Annuities

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petedist
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Annuities

Post by petedist »

Wife and are 74, reasonable good health. No children, no relatives to speak of. $1.7mil in Vanguard and TIAA. Thinking of simplifying things with annuities. Our portfolios are very conservative, concentrated in Wellesley Admiral. Before I start studying Vanguard and TIAA annuities.......any advice?
GuyInFL
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Re: Annuities

Post by GuyInFL »

What are your expenses, Social Security, and pension income?
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petedist
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Re: Annuities

Post by petedist »

Income: $35K SS, RMD's $21K, Wife's TIAA Annuity $10K, Div+CG $34K
Expenses: $70K
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ResearchMed
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Re: Annuities

Post by ResearchMed »

Do you have access to the TIAA Traditional Annuity in a 403b plan, for example?

And do you have anything planned for later care if needed, such as long term care insurance?

As far as "annuities", the only "good" type is the SPIA (Single Payment Immediate Annuity, with a second choice as a Deferred version of that). Stay away from things like "indexed annuities" or anything any salesperson is "trying to sell you".

RM
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petedist
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Re: Annuities

Post by petedist »

No long term health insurance. Wife was teacher, long time TIAA. A concern is who will care for us later.

Thanks for the advice on Annuities. It is appreciated.
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FiveK
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Re: Annuities

Post by FiveK »

ResearchMed wrote: Thu May 26, 2022 8:00 pm Stay away from things like "indexed annuities" or anything any salesperson is "trying to sell you".
+1

petedist, if I understand the OP correctly, with the current annuities, SS + TIAA (assuming that $10K/yr has already been "annuitized"), you have $45K of your $70K annual expenses met. You thus need $25K/yr from your $1.7mil other investments, a 1.5% withdrawal rate.

Even if the TIAA annuity has no COLA and we ignore it completely, you need $35K/yr from $1.7mil and that's a 2% withdrawal rate.

It isn't clear that you should add yet another annuity, especially one with no COLA.
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Stinky
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Re: Annuities

Post by Stinky »

Just to be clear - what type of annuities are you considering?

An annuity that will provide you with monthly income for the rest of your lives, like a single premium immediate annuity (SPIA), or an annuity that will grow over time, like a multi year guaranteed annuity (MYGA)?

And, for what it’s worth, I don’t believe that you can buy annuities through Vanguard any more.
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Re: Annuities

Post by smectym »

Stinky wrote: Thu May 26, 2022 8:29 pm Just to be clear - what type of annuities are you considering?

An annuity that will provide you with monthly income for the rest of your lives, like a single premium immediate annuity (SPIA), or an annuity that will grow over time, like a multi year guaranteed annuity (MYGA)?

And, for what it’s worth, I don’t believe that you can buy annuities through Vanguard any more.
Stinky is correct, Vanguard has exited the annuity business.

OP was a bit vague on what type of annuity they were thinking of, but I assume they are looking at a lump sum purchase of a monthly payout annuity.

My sole advice to OP is, to carefully consider whether at this point it’s better for you to buy a *life* monthly income annuity versus something like a *10 year fixed term* annuity.

The 10-year is likely to provide a significantly higher payout. The life annuity typically becomes a better deal only when you’re in your 80s.

Often, the assets remaining in your retirement accounts continue to grow; and then, if your 10 year fixed-term product expires, and you’re still in need of further annuity protection, you can then buy a life annuity at that point at much more favorable rates.

That may or may not be the right call for you; but my point is: at least think about it, and rule it in or out.
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Re: Annuities

Post by Chardo »

What exactly are you trying to accomplish?
David Althaus
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Re: Annuities

Post by David Althaus »

Roughly same age. Here's how I questioned myself about it:

1. It's a bet we outlive our actuarial table. Our family genes suggest it would be a good bet.
2. If I need a one-time large sum (for any or no reason) that sum will need to come from somewhere else.
3. If I put the available resources under the metaphorical mattress how long could I withdraw the equivalent amount yearly before it's gone?
4. If adopted I will ladder the available investment over 5 years to mitigate the fluctuation in interest rates. They have been rising but no one knows about the future.
5. Single company risk cannot be avoided. With laddering as in 4 I can spread that risk. I could also buy from multiple suppliers but all, to varying degrees, present the same issue.
6. High fees and expenses--even in the most customer friendly selection.
7. We have potential heirs which changes our equation compared to yours.

For now our answer is no. Our IPS says we will reevaluate annuities if or when we reach 80.

All the best
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Re: Annuities

Post by Wrench »

smectym wrote: Thu May 26, 2022 11:53 pm
Stinky wrote: Thu May 26, 2022 8:29 pm Just to be clear - what type of annuities are you considering?

An annuity that will provide you with monthly income for the rest of your lives, like a single premium immediate annuity (SPIA), or an annuity that will grow over time, like a multi year guaranteed annuity (MYGA)?

And, for what it’s worth, I don’t believe that you can buy annuities through Vanguard any more.
Stinky is correct, Vanguard has exited the annuity business.

OP was a bit vague on what type of annuity they were thinking of, but I assume they are looking at a lump sum purchase of a monthly payout annuity.

My sole advice to OP is, to carefully consider whether at this point it’s better for you to buy a *life* monthly income annuity versus something like a *10 year fixed term* annuity.

The 10-year is likely to provide a significantly higher payout. The life annuity typically becomes a better deal only when you’re in your 80s.

Often, the assets remaining in your retirement accounts continue to grow; and then, if your 10 year fixed-term product expires, and you’re still in need of further annuity protection, you can then buy a life annuity at that point at much more favorable rates.

That may or may not be the right call for you; but my point is: at least think about it, and rule it in or out.
"The life annuity typically becomes a better deal only when you’re in your 80s."
I see this a lot on the forum and I don't understand it. Whether you buy at 65, 70, 75 or 80, the premium and payouts are actuarily neutral for one's life expectancy. If you buy early and die young, you don't care but your heirs lose. If you buy late, and die soon thereafter, you don't care and your heirs lose. But you are more likely to die soon when you buy later. In either case, if you live much longer than the life expectancy for your age cohort, then you win. More importantly, if one is able to purchase an SPIA at a younger age with a small fraction of their wealth so that expenses are 95-100% covered (e.g., the OP situation), then investing the balance of their portfolio with a higher risk allocation should feel more comfortable to most people. That very well could lead to a larger net worth for heirs because that portfolio could grow for many, many decades. Can someone point me to a definitive study that shows buying at age ~80 leads on average to a "better" deal by some measure? It seems to me that the actuaries who establish the SPIA rates are not going to do so in a manner where one age group gets a "better deal" than any other. That's just not the way insurance companies work.

