Allan Roth doesn't like single premium annuities

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vineviz
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Re: Allan Roth doesn't like single premium annuities

Post by vineviz » Wed Oct 10, 2018 7:07 am

willthrill81 wrote:
Tue Oct 09, 2018 9:44 pm
I think that there is a segment of retirees for whom a SPIA may make sense. As longinvest has pointed out, it probably doesn't make sense for retirees with tiny portfolios to do anything other than hold their capital for the most essential spending needs, doing their best to make ends meet on other income streams like SS.
I tend to agree that retirees with either very small or very large retirement portfolios will likely not find an SPIA to be a tool that they need to use. I certainly don't expect to use one in MY retirement because we've been fortunate so far to build a portfolio that (it seems) will more than meet our desired level of retirement spending.

That said, there is a large slice of America in the middle, who have a retirement portfolio somewhere between nothing and enough for whom an SPIA should at least be considered as a rational and possibly even wise part of their retirement plan. Especially since, for the majority of Americans, the number one goal in their retirement planning is to provide "guaranteed money every month to cover [their] living costs in retirement". (source).

In fact, according to a TIAA survey, 62% of employees would prefer to receive $2,700 a month for life rather than a $500,000 lump sum at retirement. Arguing that investors value the wrong thing only takes you so far if what we care about is meeting their ACTUAL needs instead of the needs we WISH they had.
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JoMoney
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Re: Allan Roth doesn't like single premium annuities

Post by JoMoney » Wed Oct 10, 2018 7:26 am

If you're drawing down on a portfolio of bonds/CDs, a SPIA can offer a fair alternative. I still fail to see anything being suggested that would allow someone to safely withdraw more from their portfolio.
Is there some option that would be better? Is it being suggested that rather than bonds, it should be compared to stocks?
Or that life expectancy should be ignored and one can go ahead and withdraw more (I suppose if you run out of money and can't eat the living too long problem fixes itself) ?
Last edited by JoMoney on Wed Oct 10, 2018 7:27 am, edited 1 time in total.
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Re: Allan Roth doesn't like single premium annuities

Post by longinvest » Wed Oct 10, 2018 7:27 am

nedsaid wrote:
Wed Oct 10, 2018 1:02 am
You could buy an annuity with inflation protection but this is at the price of much lower monthly payments. [...] If the purchasing power of an annuity decreases too much over time, just buy another one when you are older.
To dampen the financial risk of living to old age, an 80 years old single male could buy a 3%-indexed $711/month SPIA for $100,000 (see my earlier post for details).

If he chooses, instead, to buy a fixed $711/month SPIA, it will cost him ($711/$959 X $100,000) = $74,140. He'll be left with $25,860 that he can invest.

15 years later, our retiree has kept active and in good health, but he is somewhat weaker. In the last 15 years, inflation has averaged 3% annually. Over time, the $711 fixed payment has lost 36% of its purchase power. To avoid struggling financially, the single male has simply taken increasing withdrawals from the invested residual $25,860 to compensate the loss in purchase power. But, now, seeing that he might possibly survive to age 100 (or maybe a few years beyond, which not unheard of even if not frequent), he decides to use his residual portfolio (assuming it didn't recently burn in a stock market crash*) and go and buy another fixed SPIA... Unfortunately, he discovers that few insurance companies want to sell SPIAs to males of 95 years of age.

* Had the portfolio been invested in bonds, it would be depleted by now. I'll leave the calculation exercise to readers.

Trying to buy a SPIA for a single male of age 95 is like having a long record of being responsible for car accidents and seeking to buy car insurance. It might still possible, but the cost is prohibitive.

Laddering fixed SPIAs, starting at age 80 when SPIAs become financially efficient, doesn't work to fight inflation for those who survive to old age.
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wolf359
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Re: Allan Roth doesn't like single premium annuities

Post by wolf359 » Wed Oct 10, 2018 7:44 am

Allan Roth wrote:
Tue Oct 09, 2018 4:01 pm
I'm not saying they are "horrible products." I'm saying 1) payments aren't income, 2) they expose another risk - inflation 3) There are better ways of addressing longevity risk.
Allan, that was a very insightful article. Thank you for writing it. It did give me the additional perspective of considering SPIAs in terms of their breakeven point. I'm personally years away from ever buying a SPIA, but I've always viewed them as a potentially useful tool in the right circumstances.

If I understood your article correctly, its point was specifically that one should not have the mindset of "investing for income," that is, buying products like SPIAs for the sole purpose of buying income.

I had always viewed SPIAs more of a longevity insurance product. Insurance is used to protect against low-probability but costly events. In this case, an income annuity provides insurance against outliving assets and not having sufficient remaining income sources. I intend to use a total return approach on an investment portfolio as my primary retirement funding, but am wary of sequence of returns risk.

From this perspective, I also intend to delay social security to 70, as the cheapest longevity insurance I could buy. I would also consider QLACs or SPIAs for any remaining gaps, to be purchased as I aged and identified those gaps (no need to buy it if my health declines). I read your other article with interest, but I do not have access to TIAA or a pension.

1) payments aren't income.
To me, this is a distinction without a difference. A SPIA will give me a monthly payment for life. If that's what I need to live on, it is irrelevant if I call it income, a return of capital, or an insurance payment.

2) they expose another risk - inflation.
The inflation risk needs to be addressed separately by equity assets, real estate, or other means (I'm wrestling with how to address that risk as well.) SPIAs and most pensions are similar in that they generally are not inflation adjusted.

