Another federal annuity study

[Htown Harry]

In early 2010, there was a task force examining how the administration might increase retirement security by changing policies related to annuities. There was at least one thread on the topic:
http://www.early-retirement.org/forums/f52/annuities-wholesaled-by-obama-administration-48633.html

Now it's the General Accounting office's turn:
Delay Taking Social Security, Add Annuity to Survive Retirement, GAO Says - Bloomberg

"The GAO study was requested by Senator Kohl, a Wisconsin Democrat and chairman of the Senate Special Committee on Aging. The shift by employers from traditional pension plans, which generally guarantee income for life, to 401(k) savings accounts has put more responsibility on Americans for managing their “hard-earned savings” during retirement, Kohl said.

Almost half of those near retirement are predicted to run out of money and won’t be able to cover their basic expenses and uninsured health-care costs, July 2010 data from the Washington- based Employee Benefit Research Institute show. A husband and wife who are both 65 years old have about a 47 percent chance that at least one of them will live until 90, the GAO report said.

An immediate annuity can protect retirees from the risk of outliving their savings, according to the study. For example, a contract purchased for $95,500 by a 66-year-old couple in Florida may provide $4,262 a year until the death of the surviving spouse and include increases for inflation, the report said. Six percent of workers with a 401(k)-type plan opted for an annuity at retirement, said the study."
​

The full study is available here: http://www.gao.gov/new.items/d11400.pdf

The report has this subtitle, which will be news to very few here on the board:

"Ensuring Income throughout Retirement Requires Difficult Choices"

 

[Nords]

For example, a contract purchased for $95,500 by a 66-year-old couple in Florida may provide $4,262 a year until the death of the surviving spouse and include increases for inflation, the report said.

"May" provide a 4.5% withdrawal rate for 24 years?!? What kind of insurance company uses that sort of language?

I wonder what sort of campaign contributions go to the senator who chairs a special committee on aging.

 

[chinaco]

Thanks.

Good information about the state of boomers retirement prep and some important financial decisions they should consider.

 

[2B]

I didn't think the typical boomer had any retirement savings. At least, that's the impression I've gotten by reading all the other "studies."

As for annuities, my opinion is that you should "just say no." I can't imagine an insurance company intentionally doing anything that would ultimately be to my benefit. I would much rather have my $95,000 in my account than the promise of an insurance company for $4,200 per year.

I know some people love all or some types of annuities and that's their business. I'm just sharing my opinion. Again.

Insurance companies are salivating to get their hands on as much of the boomer savings as they can get. Various "friends" in Congress are doing what they can to facilite the process. I've seen some proposals that were even going to make 401k to annuity conversions mandatory. Fortunately, they haven't gone anywhere, yet.

Of course, SS is a government "guaranteed" annuity. No telling what might happen but I have more faith in SS than the promise of an insurance company. I see deferring SS to age 70 as the most cost effective way to purchase "income for life."

I also have decent, but not too decent, annuities in the form of some old defined benefit pensions. All together, I believe DW and I could survive pretty well on age 70 SS and my pensions. Not "needing" additional income for base case living expenses obviously help form my opinion.

I think it was in the 17th century that Britain and France financed their national debt by selling annuities. I wonder why that hasn't been considered? Oh wait, that wouldn't get any campaign contributions.

 

[Htown Harry]

I wonder what sort of campaign contributions go to the senator who chairs a special committee on aging.

I was surprised at the answer: Kohl self-finances over 90% of his campaigns. He has also announced he will retire when his term ends.

 

[chinaco]

...

As for annuities, my opinion is that you should "just say no." ...

Don't hold back!

That report did not suggest that DC plans force an annuity on someone, but it did suggest the idea of making sure they would be available in DC plans as an option.

It may not be right for you...

But a guaranteed lifetime income can be a very valuable and powerful at reducing cetain peoples' risk. For more reasons that just longevity risk... many people do not know how to manage a portfolio.

Plus people that oppose those solutions often compare SPIAs to a riskier portfolio of securities....

Let's assume a situation... that we know happens and unfortunately all too often. A boomer that has no clue about the stock market or how to manage their portfolio.... and is continually making bad decisions and losing wealth... like pulling their money out of stock mutual funds at the wrong time and going back in at the wrong time. Or consider the slightly more enlightened person that hires a financial planner... and let's assume the better scenario in that case (IMO)... a fee based planner that charges say 1% yearly to manage their no-load mutual funds. 1% every year adds up!!! Plus there is the risk those people screw up an lose money.... I know several people (educated professionals.. smart in their own profession) that use these types of planners... their planners were timing... pulling money out, jumping back in... etc.

Do you think those people, [just maybe], might be better off considering a guaranteed income solution? With at least perhaps some of their money?

