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Bad time to buy an annuity?
Old 12-05-2010, 07:30 AM   #1
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Bad time to buy an annuity?

OK so many will say it's never a good time to buy a lifetime annuity, but with interest rates so small right now is this the worst time ever? Exactly what benchmark do companies use to calculate the payout on a lifetime fixed annuity?
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Old 12-05-2010, 07:43 AM   #2
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This is not absolutely accurate...

But it is based on interest rates, mortality assumptions/experience, the companies expense assumptions/experience, and the companies willingness to accept certain level of risks in mortality and investments... In other words, some companies take a more conservative approach to mortality risk (anti-selection and general increases in life span).


I think interest rates is the only predictor you will be able to use other than actual quotes.

ImmediateAnnuity.com seems to track rates vs payout. You can get a historical perspective from it. It will give you a sense for how the payout may be priced in different interest rate climates.

Here is some other information on the subject.

Should you buy an immediate life annuity when you retire?

Inflation-Adjusted Annuities.

The high cost of a no-fee, no-commission Single Premium Immediate Annuity (SPIA).

Valuing Different Types of Single Premium Immediate Annuities (SPIA) and Single Premium Deferred Annuities (SPDA).
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Old 12-05-2010, 07:46 AM   #3
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Originally Posted by nun View Post
OK so many will say it's never a good time to buy a lifetime annuity, but with interest rates so small right now is this the worst time ever? Exactly what benchmark do companies use to calculate the payout on a lifetime fixed annuity?
Correct IMO.

But a relatively good time to take a lump sum option on a pension all else being equal.
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Old 12-05-2010, 08:02 AM   #4
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Originally Posted by nun View Post
"is this the worst time ever?"
I have no idea.

I purchased my SPIA in mid-2007 when interest rates were low.

Guess what? They went lower.

For me, the question at hand is did we need the monthly payment (regardless of rate) to meet our required income needs for a period of time (e.g. the 11-year gap between retirement and SS), and would it reduce the risk of having that sum of money remaining in the market?

Current interest rates are important, but not the only question to be answered in considering an SPIA, IMHO. We could have waited “till the cows came home”, but that would not have met our need for an immediate income stream, free from the flux of the market, and allow me to delay SS to maximize my SS for my (and the possible future benefit of my DW) in the future. SPIA payments after that time (while reduced in value due to inflation) will be just icing on the cake, after fulfilling their primary "mission" in early retirement.

Over three years later (considering the 2008 downturn and even further reduction in interest rates), I believe I made the correct decision, based upon our income requirements ...

Just our story...
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Old 12-05-2010, 08:52 AM   #5
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If you read about SPIA, some planners suggest that it be bought as a ladder as a mitigation on rate moves.

I am not sure if we will purchase a SPIA... but if we do, we will wait until the Fed is done tinkering with rates to try to fix unemployment. I would also ladder the purchase over several years and spread it across a few highly rated companies.
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Old 12-05-2010, 10:22 AM   #6
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Originally Posted by chinaco View Post

I think interest rates is the only predictor you will be able to use other than actual quotes.


The high cost of a no-fee, no-commission Single Premium Immediate Annuity (SPIA).
I just read this one. It gives a general method of determining a "fair price annuity", based on a simplified system using the relevant interest rate and mortality assumption.

This shows that interest rate necessarily plays an important part. I think also that the rate will interact with life expenctancy such that this article's simple choice of a determinate lifespan is misleading.

One thing should be clear- if you trust Uncle Sam not to bugger you on SS, delaying SS is the cheapest way to proceed. Under normal interest rates it gives a fair shake to single men (which the commercial annuity does not), a bargain to single women, and a bonanza to marrieds.

Under lower interest rate conditions such as the present, SS delay is a raging good deal for anyone not clearly on their way out.

Ha
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Old 12-05-2010, 12:33 PM   #7
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....
One thing should be clear- if you trust Uncle Sam not to bugger you on SS, delaying SS is the cheapest way to proceed. Under normal interest rates it gives a fair shake to single men (which the commercial annuity does not), a bargain to simgle women, and a bonanza to marrieds.

Under lower interest rate conditions such as the present, SS delay is a raging good deal for anyone not clearly on their way out.

Ha
I agree completely. Maximizing SS is probably the lowest cost approach to mitigate longevity risk.... or at least part of the risk.
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Old 12-06-2010, 03:37 PM   #8
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Originally Posted by chinaco View Post
If you read about SPIA, some planners suggest that it be bought as a ladder as a mitigation on rate moves.

I am not sure if we will purchase a SPIA... but if we do, we will wait until the Fed is done tinkering with rates to try to fix unemployment. I would also ladder the purchase over several years and spread it across a few highly rated companies.
For me, when I FIRE'd in 2008, I look to lump sum from my pension, put transfered that in an existing IRA, and from that pot used a portion of that for an annuity. Since I'm too young for SS, and no longer have earned income from a job, I needed to have a steady income stream to pay bills from somewhere.

I think another factor which sometimes get forgotten on weather to buy an annuity is if you plan on using that money to leave to heirs or not. For some this is a major issue, and for others a SPIA serves its purpose as bills today and not inheritance money for heirs tomorrow.
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Old 12-10-2010, 04:35 PM   #9
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Originally Posted by chinaco View Post
If you read about SPIA, some planners suggest that it be bought as a ladder as a mitigation on rate moves.

I am not sure if we will purchase a SPIA... but if we do, we will wait until the Fed is done tinkering with rates to try to fix unemployment. I would also ladder the purchase over several years and spread it across a few highly rated companies.

Example of laddering:

Annuity Laddering Retirement Income | Go To Retirement
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