immediate annuity (again)

[brewer12345]

I guess I have less faith in the markets than you, and perhaps more faith in the
insurance companies.

You want "just about no chance" that the SPIA terms will not be honored,  but
there's not anywhere close to zero chance that the portfolio being withdrawn
at 4.4% will not vanish.  So again, do you really think there's a 13-26% chance
that AIG will become insolvent ?

Is FIRECalc really "extremely conservative" ?  The default portfolio that I'm using
is 40% treasuries and 60% "total market", which sounds like something like VG
Total Stock Mkt Index to me.  Sounds like a pretty conservative portfolio to me.

No question that the insurance company failing and the portfolio failing are
highly correlated outcomes.  But have not many of these insurance companies
survived many of the historical periods which lead to one of the 13-26% likely
"failure" outcomes in FIRECalc ?

Not trying to pick a fight here - I respect that fact that you know a lot more
about insurance companies than me, and probably more about FIRECalc and
investing in general - but I'm trying to be very analytical and UN-emotional
in comparing SPIA versus invested portfolio.

John

I think we are starting out from different premises. The day I sit with a portfolio of 60% TSM and 40% treasuries is probably right after I am diagnosed with Alzheimer's, assuming I have blown the lot on Venezuelan Beav3r-Cheese futures by then. IMO, that is a portfolio that is foolishly undiversified. So when you start talking about 26% chance of withdrawal failure, we are already at a point of departure since a more diversified portfolio would be a LOT more robust than a 60/40 portfolio, especially in the kinds of scenarios that blow up the 60/40 port (runaway inflation, stagflation, etc.).

So I think that firecalc's results are extremely conservative compared to how well a more diversified portfolio would have fared in the most challenging historical scenarios.

As for the insurance companies, I am not eager to take an outsized credit exposure to any entity, no matter how highly rated. Companies demutualize, fail, get downgraded, sell off entities or blocks of policies, and usually this stuff happens in troubled times. And almost no company is immune. Not so long ago, AIG was Aaa rated (not anymore). You can somewhat mitigate these risks by choosing carefully, but you can never completely avoid them if you take an outsized credit exposure. And many of the most active companies in the SPIA world are the industry equivalent of stupid people running as fast as they can with a pair of sharp scissors (pointy end up).

So I am not all that sanguine about dealing with the insurers unless A) you have no choice and B) you keep your exposures modest.

Finally, it is worth revisiting how insurers design and manage SPIAs. These are pretty simple products. The insurer sells a block of SPIAs, takes in cash, and puts the proceeds into a bond portfolio that is usually heavy in BBBs and AA/AAA stuff, with a modest helping of junk. If they sold you an inflation indexed SPIA, they probably also threw in a fixed to CPI-linked swap. So out of this portfolio, they expect to be able to pay you in full and make a 15% ROE on the capital they put up against the SPIA. What does that tell you? It tells me that a well managed bond portfolio is more than adequate to pay out the SPIA cash flows. Now inagine how much better it would be if you could invest in higher eturn assets, didn't have to put up any expensive equity capital, and got to keep the insurer's profits.

One last thought: the option to wait has value. If you like the idea of a SPIA, there is nothing wring with staying invested, kicking the can down the road for a while, and revisiting the idea. But once you buy the SPIA, you are committed.

 

[donheff]

People can do very well financially and still make poor investments. I have not seen one annuity product that I would consider anything but a "poor" investment. ...

We've had multiple annuity threads here and its always the same story. "Hey! I can get a higher SWR with an annuity!" I'm tired of pointing out their errors. ...

SB: a bit more reasonable post. But on your first point virtually everyone interested in SPIAs views them as insurance not investments. I don't consider my health or home insurance a good investment but I still carry it. On your second point (again, looking at this as insurance not an investment) the SWR for a possible long life (which is what people are insuring for) does appear to beat comparable SWRs for self investments (at least at the outset years - later it may not but that is, again, true with all insurance).

Brewer's post following yours addresses the real dispute - is this good insurance, or not. I disagree with Brewer on the complaint that the insurance companies make money with a bond portfolio, so you could too. That applies to all insurance - health, life, home. The companies bet the averages and win. The insurees are betting against the averages and understand that they will likely lose -- so what? They are hedging and don't have the patience or nerves to do it Brewr's way (with puts). But Brewer does make some points that are very important to us insurance evaluators -- these folks may sell your insurance to other carriers, may go belly up, etc. The fact that the insurance itself may be an illusion gives me a lot more pause than the fact that the companies make money or that it would make a poor investment.

