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Annuities: plain vanilla vs. fixed COLA
Old 05-30-2016, 03:00 PM   #1
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Annuities: plain vanilla vs. fixed COLA

A good comparison of a plain vanilla SPIA annuity and a fixed-rate COLA one:

Oblivious Investor: Annuities with Fixed Cost of Living Adjustments Don’t Protect Against Inflation

Quote:
My point here isn’t that the COLA annuities are a bad idea. As you’ll notice, they do a better job of protecting against longevity than annuities without COLAs. (That is, the longer the lifetime, the better they perform.)

But annuities with fixed cost of living adjustments do not protect against inflation. Not only do they not keep up with high rates of inflation, they actually perform worse in the face of inflation than annuities without COLAs. If you want an annuity that provides true inflation protection, you have to buy one with payments that are tied to the actual rate of inflation.
Just posting for those who are interested. At this point, I'm not inclined to get any type of annuity.
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Old 05-30-2016, 03:22 PM   #2
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Thanks for posting.

Interesting article. I am also not, nor ever will be, an annuity client, but always like to make myself better informed.
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Old 05-30-2016, 06:32 PM   #3
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I am not an annuity fan either, but does anyone still offer an annuity tied to the "actual rate of inflation?" It would have to be outrageously expensive for the provider to factor in all the possible future rates if inflation. I thought a fixed rate of increase annuity was the only alternative (to level payouts).
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Old 05-30-2016, 08:02 PM   #4
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I like annuities when they are based on good interest rates.....I don't like annuities that lock in low interest rates. So I hate them now, but might love them in 10 years time.
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Old 05-31-2016, 06:59 AM   #5
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Originally Posted by Midpack View Post
I am not an annuity fan either, but does anyone still offer an annuity tied to the "actual rate of inflation?" It would have to be outrageously expensive for the provider to factor in all the possible future rates if inflation. I thought a fixed rate of increase annuity was the only alternative (to level payouts).
Some have an upside cap. AIG offers a product with no upside cap but the payout drops if there is deflation. It is an expensive "option."

Quote:
Consumer Price Index-U: This option provides an annual cost-of-living (inflation) adjustment to your income payment. Your income payments are adjusted annually and can increase or decrease along with the non-seasonally adjusted Consumer Price Index (CPI-U) published by the U.S. Bureau of Labor Statistics. On the upside, there is no cap on the increase percentage. On the downside, rest assured you will never receive less than your initial income payment.
Source: https://www.immediateannuities.com/a...te-annuity.pdf

The following is contained in the AIG rate quote.

Quote:
This quote contains a non-seasonally adjusted Consumer Price Index-U (All Urban Consumers Index, ["CPI"]) feature. Each year on January 1st the benefit payment will be adjusted for changes in the CPI as published by the Bureau of Labor Statistics. The adjustment can raise or lower the benefit payment for the next year, depending upon changes in the CPI.

A CPI decrease will never reduce the payment below the initial benefit payment amount shown on this quote. By guaranteeing a minimum benefit payment, any negative movements in the CPI which are not applied to the benefit payment will be used to offset future CPI increases by not changing the benefit payment until the year in which the cumulative annual increases exceed the cumulative negative adjustment. In the year the cumulative increases in the CPI exceed the cumulative negative adjustment, the benefit payment will be increased only to the extent the CPI exceeds the cumulative negative adjustment.
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Old 05-31-2016, 12:19 PM   #6
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Laddered annuities after age 75 are a good alternative, depending on your evaluation of your life expectancy. I personally consider annuities only as a back-up plan. The best annuity, of course, remains delaying SS until 70.
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Old 05-31-2016, 12:41 PM   #7
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The best annuity, of course, remains delaying SS until 70.
That's how I see it too.
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Old 05-31-2016, 01:21 PM   #8
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That's how I see it too.
Me too, as long as I'm not residing permanently in the dirt apartment complex.
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Old 05-31-2016, 04:15 PM   #9
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Originally Posted by Midpack View Post
I am not an annuity fan either, but does anyone still offer an annuity tied to the "actual rate of inflation?" It would have to be outrageously expensive for the provider to factor in all the possible future rates if inflation. I thought a fixed rate of increase annuity was the only alternative (to level payouts).

Why isn't it possible to provide them if we already have inflation adjusted TIPS? I.e., the insurance company somehow use the yearly inflation adjustment to generate the COLA? I say "somehow" because I wouldn't know myself


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Old 05-31-2016, 04:27 PM   #10
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Why isn't it possible to provide them if we already have inflation adjusted TIPS? I.e., the insurance company somehow use the yearly inflation adjustment to generate the COLA? I say "somehow" because I wouldn't know myself
Calculating the adjustment/COLA isn't the issue.

