No, really. Deferred income annuities (DIAs) are superior to SPIAs in every way.

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Northern Flicker
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Re: No, really. Deferred income annuities (DIAs) are superior to SPIAs in every way.

Post by Northern Flicker »

GoWithTheCashFlow wrote: It may be perfectly reasonable to pay an insurance company to manage one's assets for current income, just like it may be perfectly reasonable to pay an advisor to manage one's assets. As long as one understands that is what is happening, then who am I to say they shouldn't?
Why wouldn't someone assume that the more years in which they have a relationship with the insurer, the more they are paying in fees to the insurer? The difference in mortality credits is more subtle, but that is not a free lunch-- it is paid by a reduced expected value of the annuitant's estate. Heirs will de facto pay it if the annuitant dies young.

But the annuitant is not just paying the insurer to manage the annuitized asset portfolio-- the insurer also is absorbing its risk. The annuitant may have the ability to match duration of the asset to the liabilities, but the insurer may include bonds with credit risk in the portfolio, providing a higher return even after taking their fees out, while absorbing the credit risk. The risk of the insurer becoming insolvent likely is not compensated in that return, but idiosyncratic solvency risk can be covered through a state insurance guaranty pool.
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GoWithTheCashFlow
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Re: No, really. Deferred income annuities (DIAs) are superior to SPIAs in every way.

Post by GoWithTheCashFlow »

Northern Flicker wrote: Mon Feb 03, 2025 2:39 pm Why wouldn't someone assume that the more years in which they have a relationship with the insurer, the more they are paying in fees to the insurer? (The difference in mortality credits is more subtle, but that is not a free lunch-- it is paid in a reduced expected value of estate. Heirs will pay it if the annuitant dies young).

But they are not just paying the insurer to manage that asset portfolio-- the insurer also is absorbing its risk. The annuitant may have the ability to match duration of the asset to the liabilities, but the insurer may include bonds with credit risk in the portfolio, providing a higher return even after taking their fees out, while absorbing the credit risk.
Everything you say is plainly true, but misses my intended meaning, which I admit is my fault.

I'm thinking about things from the perspective of an investor attempting to maximize expected utility. If an investor chooses a particular strategy which reduces the investor's expected utility, in terms of utility from consumption/wealth only, then the investor is "paying" for the strategy by their reduced expected utility. Of course, there are utility considerations beyond just the level of wealth and consumption. For instance, paying the 1% AUM for a financial advisor would make sense if the costs of executing the optimal financial strategy (in terms of time and mental load) are higher than the cost of the 1% AUM, even though paying the 1% AUM will result in lower wealth/consumption when compared with the optimal strategy.

The excess return the annuitant receives from the credit exposure of the insurer's portfolio likely isn't worth it except at relatively short durations because of the inflation risk. And that's before considering the cost of liquidity and the cost to the estate. At even longer durations, the mortality credits are enough to offset the inflation risk and those extra costs, but the investor would prefer to avoid the period in between. That's the "cost" people are missing when advocating for a SPIA. Of course, the "cost" may be less than the benefit of simplicity. I'm just saying the cost should be acknowledged.
Northern Flicker
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Joined: Fri Apr 10, 2015 12:29 am

Re: No, really. Deferred income annuities (DIAs) are superior to SPIAs in every way.

Post by Northern Flicker »

I'm not advocating for the SPIA. I'm advocating for a more complete analysis.
Northern Flicker
Posts: 17472
Joined: Fri Apr 10, 2015 12:29 am

Re: No, really. Deferred income annuities (DIAs) are superior to SPIAs in every way.

Post by Northern Flicker »

GoWithTheCashFlow wrote: The excess return the annuitant receives from the credit exposure of the insurer's portfolio likely isn't worth it except at relatively short durations because of the inflation risk.
At any particular duration, a higher payout rate has less inflation risk than a lower payout rate because it has more yield to offset inflation. That said, I would not buy a SPIA from a low-rated insurer even with the protection of a state guaranty pool. The guaranty pool is funded by all of the insurers doing business in a state. It protects against idiosyncratic insolvency of a particular insurer, but not against widespread, systematic insolvency of the entire sector.
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