 

[donheff]

It is quite a detailed piece of work (typical for a GAO report). Looking just at the executive summary it doesn't seem too bad. They state that for the two middle net-wealth households with from $350K to $375K net wealth the "experts" advise using a portion of the savings for annuities, draw down the remainder at an annual rate (e.g. 4%), use lifetime income rather than lump sum from a DB plan, and delay SS. Sounds like Otar to me. The table of contents lists a number of policy changes they address but I haven't read them yet.

 

[2B]

Do you think those people, [just maybe], might be better off considering a guaranteed income solution? With at least perhaps some of their money?

I think these people need to learn how to manage their money. After they learn to manage their money, they may decide that a FA or an annuity makes sense. Just charging into one or the other or both doesn't create a solid plan to their benefit. It just creates an opportunity for a FA or insurance company to fleece another rube.

 

[73ss454]

Heh, they should have gotten in on the 5% Pen Fed CD in January. Not only would the recipient get more monthly the family would get the 95K when they are gone or at the end of 10 years.

 

[rescueme]

Heh, they should have gotten in on the 5% Pen Fed CD in January. Not only would the recipient get more monthly the family would get the 95K when they are gone or at the end of 10 years.

Can't compare the two. One is for a limited term, the other for a lifetime.

Also an annuity (e.g. SPIA) will return a bit of your initial "investment" over time. Something you have to wait for (in your example, 10 years) before they see "their money".

Don't confuse the two retirement/financial tools.

You can certaily have a CD in addition to an (SPIA); however, one does not substitute for the other.

As I've often said, in retirement, cashflow is everything. A CD may or may not meet your income needs. An annuity (SPIA) may meet your income needs (as it does mine). However, don't confuse the two in actual use for long term retirement income.

 

[73ss454]

Is lifetime not a limited term?

 

[rescueme]

Is lifetime not a limited term?

Nope. Our SPIA pays for (both) our lifetimes. If we both die before the guaranteed period (calculated on our expected life, at time of contract execution), remaining payments go to our estate/beneficiaries. If we "die early", the term is extended beyond our expected lifetime.

However, if we live longer than expected? Payments continue - at 100%, till we are both gone...

Limited? Not at all. If one of us are alive, we get the benefit. If we die early? Others will get that benefit. If one lives "longer than expected?" Than our ROI increases and whomever is "above ground" get's the benefit. Remember, money is for the living, not the dead. If we die early? Others benefit. If we die later than expected? We benefit...

 

[ziggy29]

Part of the problem with planning on an SPIA is the same as the problem with investing in the market -- you can put in the same amount of money into the same investments as everyone else, and your retirement prospects and likely income are dependent on whether or not you are investing it into a "favorable" environment and market conditions upon your retirement.

Someone who retires in 1999 after putting 20% of income away for 30 years and then buying an SPIA would have done very well given the nosebleed levels of the stock market in 1999 and reasonably good interest rates into which to buy an annuity. In 2009, with the market just coming off two large crashes in a decade and a pathetically low rate environment, someone who did the same thing as the 1999 retiree would be lucky to have 1/3 the income.

 

[73ss454]

Nope. Our SPIA pays for (both) our lifetimes. If we both die before the guaranteed period (calculated on our expected life, at time of contract execution), remaining payments go to our estate/beneficiaries. If we "die early", the term is extended beyond our expected lifetime.

However, if we live longer than expected? Payments continue - at 100%, till we are both gone...

Limited? Not at all. If one of us are alive, we get the benefit. If we die early? Others will get that benefit.

At some point it will end and the money will go to the ins. company. With the CD it will end but the money will go to DW or my family.

 

[rescueme]

At some point it will end and the money will go to the ins. company. With the CD it will end but the money will go to DW or my family.

And you are saying that nobody benefits from a CD (other than the certificate holder?).

I don't think so ...

It's no different. We did not pay a fee for our SPIA. Any costs are recovered by the insurance company (FIDO), and they are taking the investment risk - same as a bank with a CD.

No difference, other than the term of investment gain/recovery.

An insurance compay can gain/lose on a SPIA. A bank can do the same with a (long term) CD.

You are assured of getting back your "investment" (at the end of the term), along with intrest during the term of a CD.

We are assured of getting back our "investment" a bit every month, along with a return based upon our contract (same as a CD rate).

What's the difference? Actually, you don't spend your initial investment along the way, but we do, and that return of both initial investment - along with "intrest", maintains our retirement cash flow.

 

[REWahoo]

At some point it will end and the money will go to the ins. company.

Actually the money has already gone to the ins. company. At some point it will end and the ins. company will stop gradually meting the money you gave them back to you - statistically before it's all been returned with interest.

 

[donheff]

Heh, they should have gotten in on the 5% Pen Fed CD in January. Not only would the recipient get more monthly the family would get the 95K when they are gone or at the end of 10 years.