3) There are better ways of addressing longevity risk.
Delaying Social Security is the technique that is available to most people (provided that they are Bogleheads and develop the assets necessary to use it). However, I'm planning for the contingency that the current political gridlock continues, and that both Social Security and Medicare continue on the paths that they are currently on. In such a case, Social Security takes a haircut around 2030, and Medicare payments may potentially equal what Social Security pays out (cancelling it out.) Thus, I'm anticipating that Social Security as longevity insurance may require a supplement. The only other options I see (besides continuing to work, and continuing to save like crazy) is a QLAC and a SPIA. If something happens and I'm unable to work, then I hit retirement with whatever assets I've managed to accumulate at that point.

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Re: Allan Roth doesn't like single premium annuities

Post by hirlaw » Wed Oct 10, 2018 8:49 am

The rates are linked to interest rates, so if you were purchasing a new annuity, yes - it would be higher than the recent past... but at that point you purchase one, the payouts are locked in, so an old SPIA already purchased wouldn't change.
https://www.immediateannuities.com/annuity-trends/
Thanks. That's what I was looking for.

I understand that the payouts are locked in once purchased. My concern is another point raised in Alan Roth's article: That if purchased now, the annuitant is locking in payouts at the present relatively low interest rates. Of course, we don't know where interest rates are headed, but given the Fed's inclination to continue to raise rates, some may feel that now is not the ideal time to lock in.

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JoMoney
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Re: Allan Roth doesn't like single premium annuities

Post by JoMoney » Wed Oct 10, 2018 9:01 am

hirlaw wrote:
Wed Oct 10, 2018 8:49 am
The rates are linked to interest rates, so if you were purchasing a new annuity, yes - it would be higher than the recent past... but at that point you purchase one, the payouts are locked in, so an old SPIA already purchased wouldn't change.
https://www.immediateannuities.com/annuity-trends/
Thanks. That's what I was looking for.

I understand that the payouts are locked in once purchased. My concern is another point raised in Alan Roth's article: That if purchased now, the annuitant is locking in payouts at the present relatively low interest rates. Of course, we don't know where interest rates are headed, but given the Fed's inclination to continue to raise rates, some may feel that now is not the ideal time to lock in.
Current interest rates are a concern, thankfully I've got plenty of time before I'll be making any decisions like that myself.
I do take issue / question what is being suggested as an alternative for someone who is looking at this today. If this is money someone already has in bonds/CDs/fixed income that they're taking withdrawals from, they're already exposed to the problem of low interest rates. Rates may go up in the future, but that will impact their current fixed income investments commensurately anyway...
The suggestion seems to be "don't draw on your money now, get a job instead." :confused
Last edited by JoMoney on Wed Oct 10, 2018 9:04 am, edited 1 time in total.
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Re: Allan Roth doesn't like single premium annuities

Post by beardsworth » Wed Oct 10, 2018 9:04 am

CuriousTacos wrote:
Mon Oct 08, 2018 3:17 pm
But I don't see cognitive decline mentioned in this thread, and that's what tips the scales for me. While I may be confident that I can manage my investments in a way that is superior to an SPIA, I may eventually reach a point where I can't even manage the simplest of portfolios (or worse, I make some very poor decisions or get taken advantage of).

So when I approach an age where mental decline is more likely (or if I see any signs of early decline), I think an SPIA (for some of my $) would attractive.
This is a very persuasive argument, and, in our own household, especially to my wife.

Although we're both in good health, family history (which is, of course, just one longevity factor among many) suggests that she'll substantially outlive me. And both her mother and grandmother developed dementia, although the first signs didn't appear until their early 80s.

My wife always earned more than I did, but I've always been our Designated Hunter-Gatherer for financial information, and the one who "watches" our finances and retirement holdings.

We talk about our finances at least every week, and she reads every piece of financial information I call to her attention, so that if/when I die before her, she will certainly not be lacking knowledge of how things work or what to do in continuing our financial game plan.

But she's very attracted to the "lifetime payout" and "autopilot" characteristics of annuities, i.e., something which will not need to be "managed," especially if there comes a point in life where her actual mental capacity to do any "managing" is slipping away. And, of course, there's always the chance that we'll be surprised if I turn out to be the actual surviving spouse and end up facing a similar cognitive future. So annuities appeal to me, too.
Last edited by beardsworth on Wed Oct 10, 2018 9:57 am, edited 1 time in total.

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Re: Allan Roth doesn't like single premium annuities

Post by Dandy » Wed Oct 10, 2018 9:11 am

Annuity offering insurance companies usually have to invest in longer term bonds to match their liabilities. Those rates haven't been rising as much as shorter term rates. I wouldn't be too confident yet that current rising rate environment is going to bring much higher annuity payout rates soon. Of course from a marketing standpoint there might be some noise about "the new amazing new payouts we are offering"

As was pointed out somewhere in this amazing post - rising interest rates while good for a higher payout usually means higher inflation is present or lurking.

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Re: Allan Roth doesn't like single premium annuities

Post by CWRadio » Wed Oct 10, 2018 9:12 am

CuriousTacos wrote:
Mon Oct 08, 2018 3:17 pm
I see both sides of the argument about whether an SPIA is worth it for the longevity insurance. And some of us may have large enough portfolios that this isn't really a concern (a 3% withdrawal rate is pretty safe forever).

But I don't see cognitive decline mentioned in this thread, and that's what tips the scales for me. While I may be confident that I can manage my investments in a way that is superior to an SPIA, I may eventually reach a point where I can't even manage the simplest of portfolios (or worse, I make some very poor decisions or get taken advantage of).

