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Old 09-16-2013, 08:07 AM   #21
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Except the SPIA return benefits from pooling longevity risks and thus theoretically returns a higher level of income for as long as you live as long as you are willing to give up the difference if you die early. Have you compared the actual cash flow you would receive from cashing out your CDs over time to the cash flow of the SPIA? If the SPIA return after expenses is higher, I think I would lean that way for a "rock solid" guarantee. Some risk of insurance company failure but you could mitigate that by buying a few SPIAs under the state guarantee threshold each with a different reputable company.
No one should ever buy a SPIA over the state insurance "guarantee" maximum. I "" the guarantee because it is really a guarantee of the other insurance companies that do business in that state. Their penalty from what I've read for not picking up the failed company's policies is the loss of their ability to sell similar insurance products in the future in that state. In a true economic disaster where all insurance companies are on the brink, they might not care as much about future sales as in staying solvent themselves. No state that I am aware of backs this "guarantee" with their "full faith and credit." I consider this system failure risk to be small but it is still there.

Longevity risk is the one issue that a "roll your own" annuity can't protect you from. Insurance companies protect themselves and make self-annuitization more practical by baking in about 5 years of longevity beyond the normal mortality tables since only heathy people would actually buy a SPIA. It's the same old question of "how long will you live."
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Old 09-16-2013, 08:20 AM   #22
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The important thing that you are not beginning to consider is the extent of regulation that occurs before an insolvency occurs and the regulatory interventions that are now required once a company's surplus approaches the minimum regulatory requirements. If a company is troubled, regulators intervene early and require remediation plans and would even take over a company long before its liabilities exceed its assets.

Back in the early 1990's your post would have been more valid and less objectionable. However, the adoption of risk-based capital requirements by insurance regulators and mandatory interventions should a company's RBC fall below certain thresholds have significantly improved the solvency monitoring of insurers. The insolvencies since RBC was implemented have been modest and insurers weathered the financial crisis quite well compared to banks.

IMO, the credit risk of an insurance policy not performing is much less than the credit risk on bonds due to the aforementioned regulation and interventions. It seems odd that some people invest in bonds without much regard to credit risk yet some people fret over similar risk of insurance contracts. That said, if one buys SPIAs it would be prudent to diversify with different carriers like we diversify a bond portfolio, since it is easy to do and adds an additional layer of safety to an already safe investment.
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Old 09-16-2013, 08:51 AM   #23
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What about a scenario where one needs an annual withdrawal to live? Do you suggest that we have a 10 year buffer in cash or cash equivalents? For example if one has a need to $50k per year for expenses (Assuming No SS or pension), should we NOT put that $500k into this strategy?

Or, is this just a strategy to protect not needed cash from disaster? With a SPIA one gets a managed payout of sorts. I am not endorsing annuities, in fact the opposite is my opinion but, they do give a monthly stipend. I do see a lot of value in this DIY approach, but for some folk (Not anyone on this Forum I am sure) an Annuity provides discipline that perhaps they do not have on their own, for that they pay the cost.
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Old 09-16-2013, 09:45 AM   #24
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I gotta run, so a brief, to-the-point note:

I think this is smoke and mirrors. It's too convenient to put things in 10 year increments and ignore inflation.

Just like many of us were skeptical of the 'buckets' approach - you can't just wipe away risk by giving your money 'names' - it's all AA when you get down to it. And it appears the buckets approach blew up. This is just asset allocation, wrapped up with a bow. Now take a look over a longer time frame, and see how it performs. I wonder if Rich may be 'chasing buckets'?

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Old 09-16-2013, 10:58 AM   #25
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Here is Brewer's "roll your own" equity indexed annuity thread from a few years back that might be interesting reading to some: How to replicate an equity-indexed annuity (EIA)
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Old 09-16-2013, 11:28 AM   #26
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I like the concept. It shows the value of CDs or AAA bonds over bond funds in guaranteeing a floor over a specific time period. I also believe asset price declines are a much bigger risk than inflation. Most investors disagree with my philosophy and I like that too.
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Old 09-16-2013, 01:09 PM   #27
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Just like many of us were skeptical of the 'buckets' approach - you can't just wipe away risk by giving your money 'names' - it's all AA when you get down to it. And it appears the buckets approach blew up. This is just asset allocation, wrapped up with a bow. Now take a look over a longer time frame, and see how it performs. I wonder if Rich may be 'chasing buckets'?

-ERD50
Mea culpa re:chasing buckets but I'm not sure that's a bad thing, in proportion. You just need to avoid becoming a slave to the bucket name.

BTW I looked at ImmediateAnnuities.com and vanguard.com but both seemed to have altered their SPIA calculators to make a direct comparison difficult to achieve (for me). I'd like to see a comparison using a 6% up front commission, Vgd expense ratios v. typical expense ratios, 100% survivor benefit on original principle, etc.

