If one is pessimistic about both stocks and bonds, does a SPIA make sense?

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Watty
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by Watty » Fri Nov 15, 2019 5:55 am

fredflinstone wrote:
Thu Nov 14, 2019 11:17 am
However, for reasons I cannot discuss here (political discussions are prohibited on this forum), I am pessimistic about both stocks and bonds going forward.
When you are especially concerned about the risk the key is to be diversified not to "bet it all" on some asset class or SPIA that you think might do well.

A big problem is that you could be even be right about the future, but it could play out in ways that are unexpected.

I do not agree with most of these for various reasons but a plausible case can be made for putting an 5 or 10 percent of your portfolio in things like;

1) Precious metals
2) Commodities
3) Real estate
4) higher weighting of international investments
5) Cash (like a money market fund, not paper cash in a safe deposit box)
6) Paying off your house if it is not already paid off.

The key is to invest in a lot of things since if things turn out badly some of your investments will likely still do well.

lazyday
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by lazyday » Fri Nov 15, 2019 6:02 am

Is it true that in the postwar 20th century, US investors were often bailed out? Talk of moral hazard around 2008 made it sound like past investors, such as in the S&L and other banking crises, Chrysler ‘79, etc were helped by government funds at low cost.

In the recent crisis, the Treasury took equity when it helped Citibank. Some GM bondholders felt they were treated unfairly, also with the US taking an equity stake.

Yet people still talk about the banks getting bailed out in the recent crisis as if the rich were just handed taxpayer money. If many people believe that, then perhaps next time investors will be treated harshly.

In an FDIC account, I think it’s a bit safer to hold $50,000 than $250,000. Or $1,000,000 using slightly differently titled POD accounts. In a big enough crisis, the rules might change in the middle of the game.

If buying an SPIA specifically to protect against a worst case scenario, this might be something to consider.

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nisiprius
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by nisiprius » Fri Nov 15, 2019 7:16 am

dodecahedron wrote:
Fri Nov 15, 2019 5:20 am
nisiprius wrote:
Thu Nov 14, 2019 12:05 pm
But this is all moot up until arounda age 65 or so, because before that time mortality is very low, and the advantages of "mortality credits" are tiny and offset by the insurance company taking profits.
I want to note that it is not just ¨the insurance company taking profits¨ that more than offsets the advantages of the tiny mortality credits for younger folks.
Accordingly, I've edited my post above to say "...costs, including the insurance company's profits."
If it were just a profits issue, that could be easily resolved by having nonprofit mutual insurance companies, in much the same way Vanguard does with the way it operates its mutual funds. The profits could be pro rata distributed to the annuitants.

The fact is that annuities (or any kind of insurance product) also involve a lot of frictional overhead costs, i.e., costs for administration, compliance with government regulators, and marketing costs.
It would be interesting to see an actual breakdown as to what percentage of the premium goes to a) annuity payouts, b) administrative costs, and c) insurance company profits.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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dodecahedron
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by dodecahedron » Fri Nov 15, 2019 7:58 am

nisiprius wrote:
Fri Nov 15, 2019 7:16 am
It would be interesting to see an actual breakdown as to what percentage of the premium goes to a) annuity payouts, b) administrative costs, and c) insurance company profits.
Yes, it would. Vanguard offers variable annuities (VAs). They say their VA products have an average expense ratio of 0.48%, which compares to an industry average of 2.24%. These figures may not be strictly comparable since I imagine that Vanguard VAs are plain vanilla with few of the bells & whistles fancy doodads of dubious value (e.g., guaranteed floors against market declines) that other companies´ VA products include.

And I realize this thread is about SPIAs, not VAs, but the difference between the ERs on Vanguard VAs vs Vanguard mutual funds does give one a clue that adminstrative expenses for annuity products are nontrivial.

Edited to add: another datapoint comes from TIAA´s CREF variable annuities, which are also pretty plain vanilla and have ERs roughly comparable to Vanguard´s. TIAA does not have any accounting ¨profits¨ to speak of since, like Vanguard, it does not have outside shareholders. Obviously, both companies still need to have some operating surplus margins to reserve for contingencies.

senex
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by senex » Fri Nov 15, 2019 9:49 am

nisiprius wrote:
Thu Nov 14, 2019 12:05 pm
No. Because a SPIA is not an investment strategy, it is a retirement spending strategy.

