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Annuities: plain vanilla vs. fixed COLA
05-30-2016, 02:00 PM
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#1
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Full time employment: Posting here.
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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.
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Just posting for those who are interested. At this point, I'm not inclined to get any type of annuity.
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05-30-2016, 02:22 PM
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#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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Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. Groucho Marx
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05-30-2016, 05:32 PM
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#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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No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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05-30-2016, 07:02 PM
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#4
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Join Date: Feb 2006
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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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“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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05-31-2016, 05:59 AM
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#5
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Join Date: Jan 2014
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Quote:
Originally Posted by Midpack
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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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.
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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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05-31-2016, 11:19 AM
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#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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05-31-2016, 11:41 AM
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#7
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Full time employment: Posting here.
Join Date: Oct 2009
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Quote:
Originally Posted by Options
The best annuity, of course, remains delaying SS until 70.
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That's how I see it too.
__________________
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"Wealth consists not in having great possessions, but in having few wants."
--Epictetus
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05-31-2016, 12:21 PM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by Focus
That's how I see it too.
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Me too, as long as I'm not residing permanently in the dirt apartment complex.
__________________
Part-Owner of Texas
Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. Groucho Marx
In dire need of: faster horses, younger woman, older whiskey, more money.
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05-31-2016, 03:15 PM
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#9
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Join Date: Aug 2009
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Quote:
Originally Posted by Midpack
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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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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05-31-2016, 03:27 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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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.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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05-31-2016, 06:21 PM
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#11
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Quote:
Originally Posted by Options
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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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.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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05-31-2016, 06:30 PM
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#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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05-31-2016, 07:24 PM
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#13
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Quote:
Originally Posted by pb4uski
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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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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05-31-2016, 07:39 PM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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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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05-31-2016, 09:29 PM
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#15
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Quote:
Originally Posted by Midpack
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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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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06-01-2016, 02:38 AM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by bmcgonig
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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Interesting, and you're right, I didn't see that angle.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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06-01-2016, 11:14 AM
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#17
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Recycles dryer sheets
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Quote:
Originally Posted by pb4uski
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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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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06-01-2016, 03:51 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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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.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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06-01-2016, 04:53 PM
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#19
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Recycles dryer sheets
Join Date: Sep 2011
Location: MSP
Posts: 304
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Quote:
Originally Posted by pb4uski
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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Hmm, I'll bet she'd get along with my girl. Her name is Dee Lei'd Gratification.
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