So when I approach an age where mental decline is more likely (or if I see any signs of early decline), I think an SPIA (for some of my $) would attractive.
Interesting book on the above subject: What to Do When I Get Stupid by Lewis Mandell
https://www.amazon.com/dp/B00EDWTFU2/?c ... _lig_dp_it
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Re: Allan Roth doesn't like single premium annuities

Post by TN_Boy » Wed Oct 10, 2018 9:20 am

nedsaid wrote:
Wed Oct 10, 2018 1:02 am

Bunch of stuff snipped ...

My positive comments about Single Premium Immediate Annuities is not a blanket endorsement for everyone to rush out and buy one tomorrow. It is an irrevocable decision when you buy one and it is something to soberly think over before buying one. But is amazes me that few folks levy this kind of criticism towards pensions, which are much the same thing. Indeed, we bemoan the demise of the pensions around here.

Stuff snipped ...
So I posted this before, and you didn't respond, but I'll post it again, because I'm interested in your response. I think the difference in payout and how the payments are funded make pensions less like SPIAs than you believe they are. They are *similar* in that they pay a set amount per month, but the differences are important. For my spouses government pension, the funding is based upon both her contributions and the government contributions. In an SPIA, it's all your money. And with current interest rates, the payouts are (relatively) unattractive.
SPIAs often make sense. But why wouldn't people react differently to SS/pensions and SPIAs? Pension and SS benefits show up "magically" after many years of payroll deductions. You certainly notice the deductions, but they are a relatively small (for most people) reduction in your take-home pay. And certainly the SS deduction, at least, is not optional. The deductions are a defacto part of your budget.

But to get a decent sized payment from an SPIA, I am going to have to write somebody a six figure check. That's a big check. And that money is gone forever (for the simplest SPIAs), whether I die the next month (at which point I wouldn't care) or whether I have a financial crisis of some sort and would like that money back to be spent as a lump sum. Plus, most SPIAs pay out in nominal dollars (inflation adjusted ones pay out quite a bit less early, right?) and so will be worth less as time goes on (unlike SS).

And since you need a large check to get a decent sized payment, I don't see an SPIA as useful to anybody that doesn't have a fairly big investment portfolio. If you've only saved 50k or 100k, you probably don't want to take money out of those savings to get an SPIA.

And finally you have other factors, like if the insurer you buy from goes bankrupt, how will that play out, etc.
And in another post I gave some specific numbers:
I just tried a quick quote at immediate annuities.com. I told it I was 65 and my spouse 61 (which is false, but a reasonable situation). For $200k now, in my state they say an "average" quote will pay$ 900 a month with survivor benefits. So if I had $400,000 saved, I'm writing them a check for 1/2 my liquid assets to get under $11,000 a year. Okay, that IS more than 4% a year. And no worries about market fluctuation. But still. That's a big percentage of assets to hand over. The math does get better if you get an annuity when older ... then again, you could pull more than 4% also. Add in the way legacies might be affected (not a factor for me either) and well, SPIAs are a bit of a hard sell.

The situation where an SPIA would look good to me would be if somebody had 2 or 3M in invest-able assets, and interest rates were high ... handing somebody $500k might feel okay -- you still have a lot of assets for emergencies, legacies, etc. Though in our situation, we have reasonable assets, then inflation adjusted SS kicks in to cover a decent fraction of our living expenses.
My main point is that people are not bashing pensions because there are key differences between many (most?) pensions and SPIAs:
1) pensions often better funded (i.e. employer contributions, especially for government pensions), and
2) the funding of the pension occurs over decades, not all at once

Put another way, if pensions were funded like SPIA, you would get a lot more pension bashing on this board.

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Re: Allan Roth doesn't like single premium annuities

Post by PaulF » Wed Oct 10, 2018 9:47 am

Hmmm, people generally don't know when they will die. Therefore, they need to acquire a large enough nest egg to see them through until the upper extreme of their possible longevity (which will require years of additional work). But, by definition, this means that many people will die with significant unexpended assets.

If only there were a way for people to pool their longevity risks, I don't know, maybe through some sort of insurance scheme....

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Re: Allan Roth doesn't like single premium annuities

Post by nedsaid » Wed Oct 10, 2018 10:30 am

TN_Boy wrote:
Wed Oct 10, 2018 9:20 am

My main point is that people are not bashing pensions because there are key differences between many (most?) pensions and SPIAs:
1) pensions often better funded (i.e. employer contributions, especially for government pensions), and
2) the funding of the pension occurs over decades, not all at once

Put another way, if pensions were funded like SPIA, you would get a lot more pension bashing on this board.
Ah, many pensions are not better funded. I think Illinois pensions are funded at about 50%. My own state has a funding ratio of about 80%. There are a lot of government pensions out there that don't have enough assets to pay future liabilities. When you buy an SPIA, it is 100% funded. Really doesn't matter where the money comes from, on an employer match for a pension, it is still a part of your compensation package, in that sense the funding still comes 100% from you.