I have to admit, I too am getting tired of this topic. So I will take the pledge. From now on, I will stay out of this topic unless a future thread sheds some interesting light on the risk factors of the insurance industry itself.

 

[brewer12345]

the risk factors of the insurance industry itself.

Heh, if you are interested, just ask. No doubt there are lots I haven't thought or seen, but I can at least round up the usual suspects.

 

[JohnEyles]

Folks, thanks for all you've given me to think about.

For the record, there is no salesman pressuring me to
buy a SPIA. I am reading about it a lot, and getting quotes
from Vanguard and WebAnnuities.com. I am contemplating
committing at most 25% of my savings - still a lot of $$$.

I appreciate 2B's more nuanced response (and condolence on
his FIL's experience). As to his assertion about SWRs, I am
unable to get FIRECalc to give a 95%-safe SWR of 4.4% (that's
what the SPIA is giving, not 4.3%), that is CPI linked, for a
30-yr payout (about my mean life expectancy), with any
portfolio other than a hand-crafted "mixed portfolio". I am
not real comfortable with that, because (A) I gather many users
seem to feel the excellent results of this portfolio are an artifact of
the data set, (B) there seems to be a widespread opinion that stock
returns, going forward, may be lower than historical precedent, and
(C) I am NOT smart regarding investments, more to the point I am
not very interested in investment, so I think anything more complex
than a TSM/Treasury split may be unrealistic in the long-term.

I also continue to assert that the combined risk of my requiring
a longer than 30-yr payout, along with the 5% risk of
portfolio ruin even at 30yr payout (assuming FIRECalc's
predictions are accurate), is probably greater than the
chance of insurance company insolvency. But I respect
Brewer's apparent feelings to the contrary and willl look into
this further.

Finally, I believe the advice to wait and see - will I see
the light and realize what a moron I am?, will interest rates
rise and make the relative SWR of the SPIA even better ? - is
good advice, and I intend to take it.

John

 

[brewer12345]

Finally, I believe the advice to wait and see - will I see
the light and realize what a moron I am?, will interest rates
rise and make the relative SWR of the SPIA even better ? - is
good advice, and I intend to take it.

John

Aside from these considerations, waiting also cuts time off your actuarial lifespan estimate, which means that the payout per $1000 you lay out will rise, all else remaining equal.

 

[Dawg52]

(C) I am NOT smart regarding investments, more to the point I am
not very interested in investment, so I think anything more complex
than a TSM/Treasury split may be unrealistic in the long-term.

You don't have to be smart to get a good balanced mix. Take a look at the target funds before you make a final decision. Best of luck.

https://flagship.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0681&FundIntExt=INT

http://personal.fidelity.com/products/funds/content/freedomfunds.shtml.cvsr?refpr=ipmf8

 

[brewer12345]

You don't have to be smart to get a good balanced mix. Take a look at the target funds before you make a final decision. Best of luck.

https://flagship.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0681&FundIntExt=INT

http://personal.fidelity.com/products/funds/content/freedomfunds.shtml.cvsr?refpr=ipmf8

Yeah, I don't get that. You are willing to spend a lot of effort researching SPIAs, but won't consider spending a dozen hours a year on a portfolio?

 

[kaneohe]

John,

Don't know if you have seen the current issue (Oct) of Money Magazine but they have an interesting article on your topic of making your nest egg last. The article is also reproduced online here http://money.cnn.com/2006/09/07/pf/retirement/retire0610_updegrave_sv.moneymag/index.htm

Money's conclusion is that a 50-50 mix of a diversified stock/bond portfolio and an immediate annuity is the best but that is a conclusion you can decide for yourself.
They provide an interesting plot (by Ibbotson) of how 3 portfolio mixes:
1) 100% diversified stock/bond portfolio
2) 25% immediate annuity, balance diversified stock/bond portfolio
3) 50% immediate annuity, balance diversified portfolio

fare over the long term for a 65 yr old spending 4% of his funds a year.
The 3 plots are similar up until age 83 or so and then increasingly diverge with the 50-50 mix holding up the best for ages over 93 or so..

No single conclusion will satisfy everyone, I suppose, since as you and others have pointed out, it depends on what allows you to sleep at night and how good your genes and health might be. And whether future statistics of inflation/asset returns will be like the past and how dependable annuity insurance cos. will be in a crash and how well defined expenses
(including health care) are, etc.etc.