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Re: Annuities

Post by Stinky »

Wrench wrote: Fri May 27, 2022 5:13 pm "The life annuity typically becomes a better deal only when you’re in your 80s."
I see this a lot on the forum and I don't understand it. Whether you buy at 65, 70, 75 or 80, the premium and payouts are actuarily neutral for one's life expectancy.

[snip]

It seems to me that the actuaries who establish the SPIA rates are not going to do so in a manner where one age group gets a "better deal" than any other. That's just not the way insurance companies work.

Wrench
This is absolutely correct.

It may seem that buying a SPIA at age 80 is a better deal, because the monthly income per $1,000 of premium is higher than for a SPIA purchased at a younger age.

But the actuaries at the insurance companies do their best to ensure that, no matter the age of the purchaser, the insurer profit margin is the same. That means that the payouts to annuitants are actuarially equivalent, no matter the age of the purchaser.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Annuities

Post by Chardo »

Trust me, the actuaries are fine tuning the numbers constantly to assure new contracts are priced correctly for every age. There are no teaser rates or loss leaders. Across the population, there is no "better deal" at any age.
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Re: Annuities

Post by Parkinglotracer »

From the sales pitches I have seen it seems like annuity companies take your money then take credit for giving you back your money - ok being somewhat sarcastic.

If I was going to consider a single premium immediate annuity, say I am tired of the market ups and downs, I’d consider splitting the baby to cover my fixed expenses - put say half in an income annuity and leave half in market.

Do Medicaid rules allow one to keep annuity income if it ever comes to depleting one’s assets with LTC costs? Above my knowledge level but I think one spouse is allowed to keep annuity income even if joint assets are depleted and the other spouse applies for Medicaid. Obviously a professional elder care attorney needs to be involved in that plan.
Last edited by Parkinglotracer on Sat May 28, 2022 6:13 am, edited 1 time in total.
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Re: Annuities

Post by Chardo »

Parkinglotracer wrote: Sat May 28, 2022 6:02 am From the sales pitches I have seen it seems like annuity companies take your money then take credit for giving you back your money - ok being somewhat sarcastic.

If I was going to consider a single premium immediate annuity, say I am tired of the market ups and downs, I’d consider splitting the baby to cover my fixed expenses - put say half in an income annuity and leave half in market.

Do Medicaid rules allow one to keep annuity income if it ever comes to depleting one’s assets with LTC costs?

Aren’t there charities like consumer reports one can donate too that will pay a higher than market rate income stream for donated lump sums?
I would only advise buying an annuity for basic needs. Stay flexible with additional capital.

Medicaid will require you to spend annuity income on care.
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Re: Annuities

Post by Parkinglotracer »

Chardo wrote: Sat May 28, 2022 6:10 am
Parkinglotracer wrote: Sat May 28, 2022 6:02 am From the sales pitches I have seen it seems like annuity companies take your money then take credit for giving you back your money - ok being somewhat sarcastic.

If I was going to consider a single premium immediate annuity, say I am tired of the market ups and downs, I’d consider splitting the baby to cover my fixed expenses - put say half in an income annuity and leave half in market.

Do Medicaid rules allow one to keep annuity income if it ever comes to depleting one’s assets with LTC costs?

Aren’t there charities like consumer reports one can donate too that will pay a higher than market rate income stream for donated lump sums?
I would only advise buying an annuity for basic needs. Stay flexible with additional capital.

Medicaid will require you to spend annuity income on care.


I think there may be some advantages in an annuity if one spouse depletes assets and qualifies for Medicaid. The other spouse can keep annuity income? I need to research more.
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Re: Annuities

Post by valleyrock »

Chardo wrote: Sat May 28, 2022 5:45 am Trust me, the actuaries are fine tuning the numbers constantly to assure new contracts are priced correctly for every age. There are no teaser rates or loss leaders. Across the population, there is no "better deal" at any age.
Isn't a "better deal" going to develop as interest rates rise? In other words, at some point, I'm thinking the actuaries will factor in higher interest rates, such that payouts would be higher than if interest rates remain constant. The insurance company invests at higher interest rates the money they pull in, etc. So, if interest rates (by whatever measure) increase to 6% over the next many years, would it pay to have waited to buy an annuity then? If correct, then waiting may be helpful in today's conditions of increasing inflation, etc. Is there an insurance company annuity actuary in the house (preferably one of the SPIA variety)?
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Re: Annuities

Post by vineviz »

Parkinglotracer wrote: Sat May 28, 2022 6:02 am If I was going to consider a single premium immediate annuity, say I am tired of the market ups and downs, I’d consider splitting the baby to cover my fixed expenses - put say half in an income annuity and leave half in market.
As a general rule, income annuity purchases are optimally funded by money that you would otherwise have invested in nominal bonds.

In other words a retiree at age 70 with a portfolio that contains $350k in stocks, $200k in total bond market fund, and $100k in TIPS should - as a first order approximation - withdraw money from total bond market preferentially to fund their purchases of income annuities.

In other words, if they purchased a SPIA for $100k then their remaining investment portfolio would be $350k in stocks, $100k in total bond market fund, and $100k in TIPS.
"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: Annuities

Post by vineviz »

valleyrock wrote: Sat May 28, 2022 6:26 am
Chardo wrote: Sat May 28, 2022 5:45 am Trust me, the actuaries are fine tuning the numbers constantly to assure new contracts are priced correctly for every age. There are no teaser rates or loss leaders. Across the population, there is no "better deal" at any age.
Isn't a "better deal" going to develop as interest rates rise? In other words, at some point, I'm thinking the actuaries will factor in higher interest rates, such that payouts would be higher than if interest rates remain constant. The insurance company invests at higher interest rates the money they pull in, etc. So, if interest rates (by whatever measure) increase to 6% over the next many years, would it pay to have waited to buy an annuity then? If correct, then waiting may be helpful in today's conditions of increasing inflation, etc. Is there an insurance company annuity actuary in the house (preferably one of the SPIA variety)?
For starters you have no way of knowing whether bond yields will rise or fall in the future, so "waiting" is a market timing move that may or may not pay off.

If bond yields continue to rise, yes the nominal cost of the SPIA that pays $X/year will be lower in the future but so will the value of the bonds or bond funds you currently own which will use to fund the annuity purchase. And vice versa. You don't win or lose by waiting.

On the other hand, there is one sense in which lower bond yields make SPIAs more attractive than holding similar nominal bonds yourself because the portion of the income provided by mortality credits is not affected by those low rates.
"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: Annuities

Post by ResearchMed »

valleyrock wrote: Sat May 28, 2022 6:26 am
Chardo wrote: Sat May 28, 2022 5:45 am Trust me, the actuaries are fine tuning the numbers constantly to assure new contracts are priced correctly for every age. There are no teaser rates or loss leaders. Across the population, there is no "better deal" at any age.
Isn't a "better deal" going to develop as interest rates rise? In other words, at some point, I'm thinking the actuaries will factor in higher interest rates, such that payouts would be higher than if interest rates remain constant. The insurance company invests at higher interest rates the money they pull in, etc. So, if interest rates (by whatever measure) increase to 6% over the next many years, would it pay to have waited to buy an annuity then? If correct, then waiting may be helpful in today's conditions of increasing inflation, etc. Is there an insurance company annuity actuary in the house (preferably one of the SPIA variety)?