Yes funding for pensions occurs over decades, that is a big part of their problem. Government workers have been promised generous benefits with the knowledge that the bill won't come due for years, which is part of what created the problem in the first place.
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Re: Allan Roth doesn't like single premium annuities

Post by willthrill81 » Wed Oct 10, 2018 10:38 am

dodecahedron wrote:
Tue Oct 09, 2018 10:12 pm
My vision would be this: the Bogle-inspired annuity for each age-cohort would be invested very simply and transparently in safe fixed income instruments of the sort Bogleheads like (e.g., intermediate term Treasuries). Each living subscriber would get a proportionate share of the value of the investment pool each year. As folks in the cohort die off, the remaining subscribers would automatically get larger payments according to some fairly simple and transparent formula. Everything should be kept simple and transparent, to keep costs and risks down.
While they are not transparent and they are making some profit, insurance companies are some of the most regulated institutions on the planet (i.e. how much benefit would transparency to customers actually provide), and longinvest has pointed out that insurance companies are making perhaps a 5% profit on the premiums paid for SPIAs. I don't see a Bogle-type person being able to do too much to improve the situation.

To be honest, the only criticism of Roth's or anyone else's that can genuinely be levied against SPIA providers is the small profit that they make, and being a card carrying capitalist, I have no problem with profit in a competitive environment. By their very nature, insurance companies don't have many options for investing premiums, and the actuarial tables they use seem fair for the populace that is buying this product.
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Re: Allan Roth doesn't like single premium annuities

Post by TN_Boy » Wed Oct 10, 2018 11:31 am

nedsaid wrote:
Wed Oct 10, 2018 10:30 am
TN_Boy wrote:
Wed Oct 10, 2018 9:20 am

My main point is that people are not bashing pensions because there are key differences between many (most?) pensions and SPIAs:
1) pensions often better funded (i.e. employer contributions, especially for government pensions), and
2) the funding of the pension occurs over decades, not all at once

Put another way, if pensions were funded like SPIA, you would get a lot more pension bashing on this board.
Ah, many pensions are not better funded. I think Illinois pensions are funded at about 50%. My own state has a funding ratio of about 80%. There are a lot of government pensions out there that don't have enough assets to pay future liabilities. When you buy an SPIA, it is 100% funded. Really doesn't matter where the money comes from, on an employer match for a pension, it is still a part of your compensation package, in that sense the funding still comes 100% from you.

Yes funding for pensions occurs over decades, that is a big part of their problem. Government workers have been promised generous benefits with the knowledge that the bill won't come due for years, which is part of what created the problem in the first place.
I think we are destined to disagree on this :happy. I mean, my spouse has a pension, and it is sure obvious to me that an SPIA taken now is not equivalent to her pension when you look at contributions versus payout*. I gave an example with numbers in the part of my post you omitted; the SPIA numbers were far from compelling.

I'll try a third way of saying it. Bogleheads are fond of pensions which payout the defined benefit through the life of the pension holder. It is my belief bogleheads dislike pensions which fail to meet their commitments :oops: For pensions which meet their obligations, the payout is often based upon both employee and employer contributions over many years. Thus the payout is higher than one based upon employee contributions alone (ie. like an SPIA).

To your comment about pensions which are not funded adequately (such as those in Illinois, and many municipalities) yes of course that is a problem. But I assumed you were not saying that SPIAs were the same as pensions which are in trouble. The fact that many pensions are in trouble is interesting, but irrelevant to why bogleheads "like" pensions but might not like an SPIA.

* It's not one of those crazy pensions where she worked like 20 years and retired with a pension equal to her salary, and it is reasonably well funded.

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Re: Allan Roth doesn't like single premium annuities

Post by bsteiner » Wed Oct 10, 2018 11:38 am

willthrill81 wrote:
Wed Oct 10, 2018 10:38 am
... longinvest has pointed out that insurance companies are making perhaps a 5% profit on the premiums paid for SPIAs. ...
While they serve a purpose, in addition to the 5% profit (if that's what the profit is), there are expenses in running the insurance company and paying the agents. Also, annuities are inflexible and turn all of the investment income and gains into ordinary income.

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Re: Allan Roth doesn't like single premium annuities

Post by CULater » Wed Oct 10, 2018 11:43 am

I recall that several years ago, state employees in one state (maybe it was Florida) were given a choice of taking their retirement pensions as a lump sum instead of an annuity and overwhelmingly chose the lump sum option. Bird in hand seems better than possible future birds?
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Re: Allan Roth doesn't like single premium annuities

Post by longinvest » Wed Oct 10, 2018 11:48 am

bsteiner wrote:
Wed Oct 10, 2018 11:38 am
willthrill81 wrote:
Wed Oct 10, 2018 10:38 am
... longinvest has pointed out that insurance companies are making perhaps a 5% profit on the premiums paid for SPIAs. ...
While they serve a purpose, in addition to the 5% profit (if that's what the profit is), there are expenses in running the insurance company and paying the agents. Also, annuities are inflexible and turn all of the investment income and gains into ordinary income.
Here's what I wrote:
longinvest wrote:
Tue Oct 09, 2018 5:38 pm
[... supporting calculations ...]
I think that it's safe to claim that the insurance company charges probably around 5% in fees as part of the pricing of its annuity, to cover administration, agent commission, and profits.
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Re: Allan Roth doesn't like single premium annuities

Post by nedsaid » Wed Oct 10, 2018 11:54 am

TN_Boy wrote:
Wed Oct 10, 2018 11:31 am
nedsaid wrote:
Wed Oct 10, 2018 10:30 am
TN_Boy wrote:
Wed Oct 10, 2018 9:20 am

My main point is that people are not bashing pensions because there are key differences between many (most?) pensions and SPIAs:
1) pensions often better funded (i.e. employer contributions, especially for government pensions), and
2) the funding of the pension occurs over decades, not all at once

Put another way, if pensions were funded like SPIA, you would get a lot more pension bashing on this board.
Ah, many pensions are not better funded. I think Illinois pensions are funded at about 50%. My own state has a funding ratio of about 80%. There are a lot of government pensions out there that don't have enough assets to pay future liabilities. When you buy an SPIA, it is 100% funded. Really doesn't matter where the money comes from, on an employer match for a pension, it is still a part of your compensation package, in that sense the funding still comes 100% from you.