In my case, I am hopeful that SS for me and DW when retired will provide 50% of spending and confess to having writer's cramp if I ever had to write a check for 50% (or even 25%) of assets, so I will continue to procrastinate on the IA decision. You mentioned that you had SS but never quantified it.....was that already built into you decision?

 

[Rich_by_the_Bay]

If I had 50% in an IA (which I won't), I would not have any bonds in my portfolio. How much volatility protection would your really need in that situation?

 

[FinanceDude]

Why are we talking immediate annuities at all? Annuitization, period certain or not, it 99.99% of the time a horrible proposition. I personally would NEVER give up CONTROL of my money to an insurance company..........

If you are bound and determined to have an annuity for "peace of mind" look at a VA with Vanguard and put some "sleep at night" riders on it.

In lieu of that, listen to brewster, he speaks wisdom..........

 

[astromeria]

Why are we talking immediate annuities at all?

Why are we talking any particular kind of investment, from private REITs to pssst Wellesley? Because there are some among us who are considering them! Best to thoroughly air the pro's and con's through occasional threads on the subject.

 

[haha]

Why are we talking immediate annuities at all?  Annuitization, period certain or not, it 99.99% of the time a horrible proposition.  I personally would NEVER give up CONTROL of my money to an insurance company..........

Another shoot from the hip post on annuities. Did you read the linked Money article?

I also would not get an annuity, but not because I think it might not be a good idea. I am just genetically a gambler and I know myself.

Mostly we make our decisions emotionally, even if we think otherwise.

Ha

 

[brewer12345]

Did you read the linked Money article?

I did, and it contradicts large volumes of scholarly research while at the same time telling us virtually nothing about the littel graph that they use to push annuities. I don't find it particularly convincing, and maybe I read it too fast, but I didn't see anything about the risks of putting a large wad into an annuity of a potentially shaky insurer.

 

[FinanceDude]

Another shoot from the hip post on annuities. Did you read the linked Money article?

I also would not get an annuity, but not because I think it might not be a good idea. I am just genetically a gambler and I know myself.

Mostly we make our decisions emotionally, even if we think otherwise.

Ha

I find your post funny...............since I have been a financial advisor for a long time. Perhaps you should know your audience better

Money Magazine is a crock of BS for the most part..............."Top 10 Funds to Buy NOW" and those other headlines make me ill.................

 

[haha]

I hope you do find my post funny; I try to please.

But maybe you shouldn't admit to being a "financial advisor" around here. It's a bit like saying you are an astrologer.

Ha

 

[brewer12345]

I hope you do find my post funny; I try to please.

But maybe you shouldn't admit to being a "financial advisor" around here. It's a bit like saying you are an astrologer.

Ha

Astrologer?  Nah, its more like a dmitting that you have more than a passing fancy for farm animals.

If you admit to being an annuity salesman, you pretty much just told us that it is hard to get you out of the barn and away from the vaseline...

edit: note that the above is intended as humor and not to impugn/slight any individual.

 

[HFWR]

That's ba-a-a-a-d...

 

[FinanceDude]

I hope you do find my post funny; I try to please.

But maybe you shouldn't admit to being a "financial advisor" around here. It's a bit like saying you are an astrologer.

Ha

I think everyone on here knows that..........it's not like I'm hiding with my screen name............

BTW, what's your sign, I'd like to give you a reading..............

 

[FinanceDude]

Astrologer?  Nah, its more like a dmitting that you have more than a passing fancy for farm animals.

If you admit to being an annuity salesman, you pretty much just told us that it is hard to get you out of the barn and away from the vaseline...

Who said I am an annuity salesman? I'm much, much WORSE than that............a GASP fee-based advisor.............the horror, the horror!!!

I knew this board would be fun..................

 

[bongo2]

Finally, it is worth revisiting how insurers design and manage SPIAs. . .So out of this portfolio, they expect to be able to pay you in full and make a 15% ROE on the capital they put up against the SPIA.  What does that tell you?  It tells me that a well managed bond portfolio is more than adequate to pay out the SPIA cash flows.  Now inagine how much better it would be if you could invest in higher return assets, didn't have to put up any expensive equity capital, and got to keep the insurer's profits.

I mostly agree with what you are saying Brewer, but I think you are leaving out the benefit of (other's) mortality, which partially flows to you and partially to the insurance company. If you invest in bonds yourself you don't get the pooled money of everyone who "drops out." The questions then become: 1. how much do you value money left over after you die? 2. are the expenses of the insurance company high or low compared to the assumed mortality of your cohort?