An insurance company doesn't have access to any wonderful investments that are totally different from those you could buy yourself.
Thank you for this entire post. It lays out the key facets of SPIAs in the clearest way I've seen.

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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by tj » Fri Nov 15, 2019 10:20 am

ObliviousInvestor wrote:
Thu Nov 14, 2019 4:50 pm
beanie wrote:
Thu Nov 14, 2019 4:16 pm
randomguy wrote:
Thu Nov 14, 2019 12:14 pm

There are still one or two companies offering CPI annuities. .....
Do you know which companies? I’ve contacted several agents and none of them are selling CPI-adjusted SPIAs any more.
Principal still shows up as offering a CPI option on immediateannuities.com.
I believe aig still has one as well.

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orthros
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by orthros » Fri Nov 15, 2019 10:21 am

I may have done it wrong, but when I put information into immediateannuities.com for a late-40s couple, it didn't return any CPI-option annuities. And the non-inflation annuities returned 3.5% at best.

Since historical inflation has averaged around 3% - and gone much, much higher than that at times - this just seems like a horrible idea where I sit unless you are completely convinced that inflation will stay permanently low. Even then, 2% inflation means that you'll get half as much in real dollars by the time you're in your early 80s.

I really can't see an angle for SPIAs until someone is much older, which will then translate into a means for longevity insurance. In your case, I'd say that's at least 20 years out.

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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by TN_Boy » Fri Nov 15, 2019 4:10 pm

fredflinstone wrote:
Thu Nov 14, 2019 11:17 am
Boglehead doctrine is to "stay the course" with a mix of low-cost passively managed stock and bond funds. However, for reasons I cannot discuss here (political discussions are prohibited on this forum), I am pessimistic about both stocks and bonds going forward. Without getting into the reasons for my pessimism, I wonder if Bogleheads can tell me if a SPIA is a good alternative for someone like me who is unenthusiastic about both Boglehead asset classes. If it matters, my wife Wilma and I are currently in our late 40s or so. We will probably retire within the next few years. I'd be really happy with a 3 percent withdrawal rate. Thanks! :happy
I'd echo the comments of most posters here -- an SPIA is a poor/very poor idea because

1) the payout at your age is low, and
2) the decision is irrevocable; if things get "better" you can't go back and undo your decision.

I will ask one question another poster did; is your pessimism US-only, or do you believe the entire world is headed in the wrong direction? If the former, then perhaps moving to a (much) heavier weighting in foreign equities (not sure about bonds) might make you more comfortable. If the latter, I do not believe there is a good option for you.

For example, suppose you looked at commodities ... that might work if we hit inflation, but I'd think shrinking economies are more likely, in which we'll likely have some deflation, boding ill for commodities.

It's hard for me to think of the current global situation as being worse/a lot worse than the 1930s and 1940s when we went through a depression and world war. It was a brutal era, but we got through it.

If I was overcome with pessimism about the US (I'm not, though I can't say I'm wild about some political developments) I'd probably hunker down with a mix of short and longer term high quality fixed income, and a low percent of global non-US equities (20% of portfolio?). I'm assuming you are not worried about the US defaulting on treasuries, or bank failures with CDs not being paid out.

If you are worried about true hyperinflation in the US, I think (not trying to be funny) the only solution is to immigrate. There is nowhere to hide if a country goes into hyperinflation. The same would be true if you were concerned about a government breakdown. If you look at Venezuela for example, the only intelligent decision has been to leave. And if immigration was part of the plan, I'd start researching the best way to preserve assets in the move. [I repeat, I'm not trying to be sarcastic here, if I truly felt the US situation was sufficiently dire, this is how I would look at it]

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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by KyleAAA » Fri Nov 15, 2019 4:11 pm

No. I say that because whether one is pessimistic or optimistic of a given asset class has no bearing on the analysis.

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nedsaid
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by nedsaid » Fri Nov 15, 2019 8:28 pm

fredflinstone wrote:
Thu Nov 14, 2019 11:17 am
Boglehead doctrine is to "stay the course" with a mix of low-cost passively managed stock and bond funds. However, for reasons I cannot discuss here (political discussions are prohibited on this forum), I am pessimistic about both stocks and bonds going forward. Without getting into the reasons for my pessimism, I wonder if Bogleheads can tell me if a SPIA is a good alternative for someone like me who is unenthusiastic about both Boglehead asset classes. If it matters, my wife Wilma and I are currently in our late 40s or so. We will probably retire within the next few years. I'd be really happy with a 3 percent withdrawal rate. Thanks! :happy
Just want to point out that pessimism rarely serves an investor well. The world has always been going to hades in a handbasket.
A fool and his money are good for business.

retired@50
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by retired@50 » Fri Nov 15, 2019 8:42 pm

David Jay wrote:
Thu Nov 14, 2019 11:30 am
No, it does not make sense for a 40-something.