Yes funding for pensions occurs over decades, that is a big part of their problem. Government workers have been promised generous benefits with the knowledge that the bill won't come due for years, which is part of what created the problem in the first place.
I think we are destined to disagree on this :happy. I mean, my spouse has a pension, and it is sure obvious to me that an SPIA taken now is not equivalent to her pension when you look at contributions versus payout*. I gave an example with numbers in the part of my post you omitted; the SPIA numbers were far from compelling.

I'll try a third way of saying it. Bogleheads are fond of pensions which payout the defined benefit through the life of the pension holder. It is my belief bogleheads dislike pensions which fail to meet their commitments :oops: For pensions which meet their obligations, the payout is often based upon both employee and employer contributions over many years. Thus the payout is higher than one based upon employee contributions alone (ie. like an SPIA).

To your comment about pensions which are not funded adequately (such as those in Illinois, and many municipalities) yes of course that is a problem. But I assumed you were not saying that SPIAs were the same as pensions which are in trouble. The fact that many pensions are in trouble is interesting, but irrelevant to why bogleheads "like" pensions but might not like an SPIA.

* It's not one of those crazy pensions where she worked like 20 years and retired with a pension equal to her salary, and it is reasonably well funded.
How many times do I have to say this? It isn't surprising that pensions pay out better than SPIAs because consumers buy SPIAs one at a time where a pension is the equivalent of Costco, a pension can buy in bulk. This is why when faced with a choice between a pension and a lump sum, I most often advise that an employee take the pension, they won't get a better deal on their own.
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Re: Allan Roth doesn't like single premium annuities

Post by The Wizard » Wed Oct 10, 2018 11:56 am

TN_Boy wrote:
Wed Oct 10, 2018 9:20 am
...I think the difference in payout and how the payments are funded make pensions less like SPIAs than you believe they are. They are *similar* in that they pay a set amount per month, but the differences are important. For my spouses government pension, the funding is based upon both her contributions and the government contributions. In an SPIA, it's all your money...
For my 40 years of employment, I was required to contribute 5% of my salary to my Defined Contribution plan at TIAA. (I actually contributed way more than this 5% minimum, especially in later years.)

But my employer contributed 10% of my salary to a parallel DC plan for those 40 years. I became 100% vested in those employer contributions after five years of employment.

So when I annuitized a portion of my combined accumulation for lifetime income at start of retirement, was it "my" money that got used or was it my employer's money.
Does it really matter?
Attempted new signature...

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Re: Allan Roth doesn't like single premium annuities

Post by nedsaid » Wed Oct 10, 2018 11:59 am

The Wizard wrote:
Wed Oct 10, 2018 11:56 am
TN_Boy wrote:
Wed Oct 10, 2018 9:20 am
...I think the difference in payout and how the payments are funded make pensions less like SPIAs than you believe they are. They are *similar* in that they pay a set amount per month, but the differences are important. For my spouses government pension, the funding is based upon both her contributions and the government contributions. In an SPIA, it's all your money...
For my 40 years of employment, I was required to contribute 5% of my salary to my Defined Contribution plan at TIAA. (I actually contributed way more than this 5% minimum, especially in later years.)

But my employer contributed 10% of my salary to a parallel DC plan for those 40 years. I became 100% vested in those employer contributions after five years of employment.

So when I annuitized a portion of my combined accumulation for lifetime income at start of retirement, was it "my" money that got used or was it my employer's money.
Does it really matter?
The 10% employer contribution to the pension was part of the compensation package, so in a real sense, 100% of the contributions came from the employee. It would be like saying that wages are employer contributions. Wages and benefits are part of the total compensation package, including employer matches to retirement plans. It isn't money that just drops from heaven.
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Re: Allan Roth doesn't like single premium annuities

Post by TN_Boy » Wed Oct 10, 2018 12:46 pm

nedsaid wrote:
Wed Oct 10, 2018 11:54 am

How many times do I have to say this? It isn't surprising that pensions pay out better than SPIAs because consumers buy SPIAs one at a time where a pension is the equivalent of Costco, a pension can buy in bulk. This is why when faced with a choice between a pension and a lump sum, I most often advise that an employee take the pension, they won't get a better deal on their own.
Because you say this:
But is amazes me that few folks levy this kind of criticism towards pensions, which are much the same thing. Indeed, we bemoan the demise of the pensions around here.
If SPIA numbers were as attractive as a good pension, I suspect they would get more love here. But that's not the case. So, people here are throwing more stones at SPIAs than they would at pensions, in general.

I just ... don't find it puzzling that many people like pensions and don't like SPIAs.

But it really doesn't matter whether SPIAs are like low payout pensions or not. The SPIA must be evaluated on its own merits. It doesn't matter whether the return is partly "return of principal" or not. It just matters whether it makes sense for someone to write a big check to get a modest non-inflation adjusted payout. It might, sometimes. Longinvest has his example, and I mentioned one possibility myself upthread somewhere.