The "Better Deal" comparison is only relevant for things you could actually choose between/among at the time.
(This is not much different from a retail decision: Will this TV cost less on sale in the future, or might they raise the prices? Should I buy it now, or wait? Sure, it would be a better deal in the future IF there is a sale, but... what if there isn't, or prices actually go up?)

One can't know with certainty what interest rates will be in the future. Many people have been wrong for a long time about "interest rates could only go up", while for a long time, until recently, they kept sliding down.
And "in the future", mortality tables could perhaps change to take into account improved health and medical care, leading to increased life expectancy and thus lower annuity payments.
None of us can know what the actual payout rates will be next year or further into the future.

RM
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Re: Annuities

Post by Stinky »

valleyrock wrote: Sat May 28, 2022 6:26 am
Chardo wrote: Sat May 28, 2022 5:45 am Trust me, the actuaries are fine tuning the numbers constantly to assure new contracts are priced correctly for every age. There are no teaser rates or loss leaders. Across the population, there is no "better deal" at any age.
Isn't a "better deal" going to develop as interest rates rise? In other words, at some point, I'm thinking the actuaries will factor in higher interest rates, such that payouts would be higher than if interest rates remain constant. The insurance company invests at higher interest rates the money they pull in, etc. So, if interest rates (by whatever measure) increase to 6% over the next many years, would it pay to have waited to buy an annuity then? If correct, then waiting may be helpful in today's conditions of increasing inflation, etc. Is there an insurance company annuity actuary in the house (preferably one of the SPIA variety)?
Yes, a "better deal" for annuitants will be available if interest rates rise. That is, the amount of monthly income available per $1,000 will be higher, just because interest rates are higher.

The actuarial teams at life insurance companies get constant input from their investment departments as to what interest rates are available on "new money" investments. The actuaries develop "buckets" of investments that are targeted toward specific products, and calculate the projected earned rates, net of defaults, for each bucket. It’s most straightforward to look at buckets for single premium products like SPIAs and MYGAs, since all the premium dollars are received at one time up front. Also, for example, a bucket of investments that backs a 3 year MYGA has a shorter duration than a bucket backing a SPIA sold to a 65 year old.

The actuaries will periodically reprice their single premium products, and announce new rates when interest rates move enough to justify making a rate change.

As to whether it makes sense to defer buying a SPIA until interest rates rise - yes, the monthly annuity payments will trend to be higher for a certain age and amount of premium if interest rates are higher. But also realize that if the premium dollars to fund the SPIA are coming from a bond fund, that fund will have seen a decrease in NAV as interest rates rise.

(As to my “actuarial qualifications”, see my signature).
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Annuities

Post by Chardo »

valleyrock wrote: Sat May 28, 2022 6:26 am
Chardo wrote: Sat May 28, 2022 5:45 am Trust me, the actuaries are fine tuning the numbers constantly to assure new contracts are priced correctly for every age. There are no teaser rates or loss leaders. Across the population, there is no "better deal" at any age.
Isn't a "better deal" going to develop as interest rates rise? In other words, at some point, I'm thinking the actuaries will factor in higher interest rates, such that payouts would be higher than if interest rates remain constant. The insurance company invests at higher interest rates the money they pull in, etc. So, if interest rates (by whatever measure) increase to 6% over the next many years, would it pay to have waited to buy an annuity then? If correct, then waiting may be helpful in today's conditions of increasing inflation, etc. Is there an insurance company annuity actuary in the house (preferably one of the SPIA variety)?
My comment about "better deal" relates to purchasing at different ages. The interest rate question is separate. If one believes interest rates are rising, they should expect higher annuity payouts for future contracts. Though it's usually not as fast as you might expect. That annuity is a long term liability for the insurer, somewhat less impacted by short term rate moves than other products.
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Re: Annuities

Post by Beehave »

petedist wrote: Thu May 26, 2022 7:55 pm Income: $35K SS, RMD's $21K, Wife's TIAA Annuity $10K, Div+CG $34K
Expenses: $70K
As I understand it, the issue for the OP is whether to annuitize assets that are currently invested primarily in the Vanguard Wellesley fund.

OP's expenses of $70K are half covered by Social Security which is inflation-protected. Dividends and cap gains from the Wellesley fund appear to cover the other half of the expenses. RMDs and existing annuity provide a buffer over current expenses to handle taxes (if not already included in 70k expenses), inflation, and emergency.

Annuities are fabulous for peace of mind in meeting or slightly exceeding current and future regular expenses. According to the Vanguard site, the Wellesley fund is currently yielding just over 3%. This 3% is reflected in the $34k Div +CG cited above. That means that any annuity purchase made with Wellesley funds will need to cover the 3% loss of income from Wellesley. Given current annuity payouts, this is a very steep hill to be climbing.

I'm not sure what the perceived gain will be for this steep climb. The annuity purchase will irrevocably tie up funds for monthly income not needed. If OP and spouse wish, for LTC-type purposes wish to move into some form of assisted living community, it will likely require a substantial up-front cash payment. The annuity investment will detract from the ability to do this. Moreover, the annuity will almost surely not be inflation protected, whereas the stock component of Wellesley plus the "dynamic" nature of its bond purchases provide some degree of inflation "protection-hope" over time.

Were the OP sitting on $1.7 million of cash or growth stocks, the annuity would, in comparison with those assets, make some good sense. Given the current Wellesley investment plus the fact that basic expenses are currently easily covered, I do not see the annuitization of Wellesley-int-annuity as making sense for the OP based on my understanding.

I've posted many times previously in favor of annuities. I just don't see a compelling benefit in this instance.

In case OP is not aware, an excellent source for researching annuity payouts is immediateannuities.com. There you can run all sorts of "what-if" cases regarding current age, deferrals, spousal coverage, etc. Look for the "advanced calculator" function for full-function.

Also, in case OP is not aware, the QLAC option for IRA funds might be a reasonable way to dip toes into annuitization with some potential benefits:
(1) QLACs are deferred annuities within the IRA.
(2) They delay income and reduce current RMD requirements
(3) They're limited to (I think - - it changes periodically) $130k so you won't over-invest.
(4) The deferring of the annuity provides a "mortality" kicker plus some compounding so that the income will be enhanced over an immediate annuity and will start later when inflation may have eaten into the current income surplus you have and additional funds will be needed
(5) The taxation delay on the increased income from the QLAC (5 or 10 years down the road) may be mitigated if tax brackets spread.