Anyhow, food for thought.
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Old 09-16-2013, 02:11 PM   #28
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With a SPIA one gets a managed payout of sorts. I am not endorsing annuities, in fact the opposite is my opinion but, they do give a monthly stipend. I do see a lot of value in this DIY approach, but for some folk (Not anyone on this Forum I am sure) an Annuity provides discipline that perhaps they do not have on their own, for that they pay the cost.
Quite a few people on this forum use SPIAs to provide a foundation of income to cover the essentials and to insure against living a long time or a big down turn in the stock market.
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Old 09-16-2013, 07:10 PM   #29
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Though I am almost never a fan of commercial annuity products, Lynn and I are on the verge of re-allocating some of our cash reserves to a Do-It-Yourself immediate annuity strategy. No insurance companies are involved.

This "instrument" has been discussed here and elsewhere. Our goals are a) an rock-solid income generator for basic expenses beyond what SS and a small pension will produce, b) smooth the jump from several years of almost no taxes to the tax created by consulting pocket-change and SS kicking in in 2015 and c) simplification for the surviving spouse when that time occurs.
I'm missing the income.

It looks to me like you put $X in a CD and ($100,000-X) in stocks. You don't withdraw anything. When the CD matures, you have $100,000 from the CD and whatever the stocks grow to.

Maybe you've already covered where you get the income in a later post, I didn't see it.
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Old 09-16-2013, 07:19 PM   #30
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I'm missing the income.

It looks to me like you put $X in a CD and ($100,000-X) in stocks. You don't withdraw anything. When the CD matures, you have $100,000 from the CD and whatever the stocks grow to.

Maybe you've already covered where you get the income in a later post, I didn't see it.
+1. The only way I can see getting a regular income from this strategy is to have a ladder of 10 year CDs, and/or to take dividends and capital gains from the equity portfolio.
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Old 09-16-2013, 07:20 PM   #31
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BTW I looked at ImmediateAnnuities.com and vanguard.com but both seemed to have altered their SPIA calculators to make a direct comparison difficult to achieve (for me). I'd like to see a comparison using a 6% up front commission, Vgd expense ratios v. typical expense ratios, 100% survivor benefit on original principle, etc.
The items you're talking about are typically disclosed on a Variable Annuity, but not on a Single Premium Immediate Annuity.

With an SPIA, you pay your $100,000 to the insurance company, they send you a check a month later and every month thereafter as long as you live.
If the check is $458/mo, that's the end of the story.
Yes, the insurance company pays the agent a commission, incurs other expenses, and hopes to make a profit. But all those things come out of your $100,000 before they start paying the $458. The only thing you expect to find on a quote site is the monthly payment.


I got the $458 by logging into vanguard.com, clicking until I got to a place where I could click on "get quote" for an SPIA. That kicked me over to incomesolutions.com where I logged in again. I answered the questions on their quote form, said "no" to have someone contact me. I said I wanted a joint life annuity for a couple who are both 60, and I have $100,000 for the premium. They gave me five numbers, varying between $452.30 and $460.99
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Old 09-16-2013, 08:16 PM   #32
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I got the $458 by logging into vanguard.com, clicking until I got to a place where I could click on "get quote" for an SPIA. That kicked me over to incomesolutions.com where I logged in again. I answered the questions on their quote form, said "no" to have someone contact me. I said I wanted a joint life annuity for a couple who are both 60, and I have $100,000 for the premium. They gave me five numbers, varying between $452.30 and $460.99
The number you want to get at is the interest rate. Right now it looks like a single life SPIA for a 60 year old male has a interest rate of 3%. Is that worth the guarantee of income for life? Is a 10 year CD significantly better? At least the CD offers the opportunity to buy at another rate....hopefully it would be larger. A CD ladder would allow advantage to be taken of increasing rates, but the rates will be less the shorter the duration. There's no free lunch.
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Old 09-16-2013, 09:03 PM   #33
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Where are you getting the 3%?

I'm not sure how one could compute an interest rate for a life annuity unless you knew the insurer's pricing assumptions, mortality table, etc. What you could do is compute the IRR for a long period certain annuity and assume that an insurer would likely use similar interest rates for a life annuity.
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Old 09-16-2013, 09:33 PM   #34
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Where are you getting the 3%?
Just taking the life expectancy from the SSA tables, the monthly payout amount from one of the online quote sites and backing out the interest rate, it's probably an over estimate and there are a lot of assumptions, but it's something to hang a hat on.

The great thing about TIAA-CREF is they actually give you the accumulation interest rate and the payout interest rates used to calculate your annuity. For 2013 vintages the payout interest rate is 3%, but many of my contributions get a payout interest rate of 7.75%. Applying the same logic as I used to get the 3% rate above to the annuity quote I got from TIAA-CREF for a SPIA starting at age 55 the combined payout interest rate is 5.5% and the payout rate is 7.1%. These numbers are the reason I'll take the TIAA-Traditional annuity
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Old 09-16-2013, 10:36 PM   #35
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I'm missing the income.