A little more for the first year or two. But the study was suggesting an annuity with increasing payments to adjust for inflation. And the study also pointed out that one of the two in a typical couple has a 47% chance of living until 90. Inflation could eat up a lot of the purchasing power of that $5K/yr in that time frame.

 

[rescueme]

Inflation could eat up a lot of the purchasing power of that $5K/yr in that time frame.

True.

Our plan was that I/DW would retire at age 59, without SS or pensions but not wanting to rely only our retirement portfolio(s).

The purchase of the SPIA (with 10% of our joint assets, at the time of contract execution) at my retirement at age 59 (DW changed her mind at the last minute) still supports our decision to delay SS and use the "marital option" (e.g. DW will file at FRA age of 66, I'll claim against her at a 50% rate, and I'll delay SS - primarily for her benefit assuming I pass first, at age 70).

What this does is provide ER income (without depending only on our retirement portfolios) for about 33% (currently) of our requried income, with the availability of "trading up" to a superior inflation adjusted income vehicle in the future (AKA SS). The SPIA income at that point, while worth less due to perceived inflation, will just be "icing on the cake", in our case.

I'll be the first to say, an annuity (more specifically an SPIA) is not the answer to everybody's plan, but it was to our plan (that's all that counts )...

 

[Nords]

Bloomberg seems to have a bit of a problem with quoting the context. Here's what they said the report says:

An immediate annuity can protect retirees from the risk of outliving their savings, according to the study. For example, a contract purchased for $95,500 by a 66-year-old couple in Florida may provide $4,262 a year until the death of the surviving spouse and include increases for inflation, the report said.

Here's what the report says (page 24):

With regard to the middle quintile household without a DB plan, experts specified that they should consider using a portion, such as half, of their $191,000 in financial assets to purchase an inflation-adjusted annuity. Based on current annuity rates, a premium valued at half of $191,000 would provide an additional $355 per month ($4,262 in the first year) until the death of the last surviving spouse, and include annual increases tied to the Consumer Price Index. A monthly payment in the first year at this rate would provide slightly more than the annual income provided by a 4 percent drawdown.

And down in the footnotes:

... and the transaction fee is 2 percent of the premium.

In defense of the GAO (!), they go on to say:

For all the advantages of annuities, however, some of the experts we spoke to noted that there is commonly a psychological hurdle involved in the difficult decision to exchange a large principal payment for an unknown number of small monthly payments. In addition, some planners tempered their recommendations for annuities, given what they viewed as the credit risk of annuity insurance companies or the risk of defaulting on their obligation to make annuity payments. On the other hand, an economist and an actuary we spoke to—who do not work for insurance companies—maintain that the credit risk is small relative to the risks inherent in holding stocks and bonds.
Annuities also carry some disadvantages with regard to estate and tax planning. Regarding a retiree’s estate, annuities are typically not refundable upon death, whereas any funds that remain with the deceased’s systematic drawdown strategy could be left to beneficiaries. With regard to taxes, the income from annuities purchased with nonqualified funds is taxed as ordinary income, whereas part of the investment return from a systematic drawdown strategy of nonqualified savings is often taxed at lower capital gains or dividend tax rates.

and:

Figure 3: Delaying Social Security Is More Cost Effective than Purchasing an Annuity to Enhance Retirement Income

I was surprised at the answer: Kohl self-finances over 90% of his campaigns. He has also announced he will retire when his term ends.

I'm glad that my cynicism was unwarranted!

 

[chinaco]

Wow.

That report basically starts by noting that delaying SS is probably a good move for most people.

It also talks about DB pensions and inflation.

For DC plans it describes how annuities might play a role.

Some people on this forum seem to have a big bias against them... and dismiss them as a bad idea period!

I do not agree with that position at all.

How is it that one person can see some inherent value in a SPIA for their situation (right or wrong) and someone else declare it is a bad idea for everyone based on their situation and knowledge (right or wrong)?

Much of the debate is rooted in people mismatching the assets (they think they will wind up with more) and the associated risks (real chance of having less). If one were to compare a portfolio of high grade corp bonds and/or Treasuries... to a SPIA... the difference gets narrowed quickly to mortality credits, one's longevity, and perhaps the loss of flexibility to get at the money in a lump sum because their need changes.

Yes there are more considerations regarding the decision and how it fits into a plan.... but the same can be said for any method of generating income.... like the recurring 4% SWIP debate.

It is not the right move for me.... should not be extrapolated into... it is not right for everyone else.

 

[ziggy29]

Some people on this forum seem to have a big bias against them... and dismiss them as a bad idea period!

I do not agree with that position at all.

I don't dismiss SPIAs in the general case; I've said before that depending on the circumstances I would be willing to *consider* putting a part, maybe 1/3, of our portfolio into one to help provide a secure "baseline" income stream. But I do think they are a terrible deal *right now* given the low interest rates that jack up the price of an income stream.