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Re: Allan Roth doesn't like single premium annuities

Post by The Wizard » Wed Oct 10, 2018 1:20 pm

nedsaid wrote:
Wed Oct 10, 2018 11:59 am
...The 10% employer contribution to the pension was part of the compensation package, so in a real sense, 100% of the contributions came from the employee. It would be like saying that wages are employer contributions. Wages and benefits are part of the total compensation package, including employer matches to retirement plans. It isn't money that just drops from heaven.
Can't disagree with you about be that.
In fact, for the first 10? years of my employment, retirees were *required* to take the employer contribution sum as a lifetime monthly payout from TIAA, i.e an annuity/pension.

But the rules changed in the 80s to allow retirees to do as they pleased with the combined accumulation.

My main point is that pensions and annuities are more similar than different and people should apply their scrutiny to both of them...
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Re: Allan Roth doesn't like single premium annuities

Post by wolf359 » Wed Oct 10, 2018 1:32 pm

nedsaid wrote:
Wed Oct 10, 2018 11:54 am
How many times do I have to say this? It isn't surprising that pensions pay out better than SPIAs because consumers buy SPIAs one at a time where a pension is the equivalent of Costco, a pension can buy in bulk. This is why when faced with a choice between a pension and a lump sum, I most often advise that an employee take the pension, they won't get a better deal on their own.
I think another reason why pensions pay better is that they use different longevity tables. Pensions are spreading the mortality credits among everyone in the pension program, who are more like the general population. SPIAs tend to be purchased by a healthier population -- if you think you're not going to live long, you won't go out of your way to buy an annuity.

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Re: Allan Roth doesn't like single premium annuities

Post by columbia » Wed Oct 10, 2018 2:08 pm

wolf359 wrote:
Wed Oct 10, 2018 1:32 pm
nedsaid wrote:
Wed Oct 10, 2018 11:54 am
How many times do I have to say this? It isn't surprising that pensions pay out better than SPIAs because consumers buy SPIAs one at a time where a pension is the equivalent of Costco, a pension can buy in bulk. This is why when faced with a choice between a pension and a lump sum, I most often advise that an employee take the pension, they won't get a better deal on their own.
I think another reason why pensions pay better is that they use different longevity tables. Pensions are spreading the mortality credits among everyone in the pension program, who are more like the general population. SPIAs tend to be purchased by a healthier population -- if you think you're not going to live long, you won't go out of your way to buy an annuity.
That’s another reason that the TIAA annuities are attractive: you have large amounts of people putting money in to Traditional for decades and annuitizing the holding is the planned next step (for people all of stripes).

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Re: Allan Roth doesn't like single premium annuities

Post by willthrill81 » Wed Oct 10, 2018 2:44 pm

I would really like to hear an interview/debate between Allan Roth and Wade Pfau regarding SPIAs. :D
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Re: Allan Roth doesn't like single premium annuities

Post by dodecahedron » Wed Oct 10, 2018 2:57 pm

willthrill81 wrote:
Wed Oct 10, 2018 10:38 am
dodecahedron wrote:
Tue Oct 09, 2018 10:12 pm
My vision would be this: the Bogle-inspired annuity for each age-cohort would be invested very simply and transparently in safe fixed income instruments of the sort Bogleheads like (e.g., intermediate term Treasuries). Each living subscriber would get a proportionate share of the value of the investment pool each year. As folks in the cohort die off, the remaining subscribers would automatically get larger payments according to some fairly simple and transparent formula. Everything should be kept simple and transparent, to keep costs and risks down.
While they are not transparent and they are making some profit, insurance companies are some of the most regulated institutions on the planet (i.e. how much benefit would transparency to customers actually provide), and longinvest has pointed out that insurance companies are making perhaps a 5% profit on the premiums paid for SPIAs. I don't see a Bogle-type person being able to do too much to improve the situation.
You are right that insurance companies are highly regulated and compliance costs with those regulations are included in the operating costs of annuity providers. I would argue that a simple transparent participating tontine-like arrangement might be easier to regulate and might lower compliance costs. The participating tontine-like arrangement could reduce the amount of actuarial calculations, paperwork, and excess-contingency reserve opportunity costs.

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Re: Allan Roth doesn't like single premium annuities

Post by The Wizard » Wed Oct 10, 2018 3:00 pm

columbia wrote:
Wed Oct 10, 2018 2:08 pm
wolf359 wrote:
Wed Oct 10, 2018 1:32 pm
nedsaid wrote:
Wed Oct 10, 2018 11:54 am
How many times do I have to say this? It isn't surprising that pensions pay out better than SPIAs because consumers buy SPIAs one at a time where a pension is the equivalent of Costco, a pension can buy in bulk. This is why when faced with a choice between a pension and a lump sum, I most often advise that an employee take the pension, they won't get a better deal on their own.
I think another reason why pensions pay better is that they use different longevity tables. Pensions are spreading the mortality credits among everyone in the pension program, who are more like the general population. SPIAs tend to be purchased by a healthier population -- if you think you're not going to live long, you won't go out of your way to buy an annuity.
That’s another reason that the TIAA annuities are attractive: you have large amounts of people putting money in to Traditional for decades and annuitizing the holding is the planned next step (for people all of stripes).
I'm not sure that's correct.
I have $$ in Trad and have annuitized some of it, but as wolf said, if one was in poor health around start of retirement, annuitizing TIAA Traditional would not be recommended...
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Re: Allan Roth doesn't like single premium annuities

Post by The Wizard » Wed Oct 10, 2018 3:03 pm

willthrill81 wrote:
Wed Oct 10, 2018 2:44 pm
I would really like to hear an interview/debate between Allan Roth and Wade Pfau regarding SPIAs. :D
They've both been to the annual BH conference, though I didn't see Wade there this year.
Definitely a good topic suggestion for next time...
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Re: Allan Roth doesn't like single premium annuities

Post by SGM » Wed Oct 10, 2018 4:18 pm

nedsaid wrote:
Wed Oct 10, 2018 1:13 am
Allan Roth wrote:
Tue Oct 09, 2018 4:01 pm
There are better ways of addressing longevity risk.
You hinted at this in your article but never addressed the "better ways." Could you let us in on what those better ways are?

