and at 1% it is $46,654. Even at 0%, not a remotely realistic discount rate an annuity provider would use internally, it is only $60,756.

Looking at higher discount rates - and over 25 to 30 year spans, rates have averaged over 2% - at 2.5% such an annuity would have a PV of only $31,554, and at 3%, only $27,735.

I am all in favor of longevity insurance - I plan to take SS at 70 - but the example provided in the HumbleDollar column, if it is realistic, makes this seem like a sucker bet. $100,000 today could be much better invested against tail-end risk.
Your logic sounds reasonable.

My former life insurance company employer did not sell deferred income annuities, so I can't comment from a place of deep product knowledge. But I can suggest several things about your analysis:

1. People who are buying DIAs are doing a lot of "self-selection". No 65-year-old who has any hint of sickness is going to buy an annuity that starts payments at age 90.

2. Because of (1) above, the mortality table that was used (the 2016 Social Security table) wouldn't represent the population that would buy this product. The Social Security mortality tables are for a full population, not just the super-select people who would buy the annuity.

I really doubt that many folks, even the super-healthy, would buy a 25-year DIA. I expect that the market is something more like a 10-year deferral; that is, buy an annuity at age 70 that will start paying at age 80. Or maybe a 5-year deferral.
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Re: Article on Deferred Annuities on HumbleDoller

Post by grok87 » Wed Sep 25, 2019 12:51 pm

Horton wrote:
Wed Sep 25, 2019 10:52 am
Small Law Survivor wrote:
Wed Sep 25, 2019 7:20 am
A September 25, 2019 article by an actuary on HumbleDollar discusses how to mitigate the risks of living to very old age. One of these is a "deeply deferred annuity":
Yet another strategy might be to buy a deeply deferred annuity that doesn’t start payments until age 90. A 65-year-old man investing $100,000 today could receive approximately $65,000 of annual income for life starting at age 90.
This idea has always been intuitively appealing to me. I'll be 70 years old in a couple of years. My parents, grandparents and first-degree relatives all lived well into their 90s, and I'd like to reduce the financial risks of being 95 years old and having to rely solely on stocks/bonds.

Has anyone on Bogleheads actually pulled the trigger on this, or is too exotic for everyone here? Inquiring minds want to know.
One thing to keep in mind is that you need to factor in inflation. If inflation were 2% between ages 65 and 90, then the $65,000 at age 90 would be worth approximately $40,000 in today’s dollars.
EXActly.
How come there are hardly any inflation linked annuity products? AFAIK there is only one provider- northwestern mutual.
RIP Mr. Bogle.

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Re: Article on Deferred Annuities on HumbleDoller

Post by CRTR » Wed Sep 25, 2019 12:55 pm

There's been a lot written about this and the math is pretty compelling. The overwhelming majority of aritcles and white papers I've ready (including the one you cite), all support the idea. Here's a couple more articles for your enjoyment:

https://www.kitces.com/blog/calculating ... d-returns/
https://www.kitces.com/blog/understandi ... nt-income/
https://www.kitces.com/blog/understandi ... inability/

On the other hand, the case for a QLAC is not nearly as clear cut. The devil is the details specific to one's situation.

https://www.kitces.com/blog/why-a-qlac- ... bligation/

CRTR
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Re: Article on Deferred Annuities on HumbleDoller

Post by CRTR » Wed Sep 25, 2019 12:57 pm

There's been a lot written about this and the math is pretty compelling. The overwhelming majority of aritcles and white papers I've ready (including the one you cite), all support the idea. Here's a couple more articles for your enjoyment:

https://www.kitces.com/blog/calculating ... d-returns/
https://www.kitces.com/blog/understandi ... nt-income/
https://www.kitces.com/blog/understandi ... inability/

On the other hand, the case for a QLAC is not nearly as clear cut, especially if your primary goal is to reduce RMD exposure. The devil is the details specific to one's situation.

https://www.kitces.com/blog/why-a-qlac- ... bligation/

afan
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Re: Article on Deferred Annuities on HumbleDoller

Post by afan » Wed Sep 25, 2019 5:03 pm

The idea might work for a very narrow subset of the population. They need enough money to put it away for many years with a high probability of never getting anything back. But also little enough money to have a reasonable concern about running out.

They then need to estimate their personal life expectancy, adjusted as best they can for current health and family history. From there it is math to decide whether a delayed annuity is a good deal. To benefit you have to live longer than the insurance company expects for the people who buy the product. You will not know how long that is. The insurance company will have a great idea how long that will be on average.

The example given does not sound appealing for the reasons pointed out. Maybe if you are an age group competitive marathon runner at 65, as are you, still living, parents aunts and uncles, as were you grandparents, and in perfect health you god reasonably expect a much longer than average life. None of that will protect you from cancer or getting hit by a bus.
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