 

[Tadpole]

Everything I read say I am doing it wrong if doing it differently is wrong.

As far as the GAO report goes, I think it would be good if employers offered an annuity option but the devil is in the details. I've seen some of the 401K's offered to employees that were awful with high fees and poor or inadequate selections. I don't know that I would want to depend on the employer for selection of an annuity insurance company. Also, NOOOOO, to annuity defaults. The people I worked with were smart and highly educated but chose to remain quite ignorant of their retirement needs. I don't think they would even know that, if they didn't want an annuity, they would need to declare this before they defaulted to it. Also, they would make about 0% on a test on their knowledge of annuities.

I would like to know what people think about the "Deeply deferred annuities, or longevity insurance" recommendation. Certainly my extremely negative reaction means I don't understand this so I won't offer that extremely negative reaction.

I kept thinking as I read this that people don't need more retirement babysitting so much as they need protection against unscrupulus providers, including financial advisors and managers.

Advice to lowest quintile case - "Continue working and accumulating assets, if possible. Delay Social Security. That person's assessment of their health at 58 is "fair", the lowest of the self-assessments in the 5! cases considered. I was surprised that someone making $22,000/year didn't get more than 50% ($11,000) from Social Security. This is just about the single person poverty level in 2011 of $10,890 average for US. The CPI will put this person over the line into the poverty level quickly since it doesn't keep up with senior type inflation. No wonder there are so many seniors in poverty despite the intent of Social Security. I hope this person lives in one of those low cost states or can get assistance from other programs.

I wonder how "high" income that last person is today if their investments are in real estate and the numbers were as of 2008. Which was my main thought as I read this - life happens.

Oh, by the way, I am not against good annuity products.

 

[rescueme]

It is not the right move for me.... should not be extrapolated into... it is not right for everyone else.

You understand perfectly (tip of the hat, to you) ...

I guess I have a problem (a big one, actually) in anybody saying in any public forum you should ...

 

[Independent]

In early 2010, there was a task force examining how the administration might increase retirement security by changing policies related to annuities. There was at least one thread on the topic:
http://www.early-retirement.org/forums/f52/annuities-wholesaled-by-obama-administration-48633.html

Now it's the General Accounting office's turn:
Delay Taking Social Security, Add Annuity to Survive Retirement, GAO Says - Bloomberg

"The GAO study was requested by Senator Kohl, a Wisconsin Democrat and chairman of the Senate Special Committee on Aging.
​

The full study is available here: http://www.gao.gov/new.items/d11400.pdf

The report has this subtitle, which will be news to very few here on the board:

"Ensuring Income throughout Retirement Requires Difficult Choices"

Thanks for posting. I thought that subtitle was appropriate.

I like data, so I thought some of the statistics were interesting.

The text seemed good. It seemed to cover the basics. I liked their discussion of SS vs. private annuities, for example.

They could have done something with the question of why people don't annuitize today, I think that's pretty key to the issue if the goal is policy recommendations. Are they unaware? subject to myths? worried about inflation? deliberately keeping assets for risks or legacies? Maybe I skimmed and missed that.

In terms of policy changes, I see a real risk with employers getting too close to annuity providers. If we reduce the employers fiduciary responsibility, then it seems we've got the possibility of some compensation for getting the inside track.

It's not clear to me that most people should annuitize DC funds. I know the "experts" may differ, but what do those experts do themselves?

The only change I could see would be in terms of education. Maybe an annual report (like the now-defunct SS report) which says "Your current balance is ___ If you keep contributing at your current rate, it could be this ___ at age ___. We've looked at a couple annuity quotes, that balance would convert into a monthly income of ____ based on today's quotes."

The primary benefits of that would be to make people aware that there is something called an "annuity" which might relate to retirements, and to demonstrate that the big lump sum really doesn't buy much monthly income.

 

[2B]

I would like to know what people think about the "Deeply deferred annuities, or longevity insurance" recommendation. Certainly my extremely negative reaction means I don't understand this so I won't offer that extremely negative reaction.

I'm not sure how these products fit into the "state guarantee pools" -- not that I think too highly of them in any case. Theoretically, all companies that sell any type of insurance in a state are to "step forward" in the event of a failure of a company to pay on going benefits and make the beneficiary whole. A deeply deferred annuity isn't paying out but it is paid for.

In the case of a SPIA failure, annuitants have been made whole by the definition of the insurance companies but I know people that waited up to two years to finally get things straightened out. It was not to their satisfaction.

LTC insurance by a failed plan that is not yet paying is just that, failed. The person can then buy a new policy at whatever the prevailing rate is if they can qualify. If the LTC is being collected on, then the state insurance pool applies. I don't know how this works in practice.