If annuitization just seems to be something you can't resist, a QLAC may be the most sensible way to go about it because it provides future income boosted by mortality credits without incurring taxation to withdraw IRA assets that would otherwise be needed to buy the annuity and would incur income tax. Moreover, the limits on QLAC amounts will prevent over-doing things.

I hope this is helpful. But one other thing. At some point in the past you decided on a prudent 40-60 asset allocation with a value and dividend orientation for the stock component (Wellesley fund). This decision resulted in an overall set of assets which for you as a couple to have ample income in retirement with modest growth. Annuitization of a substantial portion of the assets for additional income at the sacrifice of growth seems not to make sense. If this appears appealing because of recent hits to Wellesley because of bonds and stocks taking a simultaneous hit, please be careful about taking a drastic, irreversible step based on market timing. If you are really concerned about your current allocation and really want to change it, then maybe a moderate QLAC allocation and a bit of TIPS would be better than an large, immediate annuitization. You've done very well up to now, so beware of sudden impulses to make radical changes.

Hope this helps! Best wishes.
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Re: Annuities

Post by ruralavalon »

petedist wrote: Thu May 26, 2022 7:55 pm Income: $35K SS, RMD's $21K, Wife's TIAA Annuity $10K, Div+CG $34K
Expenses: $70K
That's $100k income versus $70k living expenses.

A Single Premium Immediate (SPIA) is most useful to cover a shortfall between income and spending needs. There does not seem to be a shortfall cover.

petedist wrote: Thu May 26, 2022 8:07 pm No long term health insurance. Wife was teacher, long time TIAA. A concern is who will care for us later.

Thanks for the advice on Annuities. It is appreciated.

Consider a Continuing Care Retirement Community (CCRC) to address long-term care issues. This will require a large upfront capital expenditure.

I think this is probably a better use of your capital than buying an income annuity.
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Re: Annuities

Post by heyyou »

This is an uncertain time to buy an annuity due to the rising interest rates that are only better than the past's near-zero rates, but could rise far higher which reduces the value of previously purchased annuity income. One solution is to buy multiple times, with each one done a few years apart, each with a fraction of the intended total purchase amount.
https://www.immediateannuities.com/annu ... rs/?sce=hc is a good website to compare the prices from various annuity providers.

The elder care attorney should be very learned about your state's laws concerning how assets are separated for one spouse's expensive health care, and how much can be reserved for the other spouse's future living expenses.

Not quite on topic, but I am using a longevity-based portfolio spending method that is somewhat similar to a do-it-yourself variable annuity but it does not have the guarantees that an annuity from an insurance company would have, nor does it have all of the expenses that every insurance company has. https://crr.bc.edu/wp-content/uploads/2 ... 19-508.pdf That method spends a rising percentage of each recent end-of-year portfolio value, plus the annual interest and dividends, all easily seen on your December brokerage statements.

Here at Bogleheads, do-it-yourself is often recommended because that does save on costs, leaving more money for the recipient. Consider a combination of using both purchased annuities and calculated spending from the remaining portfolio. The elder care attorney should have advice about that combination.
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Re: Annuities

Post by petedist »

Thank you.
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Re: Annuities

Post by Mel Lindauer »

Here's a Forbes column I wrote a number of years ago about building your own annuity using EE Bonds. (You could also do the same with I Bonds.)

https://www.forbes.com/sites/theboglehe ... 1a12737ba3
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Re: Annuities

Post by petedist »

Thanks so much for your help. JohnP
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Re: Annuities

Post by smectym »

Wrench wrote: Fri May 27, 2022 5:13 pm
smectym wrote: Thu May 26, 2022 11:53 pm
Stinky wrote: Thu May 26, 2022 8:29 pm Just to be clear - what type of annuities are you considering?

An annuity that will provide you with monthly income for the rest of your lives, like a single premium immediate annuity (SPIA), or an annuity that will grow over time, like a multi year guaranteed annuity (MYGA)?

And, for what it’s worth, I don’t believe that you can buy annuities through Vanguard any more.
Stinky is correct, Vanguard has exited the annuity business.

OP was a bit vague on what type of annuity they were thinking of, but I assume they are looking at a lump sum purchase of a monthly payout annuity.

My sole advice to OP is, to carefully consider whether at this point it’s better for you to buy a *life* monthly income annuity versus something like a *10 year fixed term* annuity.

The 10-year is likely to provide a significantly higher payout. The life annuity typically becomes a better deal only when you’re in your 80s.

Often, the assets remaining in your retirement accounts continue to grow; and then, if your 10 year fixed-term product expires, and you’re still in need of further annuity protection, you can then buy a life annuity at that point at much more favorable rates.

That may or may not be the right call for you; but my point is: at least think about it, and rule it in or out.
"The life annuity typically becomes a better deal only when you’re in your 80s."
I see this a lot on the forum and I don't understand it. Whether you buy at 65, 70, 75 or 80, the premium and payouts are actuarily neutral for one's life expectancy. If you buy early and die young, you don't care but your heirs lose. If you buy late, and die soon thereafter, you don't care and your heirs lose. But you are more likely to die soon when you buy later. In either case, if you live much longer than the life expectancy for your age cohort, then you win. More importantly, if one is able to purchase an SPIA at a younger age with a small fraction of their wealth so that expenses are 95-100% covered (e.g., the OP situation), then investing the balance of their portfolio with a higher risk allocation should feel more comfortable to most people. That very well could lead to a larger net worth for heirs because that portfolio could grow for many, many decades. Can someone point me to a definitive study that shows buying at age ~80 leads on average to a "better" deal by some measure? It seems to me that the actuaries who establish the SPIA rates are not going to do so in a manner where one age group gets a "better deal" than any other. That's just not the way insurance companies work.

Wrench
Wrench, fair enough, but my point encompasses more variables in a retiree’s cost/benefit calculation than annuity actuaries are concerned with. Almost all discussions of annuities on this forum are binarily focused on whether or not to buy a LIFE annuity, and the idea of a 10 year- (or other fixed-) term annuity is elided from consideration. But in some situations, such as when one is retiring at 60, and needs to fill a guaranteed income hole until SS at 70, a 10 year term provides much higher monthly income than a life annuity, for a much smaller capital outlay, thus solving the bridge-to-70 issue while leaving more assets to compound in retiree’s investment accounts.

Thereafter, revisiting whether to pull the trigger on a LIFE product once the 10-year has expired, our retiree will be 10 years older (so life annuity rates more attractive); investment accounts will have had 10 years of additional potential growth; and potentially, interest rates will be higher. But even so, perhaps retiree may elect at that point NOT to buy another annuity.

