Immediate Annuities

[clifp]

yes you did but you spent alot of words talking about the downside of annuities which could be implied as applying to SPIAs

Ok let me more concise. When you a purchase an SPIA (or any annuity) what you really are doing is buying a senior bond with a maturity equal to the rest of your life, from a single company. The bond is very illiquid, but safer than a typical corporate bond. Still the company you loaned money to could go out of business leaving your financial future in trouble if you aren't diversified.

Lots of folks who wouldn't be caught dead buying an individual corporate bond, are perfectly comfortable handing over 1/2 or more of their life saving to purchase an annuity from an insurance company. If people understand what they are doing and say that's cool XYZ insurance company will never go out of business my money is safe, than fine. My believe is very few including Rob do understand this.

the most probable risk with SPIAs is you dont get as big of a return as you MIGHT in the stock market, but unlike SPIAs recently people HAVE lost money investing in stocks. and i wouldnt be surprised if people lose money investing in stocks in the future before anyone loses money on an SPIA.

Well I am happy your crystal ball is able to confidently predict what will happen in the next 30 to 50 years. Mine has been shattered. Relying on the future to be pretty much like the past, coupled with out right dismissing improbable events (housing prices across the country will drop) has caused catastrophic damage to our economy.


A few people (Running Man in particular) were on the board a year or two warning about possible dangers with leverage and the housing market. I dismissed his warning as being too alarmist, to my great expense. I am doing the same thing about annuities, and government bonds defaults. I recognize that neither insurance companies going out of business in large numbers, nor Uncle Sam defaulting bonds or hyperinflating the debts, is a particularly likely event. But it is NOT the rantings of tin foil brigade member.

 

[W2R]

Many here seem to be so envious of others who have corporate pensions. The company providing the pension could go belly-up, but pensions are guaranteed by the federal government.

An insurance company providing a pension-like SPIA annuity could also go belly-up, but if the annuity is under $100K then the state guarantees it.

So is the comparison of corporate pensions vs pension-like annuities reduced to the reliability of state governments versus the federal government? I admit my ignorance, and also admit that I wouldn't want to risk having a state in financial disarray, like California, guaranteeing my pension.

 

[Rich_by_the_Bay]

Clifp, I think your insights and cautions are well stated.

There are strategies to mitigate some of the down side you mention (e.g. buy several smaller contracts from different carriers, dollar-cost-average in by purchasing over a a few years, keep acct accounts underneath your states' guarantee amounts, skip COLA but buy add-on contracts every few years to keep up, etc.), but even at best I see SPIAs as a unique type of asset which may or may have a limited place in some people's AA.

I have not purchased a SPIA, but will consider it as I would any other asset type as my circumstances warrant.

 

[ziggy29]

So is the comparison of corporate pensions vs pension-like annuities reduced to the reliability of state governments versus the federal government? I admit my ignorance, and also admit that I wouldn't want to risk having a state in financial disarray, like California, guaranteeing my pension.

Could be that and also the amount that is insured.

Looking at the PBGC's coverage limits at various ages, it seems they will insure an income stream with a present cash value of $500,000 or more. Many state limits are much lower; in Texas the limit is $100,000.

Of course, the flip side is that the $100K limit here is per policy, so if someone took an SPIA with five different insurers for $100K each, in theory they would have $500K of coverage as well.

Still, while a state could "go down" without taking the feds with them, I don't think the reverse is true.

 

[brewer12345]

A clarification on "guarantees" of insurance products: they are not guaranteed by the states. Instead, easch state has a guarantee fund that all insurers doing business in that state pay into and it has limited funds. AFAIK, if the fund is exhausted, the state does not ante up.

 

[kaneohe]

I appreciated the spirited, yet still civilized, nature of the debate so that you could actually learn something. Much prettier than angry mobs throwing stones as sometimes happens on these types of topics.

 

[easysurfer]

I know the thought an insurance company going belly up and not being able to pay
SPIA contracts were on the minds of many with the AIG mess. But Is there a place where we can check past statistics when that has happened?

For example, over the past 20 years how many insurance companies have not been able to make their SPIA payout obligations? Where can we find data to that? Or is that tally not even kept?

It would be nice if consumers had a default rate to work with so they can decide for themselves how safe/unsafe a SPIA is.

 

[brewer12345]

Only one I know of that actually stiffed policyholders is Executive Life. Doesn't mean the future will resemble the past.

 

[easysurfer]

Only one I know of that actually stiffed policyholders is Executive Life. Doesn't mean the future will resemble the past.

Good point. But I'd be more likely to put my money in a SPIA knowing that in the past, say only 1 out of 1000 companies defaulted instead of 1 out of 100.

 

[Rob]

Immediate Annuity

I always hesitate to voice my opinion here, because the majority of you simply don't like annuities of any kind. I appreciate the candor, but it leaves me a little unsettled. I've gone on another website where university professors around the US exchange ideas about TIAA-CREF, and the TIAA annuity is their pension in retirement for many of them, because it gives them the retirement income for life.