It looks to me like you put $X in a CD and ($100,000-X) in stocks. You don't withdraw anything. When the CD matures, you have $100,000 from the CD and whatever the stocks grow to.

Maybe you've already covered where you get the income in a later post, I didn't see it.
The CD keeps cranking out its interest payments (say every 6 mos) and this is your "annuity payment." The stock gains are a variable bonus but neither stable nor predictable; just gravy you should enjoy but not count on. Or leave it around til the next ladder comes up down the road.
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Old 09-16-2013, 10:51 PM   #36
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....Take a read of the brief article above and tell me if it makes good sense.
If you're in accumulation phase and considering this alternative compared to a equity-indexed annuity, then I think the idea has some merit.

Let's say you have $100k to invest and you can buy a 10 year CD paying 3.5%. You would invest ~$71k of the $100k in the CD and it would grow to $100k in 10 years. The remaining $29k would be invested in a a low cost equity index ETF.

Worst case 10 years later your ETF has gone bust (never happen) but you still have your $100k in the CD. Likely case if stocks appreciate 8% annually your $29k grows to ~$63k over ten years so you have ~$163k in total and a aggregate 5% annual return. Even if stocks are flat over the 10 years you end up with $129k and a 2.58% annual return.

The thing is, it isn't a payout phase solution. Repeat--- it isn't a substitute for an immediate annuity - it is a substitute for an equity-indexed annuity.

In the example I outlined I "think" it would be like buying an EIA with a 29% participation rate and no cap. In reality, I think most commercial EIAs have higher participation rates but caps so it is arguably a wash.
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Old 09-17-2013, 01:37 AM   #37
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The thing is, it isn't a payout phase solution. Repeat--- it isn't a substitute for an immediate annuity - it is a substitute for an equity-indexed annuity.
Agreed, as described in the article referenced, it is not structured for payouts at all, so it is not a substitute for an immediate annuity. However, there is no reason why you could not create a CD ladder with associated equity investments, and then you could use it for periodic payouts as the CDs expire.

I'm a little amused by all the little mental schemes that people dream up to slice, dice, name, and categorize pieces of their investments ....in buckets, baskets, boxes, or broomclosets. If you put $71k in a CD and $29k in a stock ETF, then you have a 71/0/29 asset allocation. It has a certain risk/return profile that gives it a very high probability of being worth between $120k and $190k in 10 years...call it whatever nickname you want. A 0/0/100 allocation has a risk profile that gives it a high likelihood of being worth between $60k and $300k in 10 years. As an earlier poster mentioned, it is just a different asset allocation with its particular risk/return profile.
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Old 09-17-2013, 09:43 AM   #38
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The number you want to get at is the interest rate. Right now it looks like a single life SPIA for a 60 year old male has a interest rate of 3%. Is that worth the guarantee of income for life? Is a 10 year CD significantly better? At least the CD offers the opportunity to buy at another rate....hopefully it would be larger. A CD ladder would allow advantage to be taken of increasing rates, but the rates will be less the shorter the duration. There's no free lunch.
Why do I "want to get at the interest rate"?

An SPIA has many "interest rates", or "internal rates of return".

In the case of $100,000 => $458 monthly joint life payment, the IRR is

-10.3% if our second death is at exactly 10 years
1.0% if our second death is at exactly 20 years
3.7% if our second death is at exactly 30 years
4.7% if our second death is at exactly 40 years
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Old 09-17-2013, 09:47 AM   #39
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The CD keeps cranking out its interest payments (say every 6 mos) and this is your "annuity payment." The stock gains are a variable bonus but neither stable nor predictable; just gravy you should enjoy but not count on. Or leave it around til the next ladder comes up down the road.
That's not what I understand.

Quote:
... the client needs $72,629 of the $100,000 to go into this CD to grow to $100,000 in 10 years.
Were you thinking the $72,629 would both grow to $100,000 and "crank out interest payments"?
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Old 09-17-2013, 09:52 AM   #40
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I'm a little amused by all the little mental schemes that people dream up to slice, dice, name, and categorize pieces of their investments ....in buckets, baskets, boxes, or broomclosets. If you put $71k in a CD and $29k in a stock ETF, then you have a 71/0/29 asset allocation. It has a certain risk/return profile that gives it a very high probability of being worth between $120k and $190k in 10 years...call it whatever nickname you want. A 0/0/100 allocation has a risk profile that gives it a high likelihood of being worth between $60k and $300k in 10 years. As an earlier poster mentioned, it is just a different asset allocation with its particular risk/return profile.
I think it is a desire to avoid very low sustained returns on my cash or ST bond holdings that leads me to seek alternatives. The type of categorizing and labeling really doesn't matter as long as it accurately reflects what you're trying to do with the money -- "DIY Annuity" works for me as do many others. "Low Risk CDs blended not stirred with a dollop of Total Stock ETF Balanced to Retain its original equity value" just didn't flow off the tongue .
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