In short, I merely suggest that to dogmatically insist that “If you’re ever going to buy annuity it must be a LIFE annuity and don’t even think about a shorter, fixed term annuity” is not always correct. Sometimes the life annuity is the better call. But not always.
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Re: Annuities

Post by smectym »

smectym wrote: Mon May 30, 2022 3:00 am
Wrench wrote: Fri May 27, 2022 5:13 pm
smectym wrote: Thu May 26, 2022 11:53 pm
Stinky wrote: Thu May 26, 2022 8:29 pm Just to be clear - what type of annuities are you considering?

An annuity that will provide you with monthly income for the rest of your lives, like a single premium immediate annuity (SPIA), or an annuity that will grow over time, like a multi year guaranteed annuity (MYGA)?

And, for what it’s worth, I don’t believe that you can buy annuities through Vanguard any more.
Stinky is correct, Vanguard has exited the annuity business.

OP was a bit vague on what type of annuity they were thinking of, but I assume they are looking at a lump sum purchase of a monthly payout annuity.

My sole advice to OP is, to carefully consider whether at this point it’s better for you to buy a *life* monthly income annuity versus something like a *10 year fixed term* annuity.

The 10-year is likely to provide a significantly higher payout. The life annuity typically becomes a better deal only when you’re in your 80s.

Often, the assets remaining in your retirement accounts continue to grow; and then, if your 10 year fixed-term product expires, and you’re still in need of further annuity protection, you can then buy a life annuity at that point at much more favorable rates.

That may or may not be the right call for you; but my point is: at least think about it, and rule it in or out.
"The life annuity typically becomes a better deal only when you’re in your 80s."
I see this a lot on the forum and I don't understand it. Whether you buy at 65, 70, 75 or 80, the premium and payouts are actuarily neutral for one's life expectancy. If you buy early and die young, you don't care but your heirs lose. If you buy late, and die soon thereafter, you don't care and your heirs lose. But you are more likely to die soon when you buy later. In either case, if you live much longer than the life expectancy for your age cohort, then you win. More importantly, if one is able to purchase an SPIA at a younger age with a small fraction of their wealth so that expenses are 95-100% covered (e.g., the OP situation), then investing the balance of their portfolio with a higher risk allocation should feel more comfortable to most people. That very well could lead to a larger net worth for heirs because that portfolio could grow for many, many decades. Can someone point me to a definitive study that shows buying at age ~80 leads on average to a "better" deal by some measure? It seems to me that the actuaries who establish the SPIA rates are not going to do so in a manner where one age group gets a "better deal" than any other. That's just not the way insurance companies work.

Wrench
Wrench, fair enough, but my point encompasses more variables in a retiree’s cost/benefit calculation than annuity actuaries are concerned with. Almost all discussions of annuities on this forum are binarily focused on whether or not to buy a LIFE annuity, and the idea of a 10 year- (or other fixed-) term annuity is elided from consideration. But in some situations, such as when one is retiring at 60, and needs to fill a guaranteed income hole until SS at 70, a 10 year term provides much higher monthly income than a life annuity, for a much smaller capital outlay, thus solving the bridge-to-70 issue while leaving more assets to compound in retiree’s investment accounts.

Thereafter, revisiting whether to pull the trigger on a LIFE product once the 10-year has expired, our retiree will be 10 years older (so life annuity rates more attractive); investment accounts will have had 10 years of additional potential growth; and potentially, interest rates will be higher. But even so, perhaps retiree may elect at that point NOT to buy another annuity.

In short, I merely suggest that to dogmatically insist that “If you’re ever going to buy annuity it must be a LIFE annuity and don’t even think about a shorter, fixed term annuity” is not always correct. Sometimes the life annuity is the better call. But not always.
PS

And to the extent we are to place implicit faith in the calculations of the actuaries, it must at least be conceded that buying, say, a 10-year term vs. life is actuarily indifferent, and no special weight should be allowed to the wisdom of focusing solely on the life annuity product.
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Re: Annuities

Post by vineviz »

smectym wrote: Mon May 30, 2022 3:00 am Almost all discussions of annuities on this forum are binarily focused on whether or not to buy a LIFE annuity, and the idea of a 10 year- (or other fixed-) term annuity is elided from consideration. But in some situations, such as when one is retiring at 60, and needs to fill a guaranteed income hole until SS at 70, a 10 year term provides much higher monthly income than a life annuity, for a much smaller capital outlay, thus solving the bridge-to-70 issue while leaving more assets to compound in retiree’s investment accounts.
So-called "fixed annuities", like MYGAs, can be a good solution for many investors in some situations. The one you mentioned is an example.

The reason they tend to get omitted from generic discussions about annuities is that "fixed annuities" don't actually meet the definition of annuities used by economists. Fixed annuities are sold by insurance companies, but there isn't actually much - if any - insurance value in the "fixed annuity".

They are primarily investment products, in other words, much more like a bond fund or a CD than an actual annuity.
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Re: Annuities

Post by FoolMeOnce »

Wrench wrote: Fri May 27, 2022 5:13 pm
smectym wrote: Thu May 26, 2022 11:53 pm
Stinky wrote: Thu May 26, 2022 8:29 pm Just to be clear - what type of annuities are you considering?

An annuity that will provide you with monthly income for the rest of your lives, like a single premium immediate annuity (SPIA), or an annuity that will grow over time, like a multi year guaranteed annuity (MYGA)?

And, for what it’s worth, I don’t believe that you can buy annuities through Vanguard any more.
Stinky is correct, Vanguard has exited the annuity business.

OP was a bit vague on what type of annuity they were thinking of, but I assume they are looking at a lump sum purchase of a monthly payout annuity.

My sole advice to OP is, to carefully consider whether at this point it’s better for you to buy a *life* monthly income annuity versus something like a *10 year fixed term* annuity.

The 10-year is likely to provide a significantly higher payout. The life annuity typically becomes a better deal only when you’re in your 80s.

Often, the assets remaining in your retirement accounts continue to grow; and then, if your 10 year fixed-term product expires, and you’re still in need of further annuity protection, you can then buy a life annuity at that point at much more favorable rates.

That may or may not be the right call for you; but my point is: at least think about it, and rule it in or out.
"The life annuity typically becomes a better deal only when you’re in your 80s."
I see this a lot on the forum and I don't understand it. Whether you buy at 65, 70, 75 or 80, the premium and payouts are actuarily neutral for one's life expectancy. If you buy early and die young, you don't care but your heirs lose. If you buy late, and die soon thereafter, you don't care and your heirs lose. But you are more likely to die soon when you buy later. In either case, if you live much longer than the life expectancy for your age cohort, then you win. More importantly, if one is able to purchase an SPIA at a younger age with a small fraction of their wealth so that expenses are 95-100% covered (e.g., the OP situation), then investing the balance of their portfolio with a higher risk allocation should feel more comfortable to most people. That very well could lead to a larger net worth for heirs because that portfolio could grow for many, many decades. Can someone point me to a definitive study that shows buying at age ~80 leads on average to a "better" deal by some measure? It seems to me that the actuaries who establish the SPIA rates are not going to do so in a manner where one age group gets a "better deal" than any other. That's just not the way insurance companies work.