As a teacher, I trust this particular financial institution. If TIAA or TIAA-CREF defaulted on its payments, I firmly believe, as one other contributor to this website wrote to me a long time ago, we'll all be "eating squirrels under bridges".

I have a sizable amount of money also in stocks and moneymarket as a back up, along with a good bank account enough for a year in case we do start eating squirrels. The fact of the matter is, I need a pension, and TIAA-CREF provides that. There are too many bright people who also believe in this organization, including the current Fed chairman, and therefore, I'm happy to have an annuity through them.

Cheers.

 

[LOL!]

It seems appropriate to add to this thread that Jim C. Otar's Unveiling the Retirement Myth has several short chapters on annuities. While I am not at that stage yet, I found the info extremely helpful.

I believe the recommendation is to use a CPI-linked SPIA if you need it. He discusses when you need it very thoroughly. He also discusses very thoroughly how much you might need given your assets, your other income, your essential expenses, your total expenses and history.

 

[Marc]

A further question on Immediate Annuities. I am looking at retirement in around six years when I am 58. I am somewhat tax diversified but must of my retirement funds are in 401(a) and 403(b) accounts. I am considering putting one third of our retirement assets in an Immediate Annuity. I believe that interest rates will be significantly higher at that time than they are now. For a $1M annuity, I am hoping for $6K to $7K per month.

My question regards the remainder of our money. Should I consider the IA as the "bond" portion of our portfolio allowing me to keep most of the remaining money in stocks? If I had the IA, can I increase the withdrawal rate on the remaining money to 6% or 7% versus 4% recommended widely?

All advice appreciated.

Marc

 

[donheff]

My question regards the remainder of our money. Should I consider the IA as the "bond" portion of our portfolio allowing me to keep most of the remaining money in stocks? If I had the IA, can I increase the withdrawal rate on the remaining money to 6% or 7% versus 4% recommended widely?

All advice appreciated.

Marc

We had this discussion concerning defined benefit pensions. Many think you can carry a higher proportion of equities but it seems to me that the fundamental questions remain expenses and risk tolerance. How big are the expenses you have that are not supported by the annuity, what will be your SWR from the remaining portfolio, and how much of a drop can you stomach? It seems to me that the calculation remains the same as before only writ smaller (smaller expenses, smaller portfolio).

 

[travelover]

Welcome Marc. This has been discussed a number of times here (use search function, top of page) and at Bogleheads Bogleheads Investing Advice and Info, if you want to see the whole discussion. It seems that it comes down to your whole risk tolerance, as stated above.

I may have oversimplified it, but I hold enough bonds so that if my pension dies, I would not have to sell any equities for 5 years.

 

[Independent]

To me, once you cover your basic expenses with annuities (any combination of SS, pension, and private SPIA) you are able to indulge your underlying risk preference more fully.

If you like being aggressive with investments or withdrawal rate, you can be because you know that you're working with "excess" money. OTOH, if you are inherently risk averse, you can be very conservative with investments - nobody will be telling you that you "have to" get into riskier investments to meet your needs over a potentially long retirement.

In terms of the more agressive decision, I've thought that once you've covered your basic expenses with the annuities you could blow the whole "excess" in the first few years of retirement. Take the around the world cruise, backpack in the Andes, whatever. You know you don't need to save the money for later.

 

[rescueme]

My question regards the remainder of our money. Should I consider the IA as the "bond" portion of our portfolio allowing me to keep most of the remaining money in stocks?

This was a point of discussion on BH's the last few days that somewhat relates to your question:

Bogleheads :: View topic - Annual Growth Rate Next 5 Years?

I'll copy the conversation rather than to have you try to wade through the thread:

*******************************************************

"I'll give you two articles to "ponder"; one in which Mr. Bogle is quoted and says:

"And Bogle has long told Americans that the percentage of bonds in a retirement portfolio should be roughly equal to your age. That way your investment gets safer as you approach retirement. So, if you're 60 years old your nest egg should be 60 percent in bonds.

But here's something that might surprise people who've heard Bogle give that advice before. He says you should count the value of your Social Security benefit when you calculate your bond position. And, for the average American the value of Social Security equals about $300,000 worth of bonds.

"If you accept that $300,000 is the value of Social Security and you had $200,000, that could all be in stocks," Bogle says."

From:

http://www.npr.org/templates/s....=124131819

Another good paper on how you can look at your retirement income sources as part of a "total portfolio" (rather than just your portfolio itself) is:

http://www.austinlemoine.com/documents/File36.pdf

Table 2 contains (IMHO) the "interesting concepts", depending on your retirement income sources ("Present Value" fields) and your retirement financial assets/portfolio.

Whereas our 60/40 planned/actual AA may seem risky at first glance, with our current/planned income sources, matched to our current portfolio value, makes it much less risky to our retirement income plans, than at first blush and actually lowers our existing AA to a 30/70 once all our income sources are "on-line", without changing anything in our existing equity holdings.