One way to get around the low asset returns problem that you mention is to invest in the "variable payout" immediate annuity. I haven't looked into it closely, but it looks like a 55 yr old can get something like a 5.7% payout with a 3.5% (+0.5% expenses) return assumption. That looks to me like you're getting 1.7% of spending to give up your remaining assets on death (and still keep all the investment risk and reward). Has anyone purchased or thought carefully about this option?

Finally agree that the older you are the more an annuity will make sense. The mortality on a 55 yr old is something like 0.7% (and assumed to be a lot lower for annuity purchasers), while the expenses appear to be about 0.5%, so you aren't gaining much at all. Ten years older mortality will be quite a bit higher, and rapidly rising to be well over the 0.5% expenses, so you are going to get a much larger benefit from the annuity.

 

[brewer12345]

I mostly agree with what you are saying Brewer, but I think you are leaving out the benefit of (other's) mortality, which partially flows to you and partially to the insurance company.  If you invest in bonds yourself you don't get the pooled money of everyone who "drops out."  The questions then become: 1. how much do you value money left over after you die?  2. are the expenses of the insurance company high or low compared to the assumed mortality of your cohort?

You forgot #3: How much do you value to flexibility of retaining the wad of assets that you can do what you please with?
And #4: How much do you value to potential upside on your assets?

 

[JohnEyles]

Another shoot from the hip post on annuities.

Mostly we make our decisions emotionally, even if we think otherwise.

Most (ok, many) of the responses in this thread on annuities have been
shoot from the hip and emotional:

-gut dislike and mistrust of insurance companies, and a fear of
"giving up control" (wiithout considring that insurance CAN be a
good thing, a way of sharing risk, in this case the risk of "outliving
one's money")

-a well-founded consideration of the possibility of insurance company
insolvency, but without an analytical consideration of the likelihood
of this versus other types of failure (the % of failure that FIRECalc
SAYS to expect, the possibility that the historical dataset FIRECalc
uses is actually optimistic going forward, the possbility of mutual
fund company and/or brokerage insolvency)

-an insistence that the 4.4% WR I'd get in a SPIA is "not that good"
and that I can do a lot better investing myself, if I just tried a little
(without taking into consideration that the insurance company needs
to invest only to meet my median life expectancy, because of risk
pooling, whereas I need to do a bit better than that, preferring not to
assume I'll drop dead when I reach my median expectancy thank you)

-or, simply calling me "dumber than dog dung" for even considering a SPIA !

I am taking a more analytical approach.  (I think being analytical makes a
lot of sense with money).  For example, if I run FIRECalc with and without
putting 25% of my money into a SPIA, the SPIA option gives me more income
(at the 95% probability of success).  Not a lot more, BUT ... if I hit the 5%
chance of failure (or if FIRECalc is wrong), the SPIA option still leaves me with
that income (and SS).  I am using the vanilla portfolio, but I am switching
from 60% stock to 70% stock for the SPIA case (I'd need only, 3/4 as much
money in fixed-income, 30% vs 40%, since 1/4 of my income is from the
SPIA).  And I'm also assuming $16K/yr of SS starting at 62yo.

 

[brewer12345]

John, you ultimately have to do what lets you sleep at night. If you are happy with your decision and can live with it, that is all that really matters. I think that is what Ha was getting at. For all the analysis we might do, you cannot escape emotion and psychological factors in these matters.

Dunno if I have said as much in the past, but if you want an educated opinion on any insurer you are considering, just ask and I will spew away.

 

[JohnEyles]

if you want an educated opinion on any insurer you are considering, just ask and I will spew away.

Thanks !

 

[donheff]

Why are we talking immediate annuities at all? Annuitization, period certain or not, it 99.99% of the time a horrible proposition. I personally would NEVER give up CONTROL of my money to an insurance company..........

Waddaya mean I promised not to get into the annnuity discussion anymore? OK, OK, I won't jump into the discussion but I want to trash the advisor for blasting his guns without adding some analysis. That is what you charge fo right?

So talk to John and explain why he is wrong about being able to safely withdraw a slightly larger yearly amount with an annuity than he can with only a self directed portfolio. By safely I am open to all the dangers and downsides that Brewer and 2B bring up. But it would be nice to hear it all articulated by a professional.

If you impress us enough with your reasoning we might be encouraged to pay for your services (no sarcastic icon implied here).