Wrench
While actuarially neutral, doesn't the higher payout of a later purchase provider better protection against greatly outliving the actuarial tables? Or am I not thinking about the math correctly? That seems to be the motivation of many SPIA purchasers.
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Re: Annuities

Post by HMSVictory »

OP - Wade Pfau has written extensively on retirement annuities in his book "saftey first retirement planning".

He has done a lot of research on this topic and is a fan of using annuities as the fixed income portion of the portfolio which allows the rest of the portfolio to be invested much more aggressively. Sounds like you might be up for this strategy. I would not annuitize my entire portfolio as you want to retain some liquidity and more importantly growth. If you wanted to do half in a SPIA and put the other half in equities I don't think that would be the worst option and you have longevity coverage via the annuity. The downside to annuities is they do not have COLA adjustments (that is where you equity portfolio comes in to provide growth).

What's wrong with leaving the entire thing in Wellesley Income fund?
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Re: Annuities

Post by Wrench »

smectym wrote: Mon May 30, 2022 3:00 am
Wrench wrote: Fri May 27, 2022 5:13 pm
smectym wrote: Thu May 26, 2022 11:53 pm
Stinky wrote: Thu May 26, 2022 8:29 pm Just to be clear - what type of annuities are you considering?

An annuity that will provide you with monthly income for the rest of your lives, like a single premium immediate annuity (SPIA), or an annuity that will grow over time, like a multi year guaranteed annuity (MYGA)?

And, for what it’s worth, I don’t believe that you can buy annuities through Vanguard any more.
Stinky is correct, Vanguard has exited the annuity business.

OP was a bit vague on what type of annuity they were thinking of, but I assume they are looking at a lump sum purchase of a monthly payout annuity.

My sole advice to OP is, to carefully consider whether at this point it’s better for you to buy a *life* monthly income annuity versus something like a *10 year fixed term* annuity.

The 10-year is likely to provide a significantly higher payout. The life annuity typically becomes a better deal only when you’re in your 80s.

Often, the assets remaining in your retirement accounts continue to grow; and then, if your 10 year fixed-term product expires, and you’re still in need of further annuity protection, you can then buy a life annuity at that point at much more favorable rates.

That may or may not be the right call for you; but my point is: at least think about it, and rule it in or out.
"The life annuity typically becomes a better deal only when you’re in your 80s."
I see this a lot on the forum and I don't understand it. Whether you buy at 65, 70, 75 or 80, the premium and payouts are actuarily neutral for one's life expectancy. If you buy early and die young, you don't care but your heirs lose. If you buy late, and die soon thereafter, you don't care and your heirs lose. But you are more likely to die soon when you buy later. In either case, if you live much longer than the life expectancy for your age cohort, then you win. More importantly, if one is able to purchase an SPIA at a younger age with a small fraction of their wealth so that expenses are 95-100% covered (e.g., the OP situation), then investing the balance of their portfolio with a higher risk allocation should feel more comfortable to most people. That very well could lead to a larger net worth for heirs because that portfolio could grow for many, many decades. Can someone point me to a definitive study that shows buying at age ~80 leads on average to a "better" deal by some measure? It seems to me that the actuaries who establish the SPIA rates are not going to do so in a manner where one age group gets a "better deal" than any other. That's just not the way insurance companies work.

Wrench
Wrench, fair enough, but my point encompasses more variables in a retiree’s cost/benefit calculation than annuity actuaries are concerned with. Almost all discussions of annuities on this forum are binarily focused on whether or not to buy a LIFE annuity, and the idea of a 10 year- (or other fixed-) term annuity is elided from consideration. But in some situations, such as when one is retiring at 60, and needs to fill a guaranteed income hole until SS at 70, a 10 year term provides much higher monthly income than a life annuity, for a much smaller capital outlay, thus solving the bridge-to-70 issue while leaving more assets to compound in retiree’s investment accounts.

Thereafter, revisiting whether to pull the trigger on a LIFE product once the 10-year has expired, our retiree will be 10 years older (so life annuity rates more attractive); investment accounts will have had 10 years of additional potential growth; and potentially, interest rates will be higher. But even so, perhaps retiree may elect at that point NOT to buy another annuity.

In short, I merely suggest that to dogmatically insist that “If you’re ever going to buy annuity it must be a LIFE annuity and don’t even think about a shorter, fixed term annuity” is not always correct. Sometimes the life annuity is the better call. But not always.
You get no argument here from me relative to each individual choosing the right annuity, fixed or lifetime, based upon their own individual situation. Period certain annuities are an option that may make sense in some situations. SPIAs without riders make better sense in others. And in yet other cases, SPIAs with refund rider, and/or period certain rider may make the most sense. The only point of my post was that a 65 year old should not reject an SPIA out of hand just because one can get a higher payout at 80 than 65 for the same premium. The right time to buy any annuity if at all, and the type and riders, should be based on one's fixed income needs and desire for stability in an income stream; one's portfolio size relative to one's income needs; the time period that one needs the income; one's personal risk tolerance; one's desire for a legacy; one's health and that of one's spouse if there is one; one's desire, and current and future ability to manage one's portfolio absent the annuity; and so forth.

Wrench
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Taylor Larimore
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Re: Annuities

Post by Taylor Larimore »

Wrench wrote:
"The life annuity typically becomes a better deal only when you’re in your 80s."
I see this a lot on the forum and I don't understand it.
Wrench

Most annuity salespeople urge us to buy SPIA annuities NOW. These are reasons for WAITING:

* The premium is less or the lifetime income is larger.

* You might need the cash for an emergency.

* Inflation is less of a factor which allows an expensive "inflation rider" to be avoided.

* Current low interest rates are likely to become higher, thereby making the SPIA payments larger by waiting.

* Less time for insurance companies to get in trouble.

* If your health deteriorates an annuity is usually a bad choice.

* If you wait, and your portfolio becomes larger than needed, you may never need to purchase an annuity.

Best wishes
Taylor
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Re: Annuities

Post by adamthesmythe »

Have a look at

https://www.jstor.org/stable/43998275

A short quotation from the abstract

"prices react more rapidly and with greater sensitivity to an increase rather than a decrease in [interest] rates"

"prices are less sensitivity to [interest] rates than expected"

I suppose the reason that some think one should wait to 80 is because there is then less time for inflation to hurt. On the other hand the possible inflation impact is partly mitigated by the reduced sensitivity to interest rates noted above AND the fact that more of the payout is due to mortality credits.