- Ron"

********************************************************

 

[youbet]

You know you don't need to save the money for later.

Well, not exactly. You have anecdotal evidence based on your current and historical circumstances that suggests that you "don't need to save the money for later." But, since you don't know the future, this can never be certain until it comes to pass. The vast majority of us will pass either having gone broke and on the dole or with assets "left over." Few will get it right on the nose.

 

[haha]

Well, not exactly. You have anecdotal evidence based on your current and historical circumstances that suggests that you "don't need to save the money for later." But, since you don't know the future, this can never be certain until it comes to pass. The vast majority of us will pass either having gone broke and on the dole or with assets "left over." Few will get it right on the nose.

Until this past year, no one in my family going back many generations has ever died without leaving a small or large estate. Then last year my brother broke the string. He didn't die broke, he died almost $100k in the hole.

So I now truly believe that anything is indeed possible. Big earthquake to mention only one possibility.

Ha

 

[youbet]

So I now truly believe that anything is indeed possible.

Ha

Yeah, me too. 3.7 years into RE, I'm finally coming to grips with the fact that I can control only so much of my destiny, financial and otherwise. I try to conduct my investing and spending prudently based on my own circumstances and historical understanding of how things have worked in the past. But I have come to grips with the fact that only thing we can really count on is that the time we have is finite and spending it in ways that fulfill us the most is the most important thing.

 

[Nords]

But here's something that might surprise people who've heard Bogle give that advice before. He says you should count the value of your Social Security benefit when you calculate your bond position. And, for the average American the value of Social Security equals about $300,000 worth of bonds.
"If you accept that $300,000 is the value of Social Security and you had $200,000, that could all be in stocks," Bogle says."

Bogle does imputed bonds?!?

Whoa.

 

[smjsl]

I am not at a point of looking for SPIAs yet, but I am curious about their state fund guarantees for those that have experience with the subject:

(1) If I move to another state or even out of the country, would the "original" state guarantees still cover me?

(2) Can I buy SPIA from another state and have that other state cover it for me?

(3) Here is a big one: What is really covered - just return of original principle or the income stream itself?? If I invested in COLA-SPIA 100k, 20-30 years down the road, it could be that my COLA-d payments are quite reasonable, but the original 100k is not worth much of anything... so then it does not sound like a great guarantee at all if all I get back is 100k at that point....

 

[cashflo2u2]

If one invested the remaining balance of their retirement portfolio 100% in equities after the purchase of a SPIA, wouldn't that preclude the ability to rebalance in the future?

 

[brewer12345]

I am not at a point of looking for SPIAs yet, but I am curious about their state fund guarantees for those that have experience with the subject:

(1) If I move to another state or even out of the country, would the "original" state guarantees still cover me?

(2) Can I buy SPIA from another state and have that other state cover it for me?

(3) Here is a big one: What is really covered - just return of original principle or the income stream itself?? If I invested in COLA-SPIA 100k, 20-30 years down the road, it could be that my COLA-d payments are quite reasonable, but the original 100k is not worth much of anything... so then it does not sound like a great guarantee at all if all I get back is 100k at that point....

Lots of info here: nolhga.com :: welcome

Personally, I buy insurance products with the assumption that the guaranty fund coverage is worthless.

 

[clifp]

I am not at a point of looking for SPIAs yet, but I am curious about their state fund guarantees for those that have experience with the subject:

(1) If I move to another state or even out of the country, would the "original" state guarantees still cover me?

(2) Can I buy SPIA from another state and have that other state cover it for me?

(3) Here is a big one: What is really covered - just return of original principle or the income stream itself?? If I invested in COLA-SPIA 100k, 20-30 years down the road, it could be that my COLA-d payments are quite reasonable, but the original 100k is not worth much of anything... so then it does not sound like a great guarantee at all if all I get back is 100k at that point....

As a generally rule the laws of the state that you reside in when the insurance company become insolvent are the ones that are followed. In particular in the company isn't licensed to sell insurance in the state that you reside in you are out of luck, so obviously leaving the country hoses you. .

As Brewer says you shouldn't depend the guaranty fund, it is not equivalent to FDIC coverage. There are numerous limitation and exceptions and the most important being unlike FDIC where banks actually pay money into a fund, the guaranty associate assess its members an insurance company becomes insolvent. So in the event of a systemic failure like we back in 2007, I am not sure where the association would get the money.

The FAQ section for my states association says.

Frequently Asked Questions Why hasn't my agent or company told me more about the Hawaii Life & Disability Insurance Guaranty Association?
The law prohibits insurance agents and companies from using the Hawaii guaranty association in any advertising. The guaranty association is not and should not be a substitute for your prudent selection of an insurance company that is well managed and financially stable. Agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance. For more information, see our Advertising Prohibition in the Additional Info section.

 

[chinaco]

Aside from guarding against longevity risk, are there any other advantages to a spia? For example: Will the money be legally shielded from negative events... bankruptcy court, law suit against you, etc.