The TIPS provider can print money, annuity providers cannot. An annuity provider would want to plan for another 1979-1981 CPI period if not worse.

And individual TIPS have a fixed maturity (5, 10 or 30 yrs). The (average) maturity of an annuity is known with a little less certainty and us typically longer than the average TIP.
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Old 05-31-2016, 07:21 PM   #11
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Laddered annuities after age 75 are a good alternative, depending on your evaluation of your life expectancy. I personally consider annuities only as a back-up plan. The best annuity, of course, remains delaying SS until 70.
That (as always depends).....I have ample lifetime income from a pension, rent and a second SS check from the UK, so deferring US SS and waiting until I get into my early 80s for it to pay off isn't a good choice for me. I will take SS as early as I can.
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Old 05-31-2016, 07:30 PM   #12
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I wonder if you could build your own fixed adjusted by by buying a SPIA and then a series of deferred payout annuities that start paying the desired % increase.

So in the extreme, if I buy a SPIA that pays $2,000/month and a 1 year deferred annuity that pays $60/month and a 2 year deferred annuity that pays $62/month, et al assuming you want your benefits to increase 3% annually. As a practical matter you might buy deferred annuities every three years or so to provide an inflation bump. This way, you could build whatever fixed percentage increase that you want.
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Old 05-31-2016, 08:24 PM   #13
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Originally Posted by pb4uski View Post
I wonder if you could build your own fixed adjusted by by buying a SPIA and then a series of deferred payout annuities that start paying the desired % increase.

So in the extreme, if I buy a SPIA that pays $2,000/month and a 1 year deferred annuity that pays $60/month and a 2 year deferred annuity that pays $62/month, et al assuming you want your benefits to increase 3% annually. As a practical matter you might buy deferred annuities every three years or so to provide an inflation bump. This way, you could build whatever fixed percentage increase that you want.
If you google "annuity ladder", you'll see a few interesting articles on the subject. I don't see one that specifically addresses doing it to simulate a COLA - they discuss mainly reducing interest rate risk.
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Old 05-31-2016, 08:39 PM   #14
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I am thinking about doing a 50% Roth conversion nice and slow (15%) on the IRA and then buying a fixed 20 year annuity (in about 5 years) with the remains of the IRA.

SS (my account) will be FRA and the taxes will be known.

Interest rates will not be known, but everyone seems to think they will go up.
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Old 05-31-2016, 10:29 PM   #15
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Calculating the adjustment/COLA isn't the issue.

The TIPS provider can print money, annuity providers cannot. An annuity provider would want to plan for another 1979-1981 CPI period if not worse.

And individual TIPS have a fixed maturity (5, 10 or 30 yrs). The (average) maturity of an annuity is known with a little less certainty and us typically longer than the average TIP.

Sorry I don't think I was clear. Couldn't the annuity providers buy TIPS in order to cover the inflation kicker every year. I realize that the TIPS have fixed maturity and that there would be issues matching durations, but it doesn't seem insurmountable.


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Old 06-01-2016, 03:38 AM   #16
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Sorry I don't think I was clear. Couldn't the annuity providers buy TIPS in order to cover the inflation kicker every year. I realize that the TIPS have fixed maturity and that there would be issues matching durations, but it doesn't seem insurmountable.
Interesting, and you're right, I didn't see that angle.
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Old 06-01-2016, 12:14 PM   #17
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As a practical matter you might buy deferred annuities every three years or so to provide an inflation bump. This way, you could build whatever fixed percentage increase that you want.

Like many others here, I can't see going the annuity route any time soon given current rates. But in a much better environment I'd consider addressing my inflation concerns by laddering simple SPIAs on an as-needed basis. Thinking-as you mentioned-every three, or perhaps just every five years. But as I'm already delaying SS to 70 along with carrying a 30-yr low interest mortgage, I'm hoping I wouldn't have to adjust all that much or all that often. (The small incremental deferreds are another variation I guess I hadn't thought of.) In all likelihood though, I expect a reasonable SWR along with SS@70 will make all of that unnecessary.
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Old 06-01-2016, 04:51 PM   #18
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I'm with you... I don't see annuities in my future at all... I plan to dance with the girl that brung me to ER and her name is Equities... but if someone wanted a fixed COLA annuity what I outlined would be yet another option.
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Old 06-01-2016, 05:53 PM   #19
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I'm with you... I don't see annuities in my future at all... I plan to dance with the girl that brung me to ER and her name is Equities... but if someone wanted a fixed COLA annuity what I outlined would be yet another option.
Hmm, I'll bet she'd get along with my girl. Her name is Dee Lei'd Gratification.
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