The possible benefit of an annuity if one spouse needs LTC should also be considered. This is probably state-dependent and should be explored with your lawyer but may be an additional benefit of an annuity.

Apparently it is beneficial to buy annuities when interest rates are falling rather than when they are rising.
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Re: Annuities

Post by Wrench »

Taylor Larimore wrote: Mon May 30, 2022 6:39 pm Wrench wrote:
"The life annuity typically becomes a better deal only when you’re in your 80s."
I see this a lot on the forum and I don't understand it.
Wrench

Most annuity salespeople urge us to buy SPIA annuities NOW. These are reasons for WAITING:

* The premium is less or the lifetime income is larger.
But ultimately it comes down to how long you live and when you die after you get the annuity. It always IS actuarily neutral on average, so you are only guessing if you will beat the odds regardless of what age you buy.
* You might need the cash for an emergency.
It is NEVER a good idea to purchase an annuity regardless of age if there are insufficient resources remaining for emergencies.
* Inflation is less of a factor which allows an expensive "inflation rider" to be avoided.
I agree - one of the best reasons I have seen, though we do not know the future. We could have extended periods of deflation or very low inflation that make this reason inconsequential.
* Current low interest rates are likely to become higher, thereby making the SPIA payments larger by waiting.
I have seen the predictions of higher interest rates my entire investing life and they have yet to materialize. Will they go up now? Maybe. Maybe not. No body knows.
* Less time for insurance companies to get in trouble.
Another good reason, but easily dealt with by purchasing only from the highest rated companies, and within the limits of the state guarantor associations.
* If your health deteriorates an annuity is usually a bad choice.
So true, but for those who are healthy at 65 or 70, it is nearly impossible to predict future health, nor the medical advances that might allow one to overcome diseases that would certainly have killed those in previous generations.
* If you wait, and your portfolio becomes larger than needed, you may never need to purchase an annuity.
Or, your portfolio could become MUCH smaller if you wait and there is a major recession a la the financial crisis. Again, nobody knows the future.
Best wishes
Taylor
Jack Bogle's Words of Wisdom: "I (probably prefer) an immediate annuity, which starts paying you right away."
Thank you Taylor. Your words, as usual, are wise. But for every reason above, I can rationally counter with the opposite in red. Ultimately, I still respectfully suggest it comes down to each individuals personal situation and their own personal feelings and desires. IMHO, there is no "one size fits all" (with the possible exception of the three fund portfolio!) when it comes to pretty much anything in financial planning. When it makes sense to purchase an SPIA (if at all) is no exception.

Wrench
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Re: Annuities

Post by ncbill »

HMSVictory wrote: Mon May 30, 2022 8:20 am OP - Wade Pfau has written extensively on retirement annuities in his book "saftey first retirement planning".

He has done a lot of research on this topic and is a fan of using annuities as the fixed income portion of the portfolio which allows the rest of the portfolio to be invested much more aggressively. Sounds like you might be up for this strategy. I would not annuitize my entire portfolio as you want to retain some liquidity and more importantly growth. If you wanted to do half in a SPIA and put the other half in equities I don't think that would be the worst option and you have longevity coverage via the annuity. The downside to annuities is they do not have COLA adjustments (that is where you equity portfolio comes in to provide growth)...
That could be a big downside, though.

Consider a 1966 retiree who saw under 2% inflation the previous year, nearly double that the year they retire, then over 5% by 1970, moving into double-digits over the next decade after that before culminating at around 14%.

So they faced rising annual inflation for essentially the entire first half of a theoretical 30-year retirement.

I wouldn't want a non-COLA SPIA in that environment.

I suspect the only ones truly happy with non-COLA SPIAs are those like Tyler who started with them in a high interest rate environment, then saw the economy enter into a falling interest rate environment...market timing by luck of the draw.
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Re: Annuities

Post by nisiprius »

It is a very great pity that CPI-linked SPIAs don't seem to be available any more. I don't think the insurance companies saw inflation coming, I think that lack of interest in SPIAs generally, and lack of math appreciation, did them in.

It is still possible to get SPIAs that have payouts that increase by a fixed compounded amount, e.g. +3%/year, compounded. That isn't looking so great right now, but it's better than level, and probably is OK in the long run.

We own two CPI-linked SPIAs. We also have an important income source in a TIAA lifetime payout contract with a "graded options," which creates payments that increase year to year in some incomprehensible way.

Of course, the CPI-linked SPIAs failed to make the correct adjustment this year, which was the subject of a long thread. The insurance company made the correct adjustments and got it all squared away. I believe it was an innocent mistake, but the insurance-haters have a point that they shouldn't be totally set-and-forget.

In every discussion I've ever seen, the dialog has gone

"but they don't increase with inflation"
"but the inflation-linked ones do"
"but those cost a lot more"

The inflation-linked ones, when they were available, cost just about the same as 3%-compound-increasing SPIAs.
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Re: Annuities

Post by nisiprius »

It's worth noting that interest is only one of three sources for SPIA payouts. I can't vouch for the quantitative accuracy of this chart I found in a web search, but it's qualitatively right:

Image

That doesn't mean interest rates aren't important, but they are somewhat less important than you might think. The reason for buying an SPIA is to get access to "mortality credits," and, generally, to increase the "efficiency" of your retirement portfolio drawdown--spend more of your dollars yourself, leaving less at the end for anybody else. This mechanism has value even if interest rates are low. It is most important if portfolio size is in a grey area. If you have a portfolio and spending needs that make it perfectly acceptable if a lot of the portfolio is unspent by you, you don't need one.
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Re: Annuities

Post by HMSVictory »

ncbill wrote: Tue May 31, 2022 8:56 am
HMSVictory wrote: Mon May 30, 2022 8:20 am OP - Wade Pfau has written extensively on retirement annuities in his book "saftey first retirement planning".

He has done a lot of research on this topic and is a fan of using annuities as the fixed income portion of the portfolio which allows the rest of the portfolio to be invested much more aggressively. Sounds like you might be up for this strategy. I would not annuitize my entire portfolio as you want to retain some liquidity and more importantly growth. If you wanted to do half in a SPIA and put the other half in equities I don't think that would be the worst option and you have longevity coverage via the annuity. The downside to annuities is they do not have COLA adjustments (that is where you equity portfolio comes in to provide growth)...
That could be a big downside, though.

Consider a 1966 retiree who saw under 2% inflation the previous year, nearly double that the year they retire, then over 5% by 1970, moving into double-digits over the next decade after that before culminating at around 14%.

So they faced rising annual inflation for essentially the entire first half of a theoretical 30-year retirement.

I wouldn't want a non-COLA SPIA in that environment.