Insurance companies invest in bonds. Their yield will be bond-like less insurance company expenses, you can do better by holding bonds yourself in a low-cost structure. If you don’t trust bonds you can’t trust insurance company solvency.

For living expenses in retirement an SPIA adds three additional features that can make sense:
1. Return of capital - much of the annuity payout is a return of capital. The shorter your projected lifespan the greater the annual payout of your original cash.
2. Mortality credits - much of the payout for long-lived individuals come from the payments made by short-lived individuals.
3. Permanence of the payment - the policy guarantees the payout until death.
+1
OP, (Fred)
It sounds to me like you're worried about Armageddon... Perhaps you better get proficient with a deer rifle and a knife so you can eat what you kill.
If it were me... And it's not.
I'd go with no less than 30% equity, 40% bonds, and 30% SPIA, when the time is right. Maybe in your mid to late fifties...???

Regards,

averagedude
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by averagedude » Fri Nov 15, 2019 8:46 pm

I'm not going to comment if it makes sense, but the gloomers and doomers over the last 10 years have missed out on the best bull market in their investment lifetime.

stlutz
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by stlutz » Fri Nov 15, 2019 9:30 pm

averagedude wrote:
Fri Nov 15, 2019 8:46 pm
I'm not going to comment if it makes sense, but the gloomers and doomers over the last 10 years have missed out on the best bull market in their investment lifetime.
I do notice on this forum that "gloom and doom" does tend to eminate most of those who have enough to worry mostly about return of capital as opposed to return on capital.

I personally read the original post as mostly being a reflection of a change in the poster's need and willingness to take risk, and his interpretation of events is overlaid on that.

averagedude
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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by averagedude » Fri Nov 15, 2019 10:10 pm

stlutz wrote:
Fri Nov 15, 2019 9:30 pm
averagedude wrote:
Fri Nov 15, 2019 8:46 pm
I'm not going to comment if it makes sense, but the gloomers and doomers over the last 10 years have missed out on the best bull market in their investment lifetime.
I do notice on this forum that "gloom and doom" does tend to eminate most of those who have enough to worry mostly about return of capital as opposed to return on capital.

I personally read the original post as mostly being a reflection of a change in the poster's need and willingness to take risk, and his interpretation of events is overlaid on that.
You could be correct, but I interpreted this as someone who is pessimistic due to their political beliefs. Me personally, I believe that people who let their political views determine how they invest, have really missed out on investment gains. It really is letting your emotions dictate your course of action, and most financial gurus warn us of making emotional decisions when it comes to investing. What kind of deal are you going to get by turning over your nest egg to an insurance company at age 50 and start a defined benefit out of it? If someone is pessimistic about bonds, it would probably be inflation worries. How will a SPIA do in a high inflation environment? I will answer that, not very well. Someone who would be REALLY happy with a 3% withdrawal rate would be served well with a 50/50 portfolio, with a good dose of international equities for maximum diversification. At age 50, if things go bad, you can always fall back on your human capital and go back to work until things improve.

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Re: If one is pessimistic about both stocks and bonds, does a SPIA make sense?

Post by randomguy » Sat Nov 16, 2019 1:29 am

averagedude wrote:
Fri Nov 15, 2019 8:46 pm
I'm not going to comment if it makes sense, but the gloomers and doomers over the last 10 years have missed out on the best bull market in their investment lifetime.
Only if they started investing really recently. 1990-march of 2000 was better by pretty much every metric. And to some extent 1982-2000 was almost 1 big bull market. Sure black monday was bad and their were a couple of short 20% pull backs but there were no long multi year periods of stocks being down. If you go back and look in US history there are plenty of 10 year periods like this. I am willing to bet over the next 50 years there will be another couple of them. The question is how bad the bad periods in between will be.

As people have pointed out SPIA's don't really generate returns. They get the returns of bonds and split it up among. For 40+ year time periods, bond returns have tended to be pretty poor outside of the the last 30 years.

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