By the way, thanks much for contributing to this thread. You aren't being dumped on, this is a tough crowd. Just ask Larry Swedroe. Your points are well taken and I appreciate you responding to my post.
Addressing longevity risk is difficult. I have addressed it personally by having multiple sources of income including delaying SS until age 70, having rental income, a small pension, a TiAA-CREF annuity through prior employment. I may add a ladder of SPIAs after age 70. I expect that the more income streams I have, the less I will be spending from a portfolio. I will likely spend down my portfolio by gifting and donating some of it.

Any riders you put on a SPIA will increase the cost. I will not purchase an SPIA with a cost of living adjustment. There is a reason insurance companies do not push SPIAs. They are not that profitable to the insurance companies. There are a lot of annuities that are awful. If I were to purchase a variable annuity outside the good one that I have through the university contract with TIAA, I would just be adding a layer of expense over a mutual fund.

The kind of annuities that are advertised every Saturday morning on the radio are a boon to the insurance salesmen. They are similar to what were called equity indexed annuities. They have different names now since FINRA exposed them. Those kind of annuities have nothing to do with SPIAs.

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Re: Allan Roth doesn't like single premium annuities

Post by wolf359 » Fri Oct 12, 2018 8:33 am

SGM wrote:
Wed Oct 10, 2018 4:18 pm
nedsaid wrote:
Wed Oct 10, 2018 1:13 am
Allan Roth wrote:
Tue Oct 09, 2018 4:01 pm
There are better ways of addressing longevity risk.
You hinted at this in your article but never addressed the "better ways." Could you let us in on what those better ways are?

By the way, thanks much for contributing to this thread. You aren't being dumped on, this is a tough crowd. Just ask Larry Swedroe. Your points are well taken and I appreciate you responding to my post.
Addressing longevity risk is difficult. I have addressed it personally by having multiple sources of income including delaying SS until age 70, having rental income, a small pension, a TiAA-CREF annuity through prior employment. I may add a ladder of SPIAs after age 70. I expect that the more income streams I have, the less I will be spending from a portfolio. I will likely spend down my portfolio by gifting and donating some of it.

Any riders you put on a SPIA will increase the cost. I will not purchase an SPIA with a cost of living adjustment. There is a reason insurance companies do not push SPIAs. They are not that profitable to the insurance companies. There are a lot of annuities that are awful. If I were to purchase a variable annuity outside the good one that I have through the university contract with TIAA, I would just be adding a layer of expense over a mutual fund.

The kind of annuities that are advertised every Saturday morning on the radio are a boon to the insurance salesmen. They are similar to what were called equity indexed annuities. They have different names now since FINRA exposed them. Those kind of annuities have nothing to do with SPIAs.
When Alan Roth made this statement in his original article, he also linked to another article which described his recommendations. It is located here: https://www.aarp.org/money/investing/in ... es-ar.html

If you don't want to follow the link, they are:
1) Delaying social security to 70, which provides you with an inflation-adjusted annuity at minimal direct cost;
2) Employer pension, if you work for a company with a pension;
3) TIAA Traditional Annuity, if you work for a non-profit with access to TIAA.
What these three annuities have in common is that no one has the incentive to sell them to you because they don't pay a sales commission. And because of that, the costs are lower — which is better for consumers. Two of the three are at least somewhat backed by the U.S. government, and the third, TIAA, has an AA+ rating by Standard & Poor's.

When it comes to investing, I never say never. If you have the ability to take advantage of any of these three "annuities," they are worth considering.

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Re: Allan Roth doesn't like single premium annuities

Post by Dandy » Fri Oct 12, 2018 9:26 am

If you don't want to follow the link, they are:
1) Delaying social security to 70, which provides you with an inflation-adjusted annuity at minimal direct cost;
2) Employer pension, if you work for a company with a pension;
3) TIAA Traditional Annuity, if you work for a non-profit with access to TIAA.
All excellent ideas. I have 2 pensions and waited until age 70 to collect SS. I also am blessed with having a decent asset level. So, I probably don't need any annuities.

So, what does Allan recommend for someone without a pension (which are getting rarer) or is is rather small and who doesn't have access to TIAA Traditional Annuity? And maybe they need current income in retirement so waiting to age 70 to collect SS might not be in the cards? There was talk of a CD strategy that would tend to keep up with inflation. Nice to see how that work work for say a 25 or 30 year retirement. Is there no reasonable circumstances for someone to choose an insurance company immediate annuity?

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Re: Allan Roth doesn't like single premium annuities

Post by Stormbringer » Fri Oct 12, 2018 10:22 am

Consider a couple with $300,000 to invest:

Using a balanced portfolio of stocks and bonds and the 4% rule for withdrawals, they can take $12,000 a year, and adjust for inflation each year.
Maybe they won't run out of money, but it isn't guaranteed. Firecalc shows a 4-5% failure rate after 30 years that increases with longevity. If they retired in 2007, they probably had quite a few sleepless nights over the next several years.