I suspect the only ones truly happy with non-COLA SPIAs are those like Tyler who started with them in a high interest rate environment, then saw the economy enter into a falling interest rate environment...market timing by luck of the draw.
I agree about the non-COLA aspect of annuities but if you invest the other part of your portfolio heavily in equities it gives you the growth (hopefully) that you need to offset the loss of income due to inflation with the annuity. Of course the age at which you start this at is very important (ie: retiring at 52 is very different then retiring at 72).

I would use a 3% annual inflation assumption for retirement.... but that is a SWAG.
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Re: Annuities

Post by Ben Mathew »

Wrench and Stinky make good points about actuarial neutrality from the insurer's perspective. I would say the case for waiting is that an annuity is generally an expensive product (priced above bonds to cover insurer's costs). So it makes sense to avoid them except when the benefit becomes more compelling. The benefit becomes compelling at higher ages when risk of death is high and mortality credits will make a large share of the payouts.

Waiting also minimizes the inflation risk of nominal annuities, which are the only kind now available for purchase.

Neither of these arguments apply to delaying Social Security, which is a well priced inflation adjusted annuity.
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Re: Annuities

Post by Stinky »

On the CPI annuity -

The regulators allow “reasonable” reserves to be set up to back a regular non CPI annuity, because the future mortality rates for the annuitant population are highly predictable, and because insurers can purchase assets that reasonably well “match” the expected future benefit payments.

If insurers were to offer a CPI linked annuity, that would introduce another variable into the mix. That new variable is the uncertainty of future payment amounts because of the CPI linkage.

If there existed a financial “hedge” against changes in the CPI, that could be purchased by the insurer to hedge the inflation risk over the entire SPIA lifetime (maybe 30-40 years), then the insurer could issue the CPI annuities and buy the financial hedging instrument. The regulators would then allow the insurer to set up “reasonable” reserves.

But without that hedge, I expect that the regulator would require punitively high reserves, because of the huge uncertainty in future benefit payments. In turn, that would raise the price of the product to an uneconomic level.

And I believe that’s why no US life insurer currently offers a CPI linked SPIA - the lack of an adequate financial hedge for the CPI risk.
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Re: Annuities

Post by vineviz »

Stinky wrote: Tue May 31, 2022 10:41 am If there existed a financial “hedge” against changes in the CPI, that could be purchased by the insurer to hedge the inflation risk over the entire SPIA lifetime (maybe 30-40 years), then the insurer could issue the CPI annuities and buy the financial hedging instrument. The regulators would then allow the insurer to set up “reasonable” reserves.
Instruments like this do exist, in the form of inflation swaps. These swaps trade in a large and liquid market.

The most commonly traded tenors are 10 years or less, but tenors of 15 to 30 years are traded frequently enough that an insurance company could immunize a pool of CPI-linked annuities with ease at a relatively low cost.

As nisiprius noted above, when CPI-linked annuities were available on the market they were sold at prices that implied about a 2.5% to 3% rate of expected inflation which was not significantly different from the TIPS break-even rate.
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Stinky
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Re: Annuities

Post by Stinky »

vineviz wrote: Tue May 31, 2022 11:37 am
Stinky wrote: Tue May 31, 2022 10:41 am If there existed a financial “hedge” against changes in the CPI, that could be purchased by the insurer to hedge the inflation risk over the entire SPIA lifetime (maybe 30-40 years), then the insurer could issue the CPI annuities and buy the financial hedging instrument. The regulators would then allow the insurer to set up “reasonable” reserves.
Instruments like this do exist, in the form of inflation swaps. These swaps trade in a large and liquid market.

The most commonly traded tenors are 10 years or less, but tenors of 15 to 30 years are traded frequently enough that an insurance company could immunize a pool of CPI-linked annuities with ease at a relatively low cost.

As nisiprius noted above, when CPI-linked annuities were available on the market they were sold at prices that implied about a 2.5% to 3% rate of expected inflation which was not significantly different from the TIPS break-even rate.
I stand corrected on the availability of inflation swaps. Thanks for the information.

From the insurance company/regulator point of view, the question would then move to whether adequate amounts of swaps for the proper duration (relatively long) are available at a reasonable price, from counter parties who are reliable. As always, could the insurer sell this product at a price to make a profit.

Thanks again for your input.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
JDave
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Re: Annuities

Post by JDave »

I recently read an article saying retired folks feel happier about spending annuity money than savings - the idea being that with the annuities there is no worry of running out of money. Perhaps put some of your money into an annuity?
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nisiprius
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Re: Annuities

Post by nisiprius »

Stinky wrote: Tue May 31, 2022 10:41 am...If there existed a financial “hedge” against changes in the CPI, that could be purchased by the insurer to hedge the inflation risk over the entire SPIA lifetime (maybe 30-40 years), then the insurer could issue the CPI annuities and buy the financial hedging instrument. The regulators would then allow the insurer to set up “reasonable” reserves.

But without that hedge, I expect that the regulator would require punitively high reserves, because of the huge uncertainty in future benefit payments. In turn, that would raise the price of the product to an uneconomic level.

And I believe that’s why no US life insurer currently offers a CPI linked SPIA - the lack of an adequate financial hedge for the CPI risk.
But they did issue them.
For years.
I own two of them.
Purchased around 2007. And they were available, at least through 2020.

And 30-year TIPS exist and are continuing to be issued.
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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bertilak
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Re: Annuities

Post by bertilak »

nisiprius wrote: Tue May 31, 2022 9:09 am It's worth noting that interest is only one of three sources for SPIA payouts. I can't vouch for the quantitative accuracy of this chart I found in a web search, but it's qualitatively right:

Image

The reason for buying an SPIA is to get access to "mortality credits."
Can we say mortality credits is the insurance aspect of annuities? Is everything else is just (over-)paying someone to rearrange the deck chairs?
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vineviz
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Re: Annuities

Post by vineviz »

Stinky wrote: Tue May 31, 2022 11:48 am From the insurance company/regulator point of view, the question would then move to whether adequate amounts of swaps for the proper duration (relatively long) are available at a reasonable price, from counter parties who are reliable. As always, could the insurer sell this product at a price to make a profit.
The USD inflation swap market is huge, with monthly traded volumes of $80 billion+ over the past couple of years. That's about 2 orders of magnitude larger than the market for immediate income annuities.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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vineviz
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Re: Annuities

Post by vineviz »

bertilak wrote: Tue May 31, 2022 1:00 pm Can we say mortality credits is the insurance aspect of annuities? Is everything else is just (over-)paying someone to rearrange the deck chairs?
I don't think that's an obvious conclusion. The imbedded cost managing the investment portfolios for insurance companies isn't all that high, and they have some economizes of scale and liquidity advantages sufficient that it's not obvious that the "investment" component of the income annuity costs much more than a similar index ETF would cost.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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