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Old 08-07-2011, 04:58 AM   #21
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Originally Posted by pb4uski View Post
I suppose that it would be theoretically possible to replicate SS or DBP cash flows with a ladder of CDs and bonds that mature at successive points in the future but it wouldn't be practical to do.


You would have to mitigate life event risks (e.g., longevity) with assets that are low risk in terms of investment type risk (to guarantee you do not lose it... have enough, and it is liquid.. available when needed).

Pooling money is the only technique to solve that problem short of having excess assets... IOW - being better off financially than they probably are. But... one has to get past the fact that others may wind up getting their money (that they paid in).

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Old 08-07-2011, 06:41 AM   #22
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Originally Posted by chinaco View Post
But... one has to get past the fact that others may wind up getting their money (that they paid in).
That's the case with a "pure" SPIA (e.g. no riders), where you could die the day after the policy is issued. OTOH, money is for the living, not the dead (so what are you complaining about? ).

Anyway, don't current SS recipients get money paid by current wor*ers (e.g. "their money")? Sorry, I could not resist - even though I understand where you are coming from .

Anyway, most SPIA's have options such as inflation adjustment schemes, defined terms (length) of the policy etc, in which you give up a few dollars of monthly income to "protect" your premium.

For instance, while my SPIA is not inflation adjusted (since was purchased with the intent to provide higher immediate monthly income - without that option, for a limited time - till DW/me both drew SS). However, we did opt for the life (term) rider.

At the time of purchase (at age 59, for both of us), it was calculated that we (either/both) would live another 28 years, till age 87 and that was part of the policy. If we both passed before age 87, remaining payments would go to our estate - which addresses your concern. OTOH, if one/both would win the "longevity lottery" in living past age 87, the payments will continue (at 100%) till both are gone.

It's also easier to calculate an IRR return of the policy since we know the monthly payments x 28 years (336 minimum payments). And if one of us lives longer, the IRR return actually increases since payments continue after expected.

SPIA's are not for everybody, nor will fulfill every need. However, for us it acts the same as a company pension (which I don't - but DW does) operates. That is for a lifetime, normally without inflation protection. However, unlike a company pension, there is no reduction at age 62 (SS offset) nor reduction in payout to the spouse if the retiree dies, as my DW's single-life pensions will do. Additionally, a company pension (just like an insurance company) can be greatly reduced if the company goes under (as happened to both my FIL and BIL) and reduced payments are given by the PBGC. As for an insurance company paying for an SPIA? There are state programs that operate in the same manner to give you a certain level of protection.

More importantly (and just for us), it provides a good base of income in ER, which also allows us to delay our SS. In fact, we get to "trade up" from an income vehicle that is fixed to a superior lifetime, inflation adjusted income - AKA SS. And don't forget, the SPIA income does not stop/get reduced once we start SS.

We (or our estate) will never receive less than our premium, based upon a non-inflation adjusted total; in fact, we will receive a bit over 2x what the premium was. Could we do better by investing on our own? Quite possibly. However that is done, and increased risk taken with the remainder of our retirement portfolio. The SPIA is basically risk free (with the standard disclaimer of the insurance company viability). Of course, with the long term outlook of SS and discussion on this/other boards, SS may not be the only answer for everybody - especially much younger. We're both SS age (but delaying filing) so our SS outlook is a bit more positive.

For us, the SPIA (along with SS, DW's pensions, and other minor income) is just a bit more diversification in our retirement income streams; nothing more than all of us do (except those holding all cash/CD's - by at least one person on this board) in our overall investing.

Again (my mantra), "in retirement - cash flow is everything". We want to make sure that as one "spigot" dries up, there are others that continue to flow.

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