If they bought a joint-life, CPI-adjusted SPIA, they would have about a 4% payout rate, also $12,000 a year. It adjusts for inflation every year, is backed by their State government, and it will never run out as long as either of them lives, making it about as iron-clad of an income stream as one could hope for. They care little about what happens with with markets or inflation, because they've transferred that risk to others.
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Re: Allan Roth doesn't like single premium annuities

Post by linenfort » Fri Oct 12, 2018 10:51 am

I appreciate the article, Allan Roth.
Tell your clients that total return and principal protection are more important than income.
In addition to the title of this thread, the article mentions the pitfalls of individual muni bonds. Sadly, these have become my father's favorite investment, even though he was an early adopter of Vanguard funds. (He bought their S&P500 index fund for me and my siblings when I was too young to know what a fund was).

At his age, he's not going to change his mind unless the muni bond market implodes and I think it's best to leave that part of his investments alone rather than damage the relationship. There are threads about that. However, we have had talks about the dangers.
bogleheads, don't knock state lotteries. They helped defund the mafia.

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Re: Allan Roth doesn't like single premium annuities

Post by JoMoney » Fri Oct 12, 2018 11:50 am

Stormbringer wrote:
Fri Oct 12, 2018 10:22 am
Consider a couple with $300,000 to invest:

Using a balanced portfolio of stocks and bonds and the 4% rule for withdrawals, they can take $12,000 a year, and adjust for inflation each year.
Maybe they won't run out of money, but it isn't guaranteed. Firecalc shows a 4-5% failure rate after 30 years that increases with longevity. If they retired in 2007, they probably had quite a few sleepless nights over the next several years.

If they bought a joint-life, CPI-adjusted SPIA, they would have about a 4% payout rate, also $12,000 a year. It adjusts for inflation every year, is backed by their State government, and it will never run out as long as either of them lives, making it about as iron-clad of an income stream as one could hope for. They care little about what happens with with markets or inflation, because they've transferred that risk to others.
It doesn't need to be an all or nothing proposition either. They could take the bond portion of their portfolio and by a SPIA that will give them a guaranteed income floor at the maximum level that current interest rates and their life expectancy would support, and use the stock portion as a more flexible withdrawal based on how well the market performs, possibly buying additional SPIAs to increase the income floor in the future....
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Allan Roth doesn't like single premium annuities

Post by JackoC » Fri Oct 12, 2018 1:02 pm

wolf359 wrote:
Wed Oct 10, 2018 1:32 pm
nedsaid wrote:
Wed Oct 10, 2018 11:54 am
How many times do I have to say this? It isn't surprising that pensions pay out better than SPIAs because consumers buy SPIAs one at a time where a pension is the equivalent of Costco, a pension can buy in bulk. This is why when faced with a choice between a pension and a lump sum, I most often advise that an employee take the pension, they won't get a better deal on their own.
I think another reason why pensions pay better is that they use different longevity tables. Pensions are spreading the mortality credits among everyone in the pension program, who are more like the general population. SPIAs tend to be purchased by a healthier population -- if you think you're not going to live long, you won't go out of your way to buy an annuity.
That's a plausible reason why pensions would pay better. However I think most of the general seat of the pants difference in positive view of pensions v bashing SPIA's is sunk cost fallacy. People have already paid for the pension with explicit deductions or implicitly lower wages over many years. An SPIA is new money out of pocket. I doubt much of this feeling is based on a big difference in pricing relative to a given actuarial table, with people actually running the numbers of what they've paid, which in any case is seriously complicated by what you assume as opportunity cost for the previous deductions if invested in something else, plus tax. Lots of people posting negative comparisons of SPIA and pension have run all those numbers in an accurate way? I doubt it.

Note, I haven't said that I have either. One previous employer closed out their defined benefit plan by giving us literally annuities (deferred), with a major insurer. But why would I run those numbers, trying to somehow figure out what I payed implicitly in lower wages, compared to a privately offered SPIA paid for now? Either I buy additional annuity protection or not. I'm not choosing whether to throw back the company annuity, I'm not able to get more company annuity.

What would be relevant is how the private annuity is priced in absolute terms to an actuarial table. And I recall a thread here from some years ago (sorry too lazy to link) finding that SPIA's were priced fairly favorably to the SSA table, IOW quite favorably to a hypothetical upper middle class, healthy, good habits table.

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Re: Allan Roth doesn't like single premium annuities

Post by willthrill81 » Fri Oct 12, 2018 7:25 pm

Stormbringer wrote:
Fri Oct 12, 2018 10:22 am
Consider a couple with $300,000 to invest:

Using a balanced portfolio of stocks and bonds and the 4% rule for withdrawals, they can take $12,000 a year, and adjust for inflation each year.
Maybe they won't run out of money, but it isn't guaranteed. Firecalc shows a 4-5% failure rate after 30 years that increases with longevity. If they retired in 2007, they probably had quite a few sleepless nights over the next several years.

If they bought a joint-life, CPI-adjusted SPIA, they would have about a 4% payout rate, also $12,000 a year. It adjusts for inflation every year, is backed by their State government, and it will never run out as long as either of them lives, making it about as iron-clad of an income stream as one could hope for. They care little about what happens with with markets or inflation, because they've transferred that risk to others.
From whom can you still purchase a SPIA with a CPI adjustment? I didn't think anyone offered them for lifetime payouts anymore.

SPIA benefits are not guaranteed by state governments; they are guaranteed by state guaranty associations. That's a big difference.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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